NOTE 2 –
|
LIQUIDITY AND MANAGEMENT PLAN
|
The
Company has adopted the Financial Accounting Standards
Board’s (“FASB”) Accounting Standard Codification
(“ASC”) Topic 205-40, Presentation of Financial
Statements – Going Concern, which requires that management
evaluate whether there are relevant conditions and events that, in
the aggregate, raise substantial doubt about the entity’s
ability to continue as a going concern and to meet its obligations
as they become due within one year after the date that the
financial statements are issued.
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. However, since
inception, the Company has sustained significant operating losses
and such losses are expected to continue for the foreseeable
future. As of September 30, 2019, the Company had an accumulated
deficit of $$147,198,605, cash
and cash equivalents of $201,072 and a working capital deficit of
$494,818, (less derivative liability, convertible debt, right of
use liability and deferred revenue). Additionally, the Company used
in operating activities $2,612,125,
$3,854,506, and $2,082,493 for the nine months ended September 30,
2019 and the years ended December 31, 2018 and 2017
respectively. The Company will require additional cash
funding to fund operations through November 2020. Accordingly,
management has concluded that the Company does not have sufficient
funds to support operations within one year after the date the
financial statements are issued and, therefore, the Company
concluded there was substantial doubt about the Company’s
ability to continue as a going concern.
To fund
further operations, the Company will need to raise additional
capital. The Company may obtain additional financing in the future
through the issuance of its common stock, or through other equity
or debt financings. The Company’s ability to continue as a
going concern or meet the minimum liquidity requirements in the
future is dependent on its ability to raise significant additional
capital, of which there can be no assurance. If the necessary
financing is not obtained or achieved, the Company will likely be
required to reduce its planned expenditures, which could have an
adverse impact on the results of operations, financial condition
and the Company’s ability to achieve its strategic objective.
There can be no assurance that financing will be available on
acceptable terms, or at all. The financial statements contain no
adjustments for the outcome of these uncertainties. These factors
raise substantial doubt about the Company’s ability to
continue as a going concern and have a material adverse effect on
the Company’s future financial results, financial position
and cash flows.
NOTE 3 – SIGNIFICANT ACCOUNTING
POLICIES: ADOPTION OF ACCOUNTING STANDARDS
Basis of Presentation - The accompanying consolidated
financial statements include the accounts of the Company.
Intercompany accounts and transactions have been eliminated. The
preparation of these consolidated financial statements in
conformity with U.S. generally accepted accounting principles
(“GAAP”).
Principles of Consolidation -
The consolidated financial statements include the accounts of the
Company and its wholly owned and majority-owned subsidiaries.
Inter-Company items and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents - The
Company classifies highly liquid temporary investments with an
original maturity of nine months or less when purchased as cash
equivalents. The Company maintains cash balances at various
financial institutions. Balances at US banks are insured by the
Federal Deposit Insurance Corporation up to $250,000. The Company
has not experienced any losses in such accounts and believes it is
not exposed to any significant risk for cash on
deposit. At September 30, 2019, the Company had
uninsured deposits in the amount of $0.
Accounts Receivable and Revenue – The company
recognizes revenue in accordance with ASC Topic 606, Revenue from
Contracts with Customers, which requires the application of the
five-step-principles-based-accounting-model for revenue
recognition. These steps include (1) a legally enforceable
contract, written or unwritten is identified; (2) performance
obligations in the contracts are identified; (3) the transaction
price reflecting variable consideration, if any, is identified; (4)
the transaction price is allocated to the performance obligations;
and (5) revenue is recognized when the control of goods is
transferred to the customer at a particular time or over time. Our
hydroponic sales are cash or credit card. For EZ-CLONE, we extend
thirty day terms to our customers. Accounts receivable are reviewed
periodically for collectability.
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 September 30, 2019, and December 31,
2018, there was a reserve for sales returns of $20,000,
respectively, which is minimal based upon our historical
experience.
Inventories - Inventories are recorded on a first in first
out basis Inventory consists of raw materials, work in process and
finished goods and components sold by EZ-CLONE to it distribution
customers. In addition, finished goods includes products
hydroponics, which is product purchased from distributors, and in
some cases directly from the manufacturer, and resold to its
hydroponics customers. Inventory is valued at the lower of cost or
market. The reserve for inventory was $30,000 and $120,000 as of
September 30, 2019 and December
31, 2018, respectively.
Property and 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.
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.
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 Topic 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 Topic
505.
Net Loss Per Share - Under the
provisions of ASC Topic 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
September 30, 2019, there are also (i) stock option grants
outstanding for the purchase of 82.5 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) 118.4 million shares related to convertible debt that can be
converted at $0.0025 per share. In addition, we have an unknown
number of common shares to be issued under the Crossover financing
agreements in the case of default. 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 will not know the exact number of shares of
stock issued to Chicago Venture until the debt is actually
converted to equity.
As of
September 30, 2018, there are
also (i) stock option grants outstanding for the purchase of 63
million common shares at a $0.009 average exercise price; (ii)
warrants for the purchase of 595 million common shares at a $0.031
average exercise price; and (iii) 109 million shares related to convertible debt that can be
converted at $0.0025 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.
In
February 2016, the FASB issued Accounting Standards Update No.
2016-02, Leases (Topic 842) (ASU 2016-02), as amended,
which generally requires lessees to recognize operating and
financing lease liabilities and corresponding right-of-use assets
on the balance sheet and to provide enhanced disclosures
surrounding the amount, timing and uncertainty of cash flows
arising from leasing arrangements. The Company adopted the new
standard effective January 1, 2019 on a modified retrospective
basis and did not restate comparative periods. The Company elected
the package of practical expedients permitted under the transition
guidance, which allows the Company to carryforward our historical
lease classification, our assessment on whether a contract is or
contains a lease, and the Company’s initial direct costs for
any leases that exist prior to adoption of the new standard. The
Company also elected to combine lease and non-lease components and
to keep leases with an initial term of twelve months or less off
the balance sheet and recognize the associated lease payments in
the consolidated statements of operations on a straight-line basis
over the lease term.
The
Company determines if an arrangement is a lease at inception.
Operating and finance leases are included in Right of Use ("ROU")
assets, and lease liability obligations in the Company’s
consolidated balance sheets. ROU assets represent our right to use
an underlying asset for the lease term and lease liability
obligations represent the Company’s obligation to make lease
payments arising from the lease. ROU assets and liabilities are
recognized at commencement date based on the present value of lease
payments over the lease term. The Company accounts for lease
agreements with lease and non-lease components and account for such
components as a single lease component. As most of the
Company’s leases do not provide an implicit rate, we
estimated our incremental borrowing rate based on the information
available at commencement date in determining the present value of
lease payments. The Company uses the implicit rate when readily
determinable. The ROU asset also includes any lease payments made
and excludes lease incentives and lease direct costs. The
Company’s lease terms may include options to extend or
terminate the lease when it is reasonably certain that we will
exercise that option. Lease expense is recognized on a
straight-line basis over the lease term. Please refer to Note 8 for
additional information.
NOTE 4 – TRANSACTIONS
Acquisition of 51% of EZ-CLONE Enterprises, Inc.
On
October 15, 2018, in connection with the Company’s strategy
to become a dominate cultivation facilities provider, 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 with the delivery of EZ-CLONE common stock 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 November 5, 2019, the Company extended the
closing of the remaining 49% with one 24.5% shareholder by up to
nine months by agreeing to a 20% extension fee of the $855,000 cash
payment, payable at the earlier of the closing of $2,000,000 in
funding or the nine months. The Company continues to negotiate with
the second shareholder for the remaining 24.5%.
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 December 31, 2019. The
preliminary purchase price allocation is as follows:
Item
|
$
|
Common
Stock
|
$1,395,000
|
Cash
|
645,000
|
Assets
acquired
|
(911,294)
|
Liabilities
acquired
|
334,375
|
Non-controlling
interest
|
1,960,000
|
|
|
Intangibles
acquired
|
$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 September 30, 2019.
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. 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 Company recorded a loss on debt conversion
of $1,000,000 during the nine months ended September 30, 2019.
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.
Restructuring Expense
As of
September 30, 2019, the Company closed retail stores in Portland,
Maine, Encino, California and Calgary, Canada and online sales.
Also we are expecting to close the sale of the flooring division
located in Grand Prairie, Texas. The Company expects to reduce
losses and cash costs by up to $100,000 per month starting October
1, 2019. As of September 30, 2019, The Company recorded
restructuring expense of $306,000 for the sale of the flooring
division and $250,000 for the closure of the retail stores and
online sales.
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.
NOTE 5 – INVENTORY
Inventory
as of September 30, 2019 and December 31, 2018 consisted of the
following:
|
|
|
|
|
|
|
|
|
Raw
materials
|
$515,862
|
$417,570
|
Work
in process
|
40,147
|
35,280
|
Finished
goods
|
179,673
|
459,814
|
Inventory
reserve
|
(30,000)
|
(120,000)
|
Total
|
$705,682
|
$792,664
|
Inventory
consists of raw materials, work in process and finished goods and
components sold by EZ-CLONE to it distribution customers. In
addition, finished goods includes products hydroponics, which is
product purchased from distributors, and in some cases directly
from the manufacturer, and resold to its hydroponics
customers.
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 September 30, 2019 and December 31, 2018
consists of the following:
|
|
|
|
|
|
|
|
|
Machinery,
equipment and tooling
|
$356,867
|
$943,326
|
Computer
equipment
|
16,675
|
16,675
|
Leasehold
improvements
|
19,922
|
14,703
|
Total
property and equipment
|
393,464
|
974,704
|
Less
accumulated depreciation and amortization
|
(212,475)
|
(261,839)
|
Net
property and equipment
|
$180,989
|
$712,866
|
Property and equipment, net of accumulated depreciation, were
$180,989 and $712,866 as of September 30, 2019 and December 31,
2018, respectively. Accumulated depreciation was $212,475 and
$261,839 as of September 30, 2019 and December 31, 2018,
respectively. Total depreciation expense was $68,655 and $50,292
for the nine months ended September 30, 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 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. During the nine months ended
September 30, 2019, the Company disposed in connection with the
closure of the flooring division assets with a net book value of
$423,442.
NOTE 7 – INTANGIBLE
ASSETS
Intangible assets as of September 30, 2019 and December 31, 2018
consisted of the following:
|
Estimated
|
|
|
|
Useful Lives
|
|
|
|
|
|
|
Customer
lists
|
3
years
|
$1,604,341
|
$1,604,341
|
Intellectual
property
|
3
years
|
1,818,740
|
1,818,740
|
Less:
accumulated amortization
|
|
(998,399)
|
(142,628)
|
Intangible
assets, net
|
|
$2,424,682
|
$3,280,453
|
Total amortization expense was $855,771 and $0 for the nine months
ended September 30, 2019 and 2018, respectively.
On
October 15, 2018, in connection with the Company’s strategy
to become a dominate cultivation facilities provider, the Company
closed the Purchase and Sale Agreement 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 with the delivery of
EZ-CLONE common stock 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 November 5, 2019,
the Company extended the closing of the remaining 49% with one
24.5% shareholder by up to nine months by agreeing to a 20%
extension fee of the $855,000 cash payment, payable at the earlier
of the closing of $2,000,000 in funding or the nine months. The
Company continues to negotiate with the second shareholder for the
remaining 24.5%.
The fair value of the intangible assets 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- LEASES
The
Company has entered into operating leases for retail and corporate
facilities. These leases have terms which range from two to five
years, and often include options to renew. These operating leases
are listed as separate line items on the Company's September 30,
2019 Consolidated Balance Sheet, and represent the Company’s
right to use the underlying asset for the lease term. The
Company’s obligation to make lease payments are also listed
as separate line items on the Company's September 30, 2019
Consolidated Balance Sheet. Based on the present value of the lease
payments for the remaining lease term of the Company's existing
leases, the Company recognized right-of-use assets and lease
liabilities for operating leases of approximately $1,253,000 on
January 1, 2019. Operating lease right-of-use assets and
liabilities commencing after January 1, 2019 are recognized at
commencement date based on the present value of lease payments over
the lease term. During the quarter ended September 30, 2019, the
Company has cancelled all but one lease and has recognized the rent
and termination fees related to the cancelled leases as an expense
in the current period. As of September 30, 2019, total right-of-use
assets and operating lease liabilities for remaining long term
lease was approximately $576,961 and $586,699, respectively. In the
nine months ended September 30, 2019, the Company recognized
approximately $167,238 in total lease costs for the
lease.
Because
the rate implicit in each lease is not readily determinable, the
Company uses its incremental borrowing rate to determine the
present value of the lease payments.
Information
related to the Company's operating right-of-use assets and related
lease liabilities as of and for the nine months ended September 30,
2019 were as follows:
Cash paid for ROU
operating lease liability
|
$167,238
|
Weighted-average
remaining lease term
|
4 years
|
Weighted-average
discount rate
|
10%
|
Minimum future lease payments as of September
30, 2019
|
|
2019
|
$53,279
|
2020
|
216,300
|
2021
|
222,792
|
2022
|
229,476
|
2023
|
236,352
|
|
958,199
|
Imputed interest
|
(95,820)
|
Total Lease liablity
|
$862,379
|
NOTE 9- ACCOUNTS PAYABLE
Accounts payable were $1,390,381 and $1,054,371 as
of September 30, 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.
The increase relates to inventory purchased at EZ-CLONE for
production for sales during the quarter ended December 31,
2019.
NOTE 10- ACCRUED EXPENSES
Accrued expenses were $417,135 and $261,954 as of September
30, 2019 and December 31, 2018, respectively. Such liabilities
consisted of amounts due to sales tax, payroll and restructuring expense
liabilities.
NOTE 11– CONVERTIBLE NOTES PAYABLE, NET
Convertible
notes payable as of September
30, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% OID Convertible
Promissory Notes
|
$2,362,306
|
$300,977
|
$-
|
$2,663,283
|
7%
Convertible Note
|
270,787
|
29,445
|
-
|
300,232
|
Secured
Advance Note
|
299,195
|
-
|
-
|
299,195
|
|
$2,932,288
|
$330,422
|
$-
|
$3,262,710
|
Convertible
notes payable as of December
31, 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% OID Convertible
Promissory Notes
|
$2,982,299
|
$135,780
|
$-
|
$3,118,079
|
7%
Convertible note
|
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
September 30, 2019, the
outstanding principal on this 7% convertible note was $270,787 and
accrued interest was $29,445, which results in a total liability of
$300,232. The Debt is convertible at the holder’s
option into the Company’s common stock at $.0025 or
approximately 118 million shares.
10% Convertible Promissory Notes
Funding from Chicago Venture Partners, L.P. (“Chicago
Venture”), Iliad Research and Trading, L.P.
(“Iliad”) and Odyssey Research and Trading, LLC,
(“Odyssey”)
As
of December 31, 2018, the
outstanding principal balance due to Chicago Venture and Iliad was
$2,982,299 and accrued interest was $135,780, which results in a
total amount of $3,118,079.
During
the year ended December 31, 2018, Chicago Venture and Iliad
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 and Iliad financing.
As
of September 30, 2019, the
outstanding principal balance due to Chicago Venture, Iliad and
Odyssey was $2,362,306 and accrued interest was $300,977, which
results in a total amount of $2,663,383.
During
the nine months ended September 30, 2019, Chicago Venture and Iliad
converted principal and accrued interest of $1,045,000 into
264,488,842 shares of our common stock at an average per share
conversion price of $.00395 with a fair value of $1,765,395. The
Company recognized $720,375 loss on debt conversions during the
nine months ended September 30, 2019.
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement Odyssey Research and Trading, LLC,
(“Odyssey”)
On July
23, 2019, the Company executed the following agreements with
Odyssey: (i) Securities Purchase Agreement; (ii) Secured Promissory
Notes; and (iii) Security Agreement (collectively the
“Odyssey Agreements”). The Company entered into the
Odyssey Agreements with the intent to acquire working capital to
grow the Company’s businesses.
The
total amount of funding under the Odyssey Agreements is $1,105,000.
The Convertible Promissory Note carries an original issue discount
of $100,000 and a transaction expense amount of $5,000, for total
debt of $1,105,000. The Company agreed to reserve three times the
number of shares based on the redemption value with a minimum of
500 million shares of its common stock for issuance upon conversion
of the Debt, if that occurs in the future. If not converted sooner,
the Debt is due on or before July 22, 2020. The Debt carries an
interest rate of ten percent (10%). The Debt is convertible, at
Odyssey’s option, into the Company’s common stock at
$0.010 per share subject to adjustment as provided for in the
Secured Promissory Notes.
The
Company’s obligation to pay the Debt, or any portion thereof,
is secured by all of the Company’s assets.
The
Company has $659,335 available under the Notes as of September 30,
2019, but cannot access the available funds.
The
Debt is convertible at the holder’s option into
the Company’s common stock at 65% of the lower of the current
fair market value of the stock. Based upon the closing price of the
stock at September 30, 2019, the notes would convert to
approximately 940 million shares.
Secured Advance Note with Crossover Capital Fund I LLC
(“Crossover”)
On
September 20, 2019, the Company closed a Secured Advance Note with
Crossover Capital Fund I LLC (the "Crossover Note"). The Company
entered into the Crossover Note with the intent to acquire working
capital to grow the Company’s businesses. The total amount of
funding under the Crossover Note is $250,000. The Crossover Note
carries an original issue discount of $57,400 and a transaction
expense amount of $7,000, for total debt of $308,400. The Company
agreed to reserve three times the number of shares based on the
conversion value in case of default under the Crossover Note, if
that occurs in the future. The Crossover Note is due in nine months
and is repayable weekly at $9,205. The Crossover Note is
convertible into the Company’s common stock at the market
value share price subject to adjustment as provided for in the
Crossover Note in the case of default. The Company’s
obligation to pay the Crossover Note, or any portion thereof, is
secured by all of the Company’s assets. As of September 30, 2019, the outstanding
principal balance due Crossover was $299,195 and the Company
expensed the original issue discount of $57,400 and a transaction
expense amount of $7,000. The Company also issued 5,000,000 shares
of common stock to Crossover as a commitment fee that was valued at
fair market value at $25,000 or $.005 per share and was expensed
during the nine months ended September 30, 2019.
NOTE 12 – DERIVATIVE LIABILITY
The
Convertible Notes payable include a conversion feature that
pursuant ASC 815 “Derivatives and Hedging”, has
been identified as an embedded derivative financial
instrument and which the Company has elected to account for under
the fair value method of accounting.
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 $1,434,074 as of September 30,
2019. For the nine months ended
September 30, 2019, the Company recorded non-cash income of
$508,730 related to the “change in fair value of
derivative” expense related to the Chicago Venture and Iliad
financing. During the nine months ended September 30, 2019, Chicago
Venture and Iliad converted principal and accrued interest of
$1,045,000 into 264,488,842 shares of our common stock at a per
share conversion price of $.00395 with a fair value of $1,765,395.
The Company recognized $720,355 loss on debt conversions during the
nine months ended September 30, 2019.
Derivative
liability as of September 30,
2019 was as follows:
|
|
|
|
|
|
Fair Value Measurements Using Inputs
|
|
Financial
Instruments
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Derivative
Instruments
|
$-
|
$-
|
$1,434,074
|
$1,434,074
|
|
|
|
|
|
Total
|
$-
|
$-
|
$1,434,074
|
$1,434,074
|
Derivative
liability as of December 31,
2018 was as follows:
|
|
|
|
|
|
Fair Value Measurements Using Inputs
|
|
Financial
Instruments
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Derivative
Instruments
|
$-
|
$-
|
$1,795,747
|
$1,795,747
|
|
|
|
|
|
Total
|
$-
|
$-
|
$1,795,747
|
$1,795,747
|
|
|
|
|
|
The
change in the value of the derivative during 2019 is related solely
to change in fair value. The fair value of the derivative is being
calculated primarily based upon the market value of the underlying
stock and the conversion terms.
NOTE 13 – 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. This issuance was an annual award for independent director
services.
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. This issuance
was an annual award for independent director services.
NOTE 14 – 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 nine months ended September 30, 2019, the Company had
the following issuances of unregistered equity securities to
accredited investors unless otherwise indicated:
During
the nine months ended September 30, 2019, the Company issued
22,183,471 shares to suppliers for services provided. The Company
valued the shares at $174,435 per share or $0.0079.
During
the nine months ended September 30, 2019, Chicago Venture and Iliad
converted principal and accrued interest of $1,045,000 into
264,488,842 shares of our common stock at a per share conversion
price of $.00395 with a fair value of $1,765,395. The Company
recognized $720,375 loss on debt conversions during the nine months
ended September 30, 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. 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 Company recorded a loss on debt conversion
of $1,000,000 during the nine months ended September 30, 2019.
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.
On May
2, 2019, the Company issued 3,916,667 shares valued at $0.006 to a
former employee related to a cashless stock option
exercise.
The
Company issued 5,000,000 shares of common stock to Crossover as a
commitment fee that was valued at fair market value at $25,000 or
$.005 per share and was expensed during the nine months ended
September 30, 2019.
Warrants
The
Company had the following warrant activity during the nine months
ended September 30, 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. 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 Company recorded a loss on debt conversion
of $1,000,000 during the nine months ended September 30, 2019.
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.
A
summary of the warrants issued as of September 30, 2019 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2019
|
902,825,146
|
$0.029
|
Issued
|
-
|
-
|
Exercised
|
-
|
-
|
Forfeited
|
(540,000,000)
|
(0.033)
|
Expired
|
-
|
-
|
Outstanding
at September 30, 2019
|
362,825,146
|
$0.023
|
Exerciseable
at September 30, 2019
|
346,825,146
|
$0.022
|
A
summary of the status of the warrants outstanding as of September
30, 2019 is presented below:
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
-
|
$-
|
-
|
$-
|
55,000,000
|
6.91
|
0.010
|
55,000,000
|
0.010
|
48,000,000
|
5.00
|
0.012
|
32,000,000
|
0.012
|
48,687,862
|
3.33
|
0.050
|
48,687,862
|
0.050
|
211,137,284
|
2.07
|
0.021
|
211,137,284
|
0.021
|
362,825,146
|
3.05
|
$0.023
|
346,825,146
|
$0.022
|
Warrants
had no intrinsic value as of September 30, 2019.
The
warrants were valued using the following assumptions:
Dividend yield
|
0%
|
Expected life
|
1-5 Years
|
Expected volatility
|
70-200%
|
Risk free interest rate
|
0.78-2.6%
|
NOTE 15– 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 nine months ended September 30, 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 April 26, 2019, the Company issued stock option grants to two
employees for 3,000,000 shares of common stock at an
exercise price of $0.010 per share. The stock option grant vests
quarterly over three years and is exercisable for 3 years. The
stock option grants were valued at $3,000.
On
April 2, 2019, the Company amended the exercise price on stock
option grants for five million shares and changed the exercise
price from $0.020 to $0.010 per share.
On May
2, 2019, the Company issued 3,916,667 shares valued at $0.006 to a
former employee related to a cashless stock option exercise. As a
result, a stock option grant for 15,083,333 shares issued at
$0.006.
During the nine months ended September 30, 2019, a stock option
grant for 2,000,000 shares of common stock at an exercise
price of $0.02 per share expired.
As of September 30, 2019, there are 82,500,000 options to purchase
common stock at an average exercise price of $0.0099 per share
outstanding under the 2017 Amended and Restated Stock Incentive
Plan. The Company recorded $48,693 and $29,619 of compensation
expense, net of related tax effects, relative to stock options for
the nine months ended September 30, 2019 and 2018 in accordance
with ASC Topic 505. Net loss per share (basic and diluted)
associated with this expense was approximately ($0.00). As of
September 30, 2019, there is $96,268 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 3.62 years.
Stock option activity for the period ended September 30, 2019 is as
follows:
|
|
|
|
Outstanding as of
January 1, 2019
|
100,000,000
|
$0.0094
|
$940,000
|
Granted
|
3,500,000
|
0.0080
|
34,000
|
Exercised
|
(3,916,667)
|
(0.0060)
|
(23,500)
|
Forfeitures
|
(17,083,333)
|
(0.0076)
|
(130,500)
|
Outstanding as of
September 30, 2019
|
82,500,000
|
$0.0099
|
$820,000
|
|
|
|
|
The following table summarizes information about stock options
outstanding and exercisable at September 30,
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.006
|
12,000,000
|
3.25
|
$0.006
|
8,000,000
|
$0.006
|
0.007
|
10,000,000
|
3.25
|
0.007
|
6,666,667
|
0.007
|
.008-.009
|
2,500,000
|
1.30
|
.008-.009
|
1,583,333
|
0.008
|
0.010
|
20,000,000
|
3.11
|
0.010
|
15,833,333
|
0.010
|
0.012
|
38,000,000
|
4.25
|
0.012
|
12,666,667
|
0.012
|
|
82,500,000
|
3.62
|
$0.010
|
44,750,000
|
$0.009
|
Stock
option grants totaling 82,500,000 shares of common stock no
intrinsic value as of September 30, 2019.
The
stock option grants were valued using the following
assumptions:
Dividend yield
|
0%
|
Expected life
|
1-5 Years
|
Expected volatility
|
70-200%
|
Risk free interest rate
|
0.78-2.6%
|
NOTE 16 – 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.
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.
As of
September 30, 2019, the Company closed retail stores in Portland,
Maine, Encino, California and Calgary, Canada. The Company is
negotiating with the landlords and the Company has recorded
restructuring reserves.
Operating Leases
On May
31, 2019, 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, 2020.
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.
Terminated Leases
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. This lease was terminated effective September 30,
2019.
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. This lease
was terminated effective September 30, 2019 with the expected sale
of the flooring division.
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. This lease was
terminated effective September 30, 2019.
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. This lease was terminated effective September
30, 2019.
NOTE 17 – SUBSEQUENT EVENTS
The Company evaluates subsequent events, for the purpose of
adjustment or disclosure, up through the date the financial
statements are available.
The Company had the following material events subsequent to
September 30, 2019:
On
October 21, 2019 and November 12, 2019, the Company filed
Amendments to Registration Statements on Form S-1 for the
registration of 625 million shares at $0.004 per share or
$2,500,000.
On November 5, 2019, the Company extended the closing of the
remaining EZ-CLONE 49% with one 24.5% shareholder by up to nine
months by agreeing to a 20% extension fee of the $855,000 cash
payment, payable at the earlier of the closing of $2,000,000 in
funding or the nine months. The Company continues to negotiate with
the second shareholder for the remaining 24.5%.
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.
FINANCIAL PERFORMANCE
First,
our year to date revenue was $6.7 million as compared to $2.9
million for nine months ended September 30, 2018. We well outpaced
last year by more than doubling gross revenues.
Next,
gross profits, or revenue after our cost of sales, was reported at
$2.2 million for nine months ended September 30, 2019 as compared
to last year’s $243,000; a 803% year-over-year increase. This
is attributed to the EZ-CLONE business acquisition, which brought
in significantly higher margins along with our continuing GrowLife
business revenue, resulting in blended gross margin of 32.5%, up
from 8.5% during the nine months ended September 3, 2019. As the
EZ-CLONE business represents a greater percentage of our sales, we
expect to see these gross margins increase
further.
Finally,
the Company continues to generate growth by investing in its
EZ-CLONE acquisition, sales and marketing efforts and thus reports
a loss for the nine months ended September 30, 2019. We
believe that expansion spending is necessary in a high-growth
market such as the cannabis, hemp and CBD-related
businesses.
As of
September 30, 2019, we closed retail stores in Portland, Maine,
Encino, California and Calgary, Canada and online sales. Also we
are expecting to close the sale of the flooring division located in
Grand Prairie, Texas. We expect to reduce losses and cash costs by
up to $100,000 per month starting October 1, 2019. As of September
30, 2019, we recorded restructuring expense of $306,000 for the
closure of the flooring division related to the equipment write
down and $250,000 for the closure of the retail stores, related
leases and online sales.
SO WHERE ARE WE INVESTING? CLONING AND CBD
We see
the greatest opportunity for our Company in further positioning
ourselves as the industry leader in plant cloning, and more
specifically, as the leader in cloning of hemp plants grown for CBD
extraction. Hemp production was recently legalized in the United
States, subject to certain federal and state restrictions, creating
a completely new market opportunity where countless farmers are
switching their operations to hemp. Some conservative reports
estimate that more than 500 million hemp plants will be planted in
2019, with farmers looking to grow hemp to provide raw materials to
the exploding CBD market. Unfortunately, a lot of hemp growers do
not understand the intricacies of growing hemp, especially for CBD
extraction. Not all hemp plants can be used to create CBD products.
Plants need to be rich in CBD, not THC, be the correct gender, and
be healthy and large enough to process. In order to achieve this,
the only way to start plants is by using genetically modified and
feminized seeds or through cloning.
To
position as a future industry leader, we believe that we need the
foresight to project the growing hemp and CBD industry of the
future and to stay ahead of trends, and to strategically position
our company accordingly. This includes the booming need for
CBD-rich hemp.
Toward
the end of 2018, we announced the majority acquisition of a company
called EZ-CLONE Enterprises. EZ-CLONE was and is known as the
industry-leading supplier of commercial-grade cloning and
propagation equipment. This was a part of this strategic
positioning plan.
Cannabis
cultivators have been cloning their favorite strains from mother
plants for years, using various methods like tabletop growing.
These methods are extremely labor and space intensive. As the
demand for cannabis and CBD-rich hemp increases through further
legalization, so will the demand for more and more starters,
whether CLONEs or seeds. And while cloning is the preferred method
of production for many growers, cloning can be time and labor
intensive, and takes a lot of space in most grow
facilities.
In late
2017, EZ-CLONE developed its Pro unit, which is one of the largest
and the most efficient cloning systems on the market. It is
commercially scalable and allows cultivators to clone high volumes
of plants, in a short timeframe, as short as 14 days, with the
least amount of human and environmental resources consumed than
ever previously seen. These systems decrease the need for resources
such as labor and planting area, and we estimate that cultivators
reduce their costs by over 20% per plant using CLONEs vs. seed
while simultaneously producing the highest-quality plants possible.
This system is so unique, we recently announced a patent issuance
on this system and hope to secure further intellectual property
protection on EZ-CLONE products in the coming months and
years.
We
believe this illustrates how GrowLife is positioned as an innovator
of this industry-leading cloning solution, to capitalize not only
on the emerging cannabis industry but now the exploding hemp CBD
industry. In just the few months since taking over operations at
EZ-CLONE, we have seen an increase in revenue of over 130% relative
to last year.
In
addition to the Pro unit, the EZ-CLONE product line has systems of
all sizes designed for any size grow room or facility, consumable
products such as rooting compound, and everything needed to operate
these systems. Since our acquisition, we have added a
subscription-based service to provide monthly shipments to
cultivators with everything necessary to CLONE in our systems, as
well as struck a deal with technology company Emerald Metrics to
add spectral imaging add-ons to our Pro systems that allow growers
to see the health of their CLONEs through any computer or mobile
device.
We have
all heard statistics such as the CBD industry will reach $20
billion by 2024. We believe these forecasts could be understated.
Analysts continue to be shocked at the rise of consumer acceptance
of CBD products, and more and more large companies will begin to
debut CBD products, and demand for raw hemp-based CBD will grow
accordingly. Additionally, we are seeing many hemp growers losing
crop viability due to the way they are starting plants, some losing
crops to cross-pollination and some even being burned down by the
DEA when they have too high of levels of THC. We believe this is a
testament as to how much demand for hemp crops will continue to
grow, and growers will continue to search for the best way to grow
hemp to avoid these issues. And I reiterate that cloning is really
the best way to ensure a healthy crop with the proper CBD content.
We plan to be the hemp CBD heroes with our, for lack of a better
word, revolutionary cloning products. We have made strides to reach
hemp farmers and educate them on the benefits of cloning, launching
our resource and sales channel at EZCLONEHemp.com, attending
hemp-focused tradeshows, and ramping up our sales force in
hemp-heavy states where traditional agricultural is making the
switch to hemp.
IN SUMMARY
Moving
forward, we believe there will continue to be innovation in
plant-growing equipment after the planting stage, but this not
involve our present intended operations. We are not going to create
the best LED light, or trimming machine. We are going to stick with
focusing on our core competencies: helping cultivators with
jump-starting their crops, reduce their costs and grow better
plants. We’re going to help them with the equipment needed to
grow their own clones, address innovation in the cloning process
and educate cultivators on the necessity of cloning in order to
maximize yield and grow high CBD strains, and even potentially
provide the clones themselves.
We
believe that through our strategic investment in EZ-CLONE, we have
positioned ourselves very well to capitalize on this expanding
market opportunity. Where EZ-CLONE was able to create a quality
product with steady growth, GrowLife has propelled it into an
international brand being utilized by some of the largest grow
operations in the world.
Recently
we have been investing capital into building out our manufacturing
capacity for the EZ-CLONE product line to prepare for this
continued growth. We currently have a sizable backlog of orders and
need to have the manufacturing capacity to not only fulfill these
orders but keep up with demand. Growth on this scale requires
capital.
Through
a nationwide network of knowledgeable representatives, GrowLife
continues to provide 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.
Please
follow our shareholder updates for more to come on our financing.
If we secure this financing we can then dedicate funds toward
increasing our manufacturing capacity, hiring additional sales and
support staff and actualize on our vision of being the leading
source of plant starters and equipment for the hemp and cannabis
market and meet the demand as it continues to rise.
We
believe with the revenue growth and increased margins described,
our fundamentals are strong, our positioning is focused and
trajectory is encouraging. To put it is simply, we are ready and
prepared to make our place in one of the largest shifts in
mainstream wellness and agriculture in history.
Employees
As of
September 30, 2019, we had
twenty seven 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. We have approximately 13 full and part time employees
located throughout the United States 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 and manufacturers. 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.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.
Acquisition of EZ-CLONE
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 with the delivery of EZ-CLONE common stock 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 November 5, 2019, we extended the closing
of the remaining 49% with one 24.5% shareholder by up to nine
months by agreeing to a 20% extension fee of the $855,000 cash
payment, payable at the earlier of the closing of $2,000,000 in
funding or the nine months. We continue to negotiate with the
second shareholder for the remaining 24.5%.
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 September 30, 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.
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. As of March 4, 2019, the Company
no longer trades on the OTCQB, but is not quoted on the pink sheets
quotation system as a result of the Company’s bid price
closing 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.
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 September 30,
|
|
|
|
|
|
Net
revenue
|
$2,299
|
$954
|
$1,345
|
141.0%
|
Cost of goods
sold
|
1,553
|
899
|
654
|
-72.7%
|
Gross
profit
|
746
|
55
|
691
|
1256.4%
|
General and
administrative expenses
|
1,810
|
1,117
|
693
|
-62.0%
|
Restructuring
expense- flooring division
|
306
|
-
|
306
|
-100.0%
|
Restructuring
expense- retail stores and online sales
|
250
|
-
|
250
|
-100.0%
|
Operating
loss
|
(1,620)
|
(1,062)
|
(558)
|
-52.5%
|
Other income
(expense):
|
|
|
|
|
Change
in fair value of derivative
|
(147)
|
(120)
|
(27)
|
-22.5%
|
Interest
expense, net
|
(183)
|
(366)
|
183
|
50.0%
|
Impairment
of acquired assets
|
-
|
(60)
|
60
|
100.0%
|
Loss on debt
conversions
|
(132)
|
(645)
|
513
|
79.5%
|
Total other
expense, net
|
(462)
|
(1,191)
|
729
|
61.2%
|
Loss before income
taxes
|
(2,082)
|
(2,253)
|
171
|
7.6%
|
Income taxes -
current benefit
|
-
|
-
|
-
|
0.0%
|
Net
loss
|
$(2,082)
|
$(2,253)
|
$171
|
7.6%
|
THREE MONTHS ENDED SEPTEMBER
30, 2019 AS COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 2018
Revenue
Net
revenue for the three months ended September 30, 2019 increased by
$1,345,000 to $2,299,000 from $954,000 for the three months ended
September 30, 2018. The increase resulted from increased sales
personnel and the acquisition of
EZ-CLONE on October 15, 2018. The hydroponics revenue for
the three months ended September 30, 2019 was $1,156,000 as
compared to $855,000 for the three months ended September 30, 2018.
The EZ-CLONE revenue for the three months ended September 30, 2019
was $1,143,000 as compared to $0 for the three months ended
September 30, 2018.
Cost of Goods Sold
Cost of
sales for the three months ended September 30, 2019 increased by
$654,000 to $1,553,000 from $899,000 for the three months ended
September 30, 2018. The increase resulted the acquisition of EZ-CLONE on October 15,
2018.
Gross profit was $746,000 for the three months ended September 30,
2019 as compared to a gross profit of $55,000 for the three months
ended September 30, 2018. The gross profit percentage was 32.4% for
the three months ended September 30, 2019 as compared to 5.8% for
the three months ended September 30, 2018. The increase was
due increased sales, offset by lower cost of sales related to
favorable product mix related to the
acquisition of EZ-CLONE on October 15, 2018. EZ-CLONE
reported a gross profit percentage of
50.4%.
General and Administrative Expenses
General
and administrative expenses for the three months ended September
30, 2019 were $1,810,000 as compared to $1,117,000 for the three
months ended September 30, 2018. The variances were as follows: (i)
an increase in non-cash other expenses of $310,000; (ii) an
increase in EZ-CLONE expenses (primarily payroll and rent) of
$138,000; and (iii) an increase in other expenses of $245,000
(primary payroll and sales and marketing expenses). As part of the
general and administrative expenses for the nine months ended
September 30, 2019, we recorded public relation, investor relation
or business development expenses of $25,000 and $0 respectively.
The increase resulted from increased sales personnel and
the acquisition of EZ-CLONE on October
15, 2018.
Non-cash
general and administrative expenses for the three months ended
September 30, 2019 included non-cash expenses of $310,000 including
(i) depreciation of ($16,000); (ii) amortization of intangible
assets of $285,000; and (iii) stock based compensation of $41,000
related to stock option grants and warrants.
Non-cash
general and administrative expenses for the three months ended
September 30, 2018 were $81,000 including (i) depreciation and
amortization of $19,000; and (ii) stock based compensation of
$62,000 related to stock option grants and warrants.
Restructuring Expense
As of
September 30, 2019, we closed retail stores in Portland, Maine,
Encino, California and Calgary, Canada and online sales. Also we
are expecting to close the sale of the flooring division located in
Grand Prairie, Texas. We expects to reduce losses and cash costs by
up to $100,000 per month starting October 1, 2019. As of September
30, 2019, we recorded restructuring expense of $306,000 for the
sale of the flooring division and $250,000 for the closure of the
retail stores and online sales.
Other Expense
Other
expense for the three months ended September 30, 2019 was $462,000
as compared to other expense of $1,191,000 for the three months
ended September 30, 2018. The other expense for the three months
ended September 30, 2019 included (i) change in derivative
liability of $147,000; (ii) interest expense of $183,000; and (iii)
loss on debt conversions of $132,000. 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 September 30, 2018
included (i) interest expense of $366,000; (ii) loss on debt
conversions of $645,000; (iii) change in fair value of derivative
of $120,000; and impairment of acquired assets of $60,000. 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. The impairment of acquired assets related to the Go Green
acquisition.
Net Loss
Net
loss for the three months ended September 30, 2019 was $2,082,000
as compared to $2,253,000 for the three months ended September 30,
2018 for the reasons discussed above.
Net
loss for the three months ended September 30, 2019 included
non-cash expenses of $1,286,000 including (i) depreciation of
$(15,000); (ii) restructuring reserve- retail stores, on line sales
and flooring division of $555,000; (iii) amortization of intangible
assets of $285,000; (iv) stock based compensation of $41,000
related to stock option grants and warrants; (v) accrued interest
on convertible notes payable of $58,000; (vi) loss on debt
conversions of $132,000; (vii) noncontrolling interest in EZ-CLONE
Enterprises, Inc. of $82,000; and (viii) change in derivative
liability of $148,000.
Net
loss for the three months ended September 30, 2018 included
non-cash expenses of $1,204,000 including (i) depreciation and
amortization of $19,000; (ii) stock based compensation of $62,000
related to stock option grants and warrants; (iii) accrued interest
and amortization of debt discount on convertible notes payable of
$362,000; (iv) loss on debt conversions of $641,000; and offset by
(v) change in derivative liability of $120,000.
We
expect losses to continue as we implement our business
plan.
(dollars in thousands)
|
Nine Months
Ended September 30,
|
|
|
|
|
|
Net
revenue
|
$6,744
|
$2,871
|
$3,873
|
134.9%
|
Cost of goods
sold
|
4,551
|
2,628
|
1,923
|
-73.2%
|
Gross
profit
|
2,193
|
243
|
1,950
|
802.5%
|
General and
administrative expenses
|
5,993
|
3,221
|
2,772
|
-86.1%
|
Restructuring
expense- flooring division
|
306
|
-
|
306
|
-100.0%
|
Restructuring
expense- retail stores and online sales
|
250
|
-
|
250
|
-100.0%
|
Operating
loss
|
(4,356)
|
(2,978)
|
(1,378)
|
-46.3%
|
Other income
(expense):
|
|
|
|
|
Change
in fair value of derivative
|
361
|
1,535
|
(1,174)
|
76.5%
|
Interest
expense, net
|
(410)
|
(1,075)
|
665
|
61.9%
|
Impairment
of acquired assets
|
-
|
(60)
|
60
|
100.0%
|
Loss on debt
conversions
|
(1,706)
|
(5,999)
|
4,293
|
71.6%
|
Total other
expense, net
|
(1,755)
|
(5,599)
|
3,844
|
68.7%
|
Loss before income
taxes
|
(6,111)
|
(8,577)
|
2,466
|
28.8%
|
Income taxes -
current benefit
|
-
|
-
|
-
|
0.0%
|
Net
loss
|
$(6,111)
|
$(8,577)
|
$2,466
|
28.8%
|
NINE MONTHS ENDED SEPTEMBER 30,
2019 AS COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2018
Revenue
Net
revenue for the nine months ended September 30, 2019 increased by
$3,873,000 to $6,744,000 from $2,871,000 for the nine months ended
June 30, 2018. The increase resulted from increased sales personnel
and the acquisition of EZ-CLONE on
October 15, 2018. The hydroponics revenue for the nine
months ended September 30, 2019 was $3,745,000 as compared to
$2,426,000 for the nine months ended September 30, 2018. The
EZ-CLONE revenue for the nine months ended September 30, 2019 was
$2,999,000 as compared to $0 for the nine months ended September
30, 2018.
Cost of Goods Sold
Cost of
sales for the nine months ended September 30, 2019 increased by
$1,923,000 to $4,551,000 from $2,628,000 for the nine months ended
September 30, 2018. The increase resulted from the acquisition of EZ-CLONE on October 15,
2018.
Gross profit was $2,193,000 for the nine months ended September 30,
2019 as compared to a gross profit of $243,000 for the nine months
ended September 30, 2018. The gross profit percentage was 32.5% for
the nine months ended September 30, 2019 as compared to 8.5% for
the nine months ended September 30, 2018. The increase was
due increased sales, offset by lower cost of sales related to
favorable product mix related to 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 nine months ended September 30,
2019 were $5,993,000 as compared to $3,221,000 for the nine months
ended September 30, 2018. The variances were as follows: (i) an
increase in non-cash other expenses of $1,220,000; (ii) an increase
in EZ-CLONE expenses (primarily payroll and rent) of $1,078,000;
and (iii) an increase in other expenses of $474,000 (primary
payroll and sales and marketing expenses). As part of the general
and administrative expenses for the nine months ended September 30,
2019, we recorded public relation, investor relation or business
development expenses of $25,000 and $0 respectively. The increase
resulted from increased sales personnel and the acquisition of EZ-CLONE on October 15,
2018.
Non-cash
general and administrative expenses for the nine months ended
September 30, 2019 included non-cash expenses of $1,220,000
including (i) depreciation of $69,000; (ii) amortization of
intangible assets of $856,000; (iii) stock based compensation of
$121,000 related to stock option grants and warrants; and (iv)
common stock issued for services of $174,000.
Non-cash
general and administrative expenses for the nine months ended
September 30, 2018 were $379,000 including (i) depreciation and
amortization of $50,000; (ii) stock based compensation of $176,000
related to stock option grants and warrants; (iii) common stock
issued for services of $153,000.
Restructuring Expense
As of
September 30, 2019, we closed retail stores in Portland, Maine,
Encino, California and Calgary, Canada and online sales. Also we
are expecting to close the sale of the flooring division located in
Grand Prairie, Texas. We expects to reduce losses and cash costs by
up to $100,000 per month starting October 1, 2019. As of September
30, 2019, we recorded restructuring expense of $306,000 for the
sale of the flooring division and $250,000 for the closure of the
retail stores and online sales.
Other Expense
Other
expense for the nine months ended September 30, 2019 was $1,755,000
as compared to other expense of $5,599,000 for the nine months
ended September 30, 2018. The other expense for the nine months
ended September 30, 2019 included (i) change in derivative
liability of $361,000; offset by (ii) interest expense of $410,000;
and (iii) loss on debt conversions of $1,706,000. 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 nine months ended September 30, 2018 included
(i) interest expense of $1,075,000; (ii) loss on debt conversions
of $5,999,000; (iii) impairment of acquired assets of $60,000; and
offset by (iv) change in fair value of derivative of $1,535,000.
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. The impairment of acquired assets related to the Go
Green acquisition.
Net Loss
Net
loss for the nine months ended September 30, 2019 was $6,111,000 as
compared to $8,577,000 for the nine months ended September 30, 2018
for the reasons discussed above.
Net
loss for the nine months ended September 30, 2019 included non-cash
expenses of non-cash expenses of $3,395,000 including (iii)
depreciation of $69,000; (iv) restructuring reserve- retail stores,
on line sales and flooring division of $555,000; (v) amortization
of intangible assets of $856,000; (vi) stock based compensation of
$121,000 related to stock option grants and warrants; (vii) common
stock issued for services of $174,000; (vii) accrued interest on
convertible notes payable of $185,000; (ix) loss on debt
conversions of $1,707,000; and (x) noncontrolling interest in
EZ-CLONE Enterprises, Inc. of $89,000; offset by (xi) change in
derivative liability of $(361,000).
Net
loss for the nine months ended September 30, 2018 included non-cash
expenses of $5,970,000 including (i) depreciation and amortization
of $50,000; (ii) stock based compensation of $176,000 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 $963,000; and (v)
loss on debt conversions of $6,170,000; offset by (vi) change in
derivative liability of $1,542,000.
We
expect losses to continue as we implement our business
plan.
LIQUIDITY AND CAPITAL RESOURCES
We
adopted the Financial Accounting Standards Board’s
(“FASB”) Accounting Standard Codification
(“ASC”) Topic 205-40, Presentation of Financial
Statements – Going Concern, which requires that management
evaluate whether there are relevant conditions and events that, in
the aggregate, raise substantial doubt about the entity’s
ability to continue as a going concern and to meet its obligations
as they become due within one year after the date that the
financial statements are issued.
The
accompanying financial statements have been prepared assuming that
we will continue as a going concern. However, since inception, we
have sustained significant operating losses and such losses are
expected to continue for the foreseeable future. As of September
30, 2019, we had an accumulated deficit of $$147,198,605, cash and cash equivalents of
$201,072 and a working capital deficit of $494,818, (less
derivative liability, convertible debt, right of use liability and
deferred revenue). Additionally, we used in operating activities
$2,612,125, $3,854,506, and $2,082,493
for the nine months ended September 30, 2019 and the years ended
December 31, 2018 and 2017 respectively. We will require
additional cash funding to fund operations through November 2020.
Accordingly, management has concluded that we do not have
sufficient funds to support operations within one year after the
date the financial statements are issued and, therefore, we
concluded there was substantial doubt about the Company’s
ability to continue as a going concern.
To fund
further operations, we will need to raise additional capital. We
may obtain additional financing in the future through the issuance
of its common stock, or through other equity or debt financings.
Our ability to continue as a going concern or meet the minimum
liquidity requirements in the future is dependent on its ability to
raise significant additional capital, of which there can be no
assurance. If the necessary financing is not obtained or achieved,
we will likely be required to reduce its planned expenditures,
which could have an adverse impact on the results of operations,
financial condition and our ability to achieve its strategic
objective. There can be no assurance that financing will be
available on acceptable terms, or at all. The financial statements
contain no adjustments for the outcome of these uncertainties.
These factors raise substantial doubt about the our ability to
continue as a going concern and have a material adverse effect on
our future financial results, financial position and cash
flows.
Funding Agreements with Chicago Venture Partners, L.P., and Iliad
Research and Trading, L.P and Odyssey Research and Trading,
LLC
On July
23, 2019, we closed the transactions described below with Odyssey
Research and Trading, LLC, a Utah limited liability company
(“Odyssey”).
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement
On July
23, 2019, we executed the following agreements with Odyssey: (i)
Securities Purchase Agreement; (ii) Secured Promissory Notes; and
(iii) Security Agreement (collectively the “Odyssey
Agreements”). The Company entered into the Odyssey Agreements
with the intent to acquire working capital to grow the
Company’s businesses.
The
total amount of funding under the Odyssey Agreements is $1,105,000.
The Convertible Promissory Note carries an original issue discount
of $100,000 and a transaction expense amount of $5,000, for total
debt of $1,105,000. We agreed to reserve three times the number of
shares based on the redemption value with a minimum of 500 million
shares of its common stock for issuance upon conversion of the
Debt, if that occurs in the future. If not converted sooner, the
Debt is due on or before July 22, 2020. The Debt carries an
interest rate of ten percent (10%). The Debt is convertible, at
Odyssey’s option, into the Company’s common stock at
$0.010 per share subject to adjustment as provided for in the
Secured Promissory Notes.
Our
obligation to pay the Debt, or any portion thereof, is secured by
all of our assets.
We have
$659,335 available under the Notes as of September 30, 2019, but
cannot access the available funds.
Secured Advance Note with Crossover Capital Fund I LLC
(“Crossover”)
We
issued 5,000,000 shares of common stock to Crossover as a
commitment fee that was valued at fair market value at $.005 per
share. On September 20,
2019, we closed a Secured Advance Note with Crossover Capital Fund
I LLC. We entered into the Crossover Note with the intent to
acquire working capital to grow our businesses. The total amount of
funding under the Crossover Note is $250,000. The Crossover Note
carries an original issue discount of $57,400 and a transaction
expense amount of $7,000, for total debt of $308,400. We agreed to
reserve three times the number of shares based on the conversion
value in case of default under the Crossover Note, if that occurs
in the future. The Crossover Note is due in nine months and is
repayable weekly at $9,205. The Crossover Note is convertible into
our common stock at market value share subject to adjustment as
provided for in the Crossover Note in the case of default. Our
obligation to pay the Crossover Note, or any portion thereof, is
secured by all of our assets. As of
September 30, 2019, the outstanding principal balance due
Crossover was $299,195 and we expensed the original issue discount
of $57,400 and a transaction expense amount of $7,000. We also
issued 5,000,000 shares of common stock to Crossover as a
commitment fee that was valued at fair market value at $.005 per
share.
Operating Activities
Net
cash used in operating activities for the nine months ended
September 30, 2019 was $2,612,000. This amount was primarily
related to a net loss of $6,023,000 and (i) net working capital of
$16,000; and (ii) non-cash expenses of $3,395,000 including (iii)
depreciation of $69,000; (iv) restructuring reserve- retail stores,
on line sales and flooring division of $555,000; (v) amortization
of intangible assets of $856,000; (vi) stock based compensation of
$121,000 related to stock option grants and warrants; (vii) common
stock issued for services of $174,000; (vii) accrued interest on
convertible notes payable of $185,000; (ix) loss on debt
conversions of $1,707,000; and (x) noncontrolling interest in
EZ-CLONE Enterprises, Inc. of $89,000; offset by (xi) change in
derivative liability of $(361,000).
Investment Activities
Net cash used in investing activities for the nine months
ended September 30, 2019 was $5,000. The amount related to the
investment in purchased assets.
Financing Activities
Net
cash provided by financing activities for the nine months ended
September 30, 2019 was $484,000. The amount related to proceeds
from note payable of $900,000 and proceeds of $250,000 from
Crossover, offset by repayment of convertible notes payable of
$659,000 and repayment of capital lease of $7,000.
Our contractual cash obligations as of September 30, 2019 are
summarized in the table below:
|
|
|
|
|
|
Contractual Cash
Obligations
|
|
|
|
|
|
Operating lease
cash payments
|
$1,119,903
|
$214,983
|
$439,092
|
$465,828
|
$-
|
Convertible notes
payable
|
3,262,710
|
3,262,710
|
-
|
-
|
-
|
Notes payable and
capital leases
|
105,385
|
105,385
|
-
|
-
|
-
|
Acquisition of 49%
of EZ-CLONE Enterprises, Inc.
|
855,000
|
855,000
|
-
|
-
|
-
|
Capital
expenditures
|
300,000
|
100,000
|
100,000
|
100,000
|
-
|
|
$5,642,998
|
$4,538,078
|
$539,092
|
$565,828
|
$-
|
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.