Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains “ forward looking statements ” (as that term is defined in Section 27A(i)(1) of the Securities Act), including statements concerning plans, objectives, goals, strategies, expectations, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. In some cases, you can identify forward-looking statements by terminology such as “ may ”, “ should ”, “ expect ”, “ plan ”, “ intend ”, “ anticipate ”, “ believe ”, “ estimate ”, “ predict ”, “ potential ” or “ continue ”, the negative of such terms or other comparable terminology. In evaluating these statements, you should consider various factors, including the assumptions, risks and uncertainties outlined in this report, if any, and our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on May 22, 2017, under the heading “ Risk Factors ”. These factors or any of them may cause our actual results to differ materially from any forward-looking statement made in this report. Forward-looking statements in this report include, among others, statements regarding our capital needs, business plans, and expectations.

While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding future events, our actual results will likely vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Some of the risks and assumptions include, but are not limited to: our need for additional financing; our limited operating history; our history of operating losses; the competitive environment in which we operate; the level of government regulation, including environmental regulation; changes in governmental regulation and administrative practices; our dependence on key personnel; our ability to fully implement our business plan; our ability to effectively manage our growth; and other regulatory, legislative and judicial developments.

We advise the reader that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf.

The forward-looking statements in this report are made as of the date of this report and we do not intend or undertake to update any of the forward-looking statements to conform these statements to actual results, except as required by applicable law, including the securities laws of the United States.

The following is management’s discussion and analysis of the significant factors that affected the Company’s financial position and results of operations during the periods included in the accompanying unaudited consolidated financial statements. You should read this in conjunction with the discussion under “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016, and the unaudited consolidated financial statements included in this quarterly report. Expectations of future financial condition and results of operations are based upon current business plans and may change.

Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our consolidated financial statements included above under “ Part I - Financial Information ” - “ Item 1. Financial Statements ”.

In this Quarterly Report on Form 10-Q, we may rely on and refer to information regarding our industry which comes from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, and we have not independently verified any of it.

Unless the context requires otherwise, references to the “ Company, ” “ we, ” “ us, ” “ our, ” “ Code Green ” and “ Code Green Apparel Corp. ” refer specifically to Code Green Apparel Corp.

In addition, unless the context otherwise requires and for the purposes of this report only:

Description of Business

The Company was incorporated in Nevada on December 11, 2007.

The Company is engaged in the business of manufacturing, selling, marketing and outfitting companies of all sizes and industries with eco-friendly apparel made from recycled textiles. The corporate apparel market encompasses a wide variety of apparel products and accessories ranging from customized uniforms to caps, t-shirts and aprons. We believe that many of these companies are actively seeking ways to incorporate being more environmentally friendly into their company and would entertain mandating that all uniforms be manufactured from recycled fabrics. As all of our products are eco-friendly, our strategy is to emphasize the sustainability features while at the same time providing our products at market competitive rates.

Code Green reduces the environmental impact of the apparel industry by designing, manufacturing and distributing apparel products from eco-friendly and sustainable textiles. It supports both the uniform needs and sustainability initiatives of companies worldwide, by offering a complete line of recycled apparel in the form of T-shirts, hats, polo shirts, pants, shorts, aprons, jackets and accessories. In addition, the Company fulfills recycled clothing needs for organizations of all sizes hosting promotional, fundraising and special events. Its apparel collection is also available to distributors and screen printers through its wholesale distribution channel.

Recent Transactions:

On April 12, 2017, our Board of Directors and majority shareholder (i.e., George J. Powell, III, the Company’s Chief Executive Officer and Director, who holds 1,000 shares of Series A Preferred Stock, which provides the holder thereof the right to vote 51% of the vote on all shareholder matters), via a written consent to action without meeting, approved the filing of a Certificate of Amendment to our Articles of Incorporation to increase the authorized common stock of the Company, from one billion (1,000,000,000) shares of common stock, $0.001 par value per share, to one billion, nine hundred and ninety million (1,990,000,000) shares of common stock, $0.001 par value share (the “ Amendment ”). 

The Amendment did not change (a) the number of authorized shares of our preferred stock, which remained ten million (10,000,000) shares of preferred stock, $0.001 par value per share; (b) the rights of our Board of Directors to designate the rights and preferences of such preferred stock (as further described in our Articles of Amendment, as amended); or (c) the previously designated series of our preferred stock. 

On April 13, 2017, the Company filed the Amendment with the Nevada Secretary of State, which became effective on the same date. 

In April 2017, the Company entered into a consulting agreement with a consultant, pursuant to which the consultant agreed to provide business consulting services to the company for a term of three months (extendable at the option of the parties), and the Company agreed to pay the consultant $25,000 per month in consideration for such services, with $25,000 due upon the parties’ entry into the agreement, $25,000 due in 15 days and $25,000 due in 30 days, which amounts were paid.

On April 12, 2017, pursuant to a Note Purchase Agreement,  we sold a 10% Convertible Debenture in the principal amount of $32,500 (which included a $5,000 original issue discount) to Sojourn Investments, LP (“ Sojourn ” and the “ Sojourn Debenture ”). The principal amount of the debenture accrues at 10% per annum until paid or converted into common stock (18% upon the occurrence of an event of default). The Sojourn Debenture has a maturity date of January 12, 2018, provided the debenture can be repaid at any time, provided that if repaid more than 30 days after the issuance date, we are required to pay 130% of the principal amount of the debenture, together with accrued interest.

The Sojourn Debenture is convertible into shares of our common stock at any time, at a conversion price equal to 58% of the average of the lowest three (3) closing prices during the prior 20 trading days.

In the event we fail to deliver the shares of common stock issuable upon conversion of the  debenture  within three business days of our receipt of a conversion notice, we are required to pay  Sojourn  $1,000 per day for each day that we fail to deliver such shares for up to the first 30 days that the failure continues.

At no time may the  Sojourn Debenture  be converted into shares of our common stock if such conversion would result in  Sojourn  and its affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of our common stock.

The  Sojourn Debenture  provides for standard and customary events of default such as failing to timely make payments under the  Sojourn Debenture  when due and the failure of the Company to timely comply with the Exchange Act reporting requirements. Additionally, upon the occurrence of certain defaults, as described in the  Sojourn Debenture , we are required to pay  Sojourn  liquidated damages in addition to the amount owed under the  Sojourn Debenture .

We hope to repay the  Sojourn Debenture  prior to any conversion. In the event that the  Sojourn Debenture  is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the  Sojourn Debenture  is converted into common stock.

On April 17, 2017, we sold Carebourn a Convertible Promissory Note in the principal amount of $135,575 (the “ April 2017 Carebourn Convertible Note ”), pursuant to a Securities Purchase Agreement, dated April 17, 2017. The April 2017 Carebourn Convertible Note bears interest at the rate of 12% per annum (22% upon an event of default) and is due and payable on April 17, 2018. The April 2017 Carebourn Convertible Note had an original issue discount of $27,075. In addition, we paid $8,500 of Carebourn’s expenses and attorneys’ fees in connection with the sale of the note, which were included in the principal amount of the note.

Periodic payments are due by us on the April 2017 Carebourn Convertible Note at the rate of $565 per day ($135,575 / 240 days)(the “ Repayment Amount ”), via direct withdrawal from our bank account. The Repayment Amount automatically adjusts to a prorated higher amount in the amount any penalties or events of default occur under the April 2017 Carebourn Convertible Note.

The April 2017 Carebourn Convertible Note provides for standard and customary events of default such as failing to timely make payments under the April 2017 Carebourn Convertible Note when due, the failure of the Company to timely comply with the Exchange Act reporting requirements and the failure to maintain a listing on the OTCQB. Additionally, upon the occurrence of certain defaults, as described in the April 2017 Carebourn Convertible Note, we are required to pay Carebourn liquidated damages in addition to the amount owed under the April 2017 Carebourn Convertible Note.

The principal amount of the April 2017 Carebourn Convertible Note and all accrued interest is convertible at the option of the holder thereof into our common stock at any time following the 180th day after the April 2017 Carebourn Convertible Note was issued. The conversion price of the April 2017 Carebourn Convertible Note is equal to 50% of the average of the lowest three (3) trading prices of the Company’s common stock during the twenty trading days prior to the conversion date.

In the event we fail to deliver the shares of common stock issuable upon conversion of the note within three business days of our receipt of a conversion notice, we are required to pay Carebourn $1,500 per day for each day that we fail to deliver such shares.

At no time may the April 2017 Carebourn Convertible Note be converted into shares of our common stock if such conversion would result in Carebourn and its affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of our common stock.

We may prepay in full the unpaid principal and interest on the April 2017 Carebourn Convertible Note, with at least 20 trading days’ notice, (a) any time prior to the 180th day after the issuance date, by paying 130% of the principal amount of the note together with accrued interest thereon; and (b) any time after the 180th day after the issuance date and prior to the 364 ^th  day after issuance, by paying 150% of the principal amount of the note together with accrued interest thereon.

The April 2017 Carebourn Convertible Note also contains customary positive and negative covenants.

We hope to repay the April 2017 Carebourn Convertible Note prior to any conversion. In the event that the April 2017 Carebourn Convertible Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the April 2017 Carebourn Convertible Note is converted into common stock.

Convertible Promissory Note with Power Up Lending Group Ltd.

On May 24, 2017, pursuant to a Securities Purchase Agreement  dated May 22, 2017 ,  we sold a 9% Convertible Promissory Note dated May 22, 2017, in the principal amount of $32,500, to Power Up Lending Group Ltd. (“ Power Up ” and the “ Power Up Note ”). The principal amount of the note accrues interest at 9% per annum until paid or converted into common stock (22% upon the occurrence of an event of default). The Power Up Note has a maturity date of February 28, 2018. We have the right to prepay the note prior to maturity, provided that we pay a prepayment penalty of between 15% and 40%, depending on the number of days that have elapsed from the date the note was sold, together with accrued interest. After the maturity date we have no right to repay the Power Up Note.

The Power Up Note is convertible into shares of our common stock beginning 180 days after the issuance date, at a conversion price equal to the greater of 65% of the average of the two lowest trading prices during the 20 trading days prior to the applicable conversion and $0.00006 per share.

In the event we fail to deliver the shares of common stock issuable upon conversion of the  note  within three business days of our receipt of a conversion notice, we are required to pay  Power Up  $2,000 per day for each day that we fail to deliver such shares, subject to certain exceptions.

At no time may the  Power Up Note  be converted into shares of our common stock if such conversion would result in  Power Up  and its affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of our common stock.

The  Power Up Note  provides for standard and customary events of default such as failing to timely make payments under the  Power Up Note  when due and the failure of the Company to timely comply with our Exchange Act reporting requirements. Additionally, upon the occurrence of certain defaults, as described in the  Power Up Note , we are required to pay  Power Up  liquidated damages in addition to the amount owed under the  Power Up Note .

We hope to repay the  Power Up Note  prior to any conversion. In the event that the  Power Up Note  is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the  Power Up Note  is converted into common stock.

Convertible Note with JSJ Investments Inc.

On May 25, 2017, we sold a 10% Convertible Promissory Note to JSJ Investments Inc. (“ JSJ ” and the “ JSJ Convertible Note ”) in the amount of $100,000. The note included a $7,500 original issuance discount and we paid $2,000 of JSJ’s legal fees in connection with our entry into the note. Amounts owed under the JSJ Convertible Note accrue interest at the rate of 10% per annum (18% upon an event of default). The JSJ Convertible Note is payable by us on demand by JSJ at any time after February 25, 2018. We have the right to prepay the JSJ Convertible Note prior to the maturity date in the event we pay a prepayment penalty of between 30% to 45% of the principal then due, together with accrued interest, provided that the note can only be repaid if JSJ consents to such repayment.

The JSJ Convertible Note and all accrued interest is convertible at the option of the holder thereof into the Company’s common stock at any time. The conversion price of the JSJ Convertible Note is 55% (a 45% discount) of the lower of (a) the third lowest intra-day trading prices of the Company’s common stock during the 20 trading days prior to any conversion date of the note, and (b) the lowest intra-day trading price of the Company’s common stock during the 20 trading days prior to the entry into the note. In the event we do not issue the holder the shares due in connection with a conversion within three business days, we are required to pay the holder $2,000 per day until such shares are delivered. In the event certain defaults under the note occur, the conversion discount increases by 5%.

The JSJ Convertible Note contains standard and customary events of default, including in the event we fail to timely file any and all reports due with the SEC. Upon the occurrence of an event of default, we are required to pay  JSJ  liquidated damages in addition to the amount owed under the  JSJ Convertible Note .

At no time may the JSJ Convertible Note be converted into shares of our common stock if such conversion would result in JSJ and its affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage may be increased or decreased by JSJ upon not less than 61 days prior written notice to us.

We hope to repay the JSJ Convertible Note prior to any conversion. In the event that the JSJ Convertible Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the JSJ Convertible Note is converted into common stock.

Convertible Promissory Note with Auctus Fund, LLC

On June 5, 2017, pursuant to a Securities Purchase Agreement,  we sold a 10% Convertible Promissory Note in the principal amount of $150,000 to Auctus Fund, LLC (“ Auctus ” and the “ Auctus Convertible Note ”). The principal amount of the note accrues at 10% per annum until paid or converted into common stock (24% upon the occurrence of an event of default). The Auctus Convertible Note has a maturity date of March 5, 2018. Auctus paid $100,000 of the purchase price of the note at the closing and agreed to pay $50,000 of the purchase price within forty five (45) days after the closing date, so long as an event of default under the note has not occurred. The note can be repaid at any time prior to the 180 ^th  day after the issuance date subject to prepayment penalties of between 35% and 50% of the principal amount of the note, together with accrued interest, depending on what is repaid.

At closing, we reimbursed Auctus’ legal expenses in the amount of $2,750 and paid $8,333 to Auctus to cover due diligence, monitoring, and other transaction costs incurred for services rendered by Auctus. An additional $4,167 in due diligence, monitoring, and other transaction costs are due in connection with the payment of the $50,000 portion of the purchase price.

The Auctus Convertible Note is convertible into shares of our common stock at any time, at a conversion price equal to 58% of the lowest trading price during the prior 20 trading days, subject to anti-dilution rights.

If we do not deliver common stock due upon a conversion of the note by DWAC, an additional 10% discount will apply for all future conversions under the note. If our common stock is “ chilled ” for deposit into the DTC system and only eligible for clearing deposit, an additional 15% discount will apply for all future conversions under the note while the “ chill ” is in effect. Additionally, if we cease to be a reporting company or if the note cannot be converted into free trading shares after 181 days from the closing date, an additional 30% discount will apply. Additionally, if we fail to maintain our status as “ DTC Eligible ” for any reason, or, if the conversion price is less than $0.0005 at any time, the principal amount of the note is increased by $10,000. If an event of default under the note occurs after the sixth month anniversary of the closing date, the principal amount of the note increases by $15,000. If the note is not paid at maturity, the principal amount of the note increases by $15,000. If, we do not maintain or replenish the reserve of shares required under the note within three (3) business days of the request of Auctus, the principal amount of the note increases by $5,000 per occurrence.

In the event we fail to deliver the shares of common stock issuable upon conversion of the  note  within three business days of our receipt of a conversion notice, we are required to pay  Auctus  $1,000 per day for each day that we fail to deliver such shares.

At no time may the  Auctus Convertible Note  be converted into shares of our common stock if such conversion would result in  Auctus  and its affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of our common stock, subject to the right of Auctus to increase such percentage to 9.99% with 61 days prior notice.

The  Auctus Convertible Note  provides for standard and customary events of default such as failing to timely make payments under the  Auctus Convertible Note  when due and the failure of the Company to timely comply with our Exchange Act reporting requirements. Additionally, upon the occurrence of certain defaults, as described in the  Auctus Convertible Note , we are required to pay  Auctus  liquidated damages in addition to the amount owed under the  Auctus Convertible Note .

We also agreed pursuant to the Securities Purchase Agreement that until the sooner of the six month anniversary of the closing date or the payment of the note in full, or full conversion of the note, we would not, directly or indirectly, without Auctus’ prior written consent, which consent shall not be unreasonably withheld, undertake certain transactions, including solicit any offers for, respond to any unsolicited offers for, or conduct any negotiations with any other person or entity in respect of any variable rate debt transactions (i.e., transactions where the conversion or exercise price of the security issued by the Company varies based on the market price of the common stock) above $500,000 (per variable rate debt transaction).

We hope to repay the  Auctus Convertible Note  prior to any conversion. In the event that the  Auctus Convertible Note  is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the  Auctus Convertible Note  is converted into common stock.

Written Consent in Lieu of Annual Meeting

Effective on August 3, 2017, George J. Powell, III, our Chief Executive Officer, Interim Chief Financial Officer, Secretary and Director, and the holder of all 1,000 shares of our outstanding Series A Preferred Stock, which provide the holder thereof the power to vote on all stockholder matters (including, but not limited to at every meeting of the stockholders of the Company and upon any action taken by stockholders of the Company with or without a meeting) equal to fifty-one percent (51%) of the total vote, executed a written consent in lieu of the 2017 annual meeting of stockholders (the “ Majority Stockholder Consent ”), approving the following matters:

In accordance with Rule 14c-2 of the Exchange Act, the corporate actions will be effective no earlier than forty (40) days after the date notice of the internet availability of an Information Statement disclosing the Majority Stockholder Consent is first sent to stockholders, which we expect to be on or around approximately September 25, 2017.

Plan of Operations

We have commenced shipping products to several customers, including Frisco Rivet and numerous specialty based accounts. We are also working diligently to finalize programs with numerous other accounts. Notwithstanding the above, we believe we need $1.5 million of additional funding for production in the near term and for our operations for the next 12 months and $2.5 million for our operations over the next 24 months. We plan to raise funding subsequent to the date of this report through the sale of debt or equity, which may not be available on favorable terms, if at all. We require additional funding to (a) fund production on new programs that are coming on line; (b) fund additional sales and marketing programs to enhance revenue growth; (c) fund development of and warehouse inventory for an E-Commerce site; (d) fund synergistic acquisitions; and (e) to bridge operational working capital until such time, if ever, as we can generate sufficient revenues to support our expenses. If we are unable to access additional capital moving forward, it will hurt our ability to grow and to generate future revenues. We may not be able to increase sales or obtain additional financing, if necessary, at a level to meet our current obligations to continue as a going concern. 

Results of Operations

Three months ended June 30, 2017 versus the three months ended June 30, 2016

The following table presents the Company’s results of operations for the three months ended June 30, 2017 compared to the three months ended June 30, 2016:

Revenue and Gross Loss

During the three months ended June 30, 2017, the Company generated no revenues through the sale of goods and had no associated costs. The Company was unable to generate revenues due to the Company's lack of cash on hand, which made it impossible for the Company to purchase raw materials. During the three months ended June 30, 2016, the Company generated $10,141 in revenues through the sale of goods with associated costs of $8,500. The Company recognized a gross profit of $1,641 for the three months ended June 30, 2016.

Operating expenses

The Company incurred $332,577 in selling, general and administrative expenses for the three months ended June 30, 2017, a $106,187 increase from the $226,390 in selling, general and administrative expenses incurred  during the three months ended June 30, 2016. This increase is directly related to increased professional fees and product development expenses.

During the three months ended June 30, 2017, the Company incurred $89,845 of consulting expenses, which are included under selling, general and administrative expenses. The Company incurred $74,600 of consulting expenses during the three months ended June 30, 2016. Consulting expenses relate to the development of products within the corporate logo wear industry made from sustainable textiles.

During the three months ended June 30, 2017, the Company incurred $84,665 of legal, accounting and professional expenses, which are included under selling, general and administrative expenses, which is a $33,375 increase from the $51,290 incurred during the three months ended June 30, 2016. Legal, accounting and professional expenses relate to the Company’s registration statement and other filings with the Securities and Exchange Commission. The main reason for the decrease in professional fees was the cost of the preparation of the Company’s Form S-1 registration statement during the prior period. Additionally, the Company did not have the resources in place to begin work on its required periodic reports during the three months ended June 30, 2017.

During the three months ended June 30, 2017, the Company incurred $70,938 of product development expenses, which are included under selling, general and administrative expenses, which is a $65,938 increase compared to the $45,000 incurred during the three months ended June 30, 2017. The product development costs relate to the development of products within the corporate logo wear industry made from sustainable textiles, and were higher in the current period as the Company was active in developing new products.

During the three months ended June 30, 2017, the Company recorded $ 48,000 of non-cash compensation related to the stock issuance to a consultant, which is included under selling, general and administrative expenses. During the three months ended June 30, 2016, the Company recorded $42,000 of non-cash compensation related to the stock issuance to a consultant.

Other income (expense)

During the three months ended June 30, 2017, the Company reported $1,327,981 of interest expense compared to $19,952 reported during the three months ended June 30, 2016. The interest expense relates to the promissory notes outstanding as described in greater detail in Notes 3 and 4 to the financial statements included herein.

During the three months ended June 30, 2017, the Company recognized a gain of $1,256,670 on change in fair value of derivative in connection with the valuation of the derivative liabilities (see Notes 4 and 5 of the financial statements included herein), compared to a loss on change in fair value of derivative of $747,718 for the three months ended June 30, 2016.

The Company recognized a $651,677 expense in connection with insufficient shares being available for the Company’s derivative liability for the three months ended June 30, 2016.

The Company had a $19,060 gain on the conversion of debt in connection with the conversion of amounts due under the terms of certain convertible promissory notes into shares of our common stock for the three months ended June 30, 2017.

Net income (loss)

The Company had a net loss for the three months ended June 30, 2017 of $384,828, a $1,259,268 decrease from the net loss of $1,644,096 incurred during the three months ended June 30, 2016. The decrease in net loss was primarily due to the reasons described above.

Six months ended June 30, 2017 versus the six months ended June 30, 2016

The following table presents the Company’s results of operations for the six months ended June 30, 2017 compared to the six months ended June 30, 2016:

Revenue and Gross Loss

During the six months ended June 30, 2017, the Company generated $33,479 in revenues through the sale of goods with associated costs of $24,628. The Company recognized a gross profit of $8,851 for the six months ended June 30, 2017. During the six months ended June 30, 2016, the Company generated $28,378 in revenues through the sale of goods with associated costs of $23,698. The Company recognized a gross profit of $4,680 for the six months ended June 30, 2016.

Operating expenses

The Company incurred $421,651 in selling, general and administrative expenses for the six months ended June 30, 2017, a $180,024 decrease from the $601,686 in selling, general and administrative expenses incurred during the six months ended June 30, 2016. This decrease is directly related to the limited cash resources which the Company had during the six months ending June 30, 2017. Selling, general and administrative expenses consist of expenses the Company incurs during day-to-day operations.

During the six months ended June 30, 2017, the Company incurred $90,645 of consulting expenses, which are included under selling, general and administrative expenses. The Company incurred $107,987 of consulting expenses during the six months ended June 30, 2016. Consulting expenses relate to the development of products within the corporate logo wear industry made from sustainable textiles.

During the six months ended June 30, 2017, the Company incurred $85,517 of legal, accounting and professional expenses, which are included under selling, general and administrative expenses, which is a $151,219 decrease from the $203,360 incurred during the six months ended June 30, 2016. Legal, accounting and professional expenses relate to the Company’s registration statement and other filings with the Securities and Exchange Commission. The main reason for the decrease in professional fees was the cost of the preparation of the Company’s Form S-1 registration statement during the prior period. Additionally, the Company did not have the resources in place to begin work on its required periodic reports during the six months ending June 30, 2017.

During the six months ended June 30, 2017, the Company incurred $71,594 of product development expenses, which are included under selling, general and administrative expenses, which is a $41,350 increase compared to the $30,244 incurred during the six months ended June 30, 2017. The product development costs relate to the development of products within the corporate logo wear industry made from sustainable textiles, and were higher in the current period as the Company was developing new products. 

During the six months ended June 30, 2017, the Company incurred $28,476 of travel expenses, which are included under selling, general and administrative expenses, which is a $46,822 decrease from the $75,297 incurred during the six months ended June 30, 2016. Travel expenses relate to the efforts by management to meet with new customers and potential customers and vary from period-to-period. Over time the Company expects to see a leveling off of these costs; however, as the Company grows the Company anticipates these expenses increasing.

During the six months ended June 30, 2017, the Company recorded $ 110,000  of non-cash compensation related to the stock issuance to the Company’s COO and a consultant, which is included under selling, general and administrative expenses. During the six months ended June 30, 2016, the Company recorded $117,000 of non-cash compensation related to the stock issuance to the Company’s COO and a consultant.

Other income (expense)

During the six months ended June 30, 2017, the Company reported $1,377,164 of interest expense compared to $31,919 reported during the six months ended June 30, 2016. The interest expense relates to the promissory notes outstanding as described in greater detail in Notes 3 and 4 to the financial statements included herein.

During the six months ended June 30, 2017, the Company recognized income of $912,422 in connection with the change in fair value of derivative in connection with the valuation of the derivative liabilities (see Notes 4 and 5 of the financial statements included herein), compared to an expense of $593,704 in change in fair value of derivative for the six months ended June 30, 2016.

The Company recognized a $561,447 gain in connection with insufficient shares being available for the Company’s derivative liability for the six months ended June 30, 2017, compared to an expense of $905,980 in connection therewith for the six months ended June 30, 2016.

The Company had a $41,817 gain on the conversion of debt in connection with the conversion of amounts due under the terms of certain convertible promissory notes into shares of our common stock for the six months ended June 30, 2017.

Net income (loss)

The Company had a net loss for the six months ended June 30, 2017 of $274,279, a $1,854,330 increase from the net loss of $2,128,609 incurred during the six months ended June 30, 2016. The increase in net loss was primarily due to the reasons described above, mainly, the non-cash derivative liability gain.

Liquidity and Capital Resources

The Company had an accumulated deficit at June 30, 2017 of approximately $14.8 million. The Company had net loss of $274,279 during the six months ended June 30, 2017, had $16,000 of current assets as of June 30, 2017, consisting solely of prepaid expenses, had only $27,283 in total assets and has negative working capital of $2,099,816, as of June 30, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or refinancing as may be required and, ultimately, to attain profitable operations. Management’s plans to eliminate the going concern situation include, but are not limited to, raising additional capital through the issuance of debt and equity (including the sale of additional convertible securities, which will likely be convertible into common stock at a discount to the trading price of the Company’s common stock), and improved cash flow management. Failure to raise additional capital or improve its performance in the next 12 months may cause the Company to significantly curtail its business activities and expansion plans within the next twelve months. The Company may be unable to sell additional debt, convertible debt and/or equity on favorable terms, if at all, and the sale of any such securities may cause substantial dilution to existing shareholders. In the event the Company is unable to fund its operations and expenses and satisfy outstanding liabilities in the future, it may be forced to liquidate assets, cease filing reports with the SEC or seek bankruptcy protection.

The Company had no cash as of June 30, 2017, compared to $47 as of December 31, 2016.

We had $27,283 of total assets as of June 30, 2017, consisting solely of fixed assets, net of $11,283 and $16,000 of prepaid expenses.

We had total liabilities of $2,315,816 as of June 30, 2017, including current liabilities consisting of accounts payable and accrued expenses of $317,052, accrued interest on our convertible notes of $179,598, notes payable of $82,500, convertible notes, net of discount, of $342,538 and derivative liability of $1,194,128, and long-term liabilities consisting of notes payable, net of current portion, of $200,000.

Our outstanding promissory notes, convertible notes and derivative liability are described in greater detail in Notes 3, 4 and 5, to the financial statements attached herein and under “ Part I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Transactions ”, above.