Document and Entity Information
Document and Entity Information - USD ($) | 12 Months Ended | ||
Dec. 31, 2014 | Sep. 30, 2015 | Jun. 30, 2014 | |
Document And Entity Information | |||
Entity Registrant Name | GrowLife, Inc. | ||
Entity Central Index Key | 1,161,582 | ||
Document Type | 10-K | ||
Document Period End Date | Dec. 31, 2014 | ||
Amendment Flag | false | ||
Current Fiscal Year End Date | --12-31 | ||
Is Entity a Well-known Seasoned Issuer? | No | ||
Is Entity a Voluntary Filer? | No | ||
Is Entity's Reporting Status Current? | No | ||
Entity Filer Category | Smaller Reporting Company | ||
Entity Public Float | $ 74,452,264 | ||
Entity Common Stock, Shares Outstanding | 902,116,496 | ||
Document Fiscal Period Focus | FY | ||
Document Fiscal Year Focus | 2,014 |
Consolidated Balance Sheets
Consolidated Balance Sheets - USD ($) | Dec. 31, 2014 | Dec. 31, 2013 |
Current Assets | ||
Cash and cash equivalents | $ 286,238 | $ 1,831,276 |
Restricted cash | 0 | 46,400 |
Accounts receivable, net of allowance of $0 and $0, respectively | 0 | 183,678 |
Inventory, net | 883,350 | 1,253,721 |
Prepaid expenses | 41,791 | 17,001 |
Other receivable | 0 | 3,666 |
Deposits | 33,584 | 46,173 |
Total Current Assets | 1,244,963 | 3,381,915 |
Equipment, net | 24,042 | 53,758 |
OTHER ASSETS | ||
Investment in a related party | 0 | 1,122,397 |
Intangible assets, net | 353,752 | 460,300 |
Goodwill | 739,000 | 739,000 |
Total Assets | 2,361,757 | 5,757,370 |
Current Liabilities | ||
Accounts payable - trade | 1,129,130 | 1,095,204 |
Accrued expenses | 385,024 | 175,603 |
Deferred revenue | 0 | 30,888 |
Derivative liability | 2,100,915 | 9,324,000 |
Current portion of convertible notes payable | 887,272 | 0 |
Related party note payable | 0 | 1,160 |
Total current liabilities | 4,502,341 | 10,626,855 |
Long-term convertible notes payable | 98,333 | 974,479 |
Total Liabilities | $ 4,600,674 | $ 11,601,334 |
COMMITMENTS AND CONTINGENCIES | ||
Stockholders' Deficit | ||
Preferred stock, $0.0001 par value, 3,000,000 shares authorized, no shares issued and outstanding | $ 0 | $ 0 |
Common stock - $0.0001 par value, 3,000,000,000 shares authorized, 879,343,771 and 755,694,870 shares issued and outstanding at 12/31/14 and 12/31/13, respectively | 87,936 | 75,571 |
Additional paid-in capital | 108,699,950 | 17,359,932 |
Unrealized gain on related party investment | 0 | 1,121,237 |
Accumulated deficit | (111,026,803) | (24,400,704) |
Total stockholders' deficit | (2,238,917) | (5,843,964) |
Total liabilities and stockholders' deficit | $ 2,361,757 | $ 5,757,370 |
Consolidated Balance Sheets (Pa
Consolidated Balance Sheets (Parenthetical) - $ / shares | Dec. 31, 2014 | Dec. 31, 2013 |
Statement of Financial Position [Abstract] | ||
Preferred stock, par value | $ 0.0001 | $ 0.0001 |
Preferred Stock, Authorized | 3,000,000 | 3,000,000 |
Preferred Stock, Issued | 0 | 0 |
Preferred stock, outstanding shares | 0 | 0 |
Common Stock par value | $ 0.0001 | $ 0.0001 |
Common Stock, Authorized | 3,000,000,000 | 3,000,000,000 |
Common Stock, Issued | 879,343,771 | 755,694,870 |
Common Stock, Outstanding | 879,343,771 | 755,694,870 |
Consolidated Statements of Oper
Consolidated Statements of Operations - USD ($) | 12 Months Ended | |
Dec. 31, 2014 | Dec. 31, 2013 | |
Income Statement [Abstract] | ||
Net revenue | $ 8,537,676 | $ 4,858,976 |
Cost of Goods Sold | 7,172,376 | 4,005,863 |
GROSS PROFIT | 1,365,300 | 853,113 |
OPERATING EXPENSES: | ||
General and administrative expenses | 4,405,503 | 3,163,007 |
Shares issued for services rendered | 2,721,600 | 1,469,184 |
Stock options expense | 724,267 | 148,633 |
Warrant expense | 0 | 7,015,000 |
Operating loss | (6,486,070) | (10,942,711) |
Other income (expense) | ||
Change in fair value of derivatives | (16,252,823) | (3,701,078) |
Loss on extinguishment of debt | 0 | (960,750) |
Interest expense, net | (64,073,997) | (5,275,749) |
Realized gain on sale of investment | 186,791 | 0 |
Other income | 0 | 42,269 |
Impairment of goodwill | 0 | (279,515) |
Impairment of intangible assets | 0 | (262,604) |
Total other (expense) | (80,140,029) | (10,437,427) |
(loss) Before Income Taxes | (86,626,099) | (21,380,138) |
Income taxes - current benefit | 0 | 0 |
Net loss | $ (86,626,099) | $ (21,380,138) |
Basic and diluted (loss) per share | $ (0.10) | $ (0.04) |
Weighted average shares of common stock outstanding- basic and diluted | 834,503,868 | 593,034,653 |
Consolidated Statements of Stoc
Consolidated Statements of Stockholders' Deficit - USD ($) | Preferred Stock [Member] | Common Stock [Member] | Unrealized gain on investment in related party | Additional Paid-In Capital | Accumulated Deficit | Total |
Begining balance at Dec. 31, 2012 | $ 300 | $ 38,970 | $ 2,643,941 | $ (3,020,566) | $ (337,355) | |
Begining balance, shares at Dec. 31, 2012 | 3,000,000 | 389,704,765 | ||||
Shares issued in acquisition, amount | $ 786 | 274,214 | 275,000 | |||
Shares issued to acquisition, shares | 7,857,141 | |||||
Fair value of option vested | 1,268 | |||||
Shares issued for services rendered, amount | $ 4,541 | 1,464,643 | 1,469,184 | |||
Shares issued for services rendered, shares | 45,404,359 | |||||
Exercise of options, amount | $ 47 | $ 8,953 | 9,000 | |||
Exercise of options, shares | 470,237 | |||||
Cashless exercise of options, amount | $ 3,680,773 | |||||
Cashless exercise of options, shares | 368 | (368) | ||||
Conversion of notes | $ 26,261 | $ 3,014,739 | 3,041,000 | |||
Conversion of notes, shares | 262,595,733 | |||||
Beneficial conversion feature | 1,750,110 | $ 1,750,110 | ||||
Cancellation of Preferred Stock | $ (300) | 300 | ||||
Cancellation of Preferred Stock, shares | (3,000,000) | |||||
Cashless exercise of Gemini Master Fund Warrants | $ 900 | $ (900) | ||||
Cashless exercise of Gemini Master Fund Warrants, shares | 9,000,000 | |||||
Shares issued in relation to the sale of common stock per the Company's Subscription Agreement, Amount | $ 36,981,862 | |||||
Shares issued in relation to the sale of common stock per the Company's Subscription Agreement, Shares | 3,698 | 1,290,667 | 1,294,365 | |||
Value of warrants expensed (issued to CANX and Hegyi, LLC) | $ 6,765,000 | $ 6,765,000 | ||||
Value of stock options expensed | $ 148,633 | 148,633 | ||||
Unrealized gain (loss) on investment in related party | $ 1,121,237 | 1,121,237 | ||||
Net loss | $ (21,380,138) | (21,380,138) | ||||
Ending balance at Dec. 31, 2013 | $ 0 | $ 75,571 | $ 1,121,237 | $ 17,359,932 | $ (24,400,704) | (5,843,964) |
Ending balance, shares at Dec. 31, 2013 | 0 | 755,694,870 | ||||
Shares issued for services rendered, amount | $ 1,522 | 2,720,078 | 2,721,600 | |||
Shares issued for services rendered, shares | 15,219,420 | |||||
Exercise of options, amount | $ 235 | 44,438 | 44,673 | |||
Exercise of options, shares | 2,351,187 | |||||
Cashless exercise of options, amount | $ 357 | (357) | ||||
Cashless exercise of options, shares | 3,570,455 | |||||
Conversion of notes | $ 10,251 | 1,875,684 | 1,885,935 | |||
Conversion of notes, shares | 102,507,839 | |||||
Value of warrants expensed (issued to CANX and Hegyi, LLC) | 62,500,000 | 62,500,000 | ||||
Value of stock options expensed | $ 724,267 | 724,267 | ||||
Unrealized gain (loss) on investment in related party | $ (1,121,237) | (1,121,237) | ||||
Change in fair value of derivative liability | $ 23,475,908 | 23,475,908 | ||||
Net loss | $ (86,626,099) | (86,626,099) | ||||
Ending balance at Dec. 31, 2014 | $ 0 | $ 87,936 | $ 0 | $ 108,699,950 | $ (111,026,803) | $ (2,238,917) |
Ending balance, shares at Dec. 31, 2014 | 0 | 879,343,771 |
Consolidated Statements of Cash
Consolidated Statements of Cash Flows - USD ($) | 12 Months Ended | |
Dec. 31, 2014 | Dec. 31, 2013 | |
Operating Activities | ||
Net loss | $ (86,626,099) | $ (21,380,138) |
Adjustments to reconcile net loss to net cash (used in) operating activities: | ||
Depreciation and amortization | 33,641 | 22,229 |
Reserve for inventories | 0 | 62,882 |
Amortization of intangible assets | 106,548 | 151,696 |
Change in inventory reserve | 12,711 | 0 |
Stock based compensation | 724,267 | 0 |
Stock options expense | 0 | 148,633 |
Common stock issued for services rendered | 2,721,600 | 1,469,184 |
Amortization of debt discount | 1,363,847 | 5,106,072 |
Change in fair value of derivative liability | 16,252,823 | 3,701,078 |
Fair value of warrants issued | 0 | 7,015,000 |
Expense related to warrant | 62,500,000 | 0 |
Loss on extinguishment of debt | 0 | 960,750 |
Accrued interest on convertible notes payable | 183,214 | 161,587 |
Impairment of goodwill | 0 | 279,515 |
Impairment of intangible assets | 0 | 262,604 |
Realized gain on sale of investment | (186,791) | 0 |
Changes in assets and liabilities: | ||
Restricted Cash | 46,400 | 0 |
Accounts receivable | 183,678 | (127,129) |
Inventory | 357,660 | (210,383) |
Prepaid expenses | (24,790) | 18,071 |
Other receivable | 3,666 | (3,666) |
Deposits | 12,589 | 2,883 |
Accounts payable | 33,926 | 468,517 |
Accrued expenses | 209,421 | 102,291 |
Deferred revenue | (30,888) | (2,750) |
Net cash used in operating activities | (2,122,577) | (1,791,074) |
Investing Activities | ||
Cash paid to acquire shares in Vape Holdings, Inc. | 0 | (1,160) |
Net cash proceeds from shares in Vape Holdings, Inc. | 187,951 | 0 |
Cash paid to acquire Rocky Mountain Hydroponics | 0 | (550,000) |
Cash acquired upon acquisition of Rocky Mountain Hydroponics | 0 | (1,398) |
Capital expenditures | (3,925) | (5,500) |
Net Cash Provided by (used In) Investing Activities: | 184,026 | (558,058) |
Financing Activities | ||
Proceeds from the issuance of common stock | 0 | 1,294,365 |
Proceeds from the issuance of ten percent convertible note | 0 | 156,000 |
Proceeds from the issuance of convertible notes | 350,000 | 1,850,000 |
Proceeds from options exercised | 44,673 | 9,000 |
Proceeds from notes payable | 0 | 1,130,000 |
Payments on notes payable | 0 | (296,719) |
Payments of notes payable - related party | (1,160) | 0 |
Advances from related party | 0 | 1,160 |
Net cash provided by financing activities | 393,513 | 4,143,806 |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (1,545,038) | 1,794,674 |
Cash, beginning of period | 1,831,276 | 36,602 |
Cash, end of period | 286,238 | 1,831,276 |
Supplemental disclosures of cash flows information: | ||
Cash paid for interest | 0 | 4,865 |
Cash paid for income taxes | 0 | 0 |
NON-CASH TRANSACTIONS | ||
Six percent Senior secured convertible notes converted into common stock | 62,025 | 1,427,809 |
Seven percent Senior secured convertible notes converted into common stock | 1,384,207 | 761,349 |
Twelve percent Senior secured convertible notes converted into common stock | 439,688 | 415,842 |
Notes payable for Greners acquisition converted into common stock, principal and interest | 0 | 156,000 |
Common stock issued for cashless exercise of options | 357 | 1,268 |
Common stock issued for services rendered | 0 | 7,015,000 |
Fair value of warrants | 0 | 382,068 |
Common stock issued to acquire Rocky Mountain Hydroponics/Evergreen Garden Center | 0 | 275,000 |
Twelve percent Senior Secured Convertible Notes issued to acquire Rocky Mountain Hydroponics/Evergreen Garden Center | 0 | 800,000 |
Notes payable for Greners acquisition converted into common stock | 0 | 156,000 |
OID Note converted into common stock | $ 0 | $ 280,000 |
1. DESCRIPTION OF BUSINESS AND
1. DESCRIPTION OF BUSINESS AND ORGANIZATION | 12 Months Ended |
Dec. 31, 2014 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
DESCRIPTION OF BUSINESS AND ORGANIZATION | GrowLife, Inc. (“GrowLife” or the “Company”) was incorporated under the laws of the State of Delaware and are 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 has authorized common stock of 3,000,000,000 shares at $0.0001 par value and 3,000,000 shares of preferred stock with a par value of $0.0001 were authorized by the shareholders. There is no preferred stock issued and the terms have not been determined as of September 30, 2015. 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. In addition to the promotion and sales of GrowLife owned brands, GrowLife companies distribute and sell over 3,000 products through its e-commerce distribution channel, Greners.com, and through our regional retail storefronts. GrowLife and its business units are organized and directed to operate strictly in accordance with all applicable state and federal laws. Past Merger and Acquisition Transactions 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 July 23, 2012, the Company completed the purchase of substantially all of the assets of Donna Klauenburch and Tao Klauenburch related to the online retail business Greners.com. On October 24, 2012, the Company’s wholly owned subsidiary GrowLife Hydroponics, Inc., a Delaware corporation, completed the purchase of all of the shares of Soja, Inc. dba Urban Garden Supplies (the “Urban Garden”) from Richard Melograno, Michael Cook, and Scott Glass (collectively the “UG Sellers”). The Company acquired all of the assets and liabilities of Urban Garden which included the inventory of the store located at 22516 Ventura Blvd., Woodland Hills, CA 91364. Agreement and Plan of Merger with SGT Merger Corporation On March 21, 2012, the Company entered into an Agreement and Plan of Merger with SGT Merger Corporation, a Nevada corporation and the Company’s wholly-owned subsidiary, SG Technologies Corp, a Nevada corporation (“SGT”), Sterling C. Scott, and W-Net Fund I, L.P., a Delaware limited partnership and current holder of the Company’s common stock. The transaction closed on April 5, 2012. At the Closing, (i) The Merger Corporation was merged with and into SGT; (ii) SGT became the Company’s wholly-owned subsidiary; and (iii) all SGT shares of common stock were exchanged for shares of our common stock and shares of a new series of our preferred stock, which was designated Series A Preferred Stock. At the Closing, the Company issued to SGT’s former stockholders 157,000,000 shares of the Company’s common stock and 3,000,000 shares of Series A Preferred Stock in exchange for the 200 shares of SGT’s common stock outstanding immediately prior to the Merger. Sterling C. Scott was appointed to the then Company’s Board of Directors and Chief Executive Officer. After the Merger, former holders of SGT’s common stock owned in excess of 50% of our fully-diluted shares of common stock, and as a result of certain other factors, including that all members of our executive management are members of SGT’s management, SGT is deemed to be the acquiring company and the Company was deemed to be the legal acquirer for accounting purposes, and the Merger was accounted for as a reverse merger and a recapitalization in accordance with GAAP. The consolidated financial statements of GrowLife and its subsidiaries reflect the historical activity of SGT, and the historical stockholders’ equity of SGT has been retroactively restated for the equivalent number of shares received in the exchange. Restatement of Previously Issued Unaudited Consolidated Financial Statements In connection with the review of the Form 10-Q for the Company for the three months ended March 31, 2014, management determined that previously issued unaudited consolidated financial statements issued for the three months ended March 31, 2014 contained an error which was non-cash in nature. The Company reviewed the impact of this error and determined that the impact of this error for the three months ended March 31, 2014 consolidated financial statements was material. On June 19, 2014, after review by the Company’s independent registered public accounting firm and legal counsel, the Audit Committee of the Company’s Board of Directors concluded that we should restate our unaudited interim financial statements for the three months ended March 31, 2014 to reflect the correction of the previously identified error in the unaudited consolidated financial statements for this period. The Company filed Form 10Q/A on June 27, 2014 and restated the consolidated balance sheet as of March 31, 2014, and the consolidated statements of operations and consolidated cash flows for the three months ended March 31, 2014 to reflect the correcting book entry described below. There was no impact to our actual cash balances as a result of these errors, and these errors do not change net cash flows from financing activities. There was no impact of this error on net cash flows from operating activities. Transaction with CANX USA LLC On November 19, 2013, the Company entered into a Joint Venture Agreement with CANX, a Nevada limited liability company. Under the terms of the 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 facilitate additional funding for commercially financeable transactions of up to $40,000,000. In connection with closing of the Agreement, CANX agreed to provide a commitment to provide funding in the amount of $1,300,000 for a GrowLife Infrastructure Funding Technology program transaction and provide additional funding of $1,000,000 under a 7% Convertible Note instrument. The Company initially owns a non-dilutive forty five percent (45%) share of OGI and the Company may acquire a controlling share of OGI as provided in the Agreement. In accordance with the Agreement, the Company and CANX entered into a Warrant Agreement whereby the Company delivered to CANX or its assignees a warrant to purchase 140,000,000 shares of the Company common stock at a maximum strike price of $0.033 per share. This transaction was properly recorded in the Company’s 2013 audited consolidated financial statements. In accordance with the Agreement, the Company was required to deliver to CANX or its assignees an additional warrant to purchase 100,000,000 shares of the Company’s common stock at a maximum strike price of $0.033 per share. The warrant was earned by CANX upon completion of the Company’s increase in the number of authorized common shares from 1 billion to 3 billion shares. This increase in authorized shares was effective with the shareholder approval on February 7, 2014. This warrant was not booked at March 31, 2014. After a detailed review of the facts, the Company concluded that the warrant to purchase 100,000,000 shares of the Company’s common stock was earned as of February 7, 2014, and should have been recorded in the consolidated financial statements for the three months ended March 31, 2014. The following tables present the restated items for the applicable date. For the Three Months Ended As Originally Amount of March 31, 2014 Presented Restatement As Restated Interest expense $ (799,631 ) $ (33,700,000 ) $ (34,499,631 ) Net loss (37,773,949 ) (33,700,000 ) (71,473,949 ) Net loss per share $ (0.05 ) $ (0.04 ) $ (0.09 ) As Originally Amount of March 31, 2014 Presented Restatement As Restated Additional paid-in capital $ 35,690,082 $ 33,700,000 $ 69,390,082 Accumulated deficit (62,174,653 ) (33,700,000 ) (95,874,653 ) Suspension of Trading of the Company’s Securities On April 10, 2014, the Company received notice from the SEC that trading of the Company’s common stock on the OTCBB was to be suspended from April 10, 2014 through April 24, 2014. The SEC issued its order pursuant to Section 12(k) of the Securities Exchange Act of 1934. According to the notice received by us from the SEC: “It appears to the Securities and Exchange Commission that the public interest and the protection of investors require a suspension of trading in the securities of GrowLife, Inc. because of concerns regarding the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in GrowLife’s common stock.” The Company did not receive notice from the SEC that it was being formally investigated. The suspension of trading eliminated the Company’s market makers, resulted in our trading on the grey sheets, resulted in legal proceedings and restricted the Company’s access to capital. On April 25, 2014, shares of the Company’s common stock resumed trading on the “grey sheets” and are not formally quoted or listed on any stock exchange at this time. SEC Charges of Manipulating Our Securities On August 5, 2014, the SEC charged four promoters with ties to the Pacific Northwest for manipulating the Company’s open market and conducted pre-arranged, manipulative matched orders and wash trades to create the illusion of an active market in these stocks. The promoters then sold their shares in coordination with aggressive promotional campaigns that urged investors to buy the stocks because the prices were on the verge of rising substantially. On July 9, 2015, the SEC entered into settlements with two of the promoters. In connection with the settlement of their SEC action, the two men are liable for disgorgement of approximately $2.1 million and $306,000 in illicit profits, respectively. Earlier this year the two men were also sentenced to five and three years in prison, respectively, for their participation in the scheme. |
2. GOING CONCERN
2. GOING CONCERN | 12 Months Ended |
Dec. 31, 2014 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
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 $86,626,099 and $21,380,138 for the years ended December 31, 2014 and 2013, respectively. Our net cash used in operating activities was $2,122,577 and $1,791,074 for the years ended December 31, 2014 and 2013, respectively. The Company anticipates that it will record losses from operations for the foreseeable future. As of December 31, 2014, our accumulated deficit was $111,026,803. 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, 2014 and filed with the SEC on September 30, 2015 includes an explanatory paragraph expressing 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. |
2. SIGNIFICANT ACCOUNTING POLIC
2. SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS | 12 Months Ended |
Dec. 31, 2014 | |
Accounting Policies [Abstract] | |
SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS | Basis of Presentation - Principles of Consolidation Cash and Cash Equivalents Accounts Receivable and Revenue - Inventories - Property and Equipment - Goodwill and Intangible Assets - 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. Equity Investments – The Company classifies all highly-liquid investments with stated maturities of greater than three months from the date of purchase and remaining maturities of less than one year as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such investments are viewed as being available to support current operations. The Company classifies and accounts for short-term investments as available-for-sale and reflect realized gains and losses using the specific identification method. Changes in market value, if any, excluding other-than-temporary impairments, are reflected under stockholders’ deficit as unrealized gain/loss on related party investment. Long Lived Assets Fair Value Measurements and Financial Instruments - Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The carrying value of cash, accounts receivable, investment in a related party, accounts payables, accrued expenses, due to related party, notes payable, and convertible notes approximates their fair values due to their short-term maturities. Derivative financial instruments - As of December 31, 2013, the Company had outstanding unsecured 7% convertible notes for $1,850,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $9,324,000 using the Black-Scholes-Merton option pricing model. As of December 31, 2014, the Company had outstanding unsecured 7% convertible notes for $500,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $1,278,878 using the Black-Scholes-Merton option pricing model. As of December 31, 2014, the Company had outstanding unsecured 6% convertible notes for $350,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $822,037 using the Black-Scholes-Merton option pricing model. Sales Returns - Shipping and Handling Fees and Cost - Stock Based Compensation Advertising Costs - Net Income (Loss) Per Share - Dividend Policy Use of Estimates - 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 our consolidated financial statements. In August 2014, FASB issued ASU 2014-15—Presentation of Financial Statements—Going Concern (ASC Subtopic 205-40): “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. In May 2014, FASB issued ASU 2014-09—Revenue from Contracts with Customers (Topic 606): “Section A—Summary and Amendments That Create Revenue from Contracts with Customers, (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40), Section B—Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables, Section C—Background Information and Basis for Conclusions”. In July 2013, FASB issued ASU 2013-11—Income Taxes (ASC Topic 740): “ Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists New Accounting Standards Issued But Not Yet Adopted In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) |
4. PURCHASE - ROCKY MOUNTAIN HY
4. PURCHASE - ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER | 12 Months Ended |
Dec. 31, 2014 | |
ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER | |
PURCHASE - ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER | 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 purchase included 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 Company’s Board of Directors and was appointed President of GrowLife Hydroponics, Inc. The Company paid the former owners of the RMH and EGC Companies $550,000 in cash, $800,000 in 12% Secured Convertible Notes, and $275,000 (7,857,141 shares at $0.035/share) in shares of the Company’s common stock. The purchase price was allocated to specific identifiable tangible and intangible assets at their fair value at the date of the purchase in accordance with Accounting Standards Codification 805, “Business Combinations”, as follows: Allocation $ Assets $ 907,614 Intangible assets 366,000 Goodwill 739,000 Total 2,012,614 Less fair value of liabilities (387,614 ) Purchase price $ 1,625,000 The Company is amortizing the $366,000 of intangible assets at the rate of $6,100 per month over 5 years, with the Company recording $73,200 and $42,700 of non-cash amortization expense related to these intangible assets during the years ended December 31, 2014 and 2013, respectively. The Company consolidated the results from operations from June 7, 2013. The following are unaudited pro-forma results of operations as if the acquisition had occurred on January 1, 2013 for the period ending June 7, 2013: Six Months Ended June 30, 2013, RMH/ EGC Combined As Reported As Reported Pro-Forma Net revenue $ 1,625,625 $ 1,635,143 $ 3,260,768 Cost of goods sold 1,196,277 1,127,113 2,323,390 Gross profit 429,348 508,030 937,378 General and administrative 2,007,464 475,839 2,483,303 Loss from operations (1,578,116 ) 32,191 (1,545,925 ) Other income (expense): Warrant expense (250,000 ) - (250,000 ) Loss on extinguishment of debt (2,750 ) - (2,750 ) Change in fair value of derivative (169,753 ) - (169,753 ) Interest expense, net (799,310 ) - (799,310 ) Net loss $ (2,799,929 ) $ 32,191 $ (2,767,738 ) Net loss per share - (basic and diluted) $ (0.01 ) $ 0.00 $ (0.01 ) Weighted average shares outstanding - (basic and diluted) 500,801,583 6,815,310 507,616,893 |
5. TRANSACTIONS WITH CANX USA,
5. TRANSACTIONS WITH CANX USA, LLC AND LOGIC WORKS LLC | 12 Months Ended |
Dec. 31, 2014 | |
Notes to Financial Statements | |
TRANSACTIONS WITH CANX USA, LLC AND LOGIC WORKS LLC | Transactions with CANX, LLC and Logic Works LLC 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 Agreements require the filing of a registration statement on Form S-1 within 10 days of the filing of the Company’s Form 10-Q for the period ended June 30, 2014. Due to the Company’s grey sheet trading status and other issues, the Company has not filed the registration statement. Previously, the Company entered into a Joint Venture Agreement with CANX USA LLC, 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. In connection with the closing of the Agreement, CANX agreed to provide a commitment for funding in the amount of $1,300,000 for a GrowLife Infrastructure Funding Technology program transaction and provided additional funding under a 7% Convertible Note instrument for $1,000,000, including $500,000 each from Logic Works and China West III Investments LLC, entities that are unaffiliated with CANX and operate as separate legal entities. The Company initially owned a non-dilutive forty five percent (45%) share of OGI and the Company may 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 at a maximum strike price of $0.033 per share. Also in accordance with the Joint Venture Agreement, the Company issued an additional warrant to purchase 100,000,000 shares of the Company’s common stock at a maximum strike price of $0.033 per share on February 7, 2014. On April 10, 2014, as a result of the suspension in the trading of the Company’s securities, the Company went into default on its 7% Convertible Notes Payable for $500,000 each from Logic Works and China West III. As a result, the Company accrued interest on these notes at the default rate of 24% per annum. Furthermore, as a result of being in default on these notes, the Holders could have, at their sole discretion, called these notes. Waiver and Modification Agreement The Company entered into a Waiver and Modification Agreement dated June 25, 2014 with Logic Works LLC whereby the 7% Convertible Note with Logic Works dated December 20, 2013 was modified to provide for (i) a waiver of the default under the 7% Convertible Note; (ii) a conversion price which is the lesser of (A) $0.025 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 the Holder elects to convert all or part of this Note; (iii) the filing of a registration statement on Form S-1 within 10 days of the filing of the Company’s Form 10-Q for the period ended June 30, 2014; and (iv) continuing interest of 24% per annum. China West III converted its Note into common stock on June 4, 2014. Due to the Company’s grey sheet trading status and other issues, the Company has not filed the registration statement. Amended and Restated Joint Venture Agreement The Company entered into an Amended and Restated Joint Venture Agreement dated July 1, 2014 with CANX whereby the Joint Venture Agreement dated November 19, 2013 was modified 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 six months, subject to extension; (ii) up to $10,000,000 in working capital loans, with each loaning requiring approval in advance by CANX; (iii) confirmed that the five year warrants, subject to extension, 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 extension, 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; (vi) a four year term, subject to adjustment and (vi) the filing of a registration statement on Form S-1 within 10 days of the filing of the Company’s Form 10-Q for the period ended June 30, 2014. Due to the Company’s grey sheet trading status and other issues, the Company has not filed the registration statement. Secured Convertible Note and Secured Credit Facility 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, provides for 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. 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. As of September 30, 2014, the Company has borrowed $350,000 under the Secured Convertible Note and Secured Credit Facility dated June 25, 2014 with Logic Works. OGI was incorporated on January 7, 2014 in the State of Nevada and had no business activities as of December 31, 2014. |
6. TERMINATED AGREEMENTS WITH W
6. TERMINATED AGREEMENTS WITH WISE PHOENIX, LLC AND AJOA HOLDINGS, LLC RELATED TO CEN BIOTECH, INC. AND R.X.B.N. INC. | 12 Months Ended |
Dec. 31, 2014 | |
Notes to Financial Statements | |
6. TERMINATED AGREEMENTS WITH WISE PHOENIX, LLC AND AJOA HOLDINGS, LLC RELATED TO CEN BIOTECH, INC. AND R.X.B.N. INC. | On January 24, 2014, the Company executed an Interest Purchase Agreement (“IPA”) whereby Wise Phoenix LLC, a Nevada limited liability company (“WP”), and AJOA Holdings, LLC, a Nevada limited liability company (“AJOA”) (WP and AJOA may be collective referred to as “Sellers”), sold to OGI, 25% of the fully diluted outstanding equity of CEN Biotech, Inc., a corporation organized under the laws of Canada (“CEN”). The Company was obligated to issue shares of common stock to the Sellers. CEN, under the authority and inspection of the Canadian authorities, has been authorized to build a medical marijuana growing facility in Canada, which could produce as much as 1.3 million pounds of dried marijuana annually. On January 24, 2014, the Company entered into a Shareholder Agreement with the shareholders of CEN. The Shareholder Agreement contemplated OGI’s assignment of the 25% equity interest in CEN to the Company and therefore notes that the Company has a 25% interest. The Company, AJOA, WP, Creative Edge Nutrition, Inc., and one individual, collectively representing 93% percent ownership of CEN, have signed the Shareholder Agreement as of January 24, 2014, as well as CEN itself. Another eight individuals representing the remaining 7% were expected to sign the Shareholder Agreement. On January 24, 2014, OGI entered into a Master Equipment, Procurement and Services Agreement (“RXNB MEPS”) with RXNB dictating that the legal cannabis growing needs of WP, AJOA, and RXNB shall generally be supplied by the Company, so long as specification, price, and quality are substantially equal. On April 10, 2014, the Company received notice from both R.X.N.B., Inc. and CEN Biotech, Inc. that both companies were rescinding and/or voiding their respective Interest Purchase Agreements with the Company because the SEC had suspended the Company’s trading in securities due to potential issues of accuracy and adequacy of information in the marketplace. There were no penalties related to the rescinding of the Agreements. |
7. INVENTORY
7. INVENTORY | 12 Months Ended |
Dec. 31, 2014 | |
Inventory Disclosure [Abstract] | |
INVENTORY | Inventory as of December 31, 2014 and December 31, 2013 consists of the following: December 31, 2014 December 31, 2013 (Audited) (Audited) Raw materials $ - $ 94,681 Finished goods 923,565 1,028,037 Inventory in transit - 221,728 Inventory reserve (40,215 ) (90,725 ) Total $ 883,350 $ 1,253,721 Finished goods inventory relates to product at the CompanyÂ’s retail stores, which is product purchased from distributors, and in some cases directly from the manufacturer, and resold at our stores. Inventory in transit relates to product purchased by the Company but which had not been received as of December 31, 2014. 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. |
8. PROPERTY AND EQUIPMENT
8. PROPERTY AND EQUIPMENT | 12 Months Ended |
Dec. 31, 2014 | |
Property, Plant and Equipment [Abstract] | |
PROPERTY AND EQUIPMENT | Property and equipment as of December 31, 2014 and 2013 consists of the following: December 31, December 31, 2014 2013 (Audited) (Audited) Machines and equipment $ 63,172 $ 63,172 Furniture and fixtures 49,787 49,787 Computer equipment 52,304 52,304 Leasehold improvements 56,965 53,040 Total property and equipment 222,228 218,303 Less accumulated depreciation and amortization (198,186 ) (164,545 ) Net property and equipment $ 24,042 $ 53,758 Fixed assets, net of accumulated depreciation, were $24,042 and $53,758 as of December 31, 2014 and 2013, respectively. Accumulated depreciation was $198,186 and $164,545 as of December 31, 2014 and 2013, respectively. Total depreciation expense was $33,641 and $22,229 for the years ended December 31, 2014 and 2013, respectively. All equipment is used for selling, general and administrative purposes and accordingly all depreciation is classified in selling, general and administrative expenses. |
9. INVESTMENT IN VAPE HOLDINGS,
9. INVESTMENT IN VAPE HOLDINGS, INC. | 12 Months Ended |
Dec. 31, 2014 | |
Notes to Financial Statements | |
INVESTMENT IN VAPE HOLDINGS, INC. | In May 2013, the Company made an investment in the amount of $1,160 in Vape Holdings, Inc., a Nevada corporation, and received 200,428 shares. Sterling C. Scott, the Company’s then Chief Executive Officer, also owned 257,320 shares of Vape’s common stock. Furthermore, the former President of GrowLife, Inc., Kyle Tracey, was the Chief Executive Officer of Vape. As a result, the Company deemed Vape to be a related party and therefore has recorded the Company’s investment in Vape as an “Investment in a related party” on its balance sheet. The value of the Company’s investment in Vape as of December 31, 2013 was $5.60 per share, or $1,122,397. The Company sold 200,428 shares of Vape’s common stock during the year ended December 31, 2014 for net proceeds of $186,791 which was recorded as “other income” in the statement of operations. As of December 31, 2014, the Company recorded a $1,122,397 loss in the value of its investment in Vape by decreasing its “Investment in a related party” balance sheet account while also recording a corresponding decrease to “Unrealized loss on investment in a related party” in the Stockholders’ deficit section of the Company’s balance sheet. |
10. INTANGIBLE ASSETS
10. INTANGIBLE ASSETS | 12 Months Ended |
Dec. 31, 2014 | |
Goodwill and Intangible Assets Disclosure [Abstract] | |
INTANGIBLE ASSETS | Intangible assets as of December 31, 2014 consisted of the following: Intangible Assets: Estimated Useful Lives Cost Accumulated Amortization Net Book Value RMH/EGC acquisition- customer contracts 5 years $ 366,000 $ (115,900 ) $ 250,100 Greners acquisition- customer contracts 5 years 230,000 (129,948 ) 100,052 Phototron acquisition- customer contracts 5 years 215,000 (215,000 ) - Soja, Inc. (Urban Garden Supply) acquisition- customer contracts 5 years 60,000 (60,000 ) - Trademarks 3,600 - 3,600 Total intangible assets $ 874,600 $ (520,848 ) $ 353,752 Total amortization expense was $106,548 and $108,966 for the years ended December 31, 2014 and 2013, respectively. The fair value of the assets acquired detailed above, estimated by using a discounted cash flow approach based on future economic benefits associated with agreements with customers, or through expected continued business activities with its customers. In summary, the estimate was based on a projected income approach and related discounted cash flows over five years, with applicable risk factors assigned to assumptions in the forecasted results. |
11. DERIVATIVE LIABILITY
11. DERIVATIVE LIABILITY | 12 Months Ended |
Dec. 31, 2014 | |
Notes to Financial Statements | |
DERIVATIVE LIABILITY | In April 2008, the FASB issued a pronouncement that provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008. 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. 7% Convertible Notes As of December 31, 2013, the Company had outstanding 7% convertible notes for $1,850,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company had valued the derivative liability of these notes at $9,324,000 using the Black-Scholes-Merton option pricing model. As of December 31, 2014, the Company had outstanding unsecured 7% convertible notes for $500,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $1,278,878 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 157.1%; (iii) risk free rate of 0.78%, (iv) stock price of $0.02, (v) per share conversion price of $0.007, and (vi) expected term of .50-.75 years, as the Company estimates that these notes will be converted by June 30, 2015 to September 30, 2015. 6% Convertible Notes As of December 31, 2014, the Company had outstanding unsecured 6% convertible notes for $350,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $822,037 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 157.1%; (iii) risk free rate of 0.78%, (iv) stock price of $.02, (v) per share conversion price of $0.007, and (vi) expected term of 1.46 years. 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. Carrying Fair Value Measurements Using Inputs Amount at Financial Instruments Level 1 Level 2 Level 3 December 31, 2014 Liabilities: Derivative Instruments - Warrants $ - $ 2,100,915 $ - $ 2,100,915 Total $ - $ 2,100,915 $ - $ 2,100,915 For the year ended December 31, 2014, the Company recorded a non-cash gain of $7,223,085 related to the “change in fair value of derivative” expense related to its 6% and 7% convertible notes. |
12. RELATED PARTY TRANSACTIONS
12. RELATED PARTY TRANSACTIONS | 12 Months Ended |
Dec. 31, 2014 | |
Related Party Transactions [Abstract] | |
RELATED PARTY TRANSACTIONS | Since January 1, 2013, 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. Transactions with an Employee On March 14, 2013, the Company entered into a Notes Payable with an employee $25,000. The Note Payable provides for interest 6% per year with a term of ninety days. On June 26, 2013, the Company signed an Amended Note Payable, extending the term through September 30, 2013. On September 6, 2013, the Company issued 1,224,918 shares of its common stock at a per share price of $0.021 as payment in full of the $25,000 principal and $723 of accrued and unpaid interest. On March 20, 2013, this employee purchased 2,000,000 shares of the CompanyÂ’s common stock at a price of $0.035 per share. The aggregate proceeds were $70,000. The shares were purchased as part of the CompanyÂ’s Subscription Agreement dated December 2011. Loans and Advances from Sterling C. Scott Sterling Scott advanced various amounts to us. As of December 31, 2011, the amount due the former CEO was $183,103, and additional advances of $98,897 were made to us through April 5, 2012. On April 5, 2012, Mr. Scott converted $282,000 of these advances into a 6% senior convertible note. Mr. Scott made further advances during the year ended December 31, 2012 which were converted into the 6% senior convertible note. As of December 31, 2013, total amount owed to Mr. Scott was $453,932, which consisted of $413,680 in principal and $40,252 in accrued interest. As of September 10, 2014, the outstanding principal balance on Mr. ScottÂ’s 6% convertible note was $413,680 and accrued interest were sold to two parties not related to us. Investment in Vape Holdings, Inc. See Note 9 for additional details. Agreement with Jeff Giarraputo On February 26, 2014, the Company engaged Jeff Giarraputo, a member of the Board of Directors, as an advisor to the Company 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, the Company 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 the our common stock. All shares subject to the option will vest 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 this stock option was not issued. |
13. CONVERTIBLE NOTES PAYABLE
13. CONVERTIBLE NOTES PAYABLE | 12 Months Ended |
Dec. 31, 2014 | |
Notes to Financial Statements | |
CONVERTIBLE NOTES PAYABLE | Convertible notes payable as of December 31, 2014 consists of the following: Principal Accrued Interest Debt Discount Balance As of December 31, 2014 6% Senior secured convertible notes (2012) $ 413,680 $ 71,669 $ (20,486 ) $ 464,863 6% Secured convertible note (2014) 350,000 9,641 (261,308 ) 98,333 7% Convertible note ($850,000) 250,000 43,973 (93,753 ) 200,220 7% Convertible note ($1,000,000) 250,000 74,468 (102,279 ) 222,189 $ 1,263,680 $ 199,751 $ (477,826 ) $ 985,605 On April 10, 2014, as a result of the SEC suspension in the trading of our securities, the Company went into default on its 6% Senior Secured Convertible Notes Payable and 7% Convertible Notes Payable. As a result, the Company accrued interest on these notes at the default rate of 12% and 24% per annum, respectively. 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 rather than long-term debt as of March 31, 2014. During July 2014, the Company reached settlement agreements with the holders of the 7% Convertible Notes Payable and the Company is not in default under any of our convertible notes payable. The Company is accruing interest at the interest rate in the settlement agreements or convertible notes. 6% Senior Secured Convertible Notes Payable (2012) On September 28, 2012, the Company entered into an Amendment and Exchange Agreement (“Exchange Agreement”) with W-Net, Europa International, Inc., Sterling Scott, Robert Shapiro, Lauri Bilawa, Carla Badaracco and Forglen, LLC. The Exchange Agreement provided for the issuance of new 6% Senior Secured Convertible Notes that replaced the 6% Senior Secured Convertible Notes that were previously issued during 2012. The 6% Notes accrued interest at the rate of 6% per annum and had a maturity date of April 15, 2015. No cash payments were required; however, accrued interest is due at maturity. In the event of a default the Investors may declare the entire principal and accrued interest to be due and payable. Default interest will accrue at the rate of 12% per annum. The 6% Notes were secured by substantially all of the assets of the Company and are convertible into common stock at the rate of $0.007 per share. The Company determined that the conversion feature was a beneficial conversion feature and determined its value to be $102,096 as of December 31, 2013, which the Company recorded as a debt discount to the 6% Notes. As of December 31, 2013 the Company owed principal of $468,680 and accrued interest of $46,196 on these 6% Notes. On January 3, 2014, Carla Badaracco converted $30,000 of principal and $2,901 of accrued and unpaid interest into 4,700,196 shares of the Company’s common stock at a per share conversion price of $0.007. Upon conversion of the $30,000 of principal, the Company recorded $6,535 of non-cash interest expense to fully amortize the remaining debt discount associated with the $30,000 of principal that was converted on January 3, 2014. On July 3, 2014, Robert Shapero, a Holder of the Company’s 6% Convertible Notes Payable, converted $25,000 of principal and $4,136 of accrued interest into 4,162,623 shares of the Company’s common stock at a per share conversion price of $0.007. As of September 10, 2014, the outstanding principal balance on Mr. Scott’s 6% convertible note of $413,680 and accrued interest were sold to two parties not related to us. On April 27, 2015, the Company entered into Amendment One of the Amended and Restated 6% Senior Secured Convertible Note, which increased the interest rate to 12% 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 present. During the year ended December 31, 2014, the Company recorded interest expense of $32,498 and $81,610 of non-cash interest expense related to the amortization of the debt discount associated with these 6% convertible notes, respectively. As of December 31, 2014, the outstanding principal on these 6% convertible notes was $413,680, accrued interest was $71,669, and unamortized debt discount was $20,486, which results in a net amount of $464,683. The Company accrued interest on these notes at the default rate of 12% from April 10, 2014 to July 10, 2014. 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, provides for 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. 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. During the year ended December 31, 2014, the Company recorded interest expense of $9,641 and $88,692 of non-cash interest expense related to the amortization of the debt discount associated with these 6% convertible notes, respectively. As of December 31, 2014, the Company has borrowed $350,000 under the Secured Convertible Note and Secured Credit Facility, accrued interest was $9,641 and the unamortized debt discount was $261,308, which results in a net amount of $98,333. 7% Convertible Note Payable On October 11, 2013, the Company issued 7% Convertible Notes in the aggregate amount of $850,000 to Europa International, Inc., Myli Burger, Adam Liebross and Forglen LLC. The original principal balance is due September 30, 2015 and the annual rate of interest is 7%, which increases to 24% per annum, or the maximum rate permitted under any applicable law, in the event of default. Subject to certain limitations, the Holders can, at its sole discretion, convert the outstanding and unpaid principal and interest into shares of the Company’s common stock. The conversion price for the period of time from the date of this 7% Note through and including September 30, 2014 is the lesser of (a) $0.025 per share and (b) seventy percent (70%) of the average of the three (3) lowest daily volume weighted average closing prices occurring during the twenty (20) consecutive trading days immediately preceding the applicable conversion date on which the Holder elects to convert all or part of this 7% Note, subject to adjustment as provided in this 7% Note. The conversion price is $0.025 per share for the period of October 1, 2014 through the maturity date of September 30, 2015, subject to adjustment as provided in this 7% Note. At any time after the 12-month period immediately following the date of this 7% Note, the Company has the option to pre-pay the entire outstanding principal amount of this 7% Note by paying to the Holder an amount equal to one hundred and fifty percent (150%) of the principal and interest then outstanding. The Company’s obligations under this 7% Note will accelerate upon a bankruptcy event with respect to the Company or any subsidiary, any default in the Company’s payment obligations under this 7% Note, the Company’s failure to issue shares of its common stock in connection with a conversion of this 7% Note, the Company’s or any subsidiary’s breach of any provision of any agreement providing for indebtedness of the Company or such subsidiary in an amount exceeding $100,000, the common stock of the Company being suspended or delisted from trading on the Over the Counter Bulletin Board (the “Primary Market”) market and the OTCQB, the Company losing its status as “DTC Eligible” or the Company becoming late or delinquent in its filing requirements with the Securities and Exchange Commission. Upon any such acceleration of this 7% Note, the Company shall be obligated to pay an amount equal to the greater of (i) one hundred and twenty percent (120%) of the outstanding principal of this 7% Note (plus all accrued but unpaid interest) and (ii) the product of (a) the highest closing price for the Company’s common stock for the five (5) days on which the Primary Market is open for business immediately preceding such acceleration and (b) a fraction, the numerator of which is the outstanding principal of this 7% Note, and the denominator of which is the applicable conversion price as of the date of determination. During July 2014, the Company reached settlement agreements with the holders of the 7% Convertible Notes Payable and the Company is not in default under any of our convertible notes payable. We continue to accrue interest at the interest rate in the settlement agreements. Due to the “reset” clause in these 7% Notes relating to the conversion price, the Company determined that the conversion feature is considered a beneficial conversion feature and created a derivative. On the date of issuance of the $850,000 of 7% convertible notes, the Company calculated the value of the derivative liability using the weighted-average 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 25.09%; (iii) risk free rate of 0.23%, (iv) expected term of 1 year, (v) market value share price of $0.063, and (vi) per share conversion price of $0.025. Based upon this model, the Company determined an initial derivative liability value of $1,292,000, which it recorded as a derivative liability as of the date of issuance while also recording a $442,000 non-cash interest expense and an $850,000 debt discount on its balance sheet in relation to the bifurcation of the embedded conversion options of these notes. On December 20, 2013, the Company issued 7% Convertible Notes for $1,000,000, including $500,000 each from Logic Works and China West III Investments LLC. As previously stated, due to the “reset” clause in these 7% Notes relating to the conversion price, the Company has determined that the conversion feature is considered a beneficial conversion feature and thereby creates a derivative. On the date of issuance of the $1,000,000 of 7% convertible notes, the Company calculated the value of the derivative liability using the weighted-average 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 45.04%; (iii) risk free rate of 0.02%, (iv) expected term of 1 year, (v) market value share price of $0.14, and (vi) per share conversion price of $0.025. Based upon this model, the Company determined an initial derivative liability value of $4,600,000, which it recorded as a derivative liability as of the date of issuance while also recording a $3,600,000 non-cash interest expense and an $1,000,000 debt discount on its balance sheet in relation to the bifurcation of the embedded conversion options of these notes. At December 31, 2013, the outstanding principal balance on these 7% convertible notes was $1,850,000, the accrued and unpaid interest totaled $15,668, and the related debt discount totaled $1,698,292, for a net value of $167,376. On March 7, 2014, the Company issued 2,000,000 shares of its common stock to Adam Liebross related to the conversion of $50,000 of principal at a per share conversion price of $0.025 of the Company’s 7% Convertible Notes Payable. Upon the conversion of the $50,000, the Company recorded $39,583 of non-cash interest expense to fully amortize the remaining portion of the debt discount related to the $50,000 of principal. On March 18, 2014, the Company issued 22,727,668 shares of its common stock to Adam Liebross (8,300,260 shares), Myli Burger Holdings LLC (4,122,248 shares) and Europa International Inc. (10,304,800 shares) related to the total conversion of $550,000 of principal and $18,192 of accrued and interest at a per share conversion price of $0.025 of the Company’s 7% Convertible Notes Payable. Upon the conversion of the $550,000, the Company recorded $435,412 of non-cash interest expense to fully amortize the remaining portion of the debt discount related to the $550,000 of principal. On April 9, 2014, the Company issued 5,347,032 shares of its common stock to Forglen LLC related to the conversion of $125,000 of principal and $8,676 of accrued interest at a per share conversion price of $0.025 of the Company’s 7% Convertible Notes Payable. Upon the conversion of the $125,000, the Company recorded $197,915 of non-cash interest expense to fully amortize the remaining portion of the debt discount related to the $125,000 of principal. 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. The Company recorded a non-cash interest credit $67,703 to record this transaction. On April 9, 2014, the Company issued 5,347,032 shares of its common stock to Forglen LLC related to the conversion of $125,000 of principal and $8,676 of accrued interest at a per share conversion price of $0.025 of the Company’s 7% Convertible Notes Payable. 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 his note payable. On June 4, 2014, the Company issued 20,640,548 shares of the Company’s common stock to China West III Investments LLC related to the conversion of $500,000 of principal and $16,014 of accrued interest at a per share conversion price of $0.033 of the Company’s 7% Convertible Notes Payable. Upon the conversion of the $500,000, the Company recorded $363,640 of non-cash interest expense to fully amortize the remaining portion of the debt discount related to the $500,000 of principal. On July 31, 2014, Logic Works, a Holder of the Company’s 7% Convertible Notes Payable, converted $250,000 of principal into 35,714,286 shares of the Company’s common stock at a per share conversion price of $0.007. Upon the conversion of the $250,000, the Company recorded $181,820 of non-cash interest expense to fully amortize the remaining portion of the debt discount related to the $250,000 of principal. The principal balance due to Logic Works as of December 31, 2014 is $250,000 is due September 30, 2015. The current annual rate of interest is 24% per annum. The conversion price is $0.007 per share. During the year ended December 31, 2014, the Company recorded interest expense of $136,980 and $1,502,260 of non-cash interest expense related to the amortization of the debt discount associated with these 7% convertible notes, respectively. As of March 31, 2015, the outstanding principal on these 7% convertible notes was $500,000, accrued interest was $118,441, and unamortized debt discount was $196,032, which results in a net amount of $422,409. 12% Senior Secured Convertible Notes Payable On June 7, 2013, the Company issued $800,000 of 12% Senior Secured Convertible Notes to the former owners of RMH/EGC. These 12% Convertible Notes have a two year term, with the expiration date of June 8, 2015. The 12% Convertible Notes are secured by substantially all of the Company’s assets. Interest accrues daily on the outstanding principal amount at an annual rate of 12%. The holders of the 12% Convertible Notes can, at their sole discretion, convert any or all of the outstanding principal and accrued and unpaid interest into shares of the Company’s common stock. The conversion price was $0.035 per share, which was subject to adjustment in the event of any stock splits, stock dividends, and similar events. In the event of a default by the Company, the outstanding principal amount of these 12% Convertible Notes, plus accrued interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the holder’s sole discretion, immediately due and payable in cash. In addition, in the event of a default, the rate of interest will increase to 18% and will be calculated in the same manner described above. At December 31, 2013, the outstanding principal balance on these 12% convertible notes was $408,000 with accrued interest totaling $27,608, for a total amount owed of $435,608. On the date these notes were issued, it was determined that there was a beneficial conversion feature valued at $0.005 per share, or $114,285 in the aggregate, which was recorded as a debt discount. As of December 31, 2013, the unamortized debt discount related to these 12% convertible notes was $41,825. On January 31, 2014, the Company issued 12,562,518 shares of its common stock related to the conversion of $408,000 of principal and $31,688 of accrued interest at a per share conversion price of $0.035 of the Company’s 12% Senior Secured Convertible Notes Payable. During the three month period ended March 31, 2014, the Company recorded $4,080 of interest expense and $41,825 of non-cash interest expense related to the amortization of the $41,285 of debt discount. As of March 31, 2014, these 12% convertible notes had been satisfied in full and all related debt discount had been fully amortized as non-cash interest expense. |
14. EQUITY
14. EQUITY | 12 Months Ended |
Dec. 31, 2014 | |
Equity [Abstract] | |
EQUITY | 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, 2014, the Company had had the following sales of unregistered sales of equity securities: On January 3, 2014, the Company issued 4,700,196 shares of its common stock to Carla Badaracco related to the conversion of $30,000 of principal and $2,901 of accrued interest at a per share conversion price of $0.007 of the CompanyÂ’s 6% Senior Secured Convertible Notes Payable. On January 31, 2014, the Company issued 12,562,518 shares of its common stock related to the conversion of $408,000 of principal and $31,688 of accrued interest at a per share conversion price of $0.035 of the CompanyÂ’s 12% Senior Secured Convertible Notes Payable. On January 31, 2014, the Company issued 2,351,187 shares of its common stock to Doug Braun related to the exercise of a stock option granted in fiscal year 2011. The Company received $44,673 or $0.019 per share. On February 13, 2014, the Company issued 29,420 shares of its common stock to Alby Segall, a third party consultant and non-accredited investor, as payment in full for services rendered. The shares were valued at the fair market price of $0.3399 per share. On February 16, 2014, the Company issued 1,250,000 shares of its common stock to Integrity Media, Inc. related to a November 16, 2013 Service Agreement for investor relations. The shares were valued at the fair market price of $0.38 per share. On March 7, 2014, the Company issued 2,000,000 shares of its common stock to Adam Liebross related to the conversion of $50,000 of principal at a per share conversion price of $0.025 of the CompanyÂ’s 7% Convertible Notes Payable. On March 18, 2014, the Company issued 22,727,668 shares of its common stock to Adam Liebross (8,300,260 shares), Myli Burger Holdings LLC (4,122,248 shares) and Europa International Inc. (10,304,800 shares) related to the total conversion of $550,000 of principal and $18,192 of accrued and interest at a per share conversion price of $0.025 of the CompanyÂ’s 7% Convertible Notes Payable. On March 20, 2014, the Company issued 2,775,000 shares of its common stock to Doug Braun related to the cashless exercise of a stock option granted in fiscal year 2011 to purchase 4,500,000 shares of the CompanyÂ’s common stock at $0.23 per share. On March 31, 2014, the Company issued 500,000 shares to each of its four independent Board Directors, The Company valued the 2,000,000 shares at $0.58 per share which was the closing price of the CompanyÂ’s common stock on March 31, 2014. The Company recorded stock based compensation of $1,160,000 during the three months ended March 31, 2014. On April 25, 2014, the Company entered into four Restricted Stock Cancellation Agreements with the four independent members of the CompanyÂ’s Board of Directors, pursuant to which the Directors agreed to each cancel 500,000 shares of the CompanyÂ’s restricted common stock granted to each Director on March 31, 2014. The Company recorded a reduction in common stock and an increase in additional paid in capital of $200 during the nine months ended September 30, 2014 are related to cancellation of the Restricted Stock Agreements. On April 9, 2014, the Company issued 5,347,032 shares of its common stock to Forglen LLC related to the conversion of $125,000 of principal and $8,676 of accrued interest at a per share conversion price of $0.025 of the CompanyÂ’s 7% Convertible Notes Payable. On June 4, 2014, the Company issued 20,640,548 shares of the CompanyÂ’s common stock to China West III Investments LLC related to the conversion of $500,000 of principal and $16,014 of accrued interest at a per share conversion price of $0.033 of the CompanyÂ’s 7% Convertible Notes Payable. On July 1, 2014, Horwitz and Armstrong LLP converted debt of $100,000 debt into 500,000 shares of the CompanyÂ’s common stock at a per share conversion price of $0.11 and a cash payment of $35,000. On July 3, 2014, Sterling Scott exercised his option on a cashless basis and was issued 795,455 shares of restricted common stock at $.085 per share. Mr. Scott was awarded a stock option grant on November 3, 2013 for 12,000,000 shares and had vested 3,500,000 shares as of his resignation on May 19, 2014. The shares were valued at the fair market price of $0.085 per share. On July 3, 2014, Robert Shapero, a Holder of the CompanyÂ’s 6% Convertible Notes Payable, converted $25,000 of principal and $4,136 of accrued interest into 4,162,623 shares of the CompanyÂ’s common stock at a per share conversion price of $0.007. On April 9, 2014, the Company issued 5,347,032 shares of its common stock to Forglen LLC related to the conversion of $125,000 of principal and $8,676 of accrued interest at a per share conversion price of $0.025 of the CompanyÂ’s 7% Convertible Notes Payable. 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 CompanyÂ’s securities. On July 15, 2014, the Company entered into a Severance Agreement with Mr. Genesi whereby Mr. Genesi resigned as Chief Financial Officer and the Parties cancelled the Executive Employment Agreement dated November 3, 2013. The Company agreed to issue 6,000,000 shares of restricted common stock. The shares were valued at the fair market price of $0.08 per share. On July 31, 2014, Logic Works, a Holder of the CompanyÂ’s 7% Convertible Notes Payable, converted $250,000 of principal into 35,714,286 shares of the CompanyÂ’s common stock at a per share conversion price of $0.007. On August 1, 2014, the Company issued 300,000 shares of its common stock to Joseph Barnes pursuant to an Manager Services Agreement with Mr. Barnes dated August 1, 2013. The shares were valued at the fair market price of $0.08 per share. On August 15, 2014, the Company issued 300,000 shares of its common stock to Dennis Kuznetsov pursuant to an Employment Agreement with Mr. Kuznetsov dated August 15, 2013. The shares were valued at the fair market price of $0.06 per share. 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. On September 15, 2014, the Company issued 80,000 shares of its common stock to Josh Nash pursuant to an Employment Agreement with Mr. Nash dated September 15, 2013. The shares were valued at the fair market price of $0.07 per share. On October 1, 2014, the Company issued 100,000 shares of its common stock to Jeremy Belmont pursuant to an Employment Agreement with Mr. Belmont dated October 1, 2013. The shares were valued at the fair market price of $0.06 per share. On October 8, 2014, Fifth Avenue Law Group PLLP converted debt of $68,000 debt into 1,360,000 shares of the CompanyÂ’s common stock at a per share conversion price of $0.05. On October 31, 2014, the Company issued 100,000 shares of its common stock to Frank Hariton pursuant to a Legal Agreement with Mr. Hariton dated August 14, 2014. The shares were valued at the fair market price of $0.05 per share. On December 10, 2014, the Company issued 200,000 shares of its common stock to Velomedia, Inc. pursuant to a debt conversion. The shares were valued at the fair market price of $0.05 per share. Warrants On November 19, 2013, the Company issued a warrant for 140,000,000 common shares to CANX or its assignees in accordance with the Joint Venture Agreement. The warrants have a five-year term with an original exercise price of $0.033 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 24.82%; (iii) risk free rate of 0.05% and (iv) an expected term of one year. The Company expensed the entire $5,040,000 at the time of issuance because the warrants vested immediately and were also exercisable immediately. On February 7, 2014, the Company issued a warrant for 100,000,000 common shares to CANX or its assignees in accordance with the Joint Venture Agreement. The warrants have a five-year term with an original exercise price of $0.033 per share The warrant was earned by CANX upon completion of the CompanyÂ’s increase in the number of authorized common shares from 1 billion to 3 billion shares. This increase in authorized shares was effective with the shareholder approval on February 7, 2014. 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 200%; (iii) risk free rate of 0.78% and (iv) an expected term of five years. The Company expensed the entire $33,700,000 at the time of issuance because the warrants vested immediately and were also exercisable immediately. The Company entered into an Amended and Restated Joint Venture Agreement dated July 1, 2014 with CANX and granted on July 10, 2014 CANX five year warrants, subject to extension, 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; 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 161.0%; (iii) risk free rate of 0.78% and (iv) an expected term of five years. The Company expensed the entire $28,800,000 at the time of issuance because the warrants vested immediately and were also exercisable immediately. On December 11, 2013, the Company issued a warrant for 25,000,000 common shares to Hegyi, LLC, an entity controlled by Marco Hegyi, President of the Company. The warrants have a five-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) an expected term of three years. The Company expensed the entire $1,725,000 at the time of issuance because the warrants vested immediately and were also exercisable immediately. A summary of the warrants issued as of December 31, 2014 were as follows: December 31, 2014 Weighted Average Exercise Shares Price Outstanding at beginning of period 165,000,000 $ 0.040 Issued 400,000,000 0.033 Exercised - - Forfeited - - Expired - - Outstanding at end of period 565,000,000 $ 0.035 Exerciseable at end of period 565,000,000 A summary of the status of the warrants outstanding as of December 31, 2014 is presented below: December 31, 2014 Weighted Weighted Weighted Average Average Average Number of Remaining Exercise Shares Exercise Warrants Life Price Exerciseable Price 540,000,000 4.31 $ 0.033 540,000,000 $ 0.033 25,000,000 3.94 0.080 25,000,000 0.080 565,000,000 4.27 $ 0.035 565,000,000 $ 0.035 Warrants totaling 565,000,000 shares of common stock have an intrinsic value of $0 as of December 31, 2014. |
15. STOCK OPTIONS
15. STOCK OPTIONS | 12 Months Ended |
Dec. 31, 2014 | |
Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | |
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 CompanyÂ’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 CompanyÂ’s Board of Directors voted to increase to 35,000,000 the maximum allowable shares of the CompanyÂ’s common stock allocated to the 2011 Stock Incentive Plan. The Company has outstanding unexercised stock option grants totaling 40,720,000 shares as of December 31, 2014. 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 Company records compensation expense associated with stock options and other equity-based compensation using the Black-Scholes-Merton option valuation model for estimating fair value of stock options granted under our plan. The Company amortizes the fair value of stock options on a ratable basis over the requisite service periods, which are generally the vesting periods. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company estimates the volatility of our common stock based on the historical volatility of its own common stock over the most recent period corresponding with the estimated expected life of the award. The Company bases the risk-free interest rate used in the Black Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid any cash dividends on our common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model and adjusts share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. Stock Option Activity During the year ended December 31, 2013, the Company had the following stock option activity: On November 3, 2013, the CompanyÂ’s Board of Directors granted Sterling Scott, the CompanyÂ’s then Chief Executive Officer, a stock option via the CompanyÂ’s 2011 Stock Incentive Plan to purchase 12,000,000 shares of the CompanyÂ’s common stock at an exercise price of $0.085 per share, which represents the fair value of one share of the CompanyÂ’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 CompanyÂ’s shares on November 1, 2013. Beginning in November 2013 and ending October 2015, the Company will expense the $537,600 over the 24-month vesting term of the option. On July 3, 2014, Sterling Scott exercised his option on a cashless basis and was issued 795,455 shares of restricted common stock at $.085 per share. Mr. Scott was awarded a stock option grant on November 3, 2013 for 12,000,000 shares and had vested 3,500,000 shares as of his resignation on May 19, 2014. On November 3, 2013, the CompanyÂ’s Board of Directors granted John Genesi, the CompanyÂ’s then Chief Financial Officer, a stock option via the CompanyÂ’s 2011 Stock Incentive Plan to purchase 10,000,000 shares of the CompanyÂ’s common stock at an exercise price of $0.085 per share, which represents the fair value of one share of the CompanyÂ’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 $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 CompanyÂ’s shares on November 1, 2013. Beginning in November 2013 and ending October 2015, the Company will expense the $448,000 over the 24-month vesting term of the option. On July 15, 2014, the Company entered into a Severance Agreement with Mr. Genesi whereby Mr. Genesi resigned as Chief Financial Officer and the Parties cancelled the Executive Employment Agreement dated November 3, 2013, including this 10,000,000 share stock option grant. On November 3, 2013, the CompanyÂ’s Board of Directors approved a stock option grant to Rob Hunt, a then Director and President of GrowLife Hydroponics, Inc., via the CompanyÂ’s 2011 Stock Incentive Plan to purchase 12,000,000 shares of the CompanyÂ’s common stock at an exercise price of $0.043 per share, which represents the fair value of one share of the CompanyÂ’s common stock on June 7, 2013. The option grant was made retro-active to June 8, 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 CompanyÂ’s shares on June 7, 2013. Beginning in June 2013 and ending May 2015, the Company will expense the $228,000 over the 24-month vesting term of the option.On October 17, 2014, the Company entered into a Settlement Agreement and Release with Mr. Robert Hunt, whereby the Parties cancelled the Executive Services Agreement ("ESA") dated June 7, 2013 and his stock option grant for 12,000,000 shares. During the year ended December 31, 2014, the Company had the following stock option activity: On January 31, 2014, Doug Braun, a former employee, exercised a stock option granted during fiscal year 2011 to purchase 2,351,187 shares of the CompanyÂ’s common stock at a per share exercise price of $0.019 per share, which generated proceeds of $44,673 for the Company. On March 20, 2014, Doug Braun, a former employee, exercised a stock option granted in fiscal year 2011 to purchase 4,500,000 shares of the CompanyÂ’s common stock at $0.23 per share exercised his option on a cashless basis. Per the terms of the Stock Option Agreement, the net number of shares of the CompanyÂ’s common stock issued to Mr. Braun was 2,775,000. On June 3, 2014, the CompanyÂ’s Board of Directors granted four employees, a stock option via the CompanyÂ’s 2011 Stock Incentive Plan to purchase a total 9,000,000 shares of the CompanyÂ’s common stock at an exercise price of $0.150 per share, which represents the fair value of the CompanyÂ’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 starting August 1, 2013 to October 1, 2013. The term was five years, and the options could be exercised on a cashless basis. The Company valued the options at $608,724 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 200.0%; (iii) risk free rate of 0.78%, (iv) expected term of 3 years, and a per share market price of $0.15, which was the closing price of the CompanyÂ’s shares on June 3, 2014. Beginning in June 2014 and ending October 2015, the Company will expense the $608,724 over the 24-month vesting term of the option. The four employees cancelled the stock option grants as of September 30, 2014. On July 3, 2014, Sterling C. Scott exercised his option on a cashless basis and was issued 795,455 shares of our restricted common stock valued at $67,614 or $.085 per share. On July 15, 2014, the Company entered into a Severance Agreement with Mr. Genesi whereby Mr. Genesi resigned as Chief Financial Officer and the Parties cancelled the Executive Employment Agreement dated November 3, 2013, including the stock option grant for 10,000,000 shares. On July 31, 2014, the CompanyÂ’s Board of Directors granted Mr. Scott an option to purchase 16,000,000 shares of the CompanyÂ’s common stock under the CompanyÂ’s 2011 Stock Incentive Plan at an exercise price of $0.07 per share, the fair market price on July 31, 2014. The shares vest as follows: i Two million shares will vest immediately upon securing a market maker with an approved 15c2-11 resulting in the CompanyÂ’s relisting on OTCBB (not earned as of December 31, 2014); ii Two million shares will vest immediately upon the successful approval and effectiveness of the CompanyÂ’s S-1 (not earned as of December 31, 2014); iii Two million shares will vest immediately upon the CompanyÂ’s resolution of the class action lawsuits (not earned as of December 31, 2014); and, iv Ten million shares will vest on a monthly basis over a period of three years beginning on the July 1, 2014. 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 CompanyÂ’s Stock Incentive Plan, including vesting requirements. The Company valued the grant for 10,000,000 shares at $292,480 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 200.0%; (iii) risk free rate of 0.78%, (iv) expected term of 3 years, and a per share market price of $0.07, which was the closing price of the CompanyÂ’s shares on July 1, 2014. Beginning in August 2014 and ending five years from issuance, the Company will expense the $292,480 over the 36-month vesting term of the option. On October 10, 2014, the CompanyÂ’s Board of Directors granted three employees, a stock option grant via the CompanyÂ’s 2011 Stock Incentive Plan to purchase a total 17,500,000 shares of the CompanyÂ’s common stock at an exercise price of $0.05 per share, which represents the fair value of the CompanyÂ’s common stock on the date of grant. Per the terms of the stock option agreement, the shares (i) stock option grants for 4,400,000 shares vested immediately; and (ii) stock option grants for 14,100,000 shares vest quarterly over thirty six months starting October 10, 2014 to October 9, 2017. The term was five years, and the options could be exercised on a cashless basis. The Company valued the options at $263,908 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 161.5%; (iii) risk free rate of 0.78%, (iv) expected term of 3 years, and a per share market price of $0.04, which was below the $0.05 per share closing price of the CompanyÂ’s shares on October 10, 2014. The Company expensed $69,996 during the year ended December 31, 2014. Beginning in January 2015 and ending October 2017, the Company will expense the $194,922 over the 33-month remaining vesting term of the option. On December 10, 2014, the CompanyÂ’s Board of Directors granted 23 employees, a stock option grant via the CompanyÂ’s 2011 Stock Incentive Plan to purchase a total 7,220,000 shares of the CompanyÂ’s common stock at an exercise price of $0.05 per share, which represents the fair value of the CompanyÂ’s common stock on the date of grant. Per the terms of the stock option agreement, the shares vest (i) stock option grants for 1,000,000 shares vested immediately; and (ii) stock option grants for 6,220,000 shares vest over thirty six months starting December 10, 2014 to December, 2017. The term was five years, and the options could be exercised on a cashless basis. The Company valued the options at $102,286 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 149.8%; (iii) risk free rate of 0.78%, (iv) expected term of 3 years, and a per share market price of $0.04, which was below the $0.05 per share closing price of the CompanyÂ’s shares on December 10, 2014. The Company expensed $7,098 during the year ended December 31, 2014. Beginning in January 2015 and ending December 2017, the Company will expense the $95,187 over the 35-month remaining vesting term of the option. On October 17, 2014, the Company entered into a Settlement Agreement and Release with Mr. Robert Hunt, whereby the Parties cancelled the Executive Services Agreement dated June 7, 2013 and his stock option grant for 12,000,000 shares. As of December 31, 2014, there are 40,720,000 options to purchase common stock at an average exercise price of $0.058 per share outstanding under the 2011 Stock Incentive Plan. The Company recorded $724,267 and $146,633 of compensation expense, net of related tax effects, relative to stock options for the years ended December 31, 2014 and 2013 in accordance with ASC 505. Net loss per share (basic and diluted) associated with this expense was approximately ($0.00). At December 31, 2014, there is approximately $541,011 of total unrecognized costs related to employee granted stock options that are not vested. These costs are expected to be recognized over a period of approximately 4.71 years. Stock option activity for the years ended December 31, 2014 and 2013 was as follows: Weighted Average Options Exercise Price $ Outstanding as of December 31, 2012 12,851,187 $ 0.098 $ 1,259,781 Granted 34,000,000 0.070 2,386,000 Exercised - - - Forfeitures (6,000,000 ) (0.030 ) (180,108 ) Outstanding as of December 31, 2013 40,851,187 0.085 3,465,673 Granted 49,720,000 0.075 3,706,000 Exercised (5,126,187 ) (0.13 ) (682,923 ) Forfeitures (44,725,000 ) (0.092 ) (4,132,751 ) Outstanding as of December 31, 2014 40,720,000 $ 0.058 $ 2,356,000 The following table summarizes information about stock options outstanding and exercisable at December 31, 2014: Weighted Weighted Weighted Average Average Average Range of Number Remaining Life Exercise Price Number Exercise Price Exercise Prices Outstanding In Years Exerciseable Exerciseable Exerciseable $ 0.05 24,720,000 4.80 $ 0.050 5,758,333 $ 0.050 0.07 16,000,000 4.58 0.070 1,944,444 0.070 40,720,000 4.71 $ 0.058 7,702,777 $ 0.056 Stock option grants totaling 40,720,000 shares of common stock have an intrinsic value of $0 as of December 31, 2014. |
16. COMMITMENTS, CONTINGENCIES
16. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS | 12 Months Ended |
Dec. 31, 2014 | |
Commitments and Contingencies Disclosure [Abstract] | |
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”). At a hearing held on July 21, 2014, the three class action lawsuits were consolidated into one case with Lawrence Rosen as the lead plaintiff (the “Consolidated Class Action,” styled Romero et al. vs. GrowLife et al.). 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, the Company’s insurer, filed a lawsuit contesting insurance coverage on the above legal proceedings. The Company made a general appearance in this action. On January 20, 2015, the Court ordered all of the above actions stayed pending completion of mediation of the dispute. The parties then worked diligently to finalize settlement documentation on the above actions. On April 27, 2015, the Court preliminarily approved the proposed settlement of the Consolidated Class Action. On June 1, 2015, the Court preliminarily approved the proposed settlement of the Derivative Actions pursuant to a proposed stipulated settlement agreement. On August 3, 2015, the Court entered a Final Order and Judgment resolving the Consolidated Class Action litigation in its entirety. The Consolidated Class Action was thereby dismissed in its entirety with prejudice and without costs. On August 10, 2015, pursuant to a settlement by and between the Company and AmTrust North America, AmTrust’s lawsuit contesting insurance coverage of the Consolidated Class Action and Derivative Actions was dismissed in its entirety with prejudice pursuant to a Stipulation for Dismissal of Entire Action with Prejudice executed by and between AmTrust and the Company. On August 17, 2015, the Court entered a Final Order and Judgment resolving the Derivative Actions in their entirety. The Derivative Actions were thereby dismissed in their entirety with prejudice. As a result of the foregoing, all litigation discussed herein is resolved in full at this time. The Company is obligated to issue $2 million in common stock or approximately 115.1 million shares related 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. Section 16(b) Claims The Company received four demand letters from potential plaintiffs regarding alleged Section 16(b) short-swing violations by Sterling Scott in July 2014. The Company believes the claims are without merit and has responded to the Section 16(b) claims accordingly. Two of the four claims have acknowledged our position and have been withdrawn. There has been no response to the Company’s position from the remaining two potential plaintiffs. Sales and Payroll Tax Liabilities As of September 30, 2015, the Company owes approximately $87,000 in sales tax and $20,000 in payroll taxes primarily from early 2014. The Company is currently negotiating or operating under payment plans on these liabilities. Other Legal Proceedings The Company is in default on our Portland, Maine and Boulder, Colorado store leases for non-payment of lease payments and the Company is negotiating with the landlords. 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 Current Operating Leases Upon the Company’s acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC, the Company assumed the lease for the RMH/EGC retail hydroponics store located in Portland, Maine. The lease commencement date was May 1, 2013 with an expiration date of April 30, 2016. The monthly rent for year one of the lease was $4,917, with monthly rent of $5,065 in year two, and monthly rent of $5,217 in year three of the lease. The Company has an option to extend the lease for two three year terms as long it is not in default under the lease. 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 January 23, 2014, the Company entered into a lease agreement for retail space for its hydroponics store in Boulder, Colorado. The lease commenced on February 1, 2014 and expires on May 31, 2017. Monthly rent for year one of the lease was $4,051, with monthly rent of $4,173 in year two, $4,298 in year three, and $4,427 for month 37 through 39. The Company has an option to extend the lease for one three year terms as long it is not in default under the lease. On June 18, 2014, the Company rented space at 500 Union Street, Suite 810, Seattle, Washington for its corporate office. The Company rents the space on a month to month basis for $1,700 per month. Terminated Operating Leases In May 2011, the Company entered into a lease for its Phototron business unit to rent a warehouse facility in Gardena, California. The terms of the lease provide for monthly rental expense of $4,065 with annual rent increases through the expiration of the lease on May 31, 2014. During the last twelve months of the lease the monthly rent was $4,313. The Company terminated this lease as of May 31, 2014. Upon the Company’s acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, the Company assumed the lease for the RMH/EGC retail hydroponics store located in Plaistow, New Hampshire. The lease commencement date was May 1, 2013 with an expiration date of January 31, 2016. The monthly rent throughout the term of the lease is $2,105. The Company vacated this store and expect to terminate this lease during 2015. On June 5, 2013, the Company entered into a lease to rent office space in Woodland Hills, California for the Company’s corporate headquarters. The landlord was 20259 Ventura Blvd LP, which was a previous affiliate of a stockholder of our company. The term was for ninety days and can be renewed, or terminated, by either party with thirty days written notice. The monthly rent was $6,758. The Company terminated this lease as of June 30, 2014. On May 30, 2013, the Company entered into a lease to rent retail space in Woodland Hills, California for its Urban Garden Supply (Soja, Inc.) hydroponics store. The term was for ninety days and can be renewed, or terminated, by either party with ninety days written notice. The monthly rent was $3,257. The Company terminated this lease as of June 1, 2015. On August 26, 2013, the Company entered into a lease agreement for warehouse and retail space for its Greners (Business Bloom, Inc.) business unit in Santa Rosa, California. The lease commencement date was September 1, 2013 with an expiration date of August 31, 2015. The monthly rent is $3,000. The Company terminated this lease as of November 25, 2014. On September 23, 2013, the Company entered into an Assignment and Assumption and Amendment of Lease Agreement for the Company’s retail hydroponics store in Peabody, Massachusetts. The original lease between the landlord and Evergreen Garden Center, LLC was assigned from Evergreen Garden Center, LLC to GrowLife Hydroponics, Inc. In addition, the term of the lease was extended from the original expiration date of October 31, 2013 to October 31, 2014. The monthly rent remained at $4,500 through October 31, 2014. The Company’s lease expired on October 31, 2014. 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, Total 2015 $ 175,080 2016 101,432 2017 50,438 2018 - 2019 - Beyond - Total $ 326,950 Employment and Consulting Agreements Employment Agreement with Marco Hegyi On December 4, 2013, the Company entered into an Employment Agreement with Marco Hegyi pursuant to which the Company engaged Mr. Hegyi as its President from December 4, 2013 through December 4, 2016 to provide consulting and management services. Per the terms of the Hegyi Agreement, Mr. Hegyi established an office in Seattle, Washington while also maintaining operations in the Southern California area. Mr. Hegyi’s annual compensation is $150,000 for the first year of the Hegyi Agreement; $250,000 for the second year; and $250,000 for the third year. 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, an entity affiliated with Mr. Hegyi received a Warrant to purchase up to 25,000,000 shares of common stock of the Company at an exercise price of $0.08 per share. The Hegyi Warrant is exercisable for five years. On June 20, 2014, the Company and Mr. Hegyi reduced the warrant life from ten to five years. Mr. Hegyi was 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 agreed to purchase and maintain during the Term a “key manager” 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. The Company and Mr. Hegyi waived this $2,000,000 key manager insurance. 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 terminates Mr. Hegyi’s employment at any time prior to the expiration of the Term without Cause, or if Mr. Hegyi terminates his employment at any time for “Good Reason” or due to a “Disability”, Mr. Hegyi will be entitled to receive (i) his base salary amount through the end of the Term; and (ii) his annual bonus amount for each year during the remainder of the Term, 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. 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 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 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 Scott On July 31, 2014, the Company entered into a Consulting Chief Financial Officer Letter with an entity controlled by Mark Scott pursuant to which the Company engaged Mr. Scott as its Consulting CFO from July 1, 2014 through September 30, 2014, and continuing thereafter until either party provides sixty day notice to terminate the Letter or Mr. Scott enters into a full-time employment agreement. 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. The shares vest as follows: i Two million shares will vest immediately upon securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB (not earned as of December 31, 2014); ii Two million shares will vest immediately upon the successful approval and effectiveness of the Company’s S-1 (not earned as of December 31, 2014); iii Two million shares will 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. 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 employee to the Company is terminated by the Company without Cause or Mr. Scott terminates his employment with the Company for Good Reason as defined in the Scott Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s 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 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 the Company engaged Mr. Barnes as its Senior Vice-President of Business Development from October 1, 2014 on an at will basis. This Promotion Letter supersedes and cancels 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. Mr. Barnes received a bonus of $6,500 and is also entitled to receive a quarterly bonus based on growth of the Company’s growth margin dollars. Mr. Barnes was granted an option to purchase eight million shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at an exercise price on the date of grant. The shares vest as follows: i Two million shares vested immediately; iv Six million shares will vest on a monthly basis over a period of three years beginning on the date of grant. All options will have a five-year life and allow for a cashless exercise. The stock option grant is subject to the terms and conditions of the Company’s Stock Incentive Plan, including vesting requirements. In the event that Mr. Barnes’s continuous status as employee to the Company is terminated by the Company without Cause or Mr. Barnes terminates his employment with the Company for Good Reason as defined in the Barnes Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s 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 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. Finally, Mr. Barnes is entitled to fifteen days of vacation annually and also has certain insurance and travel employment benefits. Mr. Barnes may receive severance benefits and the Company’s obligation under a termination by the Company without Cause or Mr. Barnes terminates his employment for Good Reason are discussed above. Executive Employment Agreement with Sterling C. Scott On November 3, 2013, the Company entered into an Executive Employment Agreement with Sterling C. Scott pursuant to which the Company engaged Mr. Scott as Chief Executive Officer from November 3, 2013 to November 2, 2016 to provide consulting and management services. Per the terms of the Scott Agreement, Mr. Scott received an annual salary of $120,000 and he was eligible for any benefits made generally available by the Company. Mr. Scott was eligible to receive any bonuses made generally available by the Company, and he was 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 included 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 accepted 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. On May 19, 2014, the Board of Directors ratified the resignation of Sterling Scott effective immediately as Chief Executive Officer, Chairman of the Board of Directors and a member of the Board of the Company. This resignation cancelled Mr. Scott’s Executive Employment Agreement. On July 3, 2014, Sterling Scott exercised his option on a cashless basis and was issued 795,455 shares of our restricted common stock valued at $67,614 or $.085 per share. Agreements with Robert Hunt On June 7, 2013, the Company entered into an Executive Services Agreement with Robert Hunt, pursuant to which the Company engaged Mr. Hunt, from June 8, 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 paid 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 was entitled to receive an annual cash bonus (“Bonus”) as follows for its fiscal year 2013: 100% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves 150% of sales projections for such fiscal year; 75% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves at least 125% but less than 150% 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 100% of sales projections for such fiscal year. The Bonus, if any, was 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 was entitled to receive an annual cash bonus (“Bonus”) as follows for its fiscal year 2014: 100% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves 150% of sales projections for such fiscal year; 75% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves at least 125% but less than 150% 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 100% of sales projections for such fiscal year. The Bonus, if any, was 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 received, upon approval by the Company’s Board of Directors, non-qualified options to purchase 12,000,000 shares of the Company’s common stock, at a per share exercise price equal to the fair market value of one share of the Company’s common stock on the June 7, 2013 grant date and vested in 24 equal monthly installments on the last day of each month commencing from and after June 7, 2013. The options included a cashless exercise feature. Mr. Hunt also entered into a NonCompetition, NonSolicitation and NonDisclosure Agreement dated June 7, 2013 whereby Mr. Hunt agreed to not compete with the Company for five years from June 7, 2013 or two years after any termination of employment of Mr. Hunt. On May 30, 2014, the Company announced the resignation of Robert Hunt effective May 23, 2014 as Executive Vice President of Growlife, Inc., President of Growlife Hydroponics. On June 3, 2014, the Board of Directors accepted the resignation of Robert Hunt effective June 2, 2014 as a Director of the Company. On October 17, 2014, the Company entered into a Settlement Agreement and Release with Mr. Robert Hunt, whereby the Parties cancelled the Executive Services Agreement ("ESA") dated June 7, 2013 and his stock option grant for 12,000,000 shares. The Company agreed to issue 6,000,000 shares of restricted common stock under certain conditions that have not been met, pay cash severance totaling $50,000 monthly over five month starting October 25, 2014 and reimburse Mr. Hunt for health insurance benefits and other expenses monthly over five months starting October 25, 2014. The Parties entered into a release agreement. Executive Employment Agreement with John Genesi On November 3, 2013, the Company entered into an Executive Employment Agreement with John Genesi, pursuant to which the Company engaged Mr. Genesi as our Chief Financial Officer from November 3, 2013 through November 2, 2016 to provide consulting and management services. Per the terms of the Genesi Agreement, Mr. Genesi received an annual salary of $100,000, he was eligible for any benefits made generally available by the Company, he was eligible to receive any bonuses made generally available by the Company, and he was 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 included a cashless exercise feature and vested 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 excepted 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. On July 15, 2014, the Company entered into a Severance Agreement with Mr. Genesi whereby Mr. Genesi resigned as Chief Financial Officer and the Parties cancelled the Executive Employment Agreement dated November 3, 2013, including the stock option grant for 10,000,000 shares. The Company agreed to issue 6,000,000 shares of restricted common stock, pay cash severance of six months of compensation payable monthly and provide health insurance benefits for six months from the Termination Date. Promotion Letter with Jeremy Belmont On October 10, 2014, the Company entered into a Promotion Letter with Jeremy Belmont which was effective October 1, 2014 pursuant to which the Company engaged Mr. Belmont as Vice President of Sales from October 1, 2014 on an at will basis. This Promotion Letter supersedes and cancels the Manager Services Agreement with Mr. Belmont dated October 1, 2013. Per the terms of the Belmont Agreement, Mr. Belmont’s compensation is $72,000 on an annual basis. Mr. Belmont received a bonus of $6,500 and is also entitled to receive a quarterly bonus based on growth of the Company’s growth margin dollars. Mr. Barnes was granted an option to purchase five million shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at an exercise price on the date of grant. The Shares vest as follows: i One million four hundred thousand shares vested immediately; iv Three million six hundred thousand shares will vest on a monthly basis over a period of three years beginning on the date of grant. All options will have a five-year life and allow for a cashless exercise. The stock option grant is subject to the terms and conditions of the Company’s Stock Incentive Plan, including vesting requirements. In the event that Mr. Belmont’s continuous status as employee to the Company is terminated by the Company without Cause or Mr. Belmont terminates his employment with the Company for Good Reason as defined in the Belmont Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s Stock Incentive, then 100% of the total number of Shares shall immediately become vested. Mr. Belmont 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. Finally, Mr. Belmont is entitled to fifteen days of vacation annually and also has certain insurance and travel employment benefits. Mr. Belmont may receive severance benefits and the Company’s obligation under a termination by the Company without Cause or Mr. Belmont terminates his employment for Good Reason are discussed above. Promotion Letter with Adam Edwards On October 10, 2014, the Company entered into a Promotion Letter with Adam Edwards which was effective October 1, 2014 pursuant to which the Company engaged Mr. Edwards as Vice President of Sales from October 1, 2014 on an at will basis. Per the terms of the Edwards Agreement, Mr. Edwards’s compensation is $72,000 on an annual basis. Mr. Edwards received a bonus of $6,500 and is also entitled to receive a quarterly bonus based on growth of the Company’s growth margin dollars. Mr. Edwards was granted 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 an exercise price on the date of grant. The shares vested quarterly over thirty six months. 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. Edwards’s continuous status as employee to the Company is terminated by the Company without Cause or Mr. Edwards terminates his employment with the Company for Good Reason as defined in the Edwards Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s Stock Incentive, then 100% of the total number of shares shall immediately become vested. Mr. Edwards 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. Finally, Mr. Edwards is entitled to fifteen days of vacation annually and also has certain insurance and travel employment benefits. Mr. Edwards may receive severance benefits and the Company’s obligation under a termination by the Company without Cause or Mr. Edwards terminates his employment for Good Reason are discussed above. Mr. Edwards resigned July 11, 2015. Offer Letter with Tina Qunell On November 20, 2014, the Company entered into an Offer Letter with Tina Qunell which was effective November 24, 2014 pursuant to which the Company engaged Ms. Qunell as Vice President of Marketing on an at will basis. Per the terms of the Qunell Agreement, Ms. Qunell’s compensation is $72,000 on an annual basis. Ms. Qunell was granted an option to purchase seven million shares of the Company’s co |
17. INCOME TAXES
17. INCOME TAXES | 12 Months Ended |
Dec. 31, 2014 | |
Income Tax Disclosure [Abstract] | |
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 $86,626,099 and $21,380,138 for the years ended December 31, 2014 and 2013, respectively. The Company has net operating loss carryforwards of approximately $11,964,000, which expire in 2022-2033. Because it is not more likely than not that sufficient tax earnings will be generated to utilize the net operating loss carryforwards, a corresponding valuation allowance of approximately $4,785,742 was established as of December 31, 2014. Additionally, under the Tax Reform Act of 1986, the amounts of, and benefits from, net operating losses may be limited in certain circumstances, including a change in control. Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. There can be no assurance that the Company will be able to utilize any net operating loss carryforwards in the future. For the year ended December 31, 2014, the CompanyÂ’s effective tax rate differs from the federal statutory rate principally due to net operating losses, warrants issued for services, change in fair value of derivative and debt discount. The principal components of the CompanyÂ’s deferred tax assets at December 31, 2014 and 2013 are as follows: 2014 2013 U.S. operations loss carry forward and state at statutory rate of 40% $ 4,785,742 $ 3,612,736 Less valuation allowance (4,785,742 ) (3,612,736 ) Net deferred tax assets - - Change in valuation allowance $ (4,785,742 ) $ (3,612,736 ) A reconciliation of the United States Federal Statutory rate to the CompanyÂ’s effective tax rate for the years ended December 31, 2014 and 2013 is as follows: 2014 2013 Federal statutory rate -34.0 % -34.0 % State income tax rate -6.0 % -6.0 % Change in valuation allowance 40.0 % 40.0 % Effective tax rate 0.0 % 0.0 % |
18. SUBSEQUENT EVENTS
18. SUBSEQUENT EVENTS | 12 Months Ended |
Dec. 31, 2014 | |
Subsequent Events [Abstract] | |
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, 2014, the following material transactions occurred: Equity Issuance On June 16, 2015, the Company issued 7,772,725 shares of its common stock to Horwitz + Armstrong LLP pursuant to a conversion of debt for legal services rendered to the Company in the amount of $171,000. The shares were valued at the fair market price of $0.022 per share. 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”). At a hearing held on July 21, 2014, the three class action lawsuits were consolidated into one case with Lawrence Rosen as the lead plaintiff (the “Consolidated Class Action,” styled Romero et al. vs. GrowLife et al.). 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, the Company’s insurer, filed a lawsuit contesting insurance coverage on the above legal proceedings. The Company made a general appearance in this action. On January 20, 2015, the Court ordered all of the above actions stayed pending completion of mediation of the dispute. The parties then worked diligently to finalize settlement documentation on the above actions. On April 27, 2015, the Court preliminarily approved the proposed settlement of the Consolidated Class Action. On June 1, 2015, the Court preliminarily approved the proposed settlement of the Derivative Actions pursuant to a proposed stipulated settlement agreement. On August 3, 2015, the Court entered a Final Order and Judgment resolving the Consolidated Class Action litigation in its entirety. The Consolidated Class Action was thereby dismissed in its entirety with prejudice and without costs. On August 10, 2015, pursuant to a settlement by and between the Company and AmTrust North America, AmTrust’s lawsuit contesting insurance coverage of the Consolidated Class Action and Derivative Actions was dismissed in its entirety with prejudice pursuant to a Stipulation for Dismissal of Entire Action with Prejudice executed by and between AmTrust and the Company. On August 17, 2015, the Court entered a Final Order and Judgment resolving the Derivative Actions in their entirety. The Derivative Actions were thereby dismissed in their entirety with prejudice. As a result of the foregoing, all litigation discussed herein is resolved in full at this time. The Company is obligated to issue $2 million in common stock or approximately 115.1 million shares related 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 and Payroll Tax Liabilities As of September 30, 2015, the Company owes approximately $87,000 in sales tax and $20,000 in payroll taxes primarily from early 2014. The Company is currently negotiating or operating under payment plans on these liabilities. Other Legal Proceedings The Company is in default on our Portland, Maine and Boulder, Colorado store leases for non-payment of lease payments and the Company is negotiating with the landlords. The Company is currently subject to legal actions with various vendors. Terminated Operating Leases Upon the Company’s acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, the Company assumed the lease for the RMH/EGC retail hydroponics store located in Plaistow, New Hampshire. The lease commencement date was May 1, 2013 with an expiration date of January 31, 2016. The monthly rent throughout the term of the lease is $2,105. The Company vacated this store and expect to terminate this lease during 2015. On May 30, 2013, the Company entered into a lease to rent retail space in Woodland Hills, California for its Urban Garden Supply (Soja, Inc.) hydroponics store. The term was for ninety days and can be renewed, or terminated, by either party with ninety days written notice. The monthly rent was $3,257. The Company terminated this lease as of June 1, 2015. Secured Convertible Debenture Transaction with TCA Global Credit Master Fund LP On July 9, 2015, the Company closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP, an accredited investor, whereby the Company agreed to sell and TCA agreed to purchase up to $3,000,000 of senior secured convertible redeemable debentures, of which $700,000 was purchased on July 9, 2015 and up to $2,300,000 may be purchased in additional closings. The closing of the Transaction occurred on July 9, 2015. Securities Purchase Agreement As set forth above, the Company entered into the Securities Purchase Agreement on July 9, 2015 with the Purchaser whereby the Purchaser agreed to purchase up to $3,000,000 of the Debentures of which $700,000 was purchased at Closing. In connection with the Securities Purchase Agreement, the Company, at the discretion of Purchaser, may request in writing at any time after the Closing that Purchaser purchase additional Debentures at agreed upon time periods and amounts. The Securities Purchase Agreement also provides that the Company shall, within ninety days of Closing, file any and all periodic reports with the SEC required under the Exchange Act to become current with the Company’s reporting requirements under the Securities Exchange Act of 1934 and shall use its best efforts to obtain approval for the listing and quotation of the Company’s common stock on the OTC Bulletin Board, or another Principal Trading Market more senior and established than the OTC Pink Sheets and approved by Purchaser, and to have such Common Stock trading in such Principal Trading Market. In consideration for advisory services provided by Purchaser to the Company prior to the Closing, the Company paid to Purchaser a fee by issuing to Purchaser 10,000,000 shares of Common Stock at $0.02 per share equal to $200,000. The Advisory Fee Shares were valued at a price equal to the lowest volume weighted average price for the Common Stock for the five (5) Business Days immediately prior to the Effective Date, as reported by Bloomberg (the “VWAP”). The Advisory Fee Shares are subject to adjustment as provided in the Securities Purchase Agreement. The Company also paid certain transaction, due diligence and document review and legal fees to the Purchaser in connection with the Transaction. Senior Secured, Convertible, Redeemable Debenture The Company entered into an initial Debenture dated July 9, 2015 with the Purchaser whereby the Purchaser purchased $700,000 in senior secured, convertible, redeemable debentures in exchange for $700,000 in immediately available and lawful money of the United States of America. The Company promised to pay Purchaser, by no later than October 9, 2016 the outstanding principal together with interest on the outstanding principal amount under the Debenture, at the rate of 18% per annum simple interest. The Company shall make monthly payments of principal and interest on the Debenture to Purchaser, while this Debenture is outstanding, until the Maturity Date, based on the payment, amortization and redemption premium schedule attached as Schedule A to the Debenture. The indebtedness evidenced by this Debenture is also secured by a first priority lien and security interest in all of the assets and property of the Company and various other instruments as set forth in the Transaction Documents, subject to the terms and conditions of the Intercreditor Agreement described below. At any time while the Debenture is outstanding on or after the Closing, (i) if mutually agreed upon by the parties or (ii) at the sole option of the Purchaser upon the occurrence of an Event of Default, the Purchaser 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 Common Stock of the Company at a price equal to: (i) the Conversion Amount (the numerator); divided by Security Agreement(s) In connection with the Securities Purchase Agreement and Debenture, the Company entered into a Security Agreement dated July 9, 2015 with the Purchaser whereby the Company agreed to grant to Purchaser an unconditional and continuing, first priority security interest in all of the assets and property of the Company to secure the prompt payment, performance and discharge in full of all of Company’s obligations under the Debentures, the Purchase Agreement and the other Transaction Documents, subject to the terms and conditions of the Intercreditor Agreement set forth below. In addition, each of the Company’s operating subsidiaries also agreed to grant to Purchaser an unconditional and continuing, first priority security interest in all of the assets and property of each of the subsidiaries to further secure the prompt payment, performance and discharge in full of all of Company’s obligations under the Debentures, the Purchase Agreement and the other Transaction Documents. Guaranty Agreement(s) In connection with the Securities Purchase Agreement and Debenture, each of the Company’s operating subsidiaries entered into Guaranty Agreements dated July 9, 2015 with the Purchaser whereby the subsidiaries agreed to guarantee and become surety to Purchaser for the full, prompt and unconditional payment of the Liabilities and payment and performance of the Company’s obligations and the full, prompt and unconditional performance of each term and condition to be performed by Company under the Debentures and the other Transaction Documents. Pledge Agreement(s) In connection with the Securities Purchase Agreement and Debenture, the Company entered into Pledge Agreements dated July 9, 2015 with the Purchaser whereby the Company agreed to pledge to Purchaser its shares in each of its operating subsidiaries as further security for the payment and performance of the Company’s obligations and the full, prompt and unconditional performance of each term and condition to be performed by Company under the Debentures and the other Transaction Documents. Intercreditor Agreement and Related Creditor Documentation On July 9, 2015, the Company, each of its subsidiaries, Purchaser and Logic Works LLC (an existing senior secured creditor) entered into an Intercreditor Agreement whereby Purchaser and Logic Works agreed that their outstanding senior secured loans to the Company be secured on a pari passu pari passu In addition, the Company, each of its subsidiaries, Purchaser and Jordan Scott and Andrew Gentile, respectively, each entered into Subordination Agreements dated July 9, 2015 whereby Scott and Gentile agreed to subordinate their existing 6% Senior Secured Convertible Notes, dated March 16, 2012, as amended, all of their indebtedness, obligations and security interests to the Purchaser’s security interests as more fully set forth in the Transaction Documents. On July 9, 2015, Jordan Scott and Andrew Gentile 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 present. Committed Equity Facility Transaction with TCA Global Credit Master Fund LP On August 6, 2015, the Company closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP, 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 occurred on August 6, 2015. In consideration for advisory services provided by Purchaser to the Company prior to the, the Company paid to Purchaser a fee by issuing to Purchaser 5,000,000 shares of Common Stock at $0.02 per share equal to $100,000. The Advisory Fee Shares were valued at price equal to the lowest volume weighted average price for the Common Stock for the five (5) Business Days immediately prior to the issuance. The Advisory Fee Shares are subject to adjustment as provided in the Securities Purchase Agreement. The Company also paid certain transaction, due diligence and document review and legal fees in connection with the Transaction. The Company entered into a Debenture dated August 6, 2015 with the Purchaser whereby the Purchaser purchased $100,000 in a senior secured, convertible, redeemable debenture from the Company in exchange for $100,000. The Company promised to pay Purchaser, by no later than August 6, 2016 the outstanding principal together with interest on the outstanding principal amount under the Debenture, at the rate of 18% per annum simple interest. The Debenture is convertible only at the option of Purchaser upon an event of default at a conversion price of 90%)of the lowest of the average daily volume weighted average price of the Company’s Common Stock during the 5 trading days immediately prior to the conversion date. In addition, the Company entered into a Committed Equity Facility, dated August 6, 2015, with the Purchaser in which the Company agreed to issue and sell to the Purchaser, from time to time, and the Purchaser agreed to purchase from the Company up to $3,000,000 of the Company’s common stock. At any time during the duration of the agreement and after the Company has an effective registration statement outstanding, the Company can require the Purchaser to purchase shares of its common stock which will be sold by Purchaser with the net proceeds provided to the Company, subject to the terms and conditions set forth in the Committed Equity Facility. To facilitate the Committed Equity Facility, the Company has granted the Purchaser certain registration rights pursuant to a Registration Rights Agreement dated August 6, 2015 whereby the Company will file a registration statement no later than seventy-five (75) days from the date of the Committed Equity Facility to facilitate the purchase and sale of the common stock under the Committed Equity Facility. The Company’s obligation to repay the Debenture disclosed herein as well as the Debenture entered into by and between the Company and Purchaser on July 9, 2015, are secured by security agreements, guaranty agreements and pledge agreements previously disclosed on the Company’s Current Report on Form 8-K filed July 16, 2015 and incorporated herein by reference. The Company has additionally entered into an Authorization Agreement, dated August 6, 2015, with Purchaser whereby scheduled re-payments to the Purchaser will be debited from the Company’s account according to the payment schedule of both the Debenture disclosed herein and the Debenture previously entered into on July 9, 2015. 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 due to the fact that the Company has moved its headquarters to Seattle, Washington and is no longer required to register as a foreign entity in California. Enactment of Heightened Corporate Governance Measures Pursuant to Derivative Action Settlement In connection with the settlement of the Derivative Actions related to alleged violations of federal securities laws, the Company agreed to expansive corporate governance measures. During October 2015, the Company expects to enact heightened corporate governance measure pursuant to the Derivative Action Settlement. |
2. SIGNIFICANT ACCOUNTING POL25
2. SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS (Policies) | 12 Months Ended |
Dec. 31, 2014 | |
Accounting Policies [Abstract] | |
Basis of Presentation | The accompanying consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. The preparation of these 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 $50,000 and $90,725 at December 31, 2014 and 2013, respectively. |
Property and Equipment | Property and equipment are stated at cost. Assets acquired held under capital leases are initially recorded at the lower of the present value of the minimum lease payments discounted at the implicit interest rate (35% for assets currently held under capital lease) 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 CompanyÂ’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 unitÂ’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 companiesÂ’ 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. |
Equity Investments | The Company classifies all highly-liquid investments with stated maturities of greater than three months from the date of purchase and remaining maturities of less than one year as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such investments are viewed as being available to support current operations. The Company classifies and accounts for short-term investments as available-for-sale and reflect realized gains and losses using the specific identification method. Changes in market value, if any, excluding other-than-temporary impairments, are reflected under stockholdersÂ’ deficit as unrealized gain/loss on related party investment. |
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: Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The carrying value of cash, accounts receivable, investment in a related party, accounts payables, accrued expenses, due to related party, notes payable, and convertible notes approximates their fair values due to their short-term maturities. |
Derivative Financial Instruments | The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date. As of December 31, 2013, the Company had outstanding unsecured 7% convertible notes for $1,850,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $9,324,000 using the Black-Scholes-Merton option pricing model. As of December 31, 2014, the Company had outstanding unsecured 7% convertible notes for $500,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $1,278,878 using the Black-Scholes-Merton option pricing model. As of December 31, 2014, the Company had outstanding unsecured 6% convertible notes for $350,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $822,037 using the Black-Scholes-Merton option pricing model. |
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, 2014 and 2013, there was no reserve for sales returns, which are minimal based upon our historical experience. |
Shipping and Handling Fees and Cost | For the years December 31, 2014 and 2013, shipping and handling fees billed to customers totaled $128,351 and $242,779, respectively, and were included in revenue. |
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. |
Advertising Costs | Advertising costs are expensed as incurred and are recorded in general and administrative expenses. For the years ended December 31, 2014 and 2013, advertising costs of $141,369 and $220,514, respectively, were included in general and administrative expenses. |
Net Income (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, 2014, there were stock options outstanding for the purchase of 40,720,000 common shares, warrants for the purchase of 565,000,000 common shares, 209,061,571 shares related to convertible debt and 6,000,000 of shares which we may have to issue under a settlement agreement which could potentially dilute future earnings per share. As of December 31, 2013, there were stock options outstanding for the purchase of 40,851,187 common shares, warrants for the purchase of 165,000,000 common shares and 160,626,377 shares related to convertible debt which could potentially dilute future earnings per share. |
Dividend Policy | The Company has never paid any cash dividends and intends, for the foreseeable future, to retain any future earnings for the development of our business. Our future dividend policy will be determined by the board of directors on the basis of various factors, including our results of operations, financial condition, capital requirements and investment opportunities. |
Use of Estimates | In preparing these consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions included in the CompanyÂ’s 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. |
Recently Issued 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 our consolidated financial statements. In August 2014, FASB issued ASU 2014-15—Presentation of Financial Statements—Going Concern (ASC Subtopic 205-40): “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. In May 2014, FASB issued ASU 2014-09—Revenue from Contracts with Customers (Topic 606): “Section A—Summary and Amendments That Create Revenue from Contracts with Customers, (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40), Section B—Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables, Section C—Background Information and Basis for Conclusions”. In July 2013, FASB issued ASU 2013-11—Income Taxes (ASC Topic 740): “ Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists New Accounting Standards Issued But Not Yet Adopted In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) |
1. DESCRIPTION OF BUSINESS AN26
1. DESCRIPTION OF BUSINESS AND ORGANIZATION (Tables) | 12 Months Ended |
Dec. 31, 2014 | |
Description Of Business And Organization Tables | |
Restatements of transaction with CANX USA LLC | For the Three Months Ended As Originally Amount of March 31, 2014 Presented Restatement As Restated Interest expense $ (799,631 ) $ (33,700,000 ) $ (34,499,631 ) Net loss (37,773,949 ) (33,700,000 ) (71,473,949 ) Net loss per share $ (0.05 ) $ (0.04 ) $ (0.09 ) As Originally Amount of March 31, 2014 Presented Restatement As Restated Additional paid-in capital $ 35,690,082 $ 33,700,000 $ 69,390,082 Accumulated deficit (62,174,653 ) (33,700,000 ) (95,874,653 ) |
4. PURCHASE - ROCKY MOUNTAIN 27
4. PURCHASE - ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER (Tables) - ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER | 12 Months Ended |
Dec. 31, 2014 | |
Purchase Price for tangible and intangible Assets | Allocation $ Assets $ 907,614 Intangible assets 366,000 Goodwill 739,000 Total 2,012,614 Less fair value of liabilities (387,614 ) Purchase price $ 1,625,000 |
Pro-forma operating results of Rocky Mountain Hydroponics/Evergreen Garden Center | Six Months Ended June 30, 2013, RMH/ EGC Combined As Reported As Reported Pro-Forma Net revenue $ 1,625,625 $ 1,635,143 $ 3,260,768 Cost of goods sold 1,196,277 1,127,113 2,323,390 Gross profit 429,348 508,030 937,378 General and administrative 2,007,464 475,839 2,483,303 Loss from operations (1,578,116 ) 32,191 (1,545,925 ) Other income (expense): Warrant expense (250,000 ) - (250,000 ) Loss on extinguishment of debt (2,750 ) - (2,750 ) Change in fair value of derivative (169,753 ) - (169,753 ) Interest expense, net (799,310 ) - (799,310 ) Net loss $ (2,799,929 ) $ 32,191 $ (2,767,738 ) Net loss per share - (basic and diluted) $ (0.01 ) $ 0.00 $ (0.01 ) Weighted average shares outstanding - (basic and diluted) 500,801,583 6,815,310 507,616,893 |
7. INVENTORY (Tables)
7. INVENTORY (Tables) | 12 Months Ended |
Dec. 31, 2014 | |
Inventory Disclosure [Abstract] | |
Schedule of Inventory | December 31, 2014 December 31, 2013 (Audited) (Audited) Raw materials $ - $ 94,681 Finished goods 923,565 1,028,037 Inventory in transit - 221,728 Inventory reserve (40,215 ) (90,725 ) Total $ 883,350 $ 1,253,721 |
8. PROPERTY AND EQUIPMENT (Tabl
8. PROPERTY AND EQUIPMENT (Tables) | 12 Months Ended |
Dec. 31, 2014 | |
Property, Plant and Equipment [Abstract] | |
Property and equipment | December 31, December 31, 2014 2013 (Audited) (Audited) Machines and equipment $ 63,172 $ 63,172 Furniture and fixtures 49,787 49,787 Computer equipment 52,304 52,304 Leasehold improvements 56,965 53,040 Total property and equipment 222,228 218,303 Less accumulated depreciation and amortization (198,186 ) (164,545 ) Net property and equipment $ 24,042 $ 53,758 |
10. INTANGIBLE ASSETS (Tables)
10. INTANGIBLE ASSETS (Tables) | 12 Months Ended |
Dec. 31, 2014 | |
Goodwill and Intangible Assets Disclosure [Abstract] | |
INTANGIBLE ASSETS | Intangible Assets: Estimated Useful Lives Cost Accumulated Amortization Net Book Value RMH/EGC acquisition- customer contracts 5 years $ 366,000 $ (115,900 ) $ 250,100 Greners acquisition- customer contracts 5 years 230,000 (129,948 ) 100,052 Phototron acquisition- customer contracts 5 years 215,000 (215,000 ) - Soja, Inc. (Urban Garden Supply) acquisition- customer contracts 5 years 60,000 (60,000 ) - Trademarks 3,600 - 3,600 Total intangible assets $ 874,600 $ (520,848 ) $ 353,752 |
11. DERIVATIVE LIABILITY (Table
11. DERIVATIVE LIABILITY (Tables) | 12 Months Ended |
Dec. 31, 2014 | |
Notes to Financial Statements | |
Fair Value of Derivative Liability | Carrying Fair Value Measurements Using Inputs Amount at Financial Instruments Level 1 Level 2 Level 3 December 31, 2014 Liabilities: Derivative Instruments - Warrants $ - $ 2,100,915 $ - $ 2,100,915 Total $ - $ 2,100,915 $ - $ 2,100,915 |
13. LONG-TERM CONVERTIBLE NOTES
13. LONG-TERM CONVERTIBLE NOTES PAYABLE (Tables) | 12 Months Ended |
Dec. 31, 2014 | |
Notes to Financial Statements | |
Convertible notes summarized | Principal Accrued Interest Debt Discount Balance As of December 31, 2014 6% Senior secured convertible notes (2012) $ 413,680 $ 71,669 $ (20,486 ) $ 464,863 6% Secured convertible note (2014) 350,000 9,641 (261,308 ) 98,333 7% Convertible note ($850,000) 250,000 43,973 (93,753 ) 200,220 7% Convertible note ($1,000,000) 250,000 74,468 (102,279 ) 222,189 $ 1,263,680 $ 199,751 $ (477,826 ) $ 985,605 |
14. EQUITY (Tables)
14. EQUITY (Tables) | 12 Months Ended |
Dec. 31, 2014 | |
Equity [Abstract] | |
Warrants | A summary of the warrants issued as of December 31, 2014 were as follows: December 31, 2014 Weighted Average Exercise Shares Price Outstanding at beginning of period 165,000,000 $ 0.040 Issued 400,000,000 0.033 Exercised - - Forfeited - - Expired - - Outstanding at end of period 565,000,000 $ 0.035 Exerciseable at end of period 565,000,000 A summary of the status of the warrants outstanding as of December 31, 2014 is presented below: December 31, 2014 Weighted Weighted Weighted Average Average Average Number of Remaining Exercise Shares Exercise Warrants Life Price Exerciseable Price 540,000,000 4.31 $ 0.033 540,000,000 $ 0.033 25,000,000 3.94 0.080 25,000,000 0.080 565,000,000 4.27 $ 0.035 565,000,000 $ 0.035 |
15. STOCK OPTIONS (Tables)
15. STOCK OPTIONS (Tables) | 12 Months Ended |
Dec. 31, 2014 | |
Stock Options Tables | |
Stock options | Stock option activity for the years ended December 31, 2014 and 2013 was as follows: Weighted Average Options Exercise Price $ Outstanding as of December 31, 2012 12,851,187 $ 0.098 $ 1,259,781 Granted 34,000,000 0.070 2,386,000 Exercised - - - Forfeitures (6,000,000 ) (0.030 ) (180,108 ) Outstanding as of December 31, 2013 40,851,187 0.085 3,465,673 Granted 49,720,000 0.075 3,706,000 Exercised (5,126,187 ) (0.13 ) (682,923 ) Forfeitures (44,725,000 ) (0.092 ) (4,132,751 ) Outstanding as of December 31, 2014 40,720,000 $ 0.058 $ 2,356,000 The following table summarizes information about stock options outstanding and exercisable at December 31, 2014: Weighted Weighted Weighted Average Average Average Range of Number Remaining Life Exercise Price Number Exercise Price Exercise Prices Outstanding In Years Exerciseable Exerciseable Exerciseable $ 0.05 24,720,000 4.80 $ 0.050 5,758,333 $ 0.050 0.07 16,000,000 4.58 0.070 1,944,444 0.070 40,720,000 4.71 $ 0.058 7,702,777 $ 0.056 |
16. COMMITMENTS, CONTINGENCIE35
16. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS (Tables) | 12 Months Ended |
Dec. 31, 2014 | |
Commitments and Contingencies Disclosure [Abstract] | |
Schedule of Future minimum rental payments | Years Ended December 31, Total 2015 $ 175,080 2016 101,432 2017 50,438 2018 - 2019 - Beyond - Total $ 326,950 |
17. INCOME TAXES (Tables)
17. INCOME TAXES (Tables) | 12 Months Ended |
Dec. 31, 2014 | |
Income Tax Disclosure [Abstract] | |
Deferred tax assets | 2014 2013 U.S. operations loss carry forward and state at statutory rate of 40% $ 4,785,742 $ 3,612,736 Less valuation allowance (4,785,742 ) (3,612,736 ) Net deferred tax assets - - Change in valuation allowance $ (4,785,742 ) $ (3,612,736 ) |
Income tax reconciliation | 2014 2013 Federal statutory rate -34.0 % -34.0 % State income tax rate -6.0 % -6.0 % Change in valuation allowance 40.0 % 40.0 % Effective tax rate 0.0 % 0.0 % |
1. DESCRIPTION OF BUSINESS AN37
1. DESCRIPTION OF BUSINESS AND ORGANIZATION (Details) - USD ($) | 3 Months Ended | 12 Months Ended | |
Mar. 31, 2014 | Dec. 31, 2014 | Dec. 31, 2013 | |
Net loss | $ (86,626,099) | $ (21,380,138) | |
Additional paid-in capital | 108,699,950 | 17,359,932 | |
Accumulated deficit | $ (111,026,803) | $ (24,400,704) | |
As Originally Presented | |||
Interest expense | $ (799,631) | ||
Net loss | $ (37,773,949) | ||
Net loss per share | $ (0.05) | ||
Additional paid-in capital | $ 35,690,082 | ||
Accumulated deficit | (62,174,653) | ||
Amount of Restatement | |||
Interest expense | (33,700,000) | ||
Net loss | $ (33,700,000) | ||
Net loss per share | $ (0.04) | ||
Additional paid-in capital | $ 33,700,000 | ||
Accumulated deficit | (33,700,000) | ||
As Restated | |||
Interest expense | (34,499,631) | ||
Net loss | $ (71,473,949) | ||
Net loss per share | $ (0.09) | ||
Additional paid-in capital | $ 69,390,082 | ||
Accumulated deficit | $ (95,874,653) |
2. SIGNIFICANT ACCOUNTING POL38
2. SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2014 | Dec. 31, 2013 | |
Accumulated deficit | $ (111,026,803) | $ (24,400,704) |
Shipping and handling revenue | 128,351 | 242,779 |
Advertising costs | 141,369 | 220,514 |
Inventory reserve | $ 50,000 | $ 90,725 |
4. PURCHASE - ROCKY MOUNTAIN 39
4. PURCHASE - ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER (Details) - USD ($) | Dec. 31, 2014 | Dec. 31, 2013 | Jun. 30, 2013 |
Goodwill | $ 739,000 | $ 739,000 | |
ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER | |||
Assets | $ 907,614 | ||
Intangible assets | 366,000 | ||
Goodwill | 739,000 | ||
Total Assets | 2,012,614 | ||
Less fair value of liabilities assumed | (387,614) | ||
Purchase price | $ 1,625,000 |
4. PURCHASE - ROCKY MOUNTAIN 40
4. PURCHASE - ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER (Details 1) - USD ($) | 5 Months Ended | 12 Months Ended | |
Jun. 07, 2013 | Dec. 31, 2014 | Dec. 31, 2013 | |
Net revenue | $ 8,537,676 | $ 4,858,976 | |
Cost of Goods Sold | 7,172,376 | 4,005,863 | |
Gross Profit | 1,365,300 | 853,113 | |
General and administrative expenses | 4,405,503 | 3,163,007 | |
Loss from operations | (6,486,070) | (10,942,711) | |
Other income (expense) | |||
Warrant expense | 2,721,600 | 1,469,184 | |
Loss on extinguishment of debt | 0 | (960,750) | |
Change in fair value of derivatives | (16,252,823) | (3,701,078) | |
Interest expense, net | (64,073,997) | (5,275,749) | |
Net loss | $ (86,626,099) | $ (21,380,138) | |
Net loss per share (basic and diluted) | $ (0.10) | $ (0.04) | |
Weighted average shares outstanding (basic and diluted) | 834,503,868 | 593,034,653 | |
As Reported | |||
Net revenue | $ 1,625,625 | ||
Cost of Goods Sold | 1,196,277 | ||
Gross Profit | 429,348 | ||
General and administrative expenses | 2,007,464 | ||
Loss from operations | (1,578,116) | ||
Other income (expense) | |||
Warrant expense | (250,000) | ||
Loss on extinguishment of debt | (2,750) | ||
Change in fair value of derivatives | (169,753) | ||
Interest expense, net | (799,310) | ||
Net loss | $ (2,799,929) | ||
Net loss per share (basic and diluted) | $ (0.01) | ||
Weighted average shares outstanding (basic and diluted) | 500,801,583 | ||
RMH/ EGC As Reported | |||
Net revenue | $ 1,635,143 | ||
Cost of Goods Sold | 1,127,113 | ||
Gross Profit | 508,030 | ||
General and administrative expenses | 475,839 | ||
Loss from operations | $ 32,191 | ||
Other income (expense) | |||
Warrant expense | |||
Loss on extinguishment of debt | |||
Change in fair value of derivatives | |||
Interest expense, net | |||
Net loss | $ 32,191 | ||
Net loss per share (basic and diluted) | $ 0 | ||
Weighted average shares outstanding (basic and diluted) | 6,815,310 | ||
Combined Pro-Forma | |||
Net revenue | $ 3,260,768 | ||
Cost of Goods Sold | 2,323,390 | ||
Gross Profit | 937,378 | ||
General and administrative expenses | 2,483,303 | ||
Loss from operations | (1,545,925) | ||
Other income (expense) | |||
Warrant expense | (250,000) | ||
Loss on extinguishment of debt | (2,750) | ||
Change in fair value of derivatives | (169,753) | ||
Interest expense, net | (799,310) | ||
Net loss | $ (2,767,738) | ||
Net loss per share (basic and diluted) | $ (0.01) | ||
Weighted average shares outstanding (basic and diluted) | 507,616,893 |
4. PURCHASE - ROCKY MOUNTAIN 41
4. PURCHASE - ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2014 | Dec. 31, 2013 | |
Amortization expense | $ 106,548 | $ 108,966 |
ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER | ||
Amortization period | 5 years | |
Amortization expense | $ 73,200 | $ 42,700 |
7. INVENTORY (Details)
7. INVENTORY (Details) - USD ($) | Dec. 31, 2014 | Dec. 31, 2013 |
Notes to Financial Statements | ||
Raw materials | $ 0 | $ 94,681 |
Finished goods | 923,565 | 1,028,037 |
Inventory in transit | 0 | 221,728 |
Inventory reserve | (50,000) | (90,725) |
Total inventory | $ 883,350 | $ 1,253,721 |
8. PROPERTY AND EQUIPMENT (Deta
8. PROPERTY AND EQUIPMENT (Details) - USD ($) | Dec. 31, 2014 | Dec. 31, 2013 |
Notes to Financial Statements | ||
Machines and equipment | $ 63,172 | $ 63,172 |
Furniture and fixtures | 49,787 | 49,787 |
Computer equipment | 52,304 | 52,304 |
Leasehold improvements | 56,965 | 53,040 |
Total property and equipment | 222,228 | 218,303 |
Less accumulated depreciation and amortization | (198,186) | (164,545) |
Net property and equipment | $ 24,042 | $ 53,758 |
8. PROPERTY AND EQUIPMENT (De44
8. PROPERTY AND EQUIPMENT (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2014 | Dec. 31, 2013 | |
Property And Equipment Details Narrative | ||
Depreciation expense | $ 33,641 | $ 22,229 |
9. INVESTMENT IN VAPE HOLDING45
9. INVESTMENT IN VAPE HOLDINGS, INC. (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2014 | Dec. 31, 2013 | |
Investment In Vape Holdings Inc. Details Narrative | ||
Investments in a related party | $ 0 | $ 1,122,397 |
Loss in the value of its investment | $ 1,122,397 |
10. INTANGIBLE ASSETS (Details)
10. INTANGIBLE ASSETS (Details) | Dec. 31, 2014USD ($) |
Intangible assets, gross | $ 874,600 |
Accumulated Amortization | (520,848) |
Intangible assets, net | 353,752 |
RMH/EGC acquisition - customer contracts | |
Intangible assets, gross | 366,000 |
Accumulated Amortization | (115,900) |
Intangible assets, net | 250,100 |
Greners acquisition - customer contracts | |
Intangible assets, gross | 230,000 |
Accumulated Amortization | (129,948) |
Intangible assets, net | 100,052 |
Phototron acquisition - customer contracts | |
Intangible assets, gross | 215,000 |
Accumulated Amortization | (215,000) |
Intangible assets, net | 0 |
Soja, Inc. (Urban Garden Supply) acquisition - customer contracts | |
Intangible assets, gross | 60,000 |
Accumulated Amortization | (60,000) |
Intangible assets, net | 0 |
Trademarks | |
Intangible assets, gross | 3,600 |
Accumulated Amortization | 0 |
Intangible assets, net | $ 3,600 |
10. INTANGIBLE ASSETS (Details
10. INTANGIBLE ASSETS (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2014 | Dec. 31, 2013 | |
Intangible Assets Details Narrative | ||
Amortization expense | $ 106,548 | $ 108,966 |
11. DERIVATIVE LIABILITY (Detai
11. DERIVATIVE LIABILITY (Details) | Dec. 31, 2014USD ($) |
Derivative Instruments - Warrants | $ 2,100,915 |
Level 1 | |
Derivative Instruments - Warrants | 0 |
Level 2 | |
Derivative Instruments - Warrants | 2,100,915 |
Level 3 | |
Derivative Instruments - Warrants | $ 0 |
13. CONVERTIBLE NOTES PAYABLE (
13. CONVERTIBLE NOTES PAYABLE (Details) - USD ($) | Dec. 31, 2014 | Dec. 31, 2013 |
Long-term convertible notes payable | $ 98,333 | $ 974,479 |
6% Senior Secured Convertible Notes | ||
Principal amount due | 413,680 | |
Accrued Interest | 71,669 | |
Debt discount | (20,486) | |
Long-term convertible notes payable | 464,863 | |
6% Secured convertible note (2014) | ||
Principal amount due | 350,000 | |
Accrued Interest | 9,641 | |
Debt discount | (261,308) | |
Long-term convertible notes payable | 98,333 | |
7% Convertible Notes (850,000) | ||
Principal amount due | 250,000 | |
Accrued Interest | 43,973 | |
Debt discount | (93,753) | |
Long-term convertible notes payable | 200,220 | |
7% Convertible Notes (1,000,000) | ||
Principal amount due | 250,000 | |
Accrued Interest | 74,468 | |
Debt discount | (102,279) | |
Long-term convertible notes payable | 222,189 | |
Total Long term convertible Debt Member | ||
Principal amount due | 1,263,680 | |
Accrued Interest | 199,751 | |
Debt discount | (477,826) | |
Long-term convertible notes payable | $ 985,605 |
14. EQUITY (Details)
14. EQUITY (Details) - Warrant [Member] | 12 Months Ended |
Dec. 31, 2014$ / sharesshares | |
Shares | |
Outstanding-beginning of year (in shares) | 165,000,000 |
Issued | 400,000,000 |
Exercised | 0 |
Forfeited | 0 |
Expired | 0 |
Outstanding at end of year | 565,000,000 |
Exerciseable at end of year | 565,000,000 |
Weighted Average Exercise Price | |
Outstanding-beginning | $ / shares | $ 0.040 |
Issued | $ / shares | $ 0.033 |
Exercised | $ / shares | |
Forfeited | $ / shares | |
Expired | $ / shares | |
Outstanding at end of year | $ / shares | $ 0.035 |
14. EQUITY - Price Range (Detai
14. EQUITY - Price Range (Details) | 12 Months Ended |
Dec. 31, 2014$ / sharesshares | |
Price range 1 | |
Outstanding at end of year | 540,000,000 |
Weighted average remaining life | 4 years 3 months 22 days |
Outstanding at end of year | $ / shares | $ 0.033 |
Exerciseable at end of year | 540,000,000 |
Weighted average exercise price exercisable | $ / shares | $ 0.033 |
Price range 2 | |
Outstanding at end of year | 25,000,000 |
Weighted average remaining life | 3 years 11 months 8 days |
Outstanding at end of year | $ / shares | $ 0.080 |
Exerciseable at end of year | 25,000,000 |
Weighted average exercise price exercisable | $ / shares | $ 0.080 |
Warrant [Member] | |
Outstanding at end of year | 565,000,000 |
Outstanding at end of year | $ / shares | $ 0.035 |
Exerciseable at end of year | 565,000,000 |
Weighted average exercise price exercisable | $ / shares | $ 0.035 |
15. STOCK OPTIONS (Details)
15. STOCK OPTIONS (Details) - USD ($) | 12 Months Ended | |
Dec. 31, 2014 | Dec. 31, 2013 | |
Aggregate Intrinsic Value | ||
Exercised | $ (44,673) | $ (9,000) |
Options | ||
Shares | ||
Outstanding-beginning of year (in shares) | 40,851,187 | 12,851,187 |
Issued | 49,720,000 | 34,000,000 |
Exercised | (5,126,187) | 0 |
Forfeitures | (44,725,000) | (6,000,000) |
Outstanding-end of year (in shares) | 40,720,000 | 40,851,187 |
Weighted Average Exercise Price | ||
Outstanding-beginning | $ 0.085 | $ 0.098 |
Issued | 0.075 | 0.070 |
Exercised | (0.13) | 0 |
Forfeitures | (0.092) | (0.030) |
Outstanding at end of year | $ 0.058 | $ 0.085 |
Aggregate Intrinsic Value | ||
Outstanding-beginning of year (in dollars) | $ 3,465,673 | $ 1,259,781 |
Issued | 3,706,000 | 2,386,000 |
Exercised | (682,923) | 0 |
Forfeitures | (4,132,751) | (180,108) |
Outstanding-end of year (in dollars) | $ 2,356,000 | $ 3,465,673 |
15. STOCK OPTIONS - Price range
15. STOCK OPTIONS - Price range (Details) | 12 Months Ended |
Dec. 31, 2014$ / sharesshares | |
Price 0.05 | |
Outstanding-end of year (in shares) | 24,720,000 |
Weighted average remaining life in years | 4 years 9 months 18 days |
Outstanding at end of year | $ / shares | $ 0.050 |
Exerciseable at end of year | 5,758,333 |
Weighted average exercise price exercisable | $ / shares | $ 0.050 |
Price 0.07 | |
Outstanding-end of year (in shares) | 16,000,000 |
Weighted average remaining life in years | 4 years 6 months 29 days |
Outstanding at end of year | $ / shares | $ 0.070 |
Exerciseable at end of year | 1,944,444 |
Weighted average exercise price exercisable | $ / shares | $ 0.070 |
Options | |
Outstanding-end of year (in shares) | 40,720,000 |
Outstanding at end of year | $ / shares | $ 0.058 |
Exerciseable at end of year | 7,702,777 |
Weighted average exercise price exercisable | $ / shares | $ 0.056 |
16. COMMITMENTS, CONTINGENCIE54
16. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS (Details) | Dec. 31, 2014USD ($) |
Commitments And Contingencies Details | |
2,015 | $ 175,080 |
2,016 | 101,432 |
2,017 | 50,438 |
2,018 | 0 |
2,019 | 0 |
Beyond | 0 |
Total | $ 326,950 |
17. INCOME TAXES - Deferred tax
17. INCOME TAXES - Deferred tax asset (Details) - USD ($) | 12 Months Ended | |
Dec. 31, 2014 | Dec. 31, 2013 | |
Deferred tax assets: | ||
Net operating loss carryforwards | $ 4,785,742 | $ 3,612,736 |
Less valuation allowance | (4,785,742) | (3,612,736) |
Net deferred tax asset | 0 | 0 |
Change in valuation allowance | $ (4,785,742) | $ (3,612,736) |
17. INCOME TAX - Rate reconcili
17. INCOME TAX - Rate reconciliation (Details) | 12 Months Ended | |
Dec. 31, 2014 | Dec. 31, 2013 | |
Income Tax Details | ||
Income tax benefit at the federal statutory rate | (34.00%) | (34.00%) |
State income tax benefit, net of federal tax benefit | (6.00%) | (6.00%) |
Change in valuation allowance | 40.00% | 40.00% |
Total | 0.00% | 0.00% |
17. INCOME TAXES (Details Narra
17. INCOME TAXES (Details Narrative) | 12 Months Ended |
Dec. 31, 2014USD ($) | |
Income Taxes Details Narrative | |
Net operating loss carryforwards | $ 11,964,000 |
Net operating loss carryforwards expiration | Net operating loss expire in 2022-2033 |