0001654954-19-005806.txt : 20190514
0001654954-19-005806.hdr.sgml : 20190514
20190513180349
ACCESSION NUMBER: 0001654954-19-005806
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 81
CONFORMED PERIOD OF REPORT: 20190331
FILED AS OF DATE: 20190514
DATE AS OF CHANGE: 20190513
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: GROWLIFE, INC.
CENTRAL INDEX KEY: 0001161582
STANDARD INDUSTRIAL CLASSIFICATION: GLASS PRODUCTS, MADE OF PURCHASED GLASS [3231]
IRS NUMBER: 900821083
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-50385
FILM NUMBER: 19819808
BUSINESS ADDRESS:
STREET 1: 5400 CARILLON POINT
CITY: KIRKLAND
STATE: WA
ZIP: 98033
BUSINESS PHONE: 866-781-5559
MAIL ADDRESS:
STREET 1: 5400 CARILLON POINT
CITY: KIRKLAND
STATE: WA
ZIP: 98033
FORMER COMPANY:
FORMER CONFORMED NAME: PHOTOTRON HOLDINGS, INC.
DATE OF NAME CHANGE: 20110309
FORMER COMPANY:
FORMER CONFORMED NAME: CATALYST LIGHTING GROUP INC
DATE OF NAME CHANGE: 20030909
FORMER COMPANY:
FORMER CONFORMED NAME: WENTWORTH III INC
DATE OF NAME CHANGE: 20011026
10-Q
1
phot_10q.htm
QUARTERLY REPORT
Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2019
OR
☐
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
Commission file number 000-50385
GrowLife, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of
incorporation
or organization)
90-0821083
(I.R.S.
Employer Identification No.)
5400 Carillon Point
Kirkland, WA 98033
(Address
of principal executive offices and zip code)
(866) 781-5559
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer”, “smaller reporting
company”, and “emerging growth company” in Rule
12b-2
Large accelerated
filer
☐
Accelerated
filer
☐
Non-accelerated
filer (Do not check if a smaller reporting company)
☐
Smaller reporting
company
☒
Emerging growth
company
☐
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
by Rule 12b-2 of the Exchange Act). Yes ☐ No
☒
As of
May 13, 2019, there were
3,700,407,493 shares of the issuer’s common stock, $0.0001
par value per share, outstanding.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS AND
ORGANIZATION
The
accompanying unaudited consolidated condensed financial statements
have been prepared by GrowLife, Inc. (“us,”
“we,” or “our”) in accordance with U.S.
generally accepted accounting principles (“GAAP”) for
interim financial reporting and rules and regulations of the
Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or
omitted. In the opinion of our management, all adjustments,
consisting of only normal recurring accruals, necessary for a fair
presentation of the financial position, results of operations, and
cash flows for the fiscal periods presented have been
included.
These
financial statements should be read in conjunction with the audited
financial statements and related notes included in our Annual
Report filed on Form 10-K for the year ended December 31, 2018. The
results of operations for the three months ended March 31, 2019 are
not necessarily indicative of the results expected for the full
fiscal year, or for any other fiscal period.
GrowLife,
Inc. (“GrowLife” or the “Company”) is
incorporated under the laws of the State of Delaware and is
headquartered in Kirkland, Washington. The Company was founded in
2012 with the Closing of the Agreement and Plan of Merger with SGT
Merger Corporation.
The
Company’s goal of becoming the nation’s largest
cultivation facility service provider for the production of
organics, herbs and greens and plant-based medicines has not
changed. The Company’s mission is to best serve more
cultivators in the design, build-out, expansion and maintenance of
their facilities with products of high quality, exceptional value
and competitive price. Through a nationwide network of
knowledgeable representatives, regional centers and its e-commerce
website, GrowLife provides essential and hard-to-find goods
including media (i.e., farming soil), industry-leading hydroponics
equipment, organic plant nutrients, and thousands more products to
specialty grow operations across the United States.
The
Company primarily sells through its wholly owned subsidiary,
GrowLife Hydroponics, Inc. GrowLife companies distribute and sell
over 15,000 products through its e-commerce distribution channel,
GrowLifeEco.com, and through our regional retail storefronts.
GrowLife and its business units are organized and directed to
operate strictly in accordance with all applicable state and
federal laws.
On June
7, 2013, GrowLife Hydroponics completed the purchase of Rocky
Mountain Hydroponics, LLC, a Colorado limited liability company
(“RMC”), and Evergreen Garden Center, LLC, a Maine
limited liability company (“EGC”). The effective date
of the purchase was June 7, 2013.
On October 3, 2017, the Company closed the acquisition of 51% of
the Purchased Assets from David Reichwein, a Pennsylvania resident,
GIP International Ltd, a Hong Kong corporation and DPR
International LLC, a Pennsylvania limited liability corporation.
The Purchased Assets include intellectual property, copy rights and
trademarks related to reflective tiles and flooring. The
Company did not acquire business, customer lists or
employees.
The Company acquired its 51% interest in the Purchased
Assets for $400,000. The Company funded equipment and rent of an office
lease. On February 16,
2018, the Company purchased the remaining 49% of the Purchased
Assets in exchange for a one-time payment of $250,000. As of December 31, 2018, the Company had recorded
investment in purchased assets of $552,689.
On
August 17, 2018, the Company entered into an Asset Purchase
Agreement with Go Green Hydroponics, Inc., a California corporation
and TCA – Go Green SPV, LLC, a Florida limited liability
pursuant to which the Company acquired the intellectual property
and assumed the lease for the property located at 15721 Ventura
Blvd., Encino, CA 91436. The Company intends to operate a retail
store, sale over the internet and sell on a direct basis at this
location.
6
Concurrently,
the Company and Seller entered into a Security Agreement for
securing the assets of Company as collateral for the obligations of
Company as set forth in the Security Agreement. In consideration
for the sale and assignment of the Purchased Assets, the Company
agreed to pay the Seller: (i) the proceeds generated from the sale
of the closing inventory until all closing inventory has been sold,
and (ii) to pay the Seller 5% of all gross revenue of Company
earned or in any way related to the Purchased Assets generated
between October 1, 2018 and December 31, 2019, up to a maximum of
$200,000.
On
October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-Clone Enterprises, Inc., a California
corporation. EZ-Clone is the manufacturer of multiple
award-winning products specifically designed for the commercial
cloning and propagation stage of indoor plant cultivation including
cannabis, food, and other hydroponic farming. The Company
acquired 51% of EZ-Clone for $2,040,000, payable as follows: (i) a
cash payment of $645,000; and (ii) the issuance of 107,307,692
restricted shares of the Company’s common stock at a price of
$0.013 per share or $1,395,000.
The
Company has the obligation to acquire the remaining 49% of EZ-Clone
within one year for $1,960,000,
payable as follows: (i) a cash payment of $855,000; and (ii) the
issuance of 85,000,000 shares of the Company’s common stock
at a price of $0.013 per share or $1,105,000.
On
October 17, 2017, the Company was informed by Alpine Securities
Corporation (“Alpine”) that Alpine has demonstrated
compliance with the Financial Industry Regulatory Authority
(“FINRA”) Rule 6432 and Rule 15c2-11 under the
Securities Exchange Act of 1934. We filed an amended application
with the OTC Markets to list the Company’s common stock on
the OTCQB and begin to trade on this market as of March 20, 2018.
As of March 4, 2019, the Company began
to trade on the Pink Sheet stocks
system. The Company’s bid
price had closed below $0.01 for more than 30 consecutive calendar
days.
NOTE 2 –
GOING CONCERN
The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. The Company incurred net losses of
$2,338,325 and $4,241,875 for the periods ended March 31, 2019 and
2018, respectively. Our net cash used in operating activities was
$1,116,717 and $835,480 for the periods ended March 31, 2019 and
2018, respectively.
The Company anticipates that it will record losses from operations
for the foreseeable future. As of March 31, 2019, the accumulated
deficit was $143,539,940. The Company has
experienced recurring operating losses and negative operating cash
flows since inception and has financed its working capital
requirements during this period primarily through the recurring
issuance of convertible notes payable and advances from a related
party. The audit opinion prepared by
our independent registered public accounting firm relating to our
financial statements for the year ended December 31, 2018 and 2017
filed with the SEC on March 8, 2019 includes an explanatory
paragraph expressing the substantial doubt about our ability to
continue as a going concern.
Continuation of the Company as a going concern is dependent upon
obtaining additional working capital. The financial
statements do not include any adjustments that might be necessary
if we are unable to continue as a going concern.
NOTE 3 – SIGNIFICANT ACCOUNTING
POLICIES: ADOPTION OF ACCOUNTING STANDARDS
Basis of Presentation - The accompanying consolidated
financial statements include the accounts of the Company.
Intercompany accounts and transactions have been eliminated. The
preparation of these consolidated financial statements in
conformity with U.S. generally accepted accounting principles
(“GAAP”).
Principles of Consolidation -
The consolidated financial statements include the accounts of the
Company and its wholly owned and majority-owned subsidiaries.
Inter-Company items and transactions have been eliminated in
consolidation.
7
Cash and Cash Equivalents - The
Company classifies highly liquid temporary investments with an
original maturity of nine months or less when purchased as cash
equivalents. The Company maintains cash balances at various
financial institutions. Balances at US banks are insured by the
Federal Deposit Insurance Corporation up to $250,000. The Company
has not experienced any losses in such accounts and believes it is
not exposed to any significant risk for cash on
deposit. At March 31, 2019, the Company had uninsured
deposits in the amount of $309,146.
Accounts Receivable and Revenue - Revenue is recognized at
the time the Company sells merchandise to the customer in store.
eCommerce sales include shipping revenue and are recorded upon
shipment to the customer. This is when the risk of loss transfers
to our customers, the fee is fixed and determinable, and collection
of the sale is reasonably assured. A product is not shipped without
an order from the customer and the completion of credit acceptance
procedures. The majority of our sales are cash or credit card;
however, we occasionally extend terms to our customers. Accounts
receivable are reviewed periodically for
collectability.
Inventories - Inventories are recorded on a first in first
out basis. Inventory consists of raw materials, purchased finished
goods and components held for resale. Inventory is valued at the
lower of cost or market. The reserve for inventory was $50,000 and
$120,000 as of March 31, 2019 and
December 31, 2018, respectively.
Equipment – Equipment
consists of machinery, equipment, tooling, computer equipment and
leasehold improvements, which are stated at cost less accumulated
depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives or lease
period of the relevant asset, generally 3-10 years, except for
leasehold improvements which are depreciated over the lesser of the
life of the lease or 10 years.
Long Lived Assets – The
Company reviews its long-lived assets for impairment annually or
when changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Long-lived assets under certain
circumstances are reported at the lower of carrying amount or fair
value. Assets to be disposed of and assets not expected to provide
any future service potential to the Company are recorded at the
lower of carrying amount or fair value (less the projected cost
associated with selling the asset). To the extent carrying values
exceed fair values, an impairment loss is recognized in operating
results.
Intangible Assets – Intangible assets are capitalized
and amortized on a straight-line basis over their estimated useful
life, if the life is determinable. If the life is not determinable,
amortization is not recorded. We regularly perform reviews to
determine if facts and circumstances exist which indicate that the
useful lives of our intangible assets are shorter than originally
estimated or the carrying amount of these assets may not be
recoverable. When an indication exists that the carrying amount of
intangible assets may not be recoverable, we assess the
recoverability of our assets by comparing the projected
undiscounted net cash flows associated with the related asset or
group of assets over their remaining lives against their respective
carrying amounts. Such impairment test is based on the lowest level
for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. Impairment,
if any, is based on the excess of the carrying amount over the
estimated fair value of those assets.
Fair Value Measurements and Financial Instruments - ASC
Topic 820 defines fair value, establishes a framework for measuring
fair value, establishes a three-level valuation hierarchy for
disclosure of fair value measurement and enhances disclosure
requirements for fair value measurements. The valuation hierarchy
is based upon the transparency of inputs to the valuation of an
asset or liability as of the measurement date. The three levels are
defined as follows:
Level 1
- Inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active
markets.
Level 2
- Inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial
instrument.
Level 3
- Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
8
The
carrying value of cash, accounts receivable, investment in a
related party, accounts payables, accrued expenses, due to related
party, notes payable, and convertible notes approximates their fair
values due to their short-term maturities.
Derivative financial instruments -The Company evaluates all
of its financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are
accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the
consolidated statements of operations. For stock-based derivative
financial instruments, the Company uses a weighted average
Black-Scholes-Merton option pricing model to value the derivative
instruments at inception and on subsequent valuation dates. The
classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as
current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within twelve months
of the balance sheet date.
Sales Returns - We allow customers to return defective
products when they meet certain established criteria as outlined in
our sales terms and conditions. It is our practice to regularly
review and revise, when deemed necessary, our estimates of sales
returns, which are based primarily on actual historical return
rates. We record estimated sales returns as reductions to sales,
cost of goods sold, and accounts receivable and an increase to
inventory. Returned products which are recorded as inventory are
valued based upon the amount we expect to realize upon its
subsequent disposition. As of March 31, 2019 and December 31, 2018,
there was a reserve for sales returns of $0, respectively, which is
minimal based upon our historical experience.
Stock Based Compensation - The
Company has share-based compensation plans under which employees,
consultants, suppliers and directors may be granted restricted
stock, as well as options and warrants to purchase shares of
Company common stock at the fair market value at the time of grant.
Stock-based compensation cost to employees is measured by the
Company at the grant date, based on the fair value of the award,
over the requisite service period under ASC 718. For options issued
to employees, the Company recognizes stock compensation costs
utilizing the fair value methodology over the related period of
benefit. Grants of stock to non-employees and other
parties are accounted for in accordance with the ASC
505.
Net (Loss) Per Share - Under
the provisions of ASC 260, “Earnings per Share,” basic
loss per common share is computed by dividing net loss available to
common shareholders by the weighted average number of shares of
common stock outstanding for the periods presented. Diluted net
loss per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of
common stock that would then share in the income of the Company,
subject to anti-dilution limitations. The common stock equivalents
have not been included as they are
anti-dilutive.
As of
March 31, 2019, there are also (i) stock option grants outstanding
for the purchase of 98.5
million common shares at a $0.010 average exercise price; (ii)
warrants for the purchase of 362.8 million common shares at a $0.023
average exercise price; and (iii) 114.7 million shares related to convertible debt that can be
converted at $0.002535 per share. In addition, the Company has an
unknown number of common shares to be issued under the Chicago
Venture, Iliad and St. George financing
agreements.
As of
March 31, 2018, there are also
(i) stock option grants outstanding for the purchase of 59 million
common shares at a $0.008 average exercise price; (ii) warrants for
the purchase of 595 million common shares at a $0.031 average
exercise price; and (iii) 107 million shares related to convertible debt that can be
converted at $0.002535 per share. In addition, we have an unknown
number of common shares to be issued under the Chicago
Venture Partners, L.P. financing
agreements.
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.
9
Use of Estimates - In preparing these unaudited interim
consolidated financial statements in conformity with GAAP,
management is required to make estimates and assumptions that may
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of
the consolidated financial statements and the reported amount of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates. Significant estimates and
assumptions included in our consolidated financial statements
relate to the valuation of long-lived assets, estimates of sales
returns, inventory reserves and accruals for potential liabilities,
and valuation assumptions related to derivative liability, equity
instruments and share based compensation.
Recent Accounting Pronouncements
A variety of proposed or otherwise potential accounting standards
are currently under study by standard setting organizations and
various regulatory agencies. Due to the tentative and preliminary
nature of those proposed standards, management has not determined
whether implementation of such proposed standards would be material
to the Company’s consolidated financial
statements.
NOTE 4 – TRANSACTIONS
Acquisition of 51% of EZ-Clone Enterprises, Inc.
On
October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-Clone Enterprises, Inc., a California corporation
that was founded in January 2000. EZ-Clone is the manufacturer of multiple
award-winning products specifically designed for the commercial
cloning and propagation stage of indoor plant cultivation including
cannabis, food, and other hydroponic farming. The Company
has proprietary products and services such as the Commercial Pro
System, Hobbyist Cloning Systems, Cloning Tents, Coco Collars, Coco
Seed Starters, Rooting Gel, and Clear Rez. Technical Support,
know-how and overall knowledge is also considered proprietary. The
Company trademarks are EZ CLONE and EZ CLONE CRIB.
This acquisition is expected to accelerate the Company’s
revenue growth, increase the Company gross margins and add
additional manufacturing and research and development
personnel.
The Company acquired 51% of EZ-Clone for $2,040,000, payable
as follows: (i) a cash payment of $645,000; and (ii) the issuance
of 107,307,692 restricted shares of the Company’s common
stock at a price of $0.013 per share or $1,395,000. The Company has
the obligation to acquire the remaining 49% of EZ-Clone within one
year for $1,960,000, payable as
follows: (i) a cash payment of $855,000; and (ii) the issuance of
85,000,000 shares of the Company’s common stock at a price of
$0.013 per share or $1,105,000.
The cost to acquire these assets has been preliminarily allocated
to the assets acquired according to estimated fair values and is
subject to adjustment when additional information concerning asset
valuations is finalized, but no later than October 15, 2019. The
preliminary allocation is as follows:
10
Purchase Price
Allocation
$
Common
stock
$1,395,000
Cash
645,000
Assets
acquired
(911,294)
Liabilities
acquired
939,375
Non-controlling
interest
1,960,000
EZ-Clone
equity
(605,000)
Total
$3,423,081
The results of operations of EZ-Clone were included in the
Consolidated Statements of Operations for the period October 15,
2018 to December 31, 2018.
The unaudited pro-forma financial data for the acquisition for the
year ended December 31, 2018, were as follows:
Pre-Acquisition
Operations of EZ-
Pro Forma
As Reported
January 1, 2018 to
Year Ended
December 31, 2018
October 14, 2018
December 31, 2018
Net
revenue
$4,573,461
$1,551,503
$6,124,964
Net
loss
(11,473,137)
(111,671)
(11,584,808)
Net
loss per share
$(0.00)
$(0.00)
The unaudited pro-forma financial data for the acquisition for the
year ended December 31, 2017, were as follows:
Pre-Acquisition
Operations of EZ-
Pro Forma
As Reported
January 1, 2017 to
Year Ended
December 31, 2017
December 31, 2017
December 31, 2017
Net
revenue
$2,452,104
$2,648,873
$5,100,977
Net
loss
(5,320,974)
(126,962)
(5,447,936)
Net
loss per share
$(0.00)
$(0.00)
There were no material, nonrecurring items included in the reported
the pro-forma results.
Termination of Agreements with CANX, LLC
On
February 15, 2019, the Company entered into a Termination of
Existing Agreements and Release with CANX USA, LLC, a Nevada
limited liability company. Pursuant to the Agreement, the Parties
agreed to terminate, release and
discharge all existing and further rights and obligations between
the Parties under, arising out of, or in any way related to
that certain Waiver and Modification
Agreement and Amended and Restated Joint Venture Agreement made as
of July 10, 2014, and any ancillary agreements or instruments
thereto, including, but not limited to, the Warrants issued to CANX
entitling CANX to purchase 540,000,000 shares of the
Company’s common stock at an exercise price of
$0.033.
11
In exchange for the Agreement and cancellation of the CANX
Agreements and Warrants, the Company agreed to issue $1,000,000 of
restricted common stock priced at the February 7, 2019 closing
price of $0.008, or 125,000,000 restricted common stock
shares.
NOTE 5 – INVENTORY
Inventory
as of March 31, 2019 and 2018 consisted of the
following:
March 31,
December 31,
2019
2018
Raw
materials
$348,958
$417,570
Work
in process
41,558
35,280
Finished
goods
401,842
459,814
In
producton
99,416
-
Inventory
reserve
(50,000)
(120,000)
Total
$841,774
$792,664
Raw
materials consist of supplies for the flooring product line and
EZ-Clone.
Finished
goods inventory relates to product at the Company’s retail
stores, which is product purchased from distributors, and in some
cases directly from the manufacturer, and resold at our stores and
EZ- Clone.
The
Company reviews its inventory on a periodic basis to identify
products that are slow moving and/or obsolete, and if such products
are identified, the Company records the appropriate inventory
impairment charge at such time.
NOTE 6 – PROPERTY AND EQUIPMENT
Property
and equipment as of March 31, 2019 and 2018 consists of the
following:
March 31,
December 31,
2019
2018
Machinery,
equipment and tooling
$943,327
$943,326
Computer
equipment
16,675
16,675
Leasehold
improvements
20,021
14,703
Total
property and equipment
980,023
974,704
Less
accumulated depreciation and amortization
(291,712)
(261,839)
Net
property and equipment
$688,312
$712,866
Fixed assets, net of accumulated depreciation, were $688,312 and
$712,866 as of March 31, 2019 and 2018, respectively. Accumulated
depreciation was $291,712 and $261,839 as of March 31, 2019 and
2018, respectively. Total depreciation expense was $29,873 and
$10,814 for the three months ended March 31, 2019 and 2018,
respectively. All equipment is used for manufacturing, selling,
general and administrative purposes and accordingly all
depreciation is classified in cost of goods sold, selling, general
and administrative expenses.
On October 3, 2017, the Company closed the acquisition of 51% of
the Purchased Assets from David Reichwein, a Pennsylvania resident,
GIP International Ltd, a Hong Kong corporation and DPR
International LLC, a Pennsylvania limited liability corporation.
The Purchased Assets include intellectual property, copy rights and
trademarks related to reflective tiles and flooring.
The Company did not acquire business, customer list or
employees.
12
The Company acquired its 51% interest in the Purchased
Assets for $400,000. The Company funded equipment and rent of an office
lease. On February 16,
2018, the Company purchased the remaining 49% of the Purchased
Assets in exchange for a one-time payment of $250,000. As of December 31, 2018, the Company had recorded
investment in purchased assets of $552,689.
On October 15, 2018, the Company acquired 51% of EZ-Clone
Enterprises, Inc. and acquired $244,203 of net property and
equipment.
During
the year ended December 31, 2018, the Company retired fully
depreciated assets of $358,156.
NOTE 7 – INTANGIBLE
ASSETS
Intangible assets as of March 31, 2019 and December 31, 2018
consisted of the following:
Estimated
March 31,
December 31,
Useful Lives
2019
2018
Customer
lists
3
years
$1,604,341
$1,604,341
Patents
3
years
1,818,740
1,818,740
Less:
accumulated amortization
(427,885)
(142,628)
Intangible
assets, net
$2,995,196
$3,280,453
Total amortization expense was $285,277 and $0 for the three months
ended March 31, 2019 and 2018, respectively.
On
October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-Clone Enterprises, Inc., a California corporation
that was founded in January 2000. The Company acquired 51% of
EZ-Clone for $2,040,000, payable as follows: (i) a cash payment of
$645,000; and (ii) the issuance of 107,307,692 restricted shares of
the Company’s common stock at a price of $0.013 per share or
$1,395,000. The Company has the obligation to acquire the remaining
49% of EZ-Clone within one year for $1,960,000, payable as follows: (i) a cash payment
of $855,000; and (ii) the issuance of 85,000,000 shares of the
Company’s common stock at a price of $0.013 per share or
$1,105,000.
The fair value of the intellectual property associated with the
assets acquired was $3,423,081 estimated by using a discounted cash
flow approach based on future economic benefits. In summary, the
estimate was based on a projected income approach and related
discounted cash flows over five years, with applicable risk factors
assigned to assumptions in the forecasted results.
NOTE 8- ACCOUNTS PAYABLE
Accounts payable were $1,209,449 and $1,054,371 as of March
31, 2019 and December 31, 2018, respectively. Such liabilities
consisted of amounts due to vendors for inventory purchases, audit,
legal and other expenses incurred by the Company.
NOTE 9- ACCRUED EXPENSES
Accrued expenses were $251,024 and $261,954 as of March 31,
2019 and December 31, 2018, respectively. Such liabilities
consisted of amounts due to Go Green Hydroponics, Inc. and
TCA – Go Green SPV, LLC and sales tax and payroll
liabilities.
On
August 17, 2018, the Company entered into an Asset Purchase
Agreement with Go Green Hydroponics, Inc. and TCA – Go Green
SPV, LLC. The Company acquired the inventory of Go Green but agreed
to pay the Seller 100% of the proceeds generated from the sale of
the closing inventory until all closing inventory has been sold.
The Company recorded accrued expenses $134,497 as of September 30,
2018 related to the sale of inventory. Also, the Company agreed to
pay 5% of all gross revenue of Company earned or in any way related
to the Purchased Assets generated between October 1, 2018 and
December 31, 2019, up to a maximum of $200,000. The Company
estimated gross revenue for that period to be approximately
$1,200,000 and recorded a $60,000 liability. The Company recorded
an impairment of acquired assets in the amount of $60,000 as of
December 31, 2018.
13
NOTE 10– CONVERTIBLE NOTES PAYABLE, NET
Convertible
notes payable as of March 31,
2019 consisted of the following:
Balance
Accrued
Debt
As of
Principal
Interest
Discount
March 31, 2019
10% OID Convertible
Promissory Notes
$2,036,669
$176,475
$-
$2,213,144
7%
Convertible note ($850,000)
270,787
19,942
-
290,729
$2,307,456
$196,417
$-
$2,503,873
Convertible
notes payable as of December
31, 2018 consisted of the following:
Balance
Accrued
Debt
As of
Principal
Interest
Discount
December 31, 2018
10% OID Convertible
Promissory Notes
$2,982,299
$135,780
$-
$3,118,079
7%
Convertible note ($850,000)
270,787
15,267
-
286,054
$3,253,086
$151,047
$-
$3,404,133
7% Convertible Notes Payable
On
March 12, 2018, the Company entered into a Second Amendment to the
Note. Pursuant to the Amendment, the Note’s maturity date has
been extended to December 31, 2019, and interest accrues at 7% per
annum, compounding on the maturity date. Additionally, after review
of the Note and accrued interest, the Parties agreed that as of
March 12, 2018, the outstanding balance on the Note was
$270,787.
As of
March 31, 2019, the outstanding
principal on this 7% convertible note was $270,787 and accrued
interest was $19,942, which results in a total liability of
$290,729.
10% Convertible Promissory Notes
Funding from Chicago Venture Partners, L.P. (“Chicago
Venture”) and Iliad Research and Trading, L.P.
(“Iliad”)
As
of December 31, 2018, the
outstanding principal balance due to Chicago Venture and Iliad is
$1,112,200 and accrued interest was $90,931, which results in a
total amount of $1,203,230.
During
the year ended December 31, 2018, Chicago Venture converted
principal and interest of $3,104,181 into 525,587,387 shares of our
common stock at a per share conversion price of $0.0059 with a fair
value of $7,756,330. The Company recognized $6,565,415 loss on debt
conversions during the year ended December 31, 2018.
During
the year ended December 31, 2018, the Company recorded an OID debt
discount expense of $660,472 to interest expense related to the
Chicago Venture financing.
As
of March 31, 2019, the
outstanding principal balance due to Chicago Venture is $2,036,669
and accrued interest was $176,475, which results in a total amount
of $2,213,144.
During
the three months ended March 31, 2019, Chicago Venture converted
principal and accrued interest of $375,000 into 84,156,195 shares
of our common stock at a per share conversion price of $0.00446
with a fair value of $676,055. The Company recognized $301,055 loss
on debt conversions during the three months ended March 31,
2019.
14
NOTE 11 – DERIVATIVE LIABILITY
In
April 2008, the FASB issued a pronouncement that provides guidance
on determining what types of instruments or embedded features in an
instrument held by a reporting entity can be considered indexed to
its own stock for the purpose of evaluating the first criteria of
the scope exception in the pronouncement on accounting for
derivatives. This pronouncement was effective for financial
statements issued for fiscal years beginning after December 15,
2008.
If the
conversion features of conventional convertible debt provide for a
rate of conversion that is below market value, this feature is
characterized as a beneficial conversion feature (BCF). A BCF is
recorded by the Company as a debt discount pursuant to ASC Topic
470-20. Debt with Conversion and Other Options. In those
circumstances, the convertible debt is recorded net of the discount
related to the BCF and the Company amortizes the discount to
interest expense over the life of the debt using the effective
interest method. The debt is convertible at the lesser of 65% of
the fair value of the Company’s common stock or $0.009
requiring the conversion feature to be bifurcated from the host
debt contract and accounting for separately as a derivative,
resulting in periodic revaluations.
There
was a derivative liability of $1,308,200 as of March 31,
2019. For the three months
ended March 31, 2019, the Company recorded non-cash income of
$487,223 related to the “change in fair value of
derivative” expense related to the Chicago Venture and Iliad
financing. During the three months ended March 31, 2019, Chicago
Venture converted principal and accrued interest of $375,000 into
84,156,195 shares of our common stock at a per share conversion
price of $0.00446.
Derivative
liability as of March 31, 2019
was as follows:
Carrying
Fair Value Measurements Using Inputs
Amount at
Financial
Instruments
Level 1
Level 2
Level 3
March 31, 2019
Liabilities:
Derivative
Instruments
$-
$1,308,200
$-
$1,308,200
Total
$-
$1,308,200
$-
$1,308,200
NOTE 12 – RELATED PARTY
TRANSACTIONS AND CERTAIN RELATIONSHIPS
Related Party Transactions
Transactions with Katherine McLain
Ms.
Katherine McLain was appointed as a director on February 14, 2017.
On February 22, 2019, the Company issued 8,108,108 shares of our
common stock to Katherine McLain valued at $0.0074 per share or
$60,000.
Transaction with Thom Kozik
Mr.
Kozik was appointed as a director on October 5, 2017. On February
22, 2019, the Company issued 8,108,108 shares of our common stock
to Mr. Kozik valued at $0.0074 per share or $60,000.
15
NOTE 13 – EQUITY
Authorized Capital Stock
The
Company has authorized 6,010,000,000 shares of capital stock, of
which 6,000,000,000 are shares of voting common stock, par value
$0.0001 per share, and 10,000,000 are shares of preferred stock,
par value $0.0001 per share. On
October 24, 2017 the Company filed a Certificate of Amendment of
Certificate of Incorporation with the Secretary of State of the
State of Delaware to increase the authorized shares of common stock
from 3,000,000,000 to 6,000,000,000 shares.
Non-Voting Preferred Stock
Under
the terms of our articles of incorporation, the Company’s
board of directors is authorized to issue shares of non-voting
preferred stock in one or more series without stockholder approval.
The Company’s board of directors has the discretion to
determine the rights, preferences, privileges and restrictions,
dividend rights, conversion rights, redemption privileges and
liquidation preferences, of each series of non-voting preferred
stock.
The
purpose of authorizing the Company’s board of directors to
issue non-voting preferred stock and determine the Company’s
rights and preferences is to eliminate delays associated with a
stockholder vote on specific issuances. The issuance of non-voting
preferred stock, while providing flexibility in connection with
possible acquisitions, future financings and other corporate
purposes, could have the effect of making it more difficult for a
third party to acquire, or could discourage a third party from
seeking to acquire, a majority of our outstanding voting stock.
Other than the Series B and C Preferred Stock discussed below,
there are no shares of non-voting preferred stock presently
outstanding and we have no present plans to issue any shares of
preferred stock.
Common Stock
Unless otherwise indicated, all of the following sales or issuances
of Company securities were conducted under the exemption from
registration as provided under Section 4(2) of the Securities Act
of 1933 (and also qualified for exemption under 4(5), formerly 4(6)
of the Securities Act of 1933, except as noted below). All of the
shares issued were issued in transactions not involving a public
offering, are considered to be restricted stock as defined in Rule
144 promulgated under the Securities Act of 1933 and stock
certificates issued with respect thereto bear legends to that
effect.
The Company has compensated consultants and service providers with
restricted common stock during the development of our business and
when our capital resources were not adequate to provide payment in
cash.
During the three months ended March 31, 2019, the Company had the
following sales of unregistered equity securities to accredited
investors unless otherwise indicated:
During
the three months ended March 31, 2019, the Company issued
20,916,216 shares to suppliers for services provided. The Company
valued the shares at $0.0079 per share or $165,400.
During
the three months ended March 31, 2019, Chicago Venture converted
principal and accrued interest of $375,000 into 84,156,195 shares
of our common stock at a per share conversion price of
$0.00446.
On
February 15, 2019, the Company entered into a Termination of
Existing Agreements and Release with CANX USA, LLC, a Nevada
limited liability company. Pursuant to the Agreement, the Parties
agreed to terminate, release and discharge all existing and further
rights and obligations between the Parties under, arising out of,
or in any way related to that certain Waiver and Modification
Agreement and Amended and Restated Joint Venture Agreement made as
of July 10, 2014, and any ancillary agreements or instruments
thereto, including, but not limited to, the Warrants issued to CANX
entitling CANX to purchase 540,000,000 shares of the
Company’s common stock at an exercise price of
$0.033.
In
exchange for the Agreement and cancellation of the CANX Agreements
and Warrants, the Company agreed to issue $1,000,000 of restricted
common stock priced at the February 7, 2019 closing price of
$0.008, or 125,000,000 restricted common stock shares.
16
Warrants
The
Company had the following warrant activity during the three months
ended March 31, 2019:
On
February 15, 2019, the Company entered into a Termination of
Existing Agreements and Release with CANX USA, LLC, a Nevada
limited liability company. Pursuant to the Agreement, the Parties
agreed to terminate, release and
discharge all existing and further rights and obligations between
the Parties under, arising out of, or in any way related to
that certain Waiver and Modification
Agreement and Amended and Restated Joint Venture Agreement made as
of July 10, 2014, and any ancillary agreements or instruments
thereto, including, but not limited to, the Warrants issued to CANX
entitling CANX to purchase 540,000,000 shares of the
Company’s common stock at an exercise price of
$0.033.
In exchange for the Agreement and cancellation of the CANX
Agreements and Warrants, the Company agreed to issue $1,000,000 of
restricted common stock priced at the February 7, 2019 closing
price of $0.008, or 125,000,000 restricted common stock
shares.
A
summary of the warrants issued as of March 31, 2019 is as
follows:
March 31, 2019
Weighted
Average
Exercise
Shares
Price
Outstanding
at beginning of period
902,825,146
$0.029
Issued
-
-
Exercised
-
-
Forfeited
(540,000,000)
(0.033)
Expired
-
-
Outstanding
at end of period
362,825,146
$0.023
Exerciseable
at end of period
362,825,146
$0.023
A
summary of the status of the warrants outstanding as of March 31,
2019 is presented below:
March 31, 2019
Weighted
Weighted
Weighted
Average
Average
Average
Number of
Remaining
Exercise
Shares
Exercise
Warrants
Life
Price
Exerciseable
Price
-
-
$-
-
$-
55,000,000
7.41
0.010
55,000,000
0.010
48,000,000
5.50
0.012
16,000,000
0.012
48,687,862
3.83
0.050
48,687,862
0.050
211,137,284
2.67
0.021
211,137,284
0.021
362,825,146
3.56
$0.023
330,825,146
0.023
Warrants
had no intrinsic value as of March 31, 2019.
17
The
warrants were valued using the following assumptions:
Dividend
yield
0%
Expected
life
5 Years
Expected
volatility
200%
Risk
free interest rate
0.78%
NOTE 14– STOCK OPTIONS
Description of Stock Option Plan
On
December 6, 2018, the Company’s shareholders voted to approve
the First Amended and Restated 2017 Stock Incentive Plan to
increase the shares issuable under the plan from 100 million to 200
million. The Company has 100,000,000 shares available for issuance.
The Company has outstanding unexercised stock option grants
totaling 100,000,000 shares at an average exercise price of $0.010
per share as of December 31, 2018. The Company filed registration
statements on Form S-8 to register 200,000,000 shares of the
Company’s common stock related to the 2017 Stock Incentive
Plan and First Amended and Restated 2017 Stock Incentive
Plan.
Determining Fair Value under ASC 505
The Company records compensation expense associated with stock
options and other equity-based compensation using the
Black-Scholes-Merton option valuation model for estimating fair
value of stock options granted under our plan. The Company
amortizes the fair value of stock options on a ratable basis over
the requisite service periods, which are generally the vesting
periods. The expected life of awards granted represents the period
of time that they are expected to be outstanding. The
Company estimates the volatility of our common stock based on the
historical volatility of its own common stock over the most recent
period corresponding with the estimated expected life of the award.
The Company bases the risk-free interest rate used in the Black
Scholes-Merton option valuation model on the implied yield
currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term equal to the expected life of the award.
The Company has not paid any cash dividends on our common stock and
does not anticipate paying any cash dividends in the foreseeable
future. Consequently, the Company uses an expected dividend yield
of zero in the Black-Scholes-Merton option valuation model and
adjusts share-based compensation for changes to the estimate of
expected equity award forfeitures based on actual forfeiture
experience. The effect of adjusting the forfeiture rate is
recognized in the period the forfeiture estimate is
changed.
Stock Option Activity
During the three months ended March 31, 2019, the Company had the
following stock option activity:
On February 6, 2019, the Company issued a stock option grant to an
advisory board member for 500,000 shares of common stock at
an exercise price of $0.008 per share. The stock option grant vests
quarterly over three years and is exercisable for 3 years. The
stock option grant was valued at $1,000.
On March 31, 2019, a stock option grant for 2,000,000 shares of
common stock at an exercise price of $0.008 per share
expired.
As of December 31, 2018, there are 98,500,000 options to purchase
common stock at an average exercise price of $0.010 per share
outstanding under the 2017 Amended and Restated Stock Incentive
Plan. The Company recorded $16,106 and $5,898 of compensation
expense, net of related tax effects, relative to stock options for
the three months ended March 31, 2018 and 2017 in accordance with
ASC 505. Net loss per share (basic and diluted) associated with
this expense was approximately ($0.00). As of March 31, 2019, there
is $125,855 of total unrecognized costs related to employee granted
stock options that are not vested. These costs are expected to be
recognized over a period of approximately 3.52 years.
18
Stock option activity for the period ended March 31, 2019 is as
follows:
Weighted
Average
Options
Exercise
Price
$
Outstanding as of
December 31, 2018
100,000,000
$0.0099
$990,000
Granted
500,000
0.0080
4,000
Exercised
-
-
-
Forfeitures
(2,000,000)
(0.0200)
(40,000)
Outstanding as of
March 31, 2019
98,500,000
$0.0097
$954,000
The following table summarizes information about stock options
outstanding and exercisable at March 31, 2019:
Weighted
Weighted
Weighted
Average
Average
Average
Range of
Number
Remaining Life
Exercise Price
Number
Exercise Price
Exercise Prices
Outstanding
In Years
Exerciseable
Exerciseable
Exerciseable
$0.006
31,000,000
3.50
$0.006
21,666,667
$0.006
0.007
10,000,000
3.50
0.007
5,000,000
0.007
.008-.009
2,500,000
1.55
.008-.009
1,166,667
.008-.009
0.010
12,000,000
0.63
0.010
12,000,000
0.010
0.012
38,000,000
4.50
0.012
6,333,333
0.012
0.020
5,000,000
4.10
0.020
2,000,000
0.020
98,500,000
3.52
$0.010
48,166,667
$0.009
Stock
option grants totaling 26,666,667 shares of common stock have an
intrinsic value of $48,333 as of March 31, 2019.
The
stock option grants were valued using the following
assumpti0ns:
Dividend
yield
0%
Expected
life
1 Year
Expected
volatility
124%
Risk
free interest rate
2.00%
NOTE 15 – COMMITMENTS,
CONTINGENCIES AND LEGAL PROCEEDINGS
Legal Proceedings
From time to time, the Company may become subject to various legal
proceedings that are incidental to the ordinary conduct of its
business. Although we cannot accurately predict the amount of any
liability that may ultimately arise with respect to any of these
matters, it makes provision for potential liabilities when it deems
them probable and reasonably estimable. These provisions are based
on current information and may be adjusted from time to time
according to developments.
Other than those certain legal proceedings as reported in the
Company’s annual report on Form 10-K filed with the SEC on
March 8, 2019, the Company’s know of no material, existing or
pending legal proceedings against our Company, nor is the Company
involved as a plaintiff in any material proceeding or pending
litigation. There are no proceedings in which any director, officer
or any affiliates, or any registered or beneficial shareholder, is
an adverse party or has a material interest adverse to the
Company’s interest.
19
Operating Leases
On May
31, 2018, the Company rented space at 5400 Carillon Point, Kirkland, Washington 98033
for $623 per month for the Company’s corporate office
and use of space in the Regus network, including California. The
Company’s agreement expires May 31, 2019. The Company intends
to renew this lease on comparable terms on May 31,
2019.
On October 1, 2017, GrowLife Hydroponics, Inc. entered into a lease
in Calgary, Canada. The monthly lease is approximately $3,246. The
lease expires September 30, 2022.
On December 19, 2017, GrowLife Innovations, Inc. entered into a
lease in Grand Prairie, Texas dated October 9, 2017, for 5,000 square feet for
the manufacturing and distribution of its flooring products.
The monthly lease payment is $15,000.
The lease expires December 1, 2022 and can be
renewed.
On July 2, 2018, GrowLife Hydroponics, Inc. entered into a store
lease for 1,950 square feet in Portland, Maine. The monthly lease
is approximately $2,113, with 3% increases in year two and three.
The lease expires July 2, 2021 and can be extended.
On August 31, 2018, GrowLife, Inc. entered into the Fourth
Amendment to the Lease Agreement for the store in Encino,
California. The monthly lease is approximately $6,720, with a 3%
increase on March 1, 2019. The lease expires September 1, 2019 and
the Company is required to provide six months’ notice to
terminate the lease.
On December 14, 2018, GrowLife, Inc. entered into a lease agreement
with Pensco Trust Company for a 28,000 square feet industrial space
at 10170 Croydon Way, Sacramento, California 95827 used for the
assembly and sales of plastic parts by EZ-Clone. The monthly lease
payment is $17,000 and increased approximately 3% per year. The
lease expires on December 31, 2023.
The aggregate future minimum lease payments under operating leases,
to the extent the leases have early cancellation options and
excluding escalation charges, are as follows:
Years Ended
March 31,
Total
2020
$532,926
2021
925,511
2022
549,776
2023
-
2024
-
Beyond
-
Total
$2,008,213
NOTE 16 – SUBSEQUENT EVENTS
The Company evaluates subsequent events, for the purpose of
adjustment or disclosure, up through the date the financial
statements are available.
The Company had the following material events subsequent to
March 31, 2019:
On
April 1, 2019, Chicago Venture converted principal and accrued
interest of $125,000 into 28,052,065 shares of our common stock at
a per share conversion price of $0.00446.
On
April 26, 2019, the Company extended a stock grant life for Joseph
Barnes for 8,000,000 shares of common stock at an exercise price of
$.01 per share by three years.
On
April 26, 2019, the Company extended a stock grant life for an
entity controlled by Mark Scott for 4,000,000 shares of common
stock at an exercise price of $.01 per share by three
years.
On
April 30, 2019 and May 2, 2019, the Company issued 4,863,922 to a
now former employee. The shares were valued at $.007 per
share.
20
ITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-looking
statements in this report reflect the good-faith judgment of our
management and the statements are based on facts and factors as we
currently know them. Forward-looking statements are subject to
risks and uncertainties and actual results and outcomes may differ
materially from the results and outcomes discussed in the
forward-looking statements. Factors that could cause or contribute
to such differences in results and outcomes include, but are not
limited to, those discussed below as well as those discussed
elsewhere in this report (including in Part II, Item 1A (Risk
Factors)). Readers are urged not to place undue reliance on these
forward-looking statements because they speak only as of the date
of this report. We undertake no obligation to revise or update any
forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this
report.
THE COMPANY AND OUR BUSINESS
GrowLife,
Inc. (“GrowLife” or the “Company”) is
incorporated under the laws of the State of Delaware and is
headquartered in Kirkland, Washington. We were founded in 2012 with
the Closing of the Agreement and Plan of Merger with SGT Merger
Corporation.
GrowLife’s goal is to become the nation’s largest
cultivation facility service provider
for the production of organics, herbs and greens and plant-based
medicines.
Since
early 2018 we have been discussing how we can meet our goal and
help our customers significantly lower their production costs. We
have continued to distribute thousands of third-party products to
growers through retail, e-commerce and direct sales channels, sold
to both commercial and consumer cultivators, and began developing
our own products in our research and development group. As we
pursued our goal of “measuring our success by our customer’s
success” we discovered that we needed to acquire a
critical technology for cloning.
As we
illustrated in last year’s Management Discussion section, the
bell curve we mapped out from our ‘Cube’
proof-of-concept tests showed that the Commercial Cultivation Stage is where
most of the money is spent for production. However, the
Cloning Stage is where the
greatest yield to impact occurs (blue line). While we could have
simply partnered with EZ-Clone, the 20-year leader in cloning, to
use their products to help increase the yield of Cube, there were
far greater strategic and economic benefits to both companies if
GrowLife pursued an acquisition.
On
October 15, 2018, GrowLife acquired 51% of EZ-Clone and intends to
acquire the remaining 49% later in 2019. The addition of EZ-Clone
was the missing piece for many reasons. Like a jigsaw puzzle, the
pattern became apparent of how we needed to proceed and
pivot the GrowLife business for
growth.
The
Company will continue to provide the best products that drive down
our customer’s production cost while increasing our gross
margin. Initially we can purchase and resell third-party products
as we have done in the past. However, over time we will develop our
own technologies and, in some cases, acquire them to accelerate
bringing them to market. Acquiring companies is not difficult but
integrating talent and the best of their culture can be
challenging. As a result, we have organized to integrate such
acquisitions.
21
At the
end of 2018, GrowLife decided to shift its operating organization
from divisions to a functional structure with a deep leadership
team to provide greater coverage for further geographical and
acquisition expansion. Each leader has extensive experience in
their roles. With a functional organization we maintain clear lines
of daily communication across the company and deep into our
operations. A newly acquired company can be quickly integrated into
our three groups while maintaining continuity of leadership and
knowledge transfer. EZ-Clone integrated into GrowLife in six
months, less than half the time of FreeFit. Such best practices are
conveyed with Standard Operating Procedures and absorbed with a
receptive culture.
Where
we once saw divisions to serve different market segments, we
elected to align our resources behind three functional groups
serving commercial customers at different stages. Where we were
racing to the bottom by distributing other people’s commodity
products that are perceived as too expensive for our customers and
generating only 8-10% gross margins, we now focus on our own
GrowLife/EZ-Clone products that
last quarter delivered a blended gross margin of 34% and can grow
to 40-50% gross margins over time at reasonable prices to
our customers. Additionally, our retail stores in Canada, Los
Angeles and Maine serve as regional fulfillment and e-Commerce
centers for our commercial customers. And, this is just the start.
Given the 87% year-over-year revenue growth, GrowLife will continue
to provide essential and hard-to-find goods including growing
media, industry-leading hydroponics equipment, organic plant
nutrients, and thousands more products on demand to our customers
across the United States and Canada. However, as our revenue mix
transitions to proprietary products we expect to see our gross
margins grow significantly.
Vision
The GrowLife mission is to measure its success by its
customer’s success;
serving cultivators of all sizes as a reliable business partner and
its shareholders with value and trust.
Our
vision continues to revolve around the key words in our mission
statement, “value and
trust”, with our employees, our customers and our
shareholders. Value is more than economic benefit; it must not mean
compromise or that the relationship ends with the transaction;
rather, quite the opposite. We have been exploring revenue models
that may work the way our commercial customers need help such as
dealing with the IRS 280e challenge. Employees and shareholders
also expect value but benefits and dilution is challenging so we
look to ways that solve problems. For competitive reasons we do not
go into details but will disclose as we launch such programs. Thus,
we seek value.
Trust is earned through
consistency of practice. Our operations have demonstrated such
practice. We are cautiously transparent where we do not promise
what we may not deliver therefore we do not give revenue guidance
and, for competitive reasons, avoid too many details, but we share
as much as we can to keep our customers and shareholders always
informed.
22
We
will continue to provide our customers the over 15,000 products
that they demand, however, those third-party manufacturers are not
rushing to lower their prices to help our customers lower their
production costs. It is understandable because they make more in
the short term without concern of the macro-market impact. GrowLife
is a nationwide company and is concerned about the
macro-economics.
One of
the many things that attracted the Company to EZ Clone was its
principal, William Blackburn. Billy was working on the EZ Clone Pro project that the Company
saw in 2017. A cloning system for almost 500 clones at one time; a
system that could easily cannibalize his smaller core cloning
business. We discussed the trade-offs and he told me
“that’s where the market is going and what
customer’s need. EZ Clone needs to adjust, not our
customers.” I am so glad that he is on our team and heading
up R&D and manufacturing.
We see
outdoor farming as a wasteful, destructive and an inefficient use
of precious resources. Current water, land and harvest cycles are
limited and, if left unchecked, will fail to support the
world’s population growth. However, indoor cultivation allows
our customers to replicate nature in a controllable manner that
uses a fraction of water and land while providing 2–5 times
the crop cycles of outdoor. The challenge is in getting the
economics right. Subsidies are not the answer. Even many
large-scale indoor grow operations with large capital investments
have had a difficult time staying in business because the poor
economic models fail to deliver a profit. Fruits and vegetables
have limited revenue benefit due to their low prices and saturated
supply from international and domestic growers.
Cannabis
on the other hand currently has an attractive revenue model and
valuation multiple but modest demand of about 5% of the population
due to shadows cast by interstate commerce restrictions, banking
issues and threatening federal laws. However, Cannabis laws are not
the only expected changes. We must prepare for significantly lower
prices if Cannabis is to become a mainstream alternative to beer,
wine and other alcohol in the future. Expecting a $12 Cannabis
cigarette to drop to $1 over the next couple of years is not
unreasonable.
Therefore,
GrowLife’s vision of indoor cultivation is that it is
inevitable, not another gardening alternative. For the Cannabis
market, as well as all indoor cultivators of fruits and vegetables,
to serve their markets and customers they must significantly
increase operations efficiencies at scale, remove unnecessary
expenses and lower their production costs with local, safer,
healthier and affordable crops. We
see lowering the cost of production as the game changer.
This means increasing efficiencies, scaling up production volumes
and driving down indoor operating costs. Given this vision of the
future, lowering our customer’s production costs serves as
our compass to mergers, acquisitions and partnerships.
GrowLife’s
commercial customers are at different stages of commercial
operations across all States and Provenances. Along with our
business-to-business focus we have looked at the
business-to-consumer sought to offer the GrowLife Consumer Cube
products. We recognize demand is increasing from small, aspiring
cultivation consumers across the country seeking to learn and use a
complete indoor growing solution. At this time, however, we
recognize that we cannot serve both the consumer and commercial
markets so we have decided to concentrate our efforts on commercial
customers.
23
To
grow our commercial programs GrowLife is investing in two areas,
Sales with Marketing support and Research and Development or
innovation. The funding for these efforts started with $1 million
in equity financing in February 2018 from Chicago Venture Partners
and then with $2.5 million from our shareholders in our Rights
Offering. These funds allowed us to begin our expansion and
innovation projects, thus our greater than normal G&A expenses
and EZ Clone acquisition.
Demand: Market Size and Growth
GrowLife
Inc. is engaged in the business of offering general hydroponic
growing equipment including complete indoor lighting
systems, growing mediums, soils, tools for cutting and
propagation, hydroponics systems, growing accessories, bulbs,
ballasts, reflectors, meters and timers and climate control
equipment for the indoor plant cultivation and cannabis
industries.
Additionally,
GrowLife, through its recent asset acquisition, has begun servicing
the Luxury Vinyl Tile market segment of the Floor Covering
industry, which it will use in its GrowLife clean grow room
initiative.
Hydroponic Growing Equipment (US)
Industry
Definition:
The
Hydroponic Growing Equipment industry is primarily engaged in
selling hydroponic horticulture equipment. Hydroponics is a method
of growing plants using mineral nutrient solutions in water without
the use of soil.
2017
Key Industry Statistics:
–
In 2017, the
Hydroponic Growing Equipment Stores industry generated $689.7
million in gross revenue with total profits of $26.9
million.
–
The industry grew
4.4% from 2012 to 2017 and is expected to continuing growing at a
rate of 1.7% through 2022.
–
As of 2017, there
are approximately 1,948 businesses engaged in the industry, which
contribute $210 million in wages and salaries to the nation’s
economy.
–
No companies have
been identified as “major players”.
–
Household
consumers comprise the largest market segment for the industry,
accounting for 48.1% of the market in 2017, with farms and
agriculture representing 37.2% of the market and 14.7% represented
by other types including: retail establishments, equipment
wholesalers, repair shops, industrial companies, and government
bodies.
–
The
industry’s average profit margin, defined as earnings before
interest and taxes, has increased since 2012; profit margins are
expected to have expanded from 1.8% of industry revenue in 2012 to
3.9% in 2017.
24
Product and Service Segmentation:
Of
total product sales in 2017, 35.8% of products sold were nutrients,
solution chemicals and other treatments, 30.4% were hydroponic
systems and equipment, 20% were other accessories, additions,
supplies and merchandise, and 13.8% were hardware, tools, plumping
and electrical supplies.
Key
Industry Drivers:
–
Much of the
industry’s sudden popularity is the result of heightened
consumer interest in locally grown and organic produce; many
producers of hydroponic fruits and vegetables strive to use
sustainable business practices and natural nutrients and
pesticides
–
Consumer interest
in organic foods and hydroponic growing has also increased as
disposable income continues to rise.
–
Given the
discretionary nature of the industry’s products, demand is
heavily influenced by fluctuations in the overall level of consumer
disposable income and consumer confidence in the economy. Over the
five years to 2017, per capita disposable income is anticipated to
grow an annualized 1.4%. Rising disposable income increases
consumers’ willingness to purchase luxuries such as
high-priced hydroponic growing equipment and organic
foods.
–
Impact of the
Cannabis Industry
o
According to data
released by Forbes, the
medical marijuana market is expected to generate $6.7 billion in
2017 alone. Given the size of the medical marijuana market, a
rising number of entrepreneurs have invested in hydroponic growing
equipment to be part of the medical marijuana gold rush. This
investment has been one of the primary drivers of the aggressive
growth that this industry has experienced over the past five
years.
o
In certain states,
patients with medical marijuana cards are also allowed to grow
limited quantities of marijuana for personal use. This has
encouraged patients to purchase hydroponic growing equipment and
pursue small-scale marijuana cultivation.
Competitive
advantages:
–
Most hydroponic
growing equipment stores are small business operations that serve
their immediate geographic areas. GrowLife serves a nationwide
audience with expansion into Canada.
Growth
Outlook:
“The
industry is growing faster than overall GDP”
IBIS World expects the Cannabis industry revenue to grow an
annualized 1.7% to $750.2 million over the five years to
2022.
Factors:
–
Increasing
consumer focus on healthy eating habits will likely spur demand as
more consumers seek out organic and pesticide-free produce and opt
to grow their own or purchase locally produced organic foods made
with hydroponic growing equipment.
25
–
Medical and
recreational marijuana is expected to be approved in an increasing
number of US states over the next five years, which will lead more
patients and entrepreneurs to buy marijuana and hydroponic growing
equipment to fulfill demand for this growing market.
–
This industry will
also continue to benefit from risk-averse local farmers wishing to
break their reliance on weather conditions that may be increasingly
volatile.
–
IBIS World estimates that per capita
disposable income will rise at an annualized rate of 2.7% over the
five years to 2022.
–
The US Department
of Agriculture reported in 2016 that the number of certified
organic food operators increased nearly 12.0% from 2015, and this
growth is expected to remain high over the next five
years.
–
IBIS World expects profitability to
fall somewhat over the next five years as price-based competition
accelerates.
Competitive
Advantages
–
IBIS World anticipates that the number
of industry establishments will increase at an annualized rate of
5.1% to 3,123 over the five years to 2022 earning it the rating of
“Highly competitive”
–
Market share
concentration is low with only one company representing over 1% of
market share.
–
Barriers to Entry
in this industry are Low
Medical
and Recreational Marijuana Growing Industry
Industry
Definition:
This
emerging industry pertains to those engaged in the practice of
cultivating and producing legal marijuana plants for the medical
and recreational consumer markets.
US
2016 Key Industry Statistics:
–
In 2016, the
Medical and Recreational Marijuana Growing industry generated $3.5
billion in gross revenue with total profits of $233.4
million.
–
The industry grew
28.3% from 2011 to 2016 and is expected to continuing growing at a
rate of 33.5% through 2021.
–
As of 2016, there
are approximately 148,294 businesses engaged in the industry, which
contribute $957.6 million in wages and salaries to the
nation’s economy.
–
No companies have
been identified as “major players”.
–
Medical Marijuana
patients with severe pain comprise the largest market segment for
the industry, accounting for 64.6% of the market in 2016, with
recreational consumers accounting for 14.1% of the market. The
remaining market share is shared by consumers purchasing products
for treatment of other various medical conditions.
–
The
industry’s average profit margin, defined as earnings before
interest and taxes, varies greatly across the industry because of
the myriad of laws governing medical and recreational marijuana
from state to state. Industry-wide margins have grown on account of
the legalization of recreational marijuana in Colorado and
Washington and are expected to grow as more legalization takes
effect including California.
26
Key
Industry Drivers:
–
Medical marijuana
growers continue to benefit from the steadily aging population.
Chronic illnesses have become more prevalent as the population
continues to age, driving demand for medical
marijuana.
–
An estimated 2.6
million people use marijuana for medicinal purposes, and this
segment of the US population is anticipated to increase drastically
over the next five years.
–
More than
two-thirds of Americans now live in jurisdictions that have
legalized either the medical or adult use of
marijuana.
Growth
Outlook:
“The
industry is growing at a faster rate than the US
economy”
–
Industry revenue
is estimated to increase at an annualized rate of 33.5% to $15.0
billion over the five years to 2021.
Factors:
–
Continued
legalization on the state level will increase accessibility to
medical and recreational marijuana, increasing nationwide
demand.
–
Growing acceptance
of the marijuana products will increase demand. According to a poll
conducted by Gallup, 36.0% of Americans between the ages of 18 to
29 have tried marijuana in 2013, compared with just 8.0% in
1969.
–
The level of
household income determines consumers’ ability to purchase
medical marijuana products. While prescription products can be
essential for health and therefore less susceptible to changes in
consumer expenditure, the unconventional nature of the
industry’s products make it subject to changes in disposable
income. As a result, an increase in disposable income will boost
demand for medical marijuana growers.
The
Floor Covering industry is segmented by product type including
wood, rugs, resilient (which includes the Luxury Vinyl Tile or
“LVT” segment), carpet, tile, laminate and rubber
subcategories. GrowLife is engaged in luxury vinyl tile
manufacturing and is participating in this market by selling
through business-to-business and business-to-consumer
channels.
27
2016
Key Industry Statistics:
–
In 2016, the U.S.
flooring market grew an estimated 5.1%, according to Market
Insights, with total revenues of $21.174 billion.
–
North America
flooring market will witness gains over 5% up to 2024 according to
Global Market Insights.
Luxury
Vinyl Tile
–
LVT now accounts
for 16.5% of the total flooring market in dollars and 18.8% in
volume after a 6.5% rise in units to 3.537 billion square feet. In
2015, resilient held a 13.3% market share in terms of dollars,
which was up from 12.2% in 2014, 11.9% in 2013 and 11.2% in 2012
respectively.
–
Sales have gone
from nearly $750 million in 2012 to $948 million in 2013, $1.142
billion in 2014, $1.651 billion in 2015 and $2.161 in 2016. That
represents respective gains of 26.4%, 20.5%, 27.1% and 30.9%
respectively.
–
LVT sales have
more than doubled in three years.
–
LVT increased
significantly in both residential and commercial
markets—dollars and square feet—in 2016. Residential
LVT saw a 68.3% increase in square footage from 760 million in 2015
to 1.04 billion (including WPC), making up 76.1% of the LVT market.
This number was 71% a year ago and 55% two years ago.
–
The commercial
market rose from 297.2 million square feet to 326.3 million square
feet, a 9.8% increase. While residential brought in more
dollars—$1.512 billion—last year, commercial LVT still
performed well, posting a 12.5% increase, rising from $576.4
million in 2015 to $648.6 million in 2016.
GrowLife’s
LVT product FreeFit® features significant competitive
advantages including:
o
20k+ HD imaging,
“Real Touch” texture technology, fully customizable
platform, “Seriously Easy to Install” design, made in
the US, waterproof, lifespan 3x longer than traditional vinyl, 4mmm
thickness and 22mil wear layer and wear and stain
resistance.
–
Direct to consumer
sales model that major competitors cannot execute on due to resale
agreements.
28
Growth
Outlook:
The
global vinyl flooring market is expected to reach an estimated
$16.2 billion by 2023, and it is forecast to grow at a CAGR of 4.4%
from 2018 to 2023.
Employees
As of
March 31, 2019, we had 33
full-time and part-time employees. Marco Hegyi, our Chief Executive
Officer, is based in Kirkland, Washington. Mark E. Scott, our Chief
Financial Officer, is based primarily in Seattle, Washington. In
addition, we have approximately 21 full and part time employees
located throughout the United States and Canada who operate our
businesses. We employ 12 full-time and part-time employees at
EZ-Clone in Sacramento, CA. None of our employees are subject to a
collective bargaining agreement or represented by a trade or labor
union. We believe that we have a good relationship with our
employees.
Key Partners
Our
key customers vary by state and are expected to be more defined as
the company moves from its retail walk-in purchasing sales strategy
to serving cultivation facilities directly and under predictable
purchasing contracts.
Our
key suppliers include distributors such as HydroFarm, Urban
Horticultural Supply and Hawthorne to product-specific suppliers.
All the products purchased and resold are applicable to indoor
growing for organics, greens, and plant-based
medicines.
Competition
Covering
two countries across all cultivator segments creates competitors
that also serve as partners. Large commercial cultivators have
found themselves willing to assume their own equipment support by
buying large volume purchased directly from certain suppliers and
distributors such as Hawthorne and HydroFarm. Other key competitors
on the retail side consist of local and regional hydroponic
resellers of indoor growing equipment. On the e-commerce business,
GrowersHouse.com, Hydrobuilder.com and smaller online resellers
using Amazon and eBay e-commerce market systems.
Intellectual Property and Proprietary Rights
Our
intellectual property consists of brands and their related
trademarks and websites, customer lists and affiliations, product
know-how and technology, and marketing intangibles.
Our
other intellectual property is primarily in the form of trademarks
and domain names. We also hold rights to several website addresses
related to our business including websites that are actively used
in our day-to-day business such as www.shopgrowlife.com,
www.freefit.com,
www.growlifeinc.com,
www.growlifeeco.com
and www.greners.com.
We have applied for two patents related to the vertical room
product previously discussed.
We
have a policy of entering into confidentiality and non-disclosure
agreements with our employees, some of our vendors and customers as
necessary.
Closed Transactions Expected to Grow the Company
On October 3, 2017, we closed the acquisition of 51% of the
Purchased Assets from David Reichwein, a Pennsylvania resident, GIP
International Ltd, a Hong Kong corporation and DPR International
LLC, a Pennsylvania limited liability corporation. The Purchased
Assets include intellectual property, copy rights and trademarks
related to reflective tiles and flooring.
On
February 16, 2018, we entered into an Addendum (the “First
Addendum”) to amend the terms between the Company and David
Reichwein. Pursuant to the First Addendum, we purchased the
remaining 49% of the Purchased Assets in exchange for a one-time
payment of $250,000 and the cancellation of Mr. Reichwein’s
right to receive a 10% commission on certain sales of Free Fit
products as was set forth in Mr. Reichwein’s employment
agreement. In exchange for the cancellation of the commission in
the employment agreement, Mr. Reichwein was granted the opportunity
to earn up to two $100,000 cash bonuses and an aggregate common
stock bonus of up to 7,500,000 shares if certain revenue and gross
margin goals are met in 2018.
29
On
August 17, 2018, we entered into an Asset Purchase Agreement with
Go Green Hydroponics, Inc., a California corporation and TCA
– Go Green SPV, LLC, a Florida limited liability pursuant to
which the Company acquired the intellectual property and assumed
the lease for the property located at 15721 Ventura Blvd., Encino,
CA 91436. We intend to operate a retail store, internet sales and
direct sales from this location.
Concurrently,
the Company and Seller entered into a Security Agreement for
securing our assets as collateral for the obligations of Company as
set forth in the Security Agreement. In consideration for the sale
and assignment of the Purchased Assets, we agreed to pay the
Seller: (i) the proceeds generated from the sale of the closing
inventory until all closing inventory has been sold, and (ii) to
pay the Seller 5% of all gross revenue of our earned or in any way
related to the Purchased Assets generated between October 1, 2018
and December 31, 2019, up to a maximum of $200,000.
On
October 15, 2018, we closed the Purchase and Sale Agreement with
EZ-Clone Enterprises, Inc., a California corporation. EZ-Clone is
the manufacturer of multiple award-winning products specifically
designed for the commercial cloning and propagation stage of indoor
plant cultivation including cannabis, food, and other hydroponic
farming. We acquired 51% of EZ-Clone for $2,040,000, payable as
follows: (i) a cash payment of $645,000; and (ii) the issuance of
107,307,692 restricted shares of our common stock at a price of
$0.013 per share or $1,395,000.
We have
the obligation to acquire the remaining 49% of EZ-Clone before
October 15, 2019 for $1,960,000,
payable as follows: (i) a cash payment of $855,000; and (ii) the
issuance of 85,000,000 shares of the Company’s common stock
at a price of $0.013 per share or $1,105,000.
Government Regulation
Currently,
there are thirty three states plus the District of Columbia that
have laws and/or regulation that recognize in one form or another
legitimate medical uses for cannabis and consumer use of cannabis
in connection with medical treatment. There are currently ten
states and the District of Columbia that allow recreational use of
cannabis. As of March 8, 2019, the policy and regulations of the
Federal government and its agencies is that cannabis has no medical
benefit and a range of activities including cultivation and use of
cannabis for personal use is prohibited on the basis of federal law
and may or may not be permitted on the basis of state law. Active
enforcement of the current federal regulatory position on cannabis
on a regional or national basis may directly and adversely affect
the willingness of customers of GrowLife to invest in or buy
products from GrowLife. Active enforcement of the current federal
regulatory position on cannabis may thus indirectly and adversely
affect revenues and profits of the GrowLife companies.
All
this being said, many reports show that the majority of the
American public is in favor of making medical cannabis available as
a controlled substance to those patients who need it. The need and
consumption will then require cultivators to continue to provide
safe and compliant crops to consumers. The cultivators will then
need to build facilities and use consumable products, which
GrowLife provides.
30
OUR COMMON STOCK
On
October 17, 2017, we were informed by Alpine Securities Corporation
(“Alpine”) that Alpine has demonstrated compliance with
the Financial Industry Regulatory Authority (“FINRA”)
Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of
1934. We filed an amended application with the OTC Markets to list
the Company’s common stock on the OTCQB and begin to trade on
this market as of March 20, 2018. As
of March 4, 2019, we began to trade on the Pink Sheet stocks
system. Our bid price had
closed below $0.01 for more than 30 consecutive calendar
days.
PRIMARY RISKS AND UNCERTAINTIES
We are
exposed to various risks related to legal proceedings, our need for
additional financing, the sale of significant numbers of our
shares, the potential adjustment in the exercise price of our
convertible debentures and a volatile market price for our common
stock. These risks and uncertainties are discussed in more detail
below in Part II, Item 1A.
31
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of
operations information and presentation of that data as a
percentage of change from period-to-period.
(dollars in thousands)
Three Months
Ended March 31,
2019
2018
$
Variance
%
Variance
Net
revenue
$2,244
$709
$1,535
216.5%
Cost of goods
sold
1,473
633
840
-132.7%
Gross
profit
771
76
695
914.5%
General and
administrative expenses
2,130
1,179
951
-80.7%
Operating
loss
(1,359)
(1,103)
(256)
-23.2%
Other income
(expense):
Change
in fair value of derivative
487
2,358
(1,871)
-79.3%
Interest
expense, net
(120)
(388)
268
69.1%
Loss on debt
conversions
(1,346)
(5,109)
3,763
73.7%
Total other
(expense)
(979)
(3,139)
2,160
68.8%
(Loss) before
income taxes
(2,338)
(4,242)
1,904
44.9%
Income taxes -
current benefit
-
-
-
0.0%
Net
(loss)
$(2,338)
$(4,242)
$1,904
44.9%
THREE MONTHS ENDED MARCH 31,
2019 AS COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 2018
Revenue
Net
revenue for the three months ended March 31, 2019 increased
$1,535,000 to $2,244,000 as compared to $709,000 for the three
months ended March 31, 2018. The increase resulted from increased
sales personnel and channels of distribution, the development of
the reflective tiles and flooring
product line which was acquired on October 3, 2017, the development
of the Encino business and the acquisition of EZ-Clone on October
15, 2018.
Cost of Goods Sold
Cost of
sales for the three months ended March 31, 2019 increased $840,000
to $1,473,000 as compared to $633,000 for the three months ended
March 31, 2018. The increase resulted from increased sales
personnel and channels of distribution, the development of the
reflective tiles and flooring product
line which was acquired on October 3, 2017, the development of the
Encino business and the acquisition of EZ-Clone on October 15,
2018.
Gross profit was $771,000 for the three months ended March 31, 2019
as compared to a gross profit of $76,000 for the three months ended
March 31, 2018. The gross profit percentage was 34.4% for the three
months ended March 31, 2019 as compared to 10.8% for the three
months ended March 31, 2018. The increase was due increased
sales, offset by lower cost of sales related to favorable product
mix at the reflective tiles and
flooring product line and the acquisition of EZ-Clone on October
15, 2018. EZ-Clone reported a gross profit percentage of
51.1%.
General and Administrative Expenses
General
and administrative expenses for the three months ended March 31,
2019 were $2,130,000 as compared to $1,179,000 for the three months
ended March 31, 2018. The variances were as follows: (i) an
increase in non-cash other expenses of $311,000; (ii) an increase
in EZ-Clone expenses of $426,000; and (iii) an increase in other
expenses of $214,000. As part of the general and administrative
expenses for the three months ended March 31, 2019, we recorded
public relation, investor relation or business development expenses
of $33,000 and $0 respectively. The increase resulted from
increased sales personnel and channels of distribution, the
development of the reflective tiles
and flooring product line which was acquired on October 3, 2017,
the development of the Encino business and the acquisition of
EZ-Clone on October 15, 2018.
Non-cash
general and administrative expenses for the three months ended
March 31, 2019 were $520,000 including (i) depreciation and
amortization of $30,000; (ii) amortization of intangible assets of
$285,000; (iii) stock based compensation of $40,000 related to
stock option grants and warrants; and (iv) common stock issued for
services of $165,000.
Non-cash
general and administrative expenses for the three months ended
March 31, 2018 were $294,000 including (i) depreciation and
amortization of $2,000; (ii) stock based compensation of $216,000
related to stock option grants and warrants; and (iii) common stock
issued for services of $76,000.
32
Other Expense
Other
expense for the three months ended March 31, 2019 was $979,000 as
compared to other expense of $3,139,000 for the three months ended
March 31, 2018. The other expense for the three months ended March
31, 2019 included (i) change in derivative liability of $487,000;
offset by (ii) interest expense of $120,000; and (iii) loss on debt
conversions of $1,346,000. The change in derivative liability is
the non-cash change in the fair value and relates to our derivative
instruments. The non-cash interest related to accrued interest
expense on our notes payable. The loss on debt conversions related
to the conversion of our notes payable at prices below the market
price.
The
other expense for the three months ended March 31, 2018 included
(i) interest expense of $388,000; and (ii) loss on debt conversions
of $5,109,000; offset by (iii) change in fair value of derivative
of $2,358,000 The non-cash interest related to the amortization of
the debt discount associated with our convertible notes and accrued
interest expense related to our notes payable. The loss on debt
conversions related to the conversion of our notes payable at
prices below the market price.
Net (Loss)
Net
loss for the three months ended March 31, 2019 was $2,338,000 as
compared to $4,242,000 for the three months ended March 31, 2018
for the reasons discussed above.
Net
loss for the three months ended March 31, 2019 included non-cash
expenses of $1,484,000 including (i) depreciation and amortization
of $30,000; (ii) amortization of intangible assets of $285,000;
(iii) stock based compensation of $40,000 related to stock option
grants and warrants; (iv) common stock issued for services of
$165,000; (v) accrued interest on convertible notes payable of
$66,000; (vi) loss on debt conversions of $1,360,000; (vii)
noncontrolling interest in EZ-Clone Enterprises, Inc.; and offset
by (viii) change in derivative liability of $487,000.
Net
loss for the three months ended March 31, 2018 included non-cash
expenses of $3,251,000 including (i) depreciation and amortization
of $11,000; (ii) stock based compensation of $54,000 related to
stock option grants and warrants; (iii) common stock issued for
services of $153,000 (iv) accrued interest and amortization of debt
discount on convertible notes payable of $282,000; (v) loss on debt
conversions of $5,109,000; offset by (vi) change in derivative
liability of $2,358,000 and (vii) an increase in working capital of
$156,000.
We
expect losses to continue as we implement our business
plan.
LIQUIDITY AND CAPITAL RESOURCES
We had
cash of $619,000 and working capital of approximately $164,000
(less derivative liability, convertible debt and deferred revenue)
as of March 31, 2019. We expect losses to continue as we
grow our business. Our cash used in operations for the three months
ended March 31, 2019 and for the years ended December 31, 2018 and
2017 was $1,117,000, $3,855,000 and $2,082,000,
respectively.
We will
need to obtain additional financing in the future. There can be no
assurance that we will be able to secure funding, or that if such
funding is available, the terms or conditions would be acceptable
to us. If we are unable to obtain additional financing, we may need
to restructure our operations, divest all or a portion of our
business or file for bankruptcy.
We have
financed our operations through the issuance of convertible
debentures and the sale of common stock.
33
Funding Agreements with Chicago Venture Partners, L.P. and Iliad
Research and Trading, L.P.
We have
closed several debt financing transactions with Chicago Venture and
Iliad during 2018. We have approximately $500,000 available under
this debt financing as of March 31, 2019.
Operating Activities
Net
cash used in operating activities for the three months ended March
31, 2019 was $1,117,000. This amount was primarily related to a net
loss of $2,364,000, (i) net working capital of $237,000 and offset
by (ii) non-cash expenses of $1,484,000 including (i) depreciation
and amortization of $30,000; (ii) amortization of intangible assets
of $285,000; (iii) stock based compensation of $40,000 related to
stock option grants and warrants; (iv) common stock issued for
services of $165,000; (v) accrued interest on convertible notes
payable of $66,000; (vi) loss on debt conversions of $1,360,000;
(vii) noncontrolling interest in EZ-Clone Enterprises, Inc.; and
offset by (viii) change in derivative liability of
$487,000.
Investment Activities
Net cash used in investing activities for the three months
ended March 31, 2019 was $5,000. The amount related to the
investment in purchased assets.
Financing Activities
Net
cash used in financing activities for the three months ended March
31, 2019 was $593,000. The amount related to repayment of
convertible notes payable of $591,000.
Our contractual cash obligations as of March 31, 2019 are
summarized in the table below:
Less
Than
Greater
Than
Contractual Cash
Obligations
Total
1
Year
1-3
Years
3-5
Years
5
Years
Operating
leases
$2,008,213
$532,926
$925,511
$549,776
$-
Convertible notes
payable
2,503,873
2,503,873
-
-
-
Capital
expenditures
300,000
100,000
100,000
100,000
-
$4,812,086
$3,136,799
$1,025,511
$649,776
$-
OFF-BALANCE SHEET ARRANGEMENTS
We do
not have any off-balance sheet arrangements (as that term is
defined in Item 303 of Regulation S-K) that are reasonably likely
to have a current or future material effect on our financial
condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
a) Evaluation of Disclosure Controls and Procedures
We
conducted an evaluation under the supervision and with the
participation of our management, of the effectiveness of the design
and operation of our disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act
of 1934, as amended (“Exchange Act”), means controls
and other procedures of a company that are designed to ensure that
information required to be disclosed by the company in the reports
it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures also include, without limitation, controls
and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the
company's management, including its principal executive and
principal financial officers, or persons performing similar
functions, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, our principal
executive and principal financial officers concluded as of March
31, 2019, that our disclosure controls and procedures were not
effective at the reasonable assurance level due to the material
weaknesses in our internal controls over financial reporting
discussed immediately below.
34
Identified Material Weakness
A
material weakness in our internal control over financial reporting
is a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or
detected.
Management
identified the following material weakness during its assessment of
internal controls over financial reporting:
Audit Committee:
The current Audit Committee has two independent directors, but the
Chairman is an interim Named Executive Officer. We expect to expand
this committee during 2019.
b) Changes in Internal Control over Financial
Reporting
During
the quarter ended March 31,
2019, there were no changes in our internal controls over
financial reporting during this fiscal quarter, which were
identified in connection with our management’s evaluation
required by paragraph (d) of rules 13a-15 and 15d-15 under the
Exchange Act, that materially affected, or is reasonably likely to
have a materially affect, on our internal control over financial
reporting.
From time to time, we may become subject to various legal
proceedings that are incidental to the ordinary conduct of its
business. Although we cannot accurately predict the amount of any
liability that may ultimately arise with respect to any of these
matters, it makes provision for potential liabilities when it deems
them probable and reasonably estimable. These provisions are based
on current information and may be adjusted from time to time
according to developments.
Other than those certain legal proceedings as reported in our
annual report on Form 10-K filed with the SEC on March 8, 2019, we
know of no material, existing or pending legal proceedings against
our Company, nor are we involved as a plaintiff in any material
proceeding or pending litigation. There are no proceedings in which
any director, officer or any affiliates, or any registered or
beneficial shareholder, is an adverse party or has a material
interest adverse to our interest.
There are certain inherent risks which will have an effect on the
Company’s development in the future and the most
significant risks and uncertainties known and identified by our
management are described below.
Risks Related to Our Business
There are certain inherent risks which will have an effect on the
Company’s development in the future and the most
significant risks and uncertainties known and identified by our
management are described below.
35
Risks Associated with Securities Purchase Agreement with Chicago
Venture
The
Securities Purchase Agreement with Chicago Venture will terminate
if we file protection from its creditors, a Registration Statement
on Form S-1 is not effective, and our market capitalization or the
trading volume of our common stock does not reach certain levels.
If terminated, we will be unable to draw down all or substantially
all of our Chicago Venture Notes.
Our
ability to require Chicago Venture to fund the Chicago Venture Note
is at our discretion, subject to certain limitations. Chicago
Venture is obligated to fund if each of the following conditions
are met; (i) the average and median daily dollar volumes of our
common stock for the twenty (20) and sixty (60) trading days
immediately preceding the funding date are greater than $100,000;
(ii) our market capitalization on the funding date is greater than
$17,000,000; (iii) we are not in default with respect to share
delivery obligations under the note as of the funding date; and
(iv) we are current in our reporting obligations.
There
is no guarantee that we will be able to meet the foregoing
conditions or any other conditions under the Securities Purchase
Agreement and/or Chicago Venture Note or that we will be able to
draw down any portion of the amounts available under the Securities
Purchase Agreement and/or Chicago Venture Note.
If we
not able to draw down all due under the Securities Purchase
Agreement or if the Securities Purchase Agreement is terminated, we
may be forced to curtail the scope of our operations or alter our
business plan if other financing is not available to
us.
Our common stock.
On
October 17, 2017, we were informed by Alpine Securities Corporation
(“Alpine”) that Alpine has demonstrated compliance with
the Financial Industry Regulatory Authority (“FINRA”)
Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of
1934. We filed an amended application with the OTC Markets to list
the Company’s common stock on the OTCQB and begin to trade on
this market as of March 20, 2018. As
of March 4, 2019, we began to trade on the Pink Sheet stocks
system. Our bid price had
closed below $0.01 for more than 30 consecutive calendar
days.
This
action had a material adverse effect on our business, financial
condition and results of operations. If we are unable to obtain
additional financing when it is needed, we will need to restructure
our operations, and divest all or a portion of our
business.
We have been involved in Legal Proceedings.
We have
been involved in certain disputes and legal proceedings as
discussed in the section title “Legal Proceedings”
within our Form 10-Q for the quarter year ended March 31, 2019. In
addition, as a public company, we are also potentially susceptible
to litigation, such as claims asserting violations of securities
laws. Any such claims, with or without merit, if not resolved,
could be time-consuming and result in costly litigation. There can
be no assurance that an adverse result in any future proceeding
would not have a potentially material adverse on our business,
results of operations or financial condition.
We may engage in acquisitions, mergers, strategic alliances, joint
ventures and divestures that could result in final results that are
different than expected.
In the normal course of business, we engage in discussions relating
to possible acquisitions, equity investments, mergers, strategic
alliances, joint ventures and divestitures. Such transactions are
accompanied by a number of risks, including the use of significant
amounts of cash, potentially dilutive issuances of equity
securities, incurrence of
debt on potentially unfavorable terms as well as impairment
expenses related to goodwill and amortization expenses related to
other intangible assets, the possibility that we may pay too much
cash or issue too many of our shares as the purchase price for an
acquisition relative to the economic benefits that we ultimately
derive from such acquisition, and various potential difficulties
involved in integrating acquired businesses into our
operations.
36
From time to time, we have also engaged in discussions with
candidates regarding the potential acquisitions of our product
lines, technologies and businesses. If a divestiture such as this
does occur, we cannot be certain that our business, operating
results and financial condition will not be materially and
adversely affected. A successful divestiture depends on various
factors, including our ability to effectively transfer liabilities,
contracts, facilities and employees to any purchaser; identify and
separate the intellectual property to be divested from the
intellectual property that we wish to retain; reduce fixed costs
previously associated with the divested assets or business; and
collect the proceeds from any divestitures.
If we do not realize the expected benefits of any acquisition or
divestiture transaction, our financial position, results of
operations, cash flows and stock price could be negatively
impacted.
Our proposed business is dependent on laws pertaining to the
marijuana industry.
Continued
development of the marijuana industry is dependent upon continued
legislative authorization of the use and cultivation of marijuana
at the state level. Any number of factors could slow or
halt progress in this area. Further, progress, while
encouraging, is not assured. While there may be ample
public support for legislative action, numerous factors impact
the legislative process. Any one of these factors could
slow or halt use of marijuana, which would negatively impact our
proposed business.
Currently,
thirty three states and the District of Columbia allow its citizens
to use medical cannabis. Additionally, ten states and
the District of Columbia have legalized cannabis for adult
use. The state laws are in conflict with the federal
Controlled Substances Act, which makes marijuana use and possession
illegal on a national level. The Obama administration previously
effectively stated that it is not an efficient use of resources to
direct law federal law enforcement agencies to prosecute those
lawfully abiding by state-designated laws allowing the use and
distribution of medical marijuana. The Trump
administration position is unknown. However, there is no
guarantee that the Trump administration will not change current
policy regarding the low-priority enforcement of federal
laws. Additionally, any new administration that follows
could change this policy and decide to enforce the federal laws
strongly. Any such change in the federal
government’s enforcement of current federal laws could cause
significant financial damage to us and its
shareholders.
Further,
while we do not harvest, distribute or sell marijuana, by supplying
products to growers of marijuana, we could be deemed to be
participating in marijuana cultivation, which remains illegal under
federal law, and exposes us to potential criminal liability, with
the additional risk that our business could be subject to civil
forfeiture proceedings.
The marijuana industry faces strong opposition.
It is
believed by many that large, well-funded businesses may have a
strong economic opposition to the marijuana industry. We
believe that the pharmaceutical industry clearly does not want to
cede control of any product that could generate significant
revenue. For example, medical marijuana will likely
adversely impact the existing market for the current
“marijuana pill” sold by mainstream pharmaceutical
companies. Further, the medical marijuana industry could
face a material threat from the pharmaceutical industry, should
marijuana displace other drugs or encroach upon the pharmaceutical
industry’s products. The pharmaceutical industry
is well funded with a strong and experienced lobby that eclipses
the funding of the medical marijuana movement. Any
inroads the pharmaceutical industry could make in halting or
impeding the marijuana industry harm our business, prospects,
results of operation and financial condition.
Marijuana remains illegal under Federal
law.
Marijuana
is a Schedule-I controlled substance and is illegal under federal
law. Even in those states in which the use of marijuana
has been legalized, its use remains a violation of federal
law. Since federal law criminalizing the use of
marijuana preempts state laws that legalize its use, strict
enforcement of federal law regarding marijuana would harm our
business, prospects, results of operation and financial
condition.
37
Raising additional capital to implement our business plan and pay
our debts will cause dilution to our existing stockholders, require
us to restructure our operations, and divest all or a portion of
our business.
We need
additional financing to implement our business plan and to service
our ongoing operations and pay our current debts. There can be no
assurance that we will be able to secure any needed funding, or
that if such funding is available, the terms or conditions would be
acceptable to us.
If we
raise additional capital through borrowing or other debt financing,
we may incur substantial interest expense. Sales of additional
equity securities will dilute on a pro rata basis the percentage
ownership of all holders of common stock. When we raise more equity
capital in the future, it will result in substantial dilution to
our current stockholders.
If we
are unable to obtain additional financing when it is needed, we
will need to restructure our operations, and divest all or a
portion of our business.
Closing of bank and merchant processing accounts could have a
material adverse effect on our business, financial condition and/or
results of operations.
As a
result of the regulatory environment, we have experienced the
closing of several of our bank and merchant processing accounts
since March 2014. We have been able to open other bank accounts.
However, we may have other banking accounts closed. These factors
impact management and could have a material adverse effect on our
business, financial condition and/or results of
operations.
Federal regulation and enforcement may adversely affect the
implementation of medical marijuana laws and regulations may
negatively impact our revenues and profits.
Currently,
there are thirty three states plus the District of Columbia that
have laws and/or regulation that recognize in one form or another
legitimate medical uses for cannabis and consumer use of cannabis
in connection with medical treatment. Many other states are
considering legislation to similar effect. As of the date of this
writing, the policy and regulations of the Federal government and
its agencies is that cannabis has no medical benefit and a range of
activities including cultivation and use of cannabis for personal
use is prohibited on the basis of federal law and may or may not be
permitted on the basis of state law. Active enforcement of the
current federal regulatory position on cannabis on a regional or
national basis may directly and adversely affect the willingness of
customers of GrowLife to invest in or buy products from GrowLife
that may be used in connection with cannabis. Active enforcement of
the current federal regulatory position on cannabis may thus
indirectly and adversely affect revenues and profits of the
GrowLife companies.
Our history of net losses has raised substantial doubt regarding
our ability to continue as a going concern. If we do not continue
as a going concern, investors could lose their entire
investment.
Our
history of net losses has raised substantial doubt about our
ability to continue as a going concern, and as a result, our
independent registered public accounting firm included an
explanatory paragraph in its report on our financial statements as
of and for the years ended December 31, 2018 and 2017 with
respect to this uncertainty. Accordingly, our ability to continue
as a going concern will require us to seek alternative financing to
fund our operations. This going concern opinion could materially
limit our ability to raise additional funds through the issuance of
new debt or equity securities or otherwise. Future reports on our
financial statements may include an explanatory paragraph with
respect to our ability to continue as a going concern.
We have a history of operating losses and there can be no assurance
that we can again achieve or maintain profitability.
We have
experienced net losses since inception. As of March 31, 2019, we
had an accumulated deficit of $143.5 million. There can be no assurance
that we will achieve or maintain profitability.
38
We are subject to corporate governance and internal control
reporting requirements, and our costs related to compliance with,
or our failure to comply with existing and future requirements,
could adversely affect our business.
We must
comply with corporate governance requirements under the
Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street
Reform and Consumer Protection Act of 2010, as well as additional
rules and regulations currently in place and that may be
subsequently adopted by the SEC and the Public Company Accounting
Oversight Board. These laws, rules, and regulations continue to
evolve and may become increasingly stringent in the future. We are
required to include management’s report on internal controls
as part of our annual report pursuant to Section 404 of the
Sarbanes-Oxley Act. We strive to continuously evaluate and improve
our control structure to help ensure that we comply with Section
404 of the Sarbanes-Oxley Act. The financial cost of compliance
with these laws, rules, and regulations is expected to remain
substantial.
We
cannot assure you that we will be able to fully comply with these
laws, rules, and regulations that address corporate governance,
internal control reporting, and similar matters. Failure to comply
with these laws, rules and regulations could materially adversely
affect our reputation, financial condition, and the value of our
securities.
Our inability or failure to effectively manage our growth could
harm our business and materially and adversely affect our operating
results and financial condition.
Our
strategy envisions growing our business. We plan to expand our
product, sales, administrative and marketing organizations. Any
growth in or expansion of our business is likely to continue to
place a strain on our management and administrative resources,
infrastructure and systems. As with other growing businesses, we
expect that we will need to further refine and expand our business
development capabilities, our systems and processes and our access
to financing sources. We also will need to hire, train, supervise
and manage new and retain contributing employees. These processes
are time consuming and expensive, will increase management
responsibilities and will divert management attention. We cannot
assure you that we will be able to:
●
expand
our products effectively or efficiently or in a timely
manner;
●
allocate
our human resources optimally;
●
meet
our capital needs;
●
identify
and hire qualified employees or retain valued employees;
or
●
incorporate
effectively the components of any business or product line that we
may acquire in our effort to achieve growth.
Our
operating results may fluctuate significantly based on customer
acceptance of our products. As a result, period-to-period
comparisons of our results of operations are unlikely to provide a
good indication of our future performance. Management expects that
we will experience substantial variations in our net sales and
operating results from quarter to quarter due to customer
acceptance of our products. If customers don’t accept our
products, our sales and revenues will decline, resulting in a
reduction in our operating income.
Customer
interest for our products could also be impacted by the timing of
our introduction of new products. If our competitors introduce new
products around the same time that we issue new products, and if
such competing products are superior to our own, customers’
desire for our products could decrease, resulting in a decrease in
our sales and revenues. To the extent that we introduce new
products and customers decide not to migrate to our new products
from our older products, our revenues could be negatively impacted
due to the loss of revenue from those customers. In the event that
our newer products do not sell as well as our older products, we
could also experience a reduction in our revenues and operating
income.
If we do not successfully generate additional products and
services, or if such products and services are developed but not
successfully commercialized, we could lose revenue
opportunities.
Our
future success depends, in part, on our ability to expand our
product and service offerings. To that end we have engaged in the
process of identifying new product opportunities to provide
additional products and related services to our customers. The
process of identifying and commercializing new products is complex
and uncertain, and if we fail to accurately predict
customers’ changing needs and emerging technological trends
our business could be harmed. We may have to commit significant
resources to commercializing new products before knowing whether
our investments will result in products the market will accept.
Furthermore, we may not execute successfully on commercializing
those products because of errors in product planning or timing,
technical hurdles that we fail to overcome in a timely fashion, or
a lack of appropriate resources. This could result in competitors
providing those solutions before we do and a reduction in net sales
and earnings.
39
The
success of new products depends on several factors, including
proper new product definition, timely completion and introduction
of these products, differentiation of new products from those of
our competitors, and market acceptance of these products. There can
be no assurance that we will successfully identify new product
opportunities, develop and bring new products to market in a timely
manner, or achieve market acceptance of our products or that
products and technologies developed by others will not render our
products or technologies obsolete or noncompetitive.
Our future success depends on our ability to grow and expand our
customer base. Our failure to achieve such growth or
expansion could materially harm our business.
To
date, our revenue growth has been derived primarily from the sale
of our products and through the purchase of existing businesses.
Our success and the planned growth and expansion of our business
depend on us achieving greater and broader acceptance of our
products and expanding our customer base. There can be no assurance
that customers will purchase our products or that we will continue
to expand our customer base. If we are unable to effectively market
or expand our product offerings, we will be unable to grow and
expand our business or implement our business strategy. This could
materially impair our ability to increase sales and revenue and
materially and adversely affect our margins, which could harm our
business and cause our stock price to decline.
If we
incur substantial liability from litigation, complaints, or
enforcement actions resulting from misconduct by our distributors,
our financial condition could suffer. We will require that our
distributors comply with applicable law and with our policies and
procedures. Although we will use various means to address
misconduct by our distributors, including maintaining these
policies and procedures to govern the conduct of our distributors
and conducting training seminars, it will still be difficult to
detect and correct all instances of misconduct. Violations of
applicable law or our policies and procedures by our distributors
could lead to litigation, formal or informal complaints,
enforcement actions, and inquiries by various federal, state, or
foreign regulatory authorities against us and/or our distributors.
and could consume considerable amounts of financial and other
corporate resources, which could have a negative impact on our
sales, revenue, profitability and growth prospects. As we are
currently in the process of implementing our direct sales
distributor program, we have not been, and are not currently,
subject to any material litigation, complaint or enforcement action
regarding distributor misconduct by any federal, state or foreign
regulatory authority.
Our
future manufacturers could fail to fulfill our orders for products,
which would disrupt our business, increase our costs, harm our
reputation and potentially cause us to lose our
market.
We may
depend on contract manufacturers in the future to produce our
products. These manufacturers could fail to produce products to our
specifications or in a workmanlike manner and may not deliver the
units on a timely basis. Our manufacturers may also have to obtain
inventories of the necessary parts and tools for production. Any
change in manufacturers to resolve production issues could disrupt
our ability to fulfill orders. Any change in manufacturers to
resolve production issues could also disrupt our business due to
delays in finding new manufacturers, providing specifications and
testing initial production. Such disruptions in our business and/or
delays in fulfilling orders would harm our reputation and would
potentially cause us to lose our market.
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition and our results of
operations.
We may
be unable to obtain intellectual property rights to effectively
protect our business. Our ability to compete effectively may be
affected by the nature and breadth of our intellectual property
rights. While we intend to defend against any threats to our
intellectual property rights, there can be no assurance that any
such actions will adequately protect our interests. If we are
unable to secure intellectual property rights to effectively
protect our technology, our revenue and earnings, financial
condition, and/or results of operations would be adversely
affected.
40
We may
also rely on nondisclosure and non-competition agreements to
protect portions of our technology. There can be no assurance that
these agreements will not be breached, that we will have adequate
remedies for any breach, that third parties will not otherwise gain
access to our trade secrets or proprietary knowledge, or that third
parties will not independently develop the technology.
We do
not warrant any opinion as to non-infringement of any patent,
trademark, or copyright by us or any of our affiliates, providers,
or distributors. Nor do we warrant any opinion as to invalidity of
any third-party patent or unpatentability of any third-party
pending patent application.
Our industry is highly competitive and we have less capital and
resources than many of our competitors, which may give them an
advantage in developing and marketing products similar to ours or
make our products obsolete.
We are
involved in a highly competitive industry where we may compete with
numerous other companies who offer alternative methods or
approaches, may have far greater resources, more experience, and
personnel perhaps more qualified than we do. Such resources may
give our competitors an advantage in developing and marketing
products similar to ours or products that make our products
obsolete. There can be no assurance that we will be able to
successfully compete against these other entities.
Transfers of our securities may be restricted by virtue of state
securities “blue sky” laws, which prohibit trading
absent compliance with individual state laws. These restrictions
may make it difficult or impossible to sell shares in those
states.
Transfers
of our common stock may be restricted under the securities or
securities regulations laws promulgated by various states and
foreign jurisdictions, commonly referred to as "blue sky" laws.
Absent compliance with such individual state laws, our common stock
may not be traded in such jurisdictions. Because the securities
held by many of our stockholders have not been registered for
resale under the blue sky laws of any state, the holders of such
shares and persons who desire to purchase them should be aware that
there may be significant state blue sky law restrictions upon the
ability of investors to sell the securities and of purchasers to
purchase the securities. These restrictions may prohibit the
secondary trading of our common stock. Investors should consider
the secondary market for our securities to be a limited
one.
We are dependent on key personnel.
Our
success depends to a significant degree upon the continued
contributions of key management and other personnel, some of whom
could be difficult to replace. We do not maintain key man life
insurance covering our officers. Our success will depend on the
performance of our officers and key management and other personnel,
our ability to retain and motivate our officers, our ability to
integrate new officers and key management and other personnel into
our operations, and the ability of all personnel to work together
effectively as a team. Our failure to retain and recruit
officers and other key personnel could have a material adverse
effect on our business, financial condition and results of
operations.
We have limited insurance.
We have
limited directors’ and officers’ liability insurance
and limited commercial liability insurance policies. Any
significant claims would have a material adverse effect on our
business, financial condition and results of
operations.
41
Risks Related to our Common Stock
Chicago Venture could have significant influence over matters
submitted to stockholders for approval.
Chicago Venture, Iliad and St, George
As a
result of funding from Chicago Venture, Iliad and St. George as
previously detailed, they exercise significant control over
us.
If
these persons were to choose to act together, they would be able to
significantly influence all matters submitted to our stockholders
for approval, as well as our officers, directors, management and
affairs. For example, these persons, if they choose to act
together, could significantly influence the election of directors
and approval of any merger, consolidation or sale of all or
substantially all of our assets. This concentration of voting power
could delay or prevent an acquisition of us on terms that other
stockholders may desire.
Trading in our stock is limited by the SEC’s penny stock
regulations.
Our
stock is categorized as a penny stock The SEC has adopted Rule
15g-9 which generally defines "penny stock" to be any equity
security that has a market price (as defined) less than US$ 5.00
per share or an exercise price of less than US $5.00 per share,
subject to certain exclusions (e.g., net tangible assets in excess
of $2,000,000 or average revenue of at least $6,000,000 for the
last three years). The penny stock rules impose additional sales
practice requirements on broker-dealers who sell to persons other
than established customers and accredited investors. The penny
stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the
SEC, which provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer
also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly
account statements showing the market value of each penny stock
held in the customer's account. The bid and offer quotations, and
the broker-dealer and salesperson compensation information, must be
given to the customer orally or in writing prior to effecting the
transaction and must be given to the customer in writing before or
with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not
otherwise exempt from these rules, the broker-dealer must make a
special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written
agreement to the transaction. Finally, broker-dealers may not
handle penny stocks under $0.10 per share.
These
disclosure requirements reduce the level of trading activity in the
secondary market for the stock that is subject to these penny stock
rules. Consequently, these penny stock rules would affect the
ability of broker-dealers to trade our securities if we become
subject to them in the future. The penny stock rules also could
discourage investor interest in and limit the marketability of our
common stock to future investors, resulting in limited ability for
investors to sell their shares.
FINRA sales practice requirements may also limit a
shareholder’s ability to buy and sell our stock.
In
addition to the “penny stock” rules described above,
FINRA has adopted rules that require that in recommending an
investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low priced securities
to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s
financial status, tax status, investment objectives and other
information. Under interpretations of these rules, FINRA believes
that there is a high probability that speculative low priced
securities will not be suitable for at least some customers. The
FINRA requirements make it more difficult for broker-dealers to
recommend that their customers buy our common stock, which may
limit your ability to buy and sell our stock and have an adverse
effect on the market for our shares.
42
The market price of our common stock may be volatile.
The
market price of our common stock has been and is likely in the
future to be volatile. Our common stock price may fluctuate in
response to factors such as:
●
Halting
of trading by the SEC or FINRA.
●
Announcements
by us regarding liquidity, legal proceedings, significant
acquisitions, equity investments and divestitures, strategic
relationships, addition or loss of significant customers and
contracts, capital expenditure commitments, loan, note payable and
agreement defaults, loss of our subsidiaries and impairment of
assets,
●
Issuance
of convertible or equity securities for general or merger and
acquisition purposes,
●
Issuance
or repayment of debt, accounts payable or convertible debt for
general or merger and acquisition purposes,
●
Sale of
a significant number of shares of our common stock by
shareholders,
●
General
market and economic conditions,
●
Quarterly
variations in our operating results,
●
Investor
relation activities,
●
Announcements
of technological innovations,
●
New
product introductions by us or our competitors,
●
Competitive
activities, and
●
Additions
or departures of key personnel.
These
broad market and industry factors may have a material adverse
effect on the market price of our common stock, regardless of our
actual operating performance. These factors could have a material
adverse effect on our business, financial condition, and/or results
of operations.
The sale of a significant number of our shares of common stock
could depress the price of our common stock.
Sales
or issuances of a large number of shares of common stock in the
public market or the perception that sales may occur could cause
the market price of our common stock to decline. As of March 31,
2019, there were approximately 3.67 billion shares of our common stock
issued and outstanding. In addition, as of March 31,
2019, there are also (i) stock option grants outstanding for the
purchase of 98.5 million common
shares at a $0.010 average exercise price; (ii) warrants for the
purchase of 362.8 million
common shares at a $0.0231 average exercise price; and (iii)
114.7 million shares related to convertible debt that can be
converted at 0.002535 per share.
In addition, we have an unknown number of common shares to be
issued under the Chicago Venture, Iliad and St. George financing
agreements because the number of shares ultimately issued to
Chicago Venture depends on the price at which Chicago Venture
converts its debt to shares and exercises its warrants. The lower
the conversion or exercise prices, the more shares that will be
issued to Chicago Venture upon the conversion of debt to shares. We
won’t know the exact number of shares of stock issued to
Chicago Venture until the debt is actually converted to
equity. If all stock option grant and warrant and contingent
shares are issued, approximately 4.473 billion of our currently
authorized 6 billion shares of common stock will be issued and
outstanding. For purposes
of estimating the number of shares issuable upon the
exercise/conversion of all stock options, warrants and contingent
shares, we assumed the number of shares and average share prices
detailed above.
These
stock option grant, warrant and contingent shares could result in
further dilution to common stockholders and may affect the market
price of the common stock.
Significant
shares of common stock are held by our principal shareholders,
other Company insiders and other large shareholders. As affiliates
as defined under Rule 144 of the Securities Act or Rule 144 of the
Company, our principal shareholders, other Company insiders and
other large shareholders may only sell their shares of common stock
in the public market pursuant to an effective registration
statement or in compliance with Rule 144.
These
stock option grant, warrant and contingent shares could result in
further dilution to common stockholders and may affect the market
price of the common stock.
43
Some of our convertible debentures and warrants may require
adjustment in the conversion price.
Our
Convertible Notes Payable may require an adjustment in the current
conversion price of $0.002535 per share if we issue common stock,
warrants or equity below the price that is reflected in the
convertible notes payable. Our warrant with St. George may require
an adjustment in the exercise price. The conversion price of the
convertible notes and warrants will have an impact on the market
price of our common stock. Specifically, if under the terms of the
convertible notes the conversion price goes down, then the market
price, and ultimately the trading price, of our common stock will
go down. If under the terms of the convertible notes the conversion
price goes up, then the market price, and ultimately the trading
price, of our common stock will likely go up. In other words, as
the conversion price goes down, so does the market price of our
stock. As the conversion price goes up, so presumably does the
market price of our stock. The more the conversion price goes down,
the more shares are issued upon conversion of the debt which
ultimately means the more stock that might flood into the market,
potentially causing a further depression of our stock.
We do not anticipate paying any cash dividends on our capital stock
in the foreseeable future.
We have
never declared or paid cash dividends on our capital stock. We
currently intend to retain all of our future earnings, if any, to
finance the growth and development of our business, and we do not
anticipate paying any cash dividends on our capital stock in the
foreseeable future. In addition, the terms of any future debt
agreements may preclude us from paying dividends. As a result,
capital appreciation, if any, of our common stock will be your sole
source of gain for the foreseeable future.
Anti-takeover provisions may limit the ability of another party to
acquire our company, which could cause our stock price to
decline.
Our
certificate of incorporation, as amended, our bylaws and Delaware
law contain provisions that could discourage, delay or prevent a
third party from acquiring our company, even if doing so may be
beneficial to our stockholders. In addition, these provisions could
limit the price investors would be willing to pay in the future for
shares of our common stock.
We may issue preferred stock that could have rights that are
preferential to the rights of common stock that could discourage
potentially beneficially transactions to our common
shareholders.
An
issuance of additional shares of preferred stock could result in a
class of outstanding securities that would have preferences with
respect to voting rights and dividends and in liquidation over our
common stock and could, upon conversion or otherwise, have all of
the rights of our common stock. Our Board of Directors'
authority to issue preferred stock could discourage potential
takeover attempts or could delay or prevent a change in control
through merger, tender offer, proxy contest or otherwise by making
these attempts more difficult or costly to achieve. The
issuance of preferred stock could impair the voting, dividend and
liquidation rights of common stockholders without their
approval.
If the company were to dissolve or wind-up, holders of our common
stock may not receive a liquidation preference.
If we
were too wind-up or dissolve the Company and liquidate and
distribute our assets, our shareholders would share ratably in our
assets only after we satisfy any amounts we owe to our
creditors. If our liquidation or dissolution were
attributable to our inability to profitably operate our business,
then it is likely that we would have material liabilities at the
time of liquidation or dissolution. Accordingly, we
cannot give you any assurance that sufficient assets will remain
available after the payment of our creditors to enable you to
receive any liquidation distribution with respect to any shares you
may hold.
44
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
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.
We have 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 three months ended March 31, 2019, we had the following
sales of unregistered sales of equity securities.
During
the three months ended December 31, 2018, we issued 20,916,216
shares to suppliers for services provided. We valued the shares at
$0.0079per share or $165,400.
During
the three months ended March 31, 2019, Chicago Venture converted
principal and accrued interest of $375,000 into 84,156,195 shares
of our common stock at a per share conversion price of
$0.00446.
On
February 15, 2019, we entered into a Termination of Existing
Agreements and Release with CANX USA, LLC, a Nevada limited
liability company. Pursuant to the Agreement, the Parties agreed to
terminate, release and discharge all existing and further rights
and obligations between the Parties under, arising out of, or in
any way related to that certain Waiver and Modification Agreement
and Amended and Restated Joint Venture Agreement made as of July
10, 2014, and any ancillary agreements or instruments thereto,
including, but not limited to, the Warrants issued to CANX
entitling CANX to purchase 540,000,000 shares of the
Company’s common stock at an exercise price of
$0.033.
In
exchange for the Agreement and cancellation of the CANX Agreements
and Warrants, the Company agreed to issue $1,000,000 of restricted
common stock priced at the February 7, 2019 closing price of
$0.008, or 125,000,000 restricted common stock shares.
The exhibits required to be filed herewith by Item 601 of
Regulation S-K, as described in the following index of exhibits,
are attached hereto unless otherwise indicated as being
incorporated by reference, as follows:
Certificate of Incorporation. Filed as an exhibit to the
Company’s Form 10-SB General Form for Registration of
Securities of Small Business Issuers filed with the SEC on December
7, 2007, and hereby incorporated by reference.
Second Amended and Restated Bylaws of GrowLife, Inc. dated October
16, 2015. Filed as an exhibit to the Company’s Form 8-K and
filed with the SEC on October 26, 2015, and hereby incorporated by
reference.
3.3
Certificate of Amendment of Certificate of Incorporation of
GrowLife, Inc. dated October 23, 2017 to increase the authorized
shares of Common Stock from 3,000,000,000 to 6,000,000,000 shares.
Filed as an exhibit to the Company’s Form 8-K and filed with
the SEC on October 24, 2017, and hereby incorporated by
reference.
4.1
GrowLife, Inc. 2017 Stock Incentive Plan filed as an Annex 1 to the
Company’s Preliminary Schedule 14A filed with the SEC on June
30, 2017, and hereby incorporated by reference.
Letter
by and between GrowLife, Inc. and Mark Scott Consulting Letter
dated July 31, 2014. Filed
as an exhibit to the Company’s Form 8-K filed with the SEC on
August 6, 2014, and hereby incorporated
by reference.
Joseph
Barnes Promotion Letter dated October 10, 2014. Filed as an exhibit
to the Company’s Form 8-K and
filed with the SEC on October 14, 2014, and hereby incorporated by
reference.
Marco
Hegyi Employment Agreement and Warrants dated October 21, 2016.
Filed as an exhibit to the Company’s Form 8-K and filed with
the SEC on October 27, 2016, and hereby incorporated by
reference.
10.7
Asset
Purchase Agreement dated as of October 2, 2017 amongst GrowLife,
Inc. and David Reichwein, GIP International Ltd and DPR
International LLC.
10.8
Texas
commercial Lease Agreement dated October 9, 2017 by and between
GrowLife Innovations, Inc. and All Commercial Flooring
Inc.
Compilation
of Securities Purchase Agreement and
Warrant to Purchase Common Stock dated February 9, 2018,
entered into by and between GrowLife, Inc. and St. George
Investments LLC. Filed as an exhibit to the Company’s Form
8-K and filed with the SEC on February 15, 2018, and hereby
incorporated by reference.
10.10
First
Addendum to Asset Purchase Agreement and Employment Agreement dated
February 18, 2018
amongst Growlife, Inc. and David Reichwein, GIP International Ltd
and DPR International LLC.
(filed herewith).
Second
Amendment to Forglen LLC 7% Convertible Promissory Note. Filed as
an exhibit to the Company’s Form 8-K and filed with the SEC
on March 16, 2018, and hereby incorporated by
reference.
Common
Stock Purchase Agreement dated March 20, 2018 entered into by and
between GrowLife, Inc. and St. George Investments LLC. Filed as an
exhibit to the Company’s Form 8-K and filed with the SEC on
March 23, 2018, and hereby incorporated by reference.
Compilation
of Securities Purchase Agreement,
Secured Promissory Notes, and Security Agreement. Filed as
an exhibit to the Company’s Form 8-K and filed with the SEC
on August 16, 2018, and hereby incorporated by
reference.
Asset
Purchase Agreement dated August 17, 2018 entered into by and
between GrowLife, Inc. and Go Green Hydroponics, Inc. Filed as an
exhibit to the Company’s Form 8-K and filed with the SEC on
August 23, 2018, and hereby incorporated by reference.
Security
Agreement dated August 17, 2018 by and between GrowLife, Inc. and
Go Green Hydroponics, Inc. Filed as an exhibit to the
Company’s Form 8-K and filed with the SEC on August 23, 2018,
and hereby incorporated by reference.
Rights
Offering to Shareholders filed in Amendment No.1 of Form S-1. Filed
with the SEC on September 18, 2018, and hereby incorporated by
reference. Filed as an exhibit to the Company’s Form 8-K and
filed with the SEC on September 21, 2018, and hereby incorporated
by reference.
10.17
Four
Amendment to Lease Agreement dated August 31, 2018 entered into by
and between GrowLife, Inc., The GST Non-Exempt Marital Trust under
the Samuel and Elaine Rosenthal Revocable Trust and Ackerman-Rosenthal Property, LLC. Filed
herewith.
10.18
Assignment
and Assumption of Lease dated August 31, 2018 entered into by and
between GrowLife, Inc., Go Green
Hydroponics, Inc., GST Non-Exempt Marital Trust Under the Samuel
and Elaine Rosenthal Revocable Trust and Ackerman-Rosenthal
Property, LLC. Filed herewith.
10.19
Lease
Agreement dated July 2, 2018 entered into by and between GrowLife
Hydroponics, Inc. Inc. and Brixmor SPE 4 LP. Filed
herewith.
Termination
of Existing Agreements and Release Agreement accepted February 15,
2019 entered into by and between GrowLife, Inc. and CANX USA LLC.
Filed as an exhibit to the Company’s Form 8-K and filed with
the SEC on February 20, 2019, and hereby incorporated by
reference.
Code of
Conduct and Ethics dated May 15, 2014. Attached as an exhibit to the Company’s Form
8-K filed and with the SEC on June 9, 2014, and hereby incorporated
by reference.
Audited
Financial Statements of EZ-Clone Enterprises, Inc. Filed as an
exhibit to the Company’s Form 8-KA and filed with the SEC
on January 24, 2019, and hereby incorporated by
reference.
Unaudited Pro Forma Financial Information
of GrowLife, Inc. and EZ-Clone Enterprises, Inc. Filed as an
exhibit to the Company’s Form 8-KA and filed with the SEC on
January 24, 2019, and hereby incorporated by
reference.
*Filed Herewith. Pursuant to Regulation S-T, this interactive data
file is deemed not filed or part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities
Act of 1933, is deemed not filed for purposes of Section 18 of
the Securities Exchange Act of 1934, and otherwise is not subject
to liability under these sections.
In accordance with Section 13 or 15(d) requirements of the
Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly
authorized.
GROWLIFE, INC.
(Registrant)
Date: May 13, 2019
By:
/s/ Marco Hegyi
Marco Hegyi
Chief Executive Officer and President
(Principal Executive Officer)
Date: May 13, 2019
By:
/s/ Mark Scott
Mark Scott
Chief Financial Officer
(Principal Financial and Accounting Officer)
48
EX-31.1
2
phot_ex311.htm
CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF THE SARBANES-OXLY ACT OF 2002
Blueprint
EXHIBIT 31.1
SECTION 302 CERTIFICATIONS
I,
Marco Hegyi, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of
GrowLife, Inc.;
2.
Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and
other financial information included in this report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4.
The registrant’s other certifying officer(s) and
I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a)
Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b)
Designed such internal control over financial
reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting
principles;
c)
Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
d)
Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
and
5.
The registrant’s other certifying officer(a) and
I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and
the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b)
Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial
reporting.
Date:
May 13,
2019
/s/ Marco Hegyi
Marco
Hegyi
Chief
Executive Officer
EX-31.2
3
phot_ex312.htm
CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF THE SARBANES-OXLY ACT OF 2002
Blueprint
EXHIBIT
31.2
SECTION 302 CERTIFICATIONS
I, Mark
Scott, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of
GrowLife, Inc.;
2.
Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and
other financial information included in this report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4.
The registrant’s other certifying officer(s) and
I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a)
Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b)
Designed such internal control over financial
reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting
principles;
c)
Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
d)
Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
and
5.
The registrant’s other certifying officer(a) and
I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and
the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b)
Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial
reporting.
Date:
May 13,
2019
/s/ Mark E. Scott
Mark
Scott
Chief
Financial Officer
EX-32
4
phot_ex321.htm
CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Blueprint
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In
connection with the Quarterly Report of GrowLife, Inc. (the
"Company") on Form 10-Q for the quarter ended March 31, 2019 as
filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Marco Hegyi, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
to the best of my knowledge, that:
1.The
Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended;
and
2.The
information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company for the dates and periods covered by the
Report.
This
certificate is being made for the exclusive purpose of compliance
by the Principal Executive and Financial and Accounting Officer of
the Company with the requirements of Section 906 of the
Sarbanes-Oxley Act of 2002, and may not be disclosed, distributed
or used by any person or for any reason other than as specifically
required by law.
/s/ Marco Hegyi
Marco
Hegyi
Chief
Executive Officer
May 13, 2019
EX-32.2
5
phot_ex322.htm
CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Blueprint
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In
connection with the Quarterly Report of GrowLife, Inc. (the
"Company") on Form 10-Q for the quarter ended March 31, 2019 as
filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Mark Scott, Chief Financial Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
to the best of my knowledge, that:
1.The
Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended;
and
2.The
information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company for the dates and periods covered by the
Report.
This
certificate is being made for the exclusive purpose of compliance
by the Principal Executive and Financial and Accounting Officer of
the Company with the requirements of Section 906 of the
Sarbanes-Oxley Act of 2002, and may not be disclosed, distributed
or used by any person or for any reason other than as specifically
required by law.
This is focus fiscal period of the document report. For a first quarter 2006 quarterly report, which may also provide financial information from prior periods, the first fiscal quarter should be given as the fiscal period focus. Values: FY, Q1, Q2, Q3, Q4, H1, H2, M9, T1, T2, T3, M8, CY.
This is focus fiscal year of the document report in CCYY format. For a 2006 annual report, which may also provide financial information from prior periods, fiscal 2006 should be given as the fiscal year focus. Example: 2006.
The end date of the period reflected on the cover page if a periodic report. For all other reports and registration statements containing historical data, it is the date up through which that historical data is presented. If there is no historical data in the report, use the filing date. The format of the date is CCYY-MM-DD.
The type of document being provided (such as 10-K, 10-Q, 485BPOS, etc). The document type is limited to the same value as the supporting SEC submission type, or the word 'Other'.
Indicate number of shares or other units outstanding of each of registrant's classes of capital or common stock or other ownership interests, if and as stated on cover of related periodic report. Where multiple classes or units exist define each class/interest by adding class of stock items such as Common Class A [Member], Common Class B [Member] or Partnership Interest [Member] onto the Instrument [Domain] of the Entity Listings, Instrument.
Indicate 'Yes' or 'No' whether registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. This information should be based on the registrant's current or most recent filing containing the related disclosure.
Indicate whether the registrant is one of the following: (1) Large Accelerated Filer, (2) Accelerated Filer, (3) Non-accelerated Filer, (4) Smaller Reporting Company (Non-accelerated), (5) Smaller Reporting Accelerated Filer or (6) Smaller Reporting Company and Large Accelerated Filer. Definitions of these categories are stated in Rule 12b-2 of the Exchange Act. This information should be based on the registrant's current or most recent filing containing the related disclosure.
Carrying value as of the balance sheet date of liabilities incurred (and for which invoices have typically been received) and payable to vendors for goods and services received that are used in an entity's business. Used to reflect the current portion of the liabilities (due within one year or within the normal operating cycle if longer).
Amount due from customers or clients, within one year of the balance sheet date (or the normal operating cycle, whichever is longer), for goods or services (including trade receivables) that have been delivered or sold in the normal course of business, reduced to the estimated net realizable fair value by an allowance established by the entity of the amount it deems uncertain of collection.
Carrying value as of the balance sheet date of obligations incurred and payable, pertaining to costs that are statutory in nature, are incurred on contractual obligations, or accumulate over time and for which invoices have not yet been received or will not be rendered. Examples include taxes, interest, rent and utilities. Used to reflect the current portion of the liabilities (due within one year or within the normal operating cycle if longer).
Excess of issue price over par or stated value of the entity's capital stock and amounts received from other transactions involving the entity's stock or stockholders. Includes adjustments to additional paid in capital. Some examples of such adjustments include recording the issuance of debt with a beneficial conversion feature and certain tax consequences of equity instruments awarded to employees. Use this element for the aggregate amount of additional paid-in capital associated with common and preferred stock. For additional paid-in capital associated with only common stock, use the element additional paid in capital, common stock. For additional paid-in capital associated with only preferred stock, use the element additional paid in capital, preferred stock.
Sum of the carrying amounts as of the balance sheet date of all assets that are recognized. Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.
Sum of the carrying amounts as of the balance sheet date of all assets that are expected to be realized in cash, sold, or consumed within one year (or the normal operating cycle, if longer). Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.
Amount of currency on hand as well as demand deposits with banks or financial institutions. Includes other kinds of accounts that have the general characteristics of demand deposits. Also includes short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Excludes cash and cash equivalents within disposal group and discontinued operation.
Represents the caption on the face of the balance sheet to indicate that the entity has entered into (1) purchase or supply arrangements that will require expending a portion of its resources to meet the terms thereof, and (2) is exposed to potential losses or, less frequently, gains, arising from (a) possible claims against a company's resources due to future performance under contract terms, and (b) possible losses or likely gains from uncertainties that will ultimately be resolved when one or more future events that are deemed likely to occur do occur or fail to occur.
Aggregate par or stated value of issued nonredeemable common stock (or common stock redeemable solely at the option of the issuer). This item includes treasury stock repurchased by the entity. Note: elements for number of nonredeemable common shares, par value and other disclosure concepts are in another section within stockholders' equity.
Carrying value as of the balance sheet date of the portion of long-term debt due within one year or the operating cycle if longer identified as Convertible Notes Payable. Convertible Notes Payable is a written promise to pay a note which can be exchanged for a specified amount of another, related security, at the option of the issuer and the holder.
Amount of deferred revenue as of balance sheet date. Deferred revenue represents collections of cash or other assets related to a revenue producing activity for which revenue has not yet been recognized. Generally, an entity records deferred revenue when it receives consideration from a customer before achieving certain criteria that must be met for revenue to be recognized in conformity with GAAP.
Carrying value of amounts transferred to third parties for security purposes that are expected to be returned or applied towards payment within one year or during the operating cycle, if shorter.
Fair value, after the effects of master netting arrangements, of a financial liability or contract with one or more underlyings, notional amount or payment provision or both, and the contract can be net settled by means outside the contract or delivery of an asset, expected to be settled within one year or normal operating cycle, if longer. Includes assets not subject to a master netting arrangement and not elected to be offset.
Total of the carrying values as of the balance sheet date of obligations incurred through that date and payable for obligations related to services received from employees, such as accrued salaries and bonuses, payroll taxes and fringe benefits. Used to reflect the current portion of the liabilities (due within one year or within the normal operating cycle if longer).
Total obligations incurred as part of normal operations that are expected to be paid during the following twelve months or within one business cycle, if longer.
Total of all stockholders' equity (deficit) items, net of receivables from officers, directors, owners, and affiliates of the entity which is directly or indirectly attributable to that ownership interest in subsidiary equity which is not attributable to the parent (that is, noncontrolling interest, previously referred to as minority interest).
The amount for notes payable (written promise to pay), due to related parties. Used to reflect the current portion of the liabilities (due within one year or within the normal operating cycle if longer).
Aggregate par or stated value of issued nonredeemable preferred stock (or preferred stock redeemable solely at the option of the issuer). This item includes treasury stock repurchased by the entity. Note: elements for number of nonredeemable preferred shares, par value and other disclosure concepts are in another section within stockholders' equity.
Amount of asset related to consideration paid in advance for costs that provide economic benefits within a future period of one year or the normal operating cycle, if longer.
Amount after accumulated depreciation, depletion and amortization of physical assets used in the normal conduct of business to produce goods and services and not intended for resale. Examples include, but are not limited to, land, buildings, machinery and equipment, office equipment, and furniture and fixtures.
Total of all stockholders' equity (deficit) items, net of receivables from officers, directors, owners, and affiliates of the entity which are attributable to the parent. The amount of the economic entity's stockholders' equity attributable to the parent excludes the amount of stockholders' equity which is allocable to that ownership interest in subsidiary equity which is not attributable to the parent (noncontrolling interest, minority interest). This excludes temporary equity and is sometimes called permanent equity.
A valuation allowance for trade and other receivables due to an Entity within one year (or the normal operating cycle, whichever is longer) that are expected to be uncollectible.
Total number of common shares of an entity that have been sold or granted to shareholders (includes common shares that were issued, repurchased and remain in the treasury). These shares represent capital invested by the firm's shareholders and owners, and may be all or only a portion of the number of shares authorized. Shares issued include shares outstanding and shares held in the treasury.
The maximum number of nonredeemable preferred shares (or preferred stock redeemable solely at the option of the issuer) permitted to be issued by an entity's charter and bylaws.
Total number of nonredeemable preferred shares (or preferred stock redeemable solely at the option of the issuer) issued to shareholders (includes related preferred shares that were issued, repurchased, and remain in the treasury). May be all or portion of the number of preferred shares authorized. Excludes preferred shares that are classified as debt.
Aggregate share number for all nonredeemable preferred stock (or preferred stock redeemable solely at the option of the issuer) held by stockholders. Does not include preferred shares that have been repurchased.
The aggregate costs related to goods produced and sold and services rendered by an entity during the reporting period. This excludes costs incurred during the reporting period related to financial services rendered and other revenue generating activities.
The amount of net income or loss for the period per each share in instances when basic and diluted earnings per share are the same amount and reported as a single line item on the face of the financial statements. Basic earnings per share is the amount of net income or loss for the period per each share of common stock or unit outstanding during the reporting period. Diluted earnings per share includes the amount of net income or loss for the period available to each share of common stock or common unit outstanding during the reporting period and to each share or unit that would have been outstanding assuming the issuance of common shares or units for all dilutive potential common shares or units outstanding during the reporting period.
The aggregate total of expenses of managing and administering the affairs of an entity, including affiliates of the reporting entity, which are not directly or indirectly associated with the manufacture, sale or creation of a product or product line.
Amount of revenue recognized from goods sold, services rendered, insurance premiums, or other activities that constitute an earning process. Includes, but is not limited to, investment and interest income before deduction of interest expense when recognized as a component of revenue, and sales and trading gain (loss).
Amount of noncash expense included in interest expense to amortize debt discount and premium associated with the related debt instruments. Excludes amortization of financing costs. Alternate captions include noncash interest expense.
The aggregate expense charged against earnings to allocate the cost of intangible assets (nonphysical assets not used in production) in a systematic and rational manner to the periods expected to benefit from such assets. As a noncash expense, this element is added back to net income when calculating cash provided by or used in operations using the indirect method.
Amount of currency on hand as well as demand deposits with banks or financial institutions. Includes other kinds of accounts that have the general characteristics of demand deposits. Excludes cash and cash equivalents within disposal group and discontinued operation.
Amount of increase (decrease) in cash and cash equivalents. Cash and cash equivalents are the amount of currency on hand as well as demand deposits with banks or financial institutions. Includes other kinds of accounts that have the general characteristics of demand deposits. Also includes short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Includes effect from exchange rate changes.
The value of the stock converted in a noncash (or part noncash) transaction. Noncash is defined as transactions during a period that do not result in cash receipts or cash payments in the period. "Part noncash" refers to that portion of the transaction not resulting in cash receipts or cash payments in the period.
The amount of expense recognized in the current period that reflects the allocation of the cost of tangible assets over the assets' useful lives. Includes production and non-production related depreciation.
The difference between the reacquisition price and the net carrying amount of the extinguished debt recognized currently as a component of income in the period of extinguishment, net of tax.
The increase (decrease) during the reporting period in the amounts payable to vendors for goods and services received and the amount of obligations and expenses incurred but not paid.
The increase (decrease) during the reporting period in amount due within one year (or one business cycle) from customers for the credit sale of goods and services.
The increase (decrease) during the reporting period, excluding the portion taken into income, in the liability reflecting revenue yet to be earned for which cash or other forms of consideration was received or recorded as a receivable.
The increase (decrease) during the reporting period in the aggregate value of all inventory held by the reporting entity, associated with underlying transactions that are classified as operating activities.
The increase (decrease) during the reporting period in the amount of outstanding money paid in advance for goods or services that bring economic benefits for future periods.
Amount of cash paid for interest, excluding capitalized interest, classified as operating activity. Includes, but is not limited to, payment to settle zero-coupon bond for accreted interest of debt discount and debt instrument with insignificant coupon interest rate in relation to effective interest rate of borrowing attributable to accreted interest of debt discount.
Amount of cash inflow (outflow) from financing activities, including discontinued operations. Financing activity cash flows include obtaining resources from owners and providing them with a return on, and a return of, their investment; borrowing money and repaying amounts borrowed, or settling the obligation; and obtaining and paying for other resources obtained from creditors on long-term credit.
Amount of cash inflow (outflow) from investing activities, including discontinued operations. Investing activity cash flows include making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, and equipment and other productive assets.
Amount of cash inflow (outflow) from operating activities, including discontinued operations. Operating activity cash flows include transactions, adjustments, and changes in value not defined as investing or financing activities.
The cash inflow from the issuance of a long-term debt instrument which can be exchanged for a specified amount of another security, typically the entity's common stock, at the option of the issuer or the holder.
The cash outflow from the repayment of a long-term debt instrument which can be exchanged for a specified amount of another security, typically the entity's common stock, at the option of the issuer or the holder.
The cash outflow for the obligation for a lease meeting the criteria for capitalization (with maturities exceeding one year or beyond the operating cycle of the entity, if longer).
The aggregate amount of noncash, equity-based employee remuneration. This may include the value of stock or unit options, amortization of restricted stock or units, and adjustment for officers' compensation. As noncash, this element is an add back when calculating net cash generated by operating activities using the indirect method.
The accompanying unaudited consolidated condensed
financial statements have been prepared by GrowLife, Inc. (“us,” “we,” or “our”) in accordance
with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and rules and regulations
of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of our management, all adjustments,
consisting of only normal recurring accruals, necessary for a fair presentation of the financial position, results of operations,
and cash flows for the fiscal periods presented have been included.
These financial statements should be read in
conjunction with the audited financial statements and related notes included in our Annual Report filed on Form 10-K for the year
ended December 31, 2018. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of
the results expected for the full fiscal year, or for any other fiscal period.
GrowLife, Inc. (“GrowLife” or the
“Company”) is incorporated under the laws of the State of Delaware and is headquartered in Kirkland, Washington. The
Company was founded in 2012 with the Closing of the Agreement and Plan of Merger with SGT Merger Corporation.
The Company’s goal of becoming the nation’s
largest cultivation facility service provider for the production of organics, herbs and greens and plant-based medicines has not
changed. The Company’s mission is to best serve more cultivators in the design, build-out, expansion and maintenance of their
facilities with products of high quality, exceptional value and competitive price. Through a nationwide network of knowledgeable
representatives, regional centers and its e-commerce website, GrowLife provides essential and hard-to-find goods including media
(i.e., farming soil), industry-leading hydroponics equipment, organic plant nutrients, and thousands more products to specialty
grow operations across the United States.
The Company primarily sells through its wholly
owned subsidiary, GrowLife Hydroponics, Inc. GrowLife companies distribute and sell over 15,000 products through its e-commerce
distribution channel, GrowLifeEco.com, and through our regional retail storefronts. GrowLife and its business units are organized
and directed to operate strictly in accordance with all applicable state and federal laws.
On June 7, 2013, GrowLife Hydroponics completed
the purchase of Rocky Mountain Hydroponics, LLC, a Colorado limited liability company (“RMC”), and Evergreen Garden
Center, LLC, a Maine limited liability company (“EGC”). The effective date of the purchase was June 7, 2013.
On October 3, 2017, the Company closed
the acquisition of 51% of the Purchased Assets from David Reichwein, a Pennsylvania resident, GIP International Ltd, a Hong
Kong corporation and DPR International LLC, a Pennsylvania limited liability corporation. The Purchased Assets include
intellectual property, copy rights and trademarks related to reflective tiles and flooring. The Company did not acquire
business, customer lists or employees.
The Company acquired its 51% interest in the
Purchased Assets for $400,000. The Company funded equipment and rent of an office lease. On February 16, 2018, the Company
purchased the remaining 49% of the Purchased Assets in exchange for a one-time payment of $250,000. As of December 31, 2018, the
Company had recorded investment in purchased assets of $552,689.
On August 17, 2018, the Company entered into
an Asset Purchase Agreement with Go Green Hydroponics, Inc., a California corporation and TCA – Go Green SPV, LLC, a Florida
limited liability pursuant to which the Company acquired the intellectual property and assumed the lease for the property located
at 15721 Ventura Blvd., Encino, CA 91436. The Company intends to operate a retail store, sale over the internet and sell on a direct
basis at this location.
Concurrently, the Company and Seller entered
into a Security Agreement for securing the assets of Company as collateral for the obligations of Company as set forth in the Security
Agreement. In consideration for the sale and assignment of the Purchased Assets, the Company agreed to pay the Seller: (i) the
proceeds generated from the sale of the closing inventory until all closing inventory has been sold, and (ii) to pay the Seller
5% of all gross revenue of Company earned or in any way related to the Purchased Assets generated between October 1, 2018 and December
31, 2019, up to a maximum of $200,000.
On October 15, 2018, the Company closed the
Purchase and Sale Agreement with EZ-Clone Enterprises, Inc., a California corporation. EZ-Clone is the
manufacturer of multiple award-winning products specifically designed for the commercial cloning and propagation stage of indoor
plant cultivation including cannabis, food, and other hydroponic farming. The Company acquired 51% of EZ-Clone for $2,040,000,
payable as follows: (i) a cash payment of $645,000; and (ii) the issuance of 107,307,692 restricted shares of the Company’s
common stock at a price of $0.013 per share or $1,395,000.
The Company has the obligation to acquire the
remaining 49% of EZ-Clone within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance
of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000.
On October 17, 2017, the Company was informed
by Alpine Securities Corporation (“Alpine”) that Alpine has demonstrated compliance with the Financial Industry Regulatory
Authority (“FINRA”) Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of 1934. We filed an amended application
with the OTC Markets to list the Company’s common stock on the OTCQB and begin to trade on this market as of March 20, 2018.
As of March 4, 2019, the Company began to trade on the Pink Sheet stocks system.
The Company’s bid price had closed below $0.01 for more than 30 consecutive calendar days.
The entire disclosure for the nature of an entity's business, major products or services, principal markets including location, and the relative importance of its operations in each business and the basis for the determination, including but not limited to, assets, revenues, or earnings. For an entity that has not commenced principal operations, disclosures about the risks and uncertainties related to the activities in which the entity is currently engaged and an understanding of what those activities are being directed toward.
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 $2,338,325 and $4,241,875 for the periods ended March 31, 2019
and 2018, respectively. Our net cash used in operating activities was $1,116,717 and $835,480 for the periods ended March 31, 2019
and 2018, respectively.
The Company anticipates that it will record
losses from operations for the foreseeable future. As of March 31, 2019, the accumulated deficit was $143,539,940. The
Company has experienced recurring operating losses and negative operating cash flows since inception and has financed its working
capital requirements during this period primarily through the recurring issuance of convertible notes payable and advances from
a related party. The audit opinion prepared by our independent registered public accounting firm relating to our financial statements
for the year ended December 31, 2018 and 2017 filed with the SEC on March 8, 2019 includes an explanatory paragraph expressing
the substantial doubt about our ability to continue as a going concern.
Continuation of the Company as a going concern
is dependent upon obtaining additional working capital. The financial statements do not include any adjustments that
might be necessary if we are unable to continue as a going concern.
The entire disclosure when substantial doubt is raised about the ability to continue as a going concern. Includes, but is not limited to, principal conditions or events that raised substantial doubt about the ability to continue as a going concern, management's evaluation of the significance of those conditions or events in relation to the ability to meet its obligations, and management's plans that alleviated or are intended to mitigate the conditions or events that raise substantial doubt about the ability to continue as a going concern.
Basis of Presentation - The accompanying
consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated.
The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”).
Principles of Consolidation - The consolidated
financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. Inter-Company items
and transactions have been eliminated in consolidation.
Cash and Cash Equivalents - The Company
classifies highly liquid temporary investments with an original maturity of nine months or less when purchased as cash equivalents.
The Company maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit
Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed
to any significant risk for cash on deposit. At March 31, 2019, the Company had uninsured deposits in the amount of
$309,146.
Accounts Receivable and Revenue - Revenue
is recognized at the time the Company sells merchandise to the customer in store. eCommerce sales include shipping revenue and
are recorded upon shipment to the customer. This is when the risk of loss transfers to our customers, the fee is fixed and determinable,
and collection of the sale is reasonably assured. A product is not shipped without an order from the customer and the completion
of credit acceptance procedures. The majority of our sales are cash or credit card; however, we occasionally extend terms to our
customers. Accounts receivable are reviewed periodically for collectability.
Inventories - Inventories are recorded
on a first in first out basis. Inventory consists of raw materials, purchased finished goods and components held for resale. Inventory
is valued at the lower of cost or market. The reserve for inventory was $50,000 and $120,000 as of March 31, 2019 and December
31, 2018, respectively.
Equipment – Equipment consists
of machinery, equipment, tooling, computer equipment and leasehold improvements, which are stated at cost less accumulated depreciation
and amortization. Depreciation is computed by the straight-line method over the estimated useful lives or lease period of the relevant
asset, generally 3-10 years, except for leasehold improvements which are depreciated over the lesser of the life of the lease or
10 years.
Long Lived Assets – The Company
reviews its long-lived assets for impairment annually or when changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair
value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at
the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying
values exceed fair values, an impairment loss is recognized in operating results.
Intangible Assets – Intangible
assets are capitalized and amortized on a straight-line basis over their estimated useful life, if the life is determinable. If
the life is not determinable, amortization is not recorded. We regularly perform reviews to determine if facts and circumstances
exist which indicate that the useful lives of our intangible assets are shorter than originally estimated or the carrying amount
of these assets may not be recoverable. When an indication exists that the carrying amount of intangible assets may not be recoverable,
we assess the recoverability of our assets by comparing the projected undiscounted net cash flows associated with the related asset
or group of assets over their remaining lives against their respective carrying amounts. Such impairment test is based on the lowest
level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Impairment,
if any, is based on the excess of the carrying amount over the estimated fair value of those assets.
Fair Value Measurements and Financial Instruments
- ASC Topic 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy
for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy
is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels
are defined as follows:
Level 1 - Inputs to the valuation methodology
are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 - Inputs to the valuation methodology
are unobservable and significant to the fair value measurement.
The carrying value of cash, accounts receivable,
investment in a related party, accounts payables, accrued expenses, due to related party, notes payable, and convertible notes
approximates their fair values due to their short-term maturities.
Derivative financial instruments -The
Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in
the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average
Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current
or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months
of the balance sheet date.
Sales Returns - We allow customers to
return defective products when they meet certain established criteria as outlined in our sales terms and conditions. It is our
practice to regularly review and revise, when deemed necessary, our estimates of sales returns, which are based primarily on actual
historical return rates. We record estimated sales returns as reductions to sales, cost of goods sold, and accounts receivable
and an increase to inventory. Returned products which are recorded as inventory are valued based upon the amount we expect to realize
upon its subsequent disposition. As of March 31, 2019 and December 31, 2018, there was a reserve for sales returns of $0, respectively,
which is minimal based upon our historical experience.
Stock Based Compensation - The Company
has share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock,
as well as options and warrants to purchase shares of Company common stock at the fair market value at the time of grant. Stock-based
compensation cost to employees is measured by the Company at the grant date, based on the fair value of the award, over the requisite
service period under ASC 718. For options issued to employees, the Company recognizes stock compensation costs utilizing the fair
value methodology over the related period of benefit. Grants of stock to non-employees and other parties are accounted
for in accordance with the ASC 505.
Net (Loss) Per Share - Under the provisions
of ASC 260, “Earnings per Share,” basic loss per common share is computed by dividing net loss available to common
shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted net loss per
share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that would then share in the income of the Company, subject
to anti-dilution limitations. The common stock equivalents have not been included as they are anti-dilutive.
As of March 31, 2019, there are also (i) stock
option grants outstanding for the purchase of 98.5 million common shares at a $0.010 average exercise price; (ii) warrants for
the purchase of 362.8 million common shares at a $0.023 average exercise price; and (iii) 114.7 million shares related to convertible
debt that can be converted at $0.002535 per share. In addition, the Company has an unknown number of common shares to be issued
under the Chicago Venture, Iliad and St. George financing agreements.
As of March 31, 2018, there are also (i) stock
option grants outstanding for the purchase of 59 million common shares at a $0.008 average exercise price; (ii) warrants for the
purchase of 595 million common shares at a $0.031 average exercise price; and (iii) 107 million shares related to convertible debt
that can be converted at $0.002535 per share. In addition, we have an unknown number of common shares to be issued under the Chicago
Venture Partners, L.P. financing agreements.
Dividend Policy - The Company has never
paid any cash dividends and intends, for the foreseeable future, to retain any future earnings for the development of our business.
Our future dividend policy will be determined by the board of directors on the basis of various factors, including our results
of operations, financial condition, capital requirements and investment opportunities.
Use of Estimates - In preparing these
unaudited interim consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions
that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date
of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual
results could differ from those estimates. Significant estimates and assumptions included in our consolidated financial statements
relate to the valuation of long-lived assets, estimates of sales returns, inventory reserves and accruals for potential liabilities,
and valuation assumptions related to derivative liability, equity instruments and share based compensation.
Recent Accounting Pronouncements
A variety of proposed or otherwise potential
accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative
and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards
would be material to the Company’s consolidated financial statements.
On October 15, 2018, the Company closed the
Purchase and Sale Agreement with EZ-Clone Enterprises, Inc., a California corporation that was founded in January 2000. EZ-Clone
is the manufacturer of multiple award-winning products specifically designed for the commercial
cloning and propagation stage of indoor plant cultivation including cannabis, food, and other hydroponic farming. The Company
has proprietary products and services such as the Commercial Pro System, Hobbyist Cloning Systems, Cloning Tents, Coco Collars,
Coco Seed Starters, Rooting Gel, and Clear Rez. Technical Support, know-how and overall knowledge is also considered proprietary.
The Company trademarks are EZ CLONE and EZ CLONE CRIB.
This acquisition
is expected to accelerate the Company’s revenue growth, increase the Company gross margins and add additional manufacturing
and research and development personnel.
The Company
acquired 51% of EZ-Clone for $2,040,000, payable as follows: (i) a cash payment of $645,000; and (ii) the issuance of 107,307,692
restricted shares of the Company’s common stock at a price of $0.013 per share or $1,395,000. The Company has the obligation
to acquire the remaining 49% of EZ-Clone within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and
(ii) the issuance of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000.
The cost
to acquire these assets has been preliminarily allocated to the assets acquired according to estimated fair values and is subject
to adjustment when additional information concerning asset valuations is finalized, but no later than October 15, 2019. The preliminary
allocation is as follows:
Purchase Price Allocation
$
Common stock
$
1,395,000
Cash
645,000
Assets acquired
(911,294
)
Liabilities acquired
939,375
Non-controlling interest
1,960,000
EZ-Clone equity
(605,000
)
Total
$
3,423,081
The results of operations of EZ-Clone were included in the Consolidated
Statements of Operations for the period October 15, 2018 to December 31, 2018.
The unaudited pro-forma financial data for the acquisition for the
year ended December 31, 2018, were as follows:
Pre-Acquisition
Operations of EZ-
Pro Forma
As Reported
January 1, 2018 to
Year Ended
December 31, 2018
October 14, 2018
December 31, 2018
Net revenue
$
4,573,461
$
1,551,503
$
6,124,964
Net loss
(11,473,137
)
(111,671
)
(11,584,808
)
Net loss per share
$
(0.00
)
$
(0.00
)
The unaudited pro-forma financial data for the acquisition for the
year ended December 31, 2017, were as follows:
Pre-Acquisition
Operations of EZ-
Pro Forma
As Reported
January 1, 2017 to
Year Ended
December 31, 2017
December 31, 2017
December 31, 2017
Net revenue
$
2,452,104
$
2,648,873
$
5,100,977
Net loss
(5,320,974
)
(126,962
)
(5,447,936
)
Net loss per share
$
(0.00
)
$
(0.00
)
There
were no material, nonrecurring items included in the reported the pro-forma results.
Termination of Agreements with CANX, LLC
On February 15, 2019, the Company entered into
a Termination of Existing Agreements and Release with CANX USA, LLC, a Nevada limited liability company. Pursuant to the Agreement,
the Parties agreed to terminate, release and discharge all existing and further rights and obligations between the Parties under,
arising out of, or in any way related to that certain Waiver and Modification Agreement and Amended and Restated Joint Venture
Agreement made as of July 10, 2014, and any ancillary agreements or instruments thereto, including, but not limited to, the Warrants
issued to CANX entitling CANX to purchase 540,000,000 shares of the Company’s common stock at an exercise price of $0.033.
In exchange for the Agreement and cancellation
of the CANX Agreements and Warrants, the Company agreed to issue $1,000,000 of restricted common stock priced at the February 7,
2019 closing price of $0.008, or 125,000,000 restricted common stock shares.
The entire disclosure for equity method investments and joint ventures. Equity method investments are investments that give the investor the ability to exercise significant influence over the operating and financial policies of an investee. Joint ventures are entities owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group.
Inventory as of March 31, 2019 and 2018 consisted of the following:
March 31,
December 31,
2019
2018
Raw materials
$
348,958
$
417,570
Work in process
41,558
35,280
Finished goods
401,842
459,814
In production
99,416
-
Inventory reserve
(50,000
)
(120,000
)
Total
$
841,774
$
792,664
Raw materials consist of supplies for the flooring
product line and EZ-Clone.
Finished goods inventory relates to product
at the Company’s retail stores, which is product purchased from distributors, and in some cases directly from the manufacturer,
and resold at our stores and EZ- Clone.
The Company reviews its inventory on a periodic
basis to identify products that are slow moving and/or obsolete, and if such products are identified, the Company records the appropriate
inventory impairment charge at such time.
The entire disclosure for inventory. Includes, but is not limited to, the basis of stating inventory, the method of determining inventory cost, the classes of inventory, and the nature of the cost elements included in inventory.
Property and equipment as of March 31, 2019 and 2018 consists of
the following:
March 31,
December 31,
2019
2018
Machinery, equipment and tooling
$
943,327
$
943,326
Computer equipment
16,675
16,675
Leasehold improvements
20,021
14,703
Total property and equipment
980,023
974,704
Less accumulated depreciation and amortization
(291,712
)
(261,839
)
Net property and equipment
$
688,312
$
712,866
Fixed assets, net of accumulated depreciation,
were $688,312 and $712,866 as of March 31, 2019 and 2018, respectively. Accumulated depreciation was $291,712 and $261,839 as of
March 31, 2019 and 2018, respectively. Total depreciation expense was $29,873 and $10,814 for the three months ended March 31,
2019 and 2018, respectively. All equipment is used for manufacturing, selling, general and administrative purposes and accordingly
all depreciation is classified in cost of goods sold, selling, general and administrative expenses.
On October 3, 2017, the Company closed the acquisition
of 51% of the Purchased Assets from David Reichwein, a Pennsylvania resident, GIP International Ltd, a Hong Kong corporation and
DPR International LLC, a Pennsylvania limited liability corporation. The Purchased Assets include intellectual property, copy rights
and trademarks related to reflective tiles and flooring.
The Company did not acquire business, customer
list or employees.
The Company acquired its 51% interest in the
Purchased Assets for $400,000. The Company funded equipment and rent of an office lease. On February 16, 2018, the Company
purchased the remaining 49% of the Purchased Assets in exchange for a one-time payment of $250,000. As of December 31, 2018, the
Company had recorded investment in purchased assets of $552,689.
On October 15, 2018, the Company acquired 51%
of EZ-Clone Enterprises, Inc. and acquired $244,203 of net property and equipment.
During the year ended December 31, 2018, the
Company retired fully depreciated assets of $358,156.
The entire disclosure for long-lived, physical assets used in the normal conduct of business and not intended for resale. Includes, but is not limited to, accounting policies and methodology, roll forwards, depreciation, depletion and amortization expense, including composite depreciation, accumulated depreciation, depletion and amortization expense, useful lives and method used, income statement disclosures, assets held for sale and public utility disclosures.
Intangible assets as of March 31, 2019 and December 31, 2018 consisted
of the following:
Estimated
March 31,
December 31,
Useful
Lives
2019
2018
Customer lists
3 years
$
1,604,341
$
1,604,341
Patents
3 years
1,818,740
1,818,740
Less: accumulated amortization
(427,885
)
(142,628
)
Intangible assets, net
$
2,995,196
$
3,280,453
Total amortization expense was $285,277 and
$0 for the three months ended March 31, 2019 and 2018, respectively.
On October 15, 2018, the Company closed the
Purchase and Sale Agreement with EZ-Clone Enterprises, Inc., a California corporation that was founded in January 2000. The
Company acquired 51% of EZ-Clone for $2,040,000, payable as follows: (i) a cash payment of $645,000; and (ii) the issuance
of 107,307,692 restricted shares of the Company’s common stock at a price of $0.013 per share or $1,395,000. The Company
has the obligation to acquire the remaining 49% of EZ-Clone within one year for $1,960,000, payable as follows: (i) a cash payment
of $855,000; and (ii) the issuance of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000.
The fair value of the intellectual property
associated with the assets acquired was $3,423,081 estimated by using a discounted cash flow approach based on future economic
benefits. In summary, the estimate was based on a projected income approach and related discounted cash flows over five years,
with applicable risk factors assigned to assumptions in the forecasted results.
Accounts payable were $1,209,449 and $1,054,371
as of March 31, 2019 and December 31, 2018, respectively. Such liabilities consisted of amounts due to vendors for inventory
purchases, audit, legal and other expenses incurred by the Company.
Accrued expenses were $251,024 and $261,954
as of March 31, 2019 and December 31, 2018, respectively. Such liabilities consisted of amounts due to Go Green Hydroponics,
Inc. and TCA – Go Green SPV, LLC and sales tax and payroll liabilities.
On August 17, 2018, the Company entered into
an Asset Purchase Agreement with Go Green Hydroponics, Inc. and TCA – Go Green SPV, LLC. The Company acquired the inventory
of Go Green but agreed to pay the Seller 100% of the proceeds generated from the sale of the closing inventory until all closing
inventory has been sold. The Company recorded accrued expenses $134,497 as of September 30, 2018 related to the sale of inventory.
Also, the Company agreed to pay 5% of all gross revenue of Company earned or in any way related to the Purchased Assets generated
between October 1, 2018 and December 31, 2019, up to a maximum of $200,000. The Company estimated gross revenue for that period
to be approximately $1,200,000 and recorded a $60,000 liability. The Company recorded an impairment of acquired assets in the amount
of $60,000 as of December 31, 2018.
Convertible notes payable as of March 31, 2019 consisted of the following:
Balance
Accrued
Debt
As of
Principal
Interest
Discount
March 31, 2019
10% OID Convertible Promissory Notes
$
2,036,669
$
176,475
$
-
$
2,213,144
7% Convertible note ($850,000)
270,787
19,942
-
290,729
$
2,307,456
$
196,417
$
-
$
2,503,873
Convertible notes payable as of December 31, 2018 consisted of the
following:
Balance
Accrued
Debt
As of
Principal
Interest
Discount
December 31, 2018
10% OID Convertible Promissory Notes
$
2,982,299
$
135,780
$
-
$
3,118,079
7% Convertible note ($850,000)
270,787
15,267
-
286,054
$
3,253,086
$
151,047
$
-
$
3,404,133
7% Convertible Notes Payable
On March 12, 2018, the Company entered into
a Second Amendment to the Note. Pursuant to the Amendment, the Note’s maturity date has been extended to December 31, 2019,
and interest accrues at 7% per annum, compounding on the maturity date. Additionally, after review of the Note and accrued interest,
the Parties agreed that as of March 12, 2018, the outstanding balance on the Note was $270,787.
As of March 31, 2019, the outstanding principal
on this 7% convertible note was $270,787 and accrued interest was $19,942, which results in a total liability of $290,729.
10% Convertible Promissory Notes
Funding from Chicago Venture Partners, L.P.
(“Chicago Venture”) and Iliad Research and Trading, L.P. (“Iliad”)
As of December 31, 2018, the outstanding principal
balance due to Chicago Venture and Iliad is $1,112,200 and accrued interest was $90,931, which results in a total amount of $1,203,230.
During the year ended December 31, 2018, Chicago
Venture converted principal and interest of $3,104,181 into 525,587,387 shares of our common stock at a per share conversion price
of $0.0059 with a fair value of $7,756,330. The Company recognized $6,565,415 loss on debt conversions during the year ended December
31, 2018.
During the year ended December 31, 2018, the
Company recorded an OID debt discount expense of $660,472 to interest expense related to the Chicago Venture financing.
As of March 31, 2019, the outstanding principal
balance due to Chicago Venture is $2,036,669 and accrued interest was $176,475, which results in a total amount of $2,213,144.
During the three months ended March 31, 2019,
Chicago Venture converted principal and accrued interest of $375,000 into 84,156,195 shares of our common stock at a per share
conversion price of $0.00446 with a fair value of $676,055. The Company recognized $301,055 loss on debt conversions during the
three months ended March 31, 2019.
In April 2008, the FASB issued a pronouncement
that provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity
can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement
on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after
December 15, 2008.
If the conversion features of conventional convertible
debt provide for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature
(BCF). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20. Debt with Conversion and Other Options.
In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount
to interest expense over the life of the debt using the effective interest method. The debt is convertible at the lesser of 65%
of the fair value of the Company’s common stock or $0.009 requiring the conversion feature to be bifurcated from the host
debt contract and accounting for separately as a derivative, resulting in periodic revaluations.
There was a derivative liability of $1,308,200
as of March 31, 2019. For the three months ended March 31, 2019, the Company recorded non-cash income of $487,223 related to the
“change in fair value of derivative” expense related to the Chicago Venture and Iliad financing. During the three months
ended March 31, 2019, Chicago Venture converted principal and accrued interest of $375,000 into 84,156,195 shares of our common
stock at a per share conversion price of $0.00446.
Derivative liability as of March 31, 2019 was
as follows:
Ms. Katherine McLain was appointed as a director
on February 14, 2017. On February 22, 2019, the Company issued 8,108,108 shares of our common stock to Katherine McLain valued
at $0.0074 per share or $60,000.
Transaction with Thom Kozik
Mr. Kozik was appointed as a director on October
5, 2017. On February 22, 2019, the Company issued 8,108,108 shares of our common stock to Mr. Kozik valued at $0.0074 per share
or $60,000.
The entire disclosure for related party transactions. Examples of related party transactions include transactions between (a) a parent company and its subsidiary; (b) subsidiaries of a common parent; (c) and entity and its principal owners; and (d) affiliates.
The Company has authorized 6,010,000,000 shares
of capital stock, of which 6,000,000,000 are shares of voting common stock, par value $0.0001 per share, and 10,000,000 are shares
of preferred stock, par value $0.0001 per share. On October 24, 2017 the Company filed a Certificate of Amendment of Certificate
of Incorporation with the Secretary of State of the State of Delaware to increase the authorized shares of common stock from 3,000,000,000
to 6,000,000,000 shares.
Non-Voting Preferred Stock
Under the terms of our articles of incorporation,
the Company’s board of directors is authorized to issue shares of non-voting preferred stock in one or more series without
stockholder approval. The Company’s board of directors has the discretion to determine the rights, preferences, privileges
and restrictions, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of non-voting
preferred stock.
The purpose of authorizing the Company’s
board of directors to issue non-voting preferred stock and determine the Company’s rights and preferences is to eliminate
delays associated with a stockholder vote on specific issuances. The issuance of non-voting preferred stock, while providing flexibility
in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more
difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding
voting stock. Other than the Series B and C Preferred Stock discussed below, there are no shares of non-voting preferred stock
presently outstanding and we have no present plans to issue any shares of preferred stock.
Common Stock
Unless otherwise indicated, all of the following
sales or issuances of Company securities were conducted under the exemption from registration as provided under Section 4(2) of
the Securities Act of 1933 (and also qualified for exemption under 4(5), formerly 4(6) of the Securities Act of 1933, except as
noted below). All of the shares issued were issued in transactions not involving a public offering, are considered to be restricted
stock as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear
legends to that effect.
The Company has compensated consultants and
service providers with restricted common stock during the development of our business and when our capital resources were not adequate
to provide payment in cash.
During the three months ended March 31, 2019,
the Company had the following sales of unregistered equity securities to accredited investors unless otherwise indicated:
During the three months ended March 31, 2019,
the Company issued 20,916,216 shares to suppliers for services provided. The Company valued the shares at $0.0079 per share or
$165,400.
During the three months ended March 31, 2019,
Chicago Venture converted principal and accrued interest of $375,000 into 84,156,195 shares of our common stock at a per share
conversion price of $0.00446.
On February 15, 2019, the Company entered into
a Termination of Existing Agreements and Release with CANX USA, LLC, a Nevada limited liability company. Pursuant to the Agreement,
the Parties agreed to terminate, release and discharge all existing and further rights and obligations between the Parties under,
arising out of, or in any way related to that certain Waiver and Modification Agreement and Amended and Restated Joint Venture
Agreement made as of July 10, 2014, and any ancillary agreements or instruments thereto, including, but not limited to, the Warrants
issued to CANX entitling CANX to purchase 540,000,000 shares of the Company’s common stock at an exercise price of $0.033.
In exchange for the Agreement and cancellation
of the CANX Agreements and Warrants, the Company agreed to issue $1,000,000 of restricted common stock priced at the February 7,
2019 closing price of $0.008, or 125,000,000 restricted common stock shares.
Warrants
The Company had the following warrant activity during the three months
ended March 31, 2019:
On February 15, 2019, the Company entered into
a Termination of Existing Agreements and Release with CANX USA, LLC, a Nevada limited liability company. Pursuant to the Agreement,
the Parties agreed to terminate, release and discharge all existing and further rights and obligations between the Parties under,
arising out of, or in any way related to that certain Waiver and Modification Agreement and Amended and Restated Joint Venture
Agreement made as of July 10, 2014, and any ancillary agreements or instruments thereto, including, but not limited to, the Warrants
issued to CANX entitling CANX to purchase 540,000,000 shares of the Company’s common stock at an exercise price of $0.033.
In exchange for the Agreement and cancellation
of the CANX Agreements and Warrants, the Company agreed to issue $1,000,000 of restricted common stock priced at the February 7,
2019 closing price of $0.008, or 125,000,000 restricted common stock shares.
A summary of the warrants issued as of March
31, 2019 is as follows:
March 31, 2019
Weighted
Average
Exercise
Shares
Price
Outstanding at beginning of period
902,825,146
$
0.029
Issued
-
-
Exercised
-
-
Forfeited
(540,000,000
)
(0.033
)
Expired
-
-
Outstanding at end of period
362,825,146
$
0.023
Exercisable at end of period
362,825,146
$
0.023
A summary of the status of the warrants outstanding as of March 31,
2019 is presented below:
March 31, 2019
Weighted
Weighted
Weighted
Average
Average
Average
Number of
Remaining
Exercise
Shares
Exercise
Warrants
Life
Price
Exercisable
Price
-
-
$
-
-
$
-
55,000,000
7.41
0.010
55,000,000
0.010
48,000,000
5.50
0.012
16,000,000
0.012
48,687,862
3.83
0.050
48,687,862
0.050
211,137,284
2.67
0.021
211,137,284
0.021
362,825,146
3.56
$
0.023
330,825,146
0.023
Warrants had no intrinsic value as of March 31, 2019.
The warrants were valued using the following assumptions:
The entire disclosure for shareholders' equity comprised of portions attributable to the parent entity and noncontrolling interest, including other comprehensive income. Includes, but is not limited to, balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings, accumulated balance for each classification of other comprehensive income and amount of comprehensive income.
On December 6, 2018, the Company’s shareholders
voted to approve the First Amended and Restated 2017 Stock Incentive Plan to increase the shares issuable under the plan from 100
million to 200 million. The Company has 100,000,000 shares available for issuance. The Company has outstanding unexercised stock
option grants totaling 100,000,000 shares at an average exercise price of $0.010 per share as of December 31, 2018. The Company
filed registration statements on Form S-8 to register 200,000,000 shares of the Company’s common stock related to the 2017
Stock Incentive Plan and First Amended and Restated 2017 Stock Incentive Plan.
Determining Fair Value under ASC 505
The Company records compensation expense associated
with stock options and other equity-based compensation using the Black-Scholes-Merton option valuation model for estimating fair
value of stock options granted under our plan. The Company amortizes the fair value of stock options on a ratable basis over the
requisite service periods, which are generally the vesting periods. The expected life of awards granted represents the period of
time that they are expected to be outstanding. The Company estimates the volatility of our common stock based on the
historical volatility of its own common stock over the most recent period corresponding with the estimated expected life of the
award. The Company bases the risk-free interest rate used in the Black Scholes-Merton option valuation model on the implied yield
currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.
The Company has not paid any cash dividends on our common stock and does not anticipate paying any cash dividends in the foreseeable
future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model and
adjusts share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience.
The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed.
Stock Option Activity
During the three months ended March 31, 2019,
the Company had the following stock option activity:
On February 6, 2019, the Company issued a stock
option grant to an advisory board member for 500,000 shares of common stock at an exercise price of $0.008 per share. The stock
option grant vests quarterly over three years and is exercisable for 3 years. The stock option grant was valued at $1,000.
On March 31, 2019, a stock option grant for
2,000,000 shares of common stock at an exercise price of $0.008 per share expired.
As of December 31, 2018, there are 98,500,000
options to purchase common stock at an average exercise price of $0.010 per share outstanding under the 2017 Amended and Restated
Stock Incentive Plan. The Company recorded $16,106 and $5,898 of compensation expense, net of related tax effects, relative to
stock options for the three months ended March 31, 2018 and 2017 in accordance with ASC 505. Net loss per share (basic and diluted)
associated with this expense was approximately ($0.00). As of March 31, 2019, there is $125,855 of total unrecognized costs related
to employee granted stock options that are not vested. These costs are expected to be recognized over a period of approximately
3.52 years.
Stock option activity for the period ended March 31, 2019 is as follows:
Weighted Average
Options
Exercise Price
$
Outstanding as of December 31, 2018
100,000,000
$
0.0099
$
990,000
Granted
500,000
0.0080
4,000
Exercised
-
-
-
Forfeitures
(2,000,000
)
(0.0200
)
(40,000
)
Outstanding as of March 31, 2019
98,500,000
$
0.0097
$
954,000
The following table summarizes information about
stock options outstanding and exercisable at March 31, 2019:
Weighted
Weighted
Weighted
Average
Average
Average
Range of
Number
Remaining Life
Exercise Price
Number
Exercise Price
Exercise Prices
Outstanding
In Years
Exercisable
Exercisable
Exercisable
$
0.006
31,000,000
3.50
$
0.006
21,666,667
$
0.006
0.007
10,000,000
3.50
0.007
5,000,000
0.007
.008-.009
2,500,000
1.55
.008-.009
1,166,667
.008-.009
0.010
12,000,000
0.63
0.010
12,000,000
0.010
0.012
38,000,000
4.50
0.012
6,333,333
0.012
0.020
5,000,000
4.10
0.020
2,000,000
0.020
98,500,000
3.52
$
0.010
48,166,667
$
0.009
Stock option grants totaling 26,666,667 shares of common stock have
an intrinsic value of $48,333 as of March 31, 2019.
The stock option grants were valued using the following assumptions:
The entire disclosure for freestanding option contracts issued by an entity that are indexed to, and potentially settled in, an entity's own stock. Includes disclosure on the strike price and the number of shares to which the contract is indexed, the settlement date or dates of the contract, and the issuer's accounting for the contract. If the terms of the contract provide settlement alternatives, those settlement alternatives are disclosed, including who controls the settlement alternatives, and the maximum number of shares that could be required to be issued, to net share settle the contract, if applicable. If a contract does not have a fixed or determinable maximum number of shares that could be required to be issued, the fact that a potentially infinite number of shares that may be required to be issued to settle the contract is disclosed. Disclosure also includes the contract's current fair value for each settlement alternative and how changes in the price of the issuer's equity instruments affect those settlement amounts.
From time to time, the Company may become subject
to various legal proceedings that are incidental to the ordinary conduct of its business. Although we cannot accurately predict
the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities
when it deems them probable and reasonably estimable. These provisions are based on current information and may be adjusted from
time to time according to developments.
Other than those certain legal proceedings as
reported in the Company’s annual report on Form 10-K filed with the SEC on March 8, 2019, the Company’s know of no
material, existing or pending legal proceedings against our Company, nor is the Company involved as a plaintiff in any material
proceeding or pending litigation. There are no proceedings in which any director, officer or any affiliates, or any registered
or beneficial shareholder, is an adverse party or has a material interest adverse to the Company’s interest.
Operating Leases
On May 31, 2018, the Company rented space at
5400 Carillon Point, Kirkland, Washington 98033 for $623 per month for the Company’s corporate office and use of space in
the Regus network, including California. The Company’s agreement expires May 31, 2019. The Company intends to renew this
lease on comparable terms on May 31, 2019.
On October 1, 2017, GrowLife Hydroponics, Inc.
entered into a lease in Calgary, Canada. The monthly lease is approximately $3,246. The lease expires September 30, 2022.
On December 19, 2017, GrowLife Innovations,
Inc. entered into a lease in Grand Prairie, Texas dated October 9, 2017, for 5,000 square feet for the manufacturing and distribution
of its flooring products. The monthly lease payment is $15,000. The lease expires December 1, 2022 and can be renewed.
On July 2, 2018, GrowLife Hydroponics, Inc.
entered into a store lease for 1,950 square feet in Portland, Maine. The monthly lease is approximately $2,113, with 3% increases
in year two and three. The lease expires July 2, 2021 and can be extended.
On August 31, 2018, GrowLife, Inc. entered into
the Fourth Amendment to the Lease Agreement for the store in Encino, California. The monthly lease is approximately $6,720, with
a 3% increase on March 1, 2019. The lease expires September 1, 2019 and the Company is required to provide six months’ notice
to terminate the lease.
On December 14, 2018, GrowLife, Inc. entered
into a lease agreement with Pensco Trust Company for a 28,000 square feet industrial space at 10170 Croydon Way, Sacramento, California
95827 used for the assembly and sales of plastic parts by EZ-Clone. The monthly lease payment is $17,000 and increased approximately
3% per year. The lease expires on December 31, 2023.
The aggregate future minimum lease payments
under operating leases, to the extent the leases have early cancellation options and excluding escalation charges, are as follows:
Tabular disclosure of a material business combination completed during the period, including background, timing, and recognized assets and liabilities. This table does not include leveraged buyouts.
Tabular disclosure of the carrying amount as of the balance sheet date of merchandise, goods, commodities, or supplies held for future sale or to be used in manufacturing, servicing or production process.
Tabular disclosure of physical assets used in the normal conduct of business and not intended for resale. Includes, but is not limited to, balances by class of assets, depreciation and depletion expense and method used, including composite depreciation, and accumulated deprecation.
Tabular disclosure of assets, excluding financial assets and goodwill, lacking physical substance with a finite life, by either major class or business segment.
Tabular disclosure of information pertaining to short-term and long-debt instruments or arrangements, including but not limited to identification of terms, features, collateral requirements and other information necessary to a fair presentation.
Tabular disclosure of liabilities measured at fair value measured on a recurring or nonrecurring basis. Includes, but is not limited to, fair value measurements recorded and the reasons for the measurements, level within the fair value hierarchy in which the fair value measurements are categorized and transfers between levels 1 and 2.
Tabular disclosure of warrants or rights issued. Warrants and rights outstanding are derivative securities that give the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue to entice investors by a higher return potential. The main difference between warrants and call options is that warrants are issued and guaranteed by the company, whereas options are exchange instruments and are not issued by the company. Also, the lifetime of a warrant is often measured in years, while the lifetime of a typical option is measured in months. Disclose the title of issue of securities called for by warrants and rights outstanding, the aggregate amount of securities called for by warrants and rights outstanding, the date from which the warrants or rights are exercisable, and the price at which the warrant or right is exercisable.
Tabular disclosure of the freestanding option contracts issued by an entity that are indexed to, and potentially settled in, an entity's own stock. Includes disclosure on the strike price and the number of shares to which the contract is indexed, the settlement date or dates of the contract, and the issuer's accounting for the contract. If the terms of the contract provide settlement alternatives, those settlement alternatives are disclosed, including who controls the settlement alternatives, and the maximum number of shares that could be required to be issued, to net share settle the contract, if applicable. If a contract does not have a fixed or determinable maximum number of shares that could be required to be issued, the fact that a potentially infinite number of shares that may be required to be issued to settle the contract is disclosed. Disclosure also includes the contract's current fair value for each settlement alternative and how changes in the price of the issuer's equity instruments affect those settlement amounts.
Tabular disclosure of future minimum payments required in the aggregate and for each of the five succeeding fiscal years for operating leases having initial or remaining noncancelable lease terms in excess of one year and the total minimum rentals to be received in the future under noncancelable subleases as of the balance sheet date.
Amount of cash inflow (outflow) from operating activities, including discontinued operations. Operating activity cash flows include transactions, adjustments, and changes in value not defined as investing or financing activities.
Amount recognized as of the acquisition date for the assets, including goodwill, in excess of (less than) the aggregate liabilities assumed, less the noncontrolling interest in the acquiree.
Amount before valuation and LIFO reserves of merchandise or goods in the production process expected to be completed within one year or operating cycle, if longer.
Amount of accumulated depreciation, depletion and amortization for physical assets used in the normal conduct of business to produce goods and services.
Amount before accumulated amortization of capitalized costs for computer software, including but not limited to, acquired and internally developed computer software.
Amount before accumulated depreciation of tangible personal property used to produce goods and services, including, but is not limited to, tools, dies and molds, computer and office equipment.
Amount before accumulated depreciation, depletion and amortization of physical assets used in the normal conduct of business and not intended for resale. Examples include, but are not limited to, land, buildings, machinery and equipment, office equipment, and furniture and fixtures.
Amount after accumulated depreciation, depletion and amortization of physical assets used in the normal conduct of business to produce goods and services and not intended for resale. Examples include, but are not limited to, land, buildings, machinery and equipment, office equipment, and furniture and fixtures.
Amount of accumulated depreciation, depletion and amortization for physical assets used in the normal conduct of business to produce goods and services.
The amount of expense recognized in the current period that reflects the allocation of the cost of tangible assets over the assets' useful lives. Includes production and non-production related depreciation.
Amount after accumulated depreciation, depletion and amortization of physical assets used in the normal conduct of business to produce goods and services and not intended for resale. Examples include, but are not limited to, land, buildings, machinery and equipment, office equipment, and furniture and fixtures.
Useful life of finite-lived intangible assets, in 'PnYnMnDTnHnMnS' format, for example, 'P1Y5M13D' represents the reported fact of one year, five months, and thirteen days.
Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges.
Carrying value as of the balance sheet date of liabilities incurred (and for which invoices have typically been received) and payable to vendors for goods and services received that are used in an entity's business. Used to reflect the current portion of the liabilities (due within one year or within the normal operating cycle if longer).
Carrying value as of the balance sheet date of obligations incurred and payable, pertaining to costs that are statutory in nature, are incurred on contractual obligations, or accumulate over time and for which invoices have not yet been received or will not be rendered. Examples include taxes, interest, rent and utilities. Used to reflect the current portion of the liabilities (due within one year or within the normal operating cycle if longer).
Carrying value as of the balance sheet date of the portion of long-term debt due within one year or the operating cycle if longer identified as Convertible Notes Payable. Convertible Notes Payable is a written promise to pay a note which can be exchanged for a specified amount of another, related security, at the option of the issuer and the holder.
Sum of the carrying values as of the balance sheet date of the portions of long-term notes payable due within one year or the operating cycle if longer.
Fair value, before effects of master netting arrangements, of a financial liability or contract with one or more underlyings, notional amount or payment provision or both, and the contract can be net settled by means outside the contract or delivery of an asset. Includes liabilities elected not to be offset. Excludes liabilities not subject to a master netting arrangement.
Fair value, after the effects of master netting arrangements, of a financial liability or contract with one or more underlyings, notional amount or payment provision or both, and the contract can be net settled by means outside the contract or delivery of an asset. Includes liabilities not subject to a master netting arrangement and not elected to be offset.
The number of grants made during the period on other than stock (or unit) option plans (for example, phantom stock or unit plan, stock or unit appreciation rights plan, performance target plan).
The number of non-vested equity-based payment instruments, excluding stock (or unit) options, that validly exist and are outstanding as of the balance sheet date.
The number of shares into which fully or partially vested stock options outstanding as of the balance sheet date can be currently converted under the option plan.
The weighted-average price as of the balance sheet date at which grantees can acquire the shares reserved for issuance on vested portions of options outstanding and currently exercisable under the stock option plan.
The number of non-vested equity-based payment instruments, excluding stock (or unit) options, that validly exist and are outstanding as of the balance sheet date.
The number of shares into which fully or partially vested stock options outstanding as of the balance sheet date can be currently converted under the option plan.
Weighted-average exercise price, at which grantee can acquire shares reserved for issuance, for fully vested and expected to vest exercisable or convertible options. Includes, but is not limited to, unvested options for which requisite service period has not been rendered but that are expected to vest based on achievement of performance condition, if forfeitures are recognized when they occur.
Weighted average remaining contractual term for option awards outstanding, in 'PnYnMnDTnHnMnS' format, for example, 'P1Y5M13D' represents the reported fact of one year, five months, and thirteen days.
The estimated dividend rate (a percentage of the share price) to be paid (expected dividends) to holders of the underlying shares over the option's term.
The estimated measure of the percentage by which a share price is expected to fluctuate during a period. Volatility also may be defined as a probability-weighted measure of the dispersion of returns about the mean. The volatility of a share price is the standard deviation of the continuously compounded rates of return on the share over a specified period. That is the same as the standard deviation of the differences in the natural logarithms of the stock prices plus dividends, if any, over the period.
Expected term of share-based compensation awards, in 'PnYnMnDTnHnMnS' format, for example, 'P1Y5M13D' represents the reported fact of one year, five months, and thirteen days.
The combined weighted average of the accumulated differences between the fair values on underlying shares and exercises prices to acquire such shares as of the grant date on options that were either forfeited or lapsed.
The number of shares under options that were cancelled during the reporting period as a result of occurrence of a terminating event specified in contractual agreements pertaining to the stock option plan.
The weighted average grant-date fair value of options granted during the reporting period as calculated by applying the disclosed option pricing methodology.
The number of shares into which fully or partially vested stock options outstanding as of the balance sheet date can be currently converted under the option plan.
The weighted-average price as of the balance sheet date at which grantees can acquire the shares reserved for issuance on vested portions of options outstanding and currently exercisable under the stock option plan.
Weighted average remaining contractual term for option awards outstanding, in 'PnYnMnDTnHnMnS' format, for example, 'P1Y5M13D' represents the reported fact of one year, five months, and thirteen days.
The estimated dividend rate (a percentage of the share price) to be paid (expected dividends) to holders of the underlying shares over the option's term.
The estimated measure of the percentage by which a share price is expected to fluctuate during a period. Volatility also may be defined as a probability-weighted measure of the dispersion of returns about the mean. The volatility of a share price is the standard deviation of the continuously compounded rates of return on the share over a specified period. That is the same as the standard deviation of the differences in the natural logarithms of the stock prices plus dividends, if any, over the period.
Expected term of share-based compensation awards, in 'PnYnMnDTnHnMnS' format, for example, 'P1Y5M13D' represents the reported fact of one year, five months, and thirteen days.
The amount of expense, net of income tax, recognized during the period arising from equity-based compensation arrangements (for example, shares of stock, unit, stock options or other equity instruments) with employees, directors and certain consultants qualifying for treatment as employees.
Weighted average remaining contractual term for option awards outstanding, in 'PnYnMnDTnHnMnS' format, for example, 'P1Y5M13D' represents the reported fact of one year, five months, and thirteen days.
Amount of required minimum rental payments for operating leases having an initial or remaining non-cancelable lease term in excess of one year due after the fifth rolling twelve months following the latest balance sheet. For interim and annual periods when interim periods are reported on a rolling approach, from latest balance sheet date.
Amount of required minimum rental payments for operating leases having an initial or remaining non-cancelable lease term in excess of one year due in the fifth rolling twelve months following the latest balance sheet. For interim and annual periods when interim periods are reported on a rolling approach, from latest balance sheet date.
Amount of required minimum rental payments for operating leases having an initial or remaining non-cancelable lease term in excess of one year due in the fourth rolling twelve months following the latest balance sheet. For interim and annual periods when interim periods are reported on a rolling approach, from latest balance sheet date.
Amount of required minimum rental payments for operating leases having an initial or remaining non-cancelable lease term in excess of one year due in the third rolling twelve months following the latest balance sheet. For interim and annual periods when interim periods are reported on a rolling approach, from latest balance sheet date.
Amount of required minimum rental payments for operating leases having an initial or remaining non-cancelable lease term in excess of one year due in the second rolling twelve months following the latest balance sheet. For interim and annual periods when interim periods are reported on a rolling approach, from latest balance sheet date.
Amount of required minimum rental payments for operating leases having an initial or remaining non-cancelable lease term in excess of one year due in the next rolling twelve months following the latest balance sheet. For interim and annual periods when interim periods are reported on a rolling approach, from latest balance sheet date.
