NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
The
accompanying unaudited consolidated condensed financial statements
have been prepared by GrowLife, Inc. (“the Company”,
“us,” “we,” or “our”) in
accordance with U.S. generally accepted accounting principles
(“GAAP”) for interim financial reporting and rules and
regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been
condensed or omitted. In the opinion of our management, all
adjustments, consisting of only normal recurring accruals,
necessary for a fair presentation of the financial position,
results of operations, and cash flows for the fiscal periods
presented have been included.
These
financial statements should be read in conjunction with the audited
financial statements and related notes included in our Annual
Report filed on Form 10-K for the year ended December 31, 2019,
filed with the Securities and Exchange Commission
(“SEC”) on April 1, 2020. The results of operations for
the three or six months ended June 30, 2020 are not necessarily
indicative of the results expected for the full fiscal year, or for
any other fiscal period.
NOTE 1 – DESCRIPTION OF BUSINESS AND
ORGANIZATION
GrowLife,
Inc. (“GrowLife” or the “Company”) is
incorporated under the laws of the State of Delaware and is
headquartered in Kirkland, Washington. The Company was founded in
2012 with the Closing of the Agreement and Plan of Merger with SGT
Merger Corporation.
On June
7, 2013, GrowLife Hydroponics completed the purchase of Rocky
Mountain Hydroponics, LLC, a Colorado limited liability company
(“RMC”), and Evergreen Garden Center, LLC, a Maine
limited liability company (“EGC”). The effective date
of the purchase was June 7, 2013. This is our commercial
business.
The
Company has primarily sold through its wholly owned subsidiary,
GrowLife Hydroponics, Inc. GrowLife companies distribute and sell
over products through its e-commerce distribution channel,
GrowLifeEco.com, and through its direct sales force. GrowLife and
its business units are organized and directed to operate strictly
in accordance with all applicable state and federal
laws.
On
October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-CLONE Enterprises, Inc., a California corporation
(the “Agreement”). 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 is
primarily focused on the sale of the EZ-CLONE
products.
The total purchase price was $4 million of which $1,500,000 is
payable in cash and $2.5 million payable in stock. At closing, we
paid 51% of this amount totaling $2,040,000 via a (i) a cash
payment of $645,000; and (ii) the issuance of 715,385 restricted
shares of our common stock valued $1,395,000. The Agreement called
for the Company, upon delivery of the remaining 49% of EZ Clone
stock, to acquire such stock within one year for $1,960,000,
payable as follows: (i) a cash payment of $855,000; and (ii) the
issuance of Company’s common stock at a value of
$1,105,000.
On
November 5, 2019, the Company amended the Agreement with one 24.5%
shareholder of EZ-CLONE Enterprises, Inc. (“EZ-CLONE”),
to extend the date to purchase the remaining 49% of stock of
EZ-CLONE in exchange for a 20% extension fee (a total of $171,000
for the 49% or $85,500 for each 24.5% shareholder) of the $855,000
cash payable at the earlier of the closing of $2,000,000 in funding
or nine months (July 2020). The Company did not finalize the
settlement of the remaining 49% of stock of EZ-CLONE by the July
2020 deadline and is in discussions with the 24.5% shareholder. As
of June 30, 2020, the Company has recorded a liability of
$2,026,000 for acquisition payable of which a $1,000,000 is payable
in stock and $1,026,000 is payable in cash.
As of March 4, 2019, the Company began to trade on the
Pink
Sheet stocks system. Our
bid price had closed below $0.01 for more than 30 consecutive
calendar days. As of March 17, 2020, the Company
commenced trading on the
OTCQB Market ("OTCQB") after successfully up-listing from the OTC
Pink Market.
On
October 9, 2019, the Company approved the reduction of authorized
capital stock, whereby the total number of the Company’s
authorized common stock decreased from 6,000,000,000 by a ratio of
1 for 50, to 120,000,000 shares. On
November 20, 2019, the Company filed a Certificate of Amendment of
Certificate of Incorporation with the Secretary of State of the
State of Delaware. As a result of the reduction, the Company
an aggregate 130,000,000 authorized shares consisting of: (i)
120,000,000 shares of common stock, par value $0.0001 per share,
and (ii) 10,000,000 shares of preferred stock, par value $0.0001
per share.
The reverse stock split of 1 for 150 was effective at the open of
business on November 27, 2019 whereupon the shares of common stock
began trading on a split-adjusted basis. The Company’s CUSIP
number for the Company’s common stock changed to
39985X203. All
warrant, option, share and per share information in this Form 10-Q
gives retroactive effect to the 1-for-150 reverse split with all
numbers rounded up to the nearest whole share.
NOTE 2 –
GOING CONCERN
The
accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company incurred net losses of $1,904,198 and $7,374,383 and
$11,473,136 for
the six months ended June 30, 2020 and the years
ended December 31, 2019 and 2018, respectively. Net cash used in
operating activities was $905,804, $2,909,811 and $3,854,505 for
the six months ended June 30, 2020 and the years ended December 31,
2019 and 2018, respectively.
The
Company anticipates that it will record losses from operations for
the foreseeable future. As of June 30, 2020, the Company’s
accumulated deficit was $150,365,730. The Company has limited
capital resources, and operations to date have been funded with the
proceeds from private equity and debt financings. These conditions
raise substantial doubt about our ability to continue as a going
concern. The audit report prepared by the Company’s
independent registered public accounting firm relating to our
consolidated financial statements for the year ended December 31,
2019 includes an explanatory paragraph expressing the substantial
doubt about the Company’s ability to continue as a going
concern.
The
Company believes that its cash on hand will be sufficient to fund
our operations only until September 30, 2020. The Company needs additional financing to
implement our business plan and to service our ongoing operations
and pay our current debts. There can be no assurance that we will
be able to secure any needed funding, or that if such funding is
available, the terms or conditions would be acceptable to us. If we
are unable to obtain additional financing when it is needed, we
will need to restructure our operations, and divest all or a
portion of our business. We may seek additional
capital through a combination of private and public equity
offerings, debt financings and strategic collaborations. Debt
financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to the
Company’s then-existing stockholders and/or require such
stockholders to waive certain rights and preferences. If such
financing is not available on satisfactory terms, or is not
available at all, the Company may be required to delay, scale back,
eliminate the development of business opportunities or file for
bankruptcy and our operations and financial condition may be
materially adversely affected.
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. Non-controlling interest represents the portion of
ownership which the Company does not own.
Cash and Cash Equivalents - We
classify highly liquid temporary investments with an original
maturity of three months or less when purchased as cash
equivalents. The Company maintains cash balances at various
financial institutions. Balances at US banks are insured by the
Federal Deposit Insurance Corporation up to $250,000. The Company
has not experienced any losses in such accounts and believes it is
not exposed to any significant risk for cash on
deposit. At June 30, 2020, the Company had uninsured
deposits in the amount of $274,098.
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. Our EZ-CLONE sales
include credit cash, payments in advance, 3% discount upon receipt
and, we extend thirty day terms to select 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 June 30, 2020 and December 31, 2019,
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. 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.
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.
Goodwill –
The Company reviews its acquired goodwill for impairment annually
or more frequently if events or changes in circumstances indicate
that the carrying amount may not be recoverable. In reviewing its
goodwill, the Company performs a qualitative analysis to determine
if it is more-likely-than-not that the goodwill is impaired. If the
qualitative analysis indicates that goodwill is likely impaired,
the Company calculates the fair value of its goodwill by allocating
the fair value of the business unit containing the goodwill to all
its tangible and intangible assets and liabilities, with the
residual fair value allocated to goodwill. The excess, if any, of
the goodwill carrying value in excess of its fair value would be
recognized as an impairment loss. Management has concluded that,
based on a qualitative analysis, it is more-likely-than-not that
goodwill has not been impaired as of June 30, 2020 and
December 31, 2019.
Fair Value Measurements and Financial Instruments
– ASC Topic 820, Fair Value Measurement and Disclosures,
defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. This topic also establishes a fair
value hierarchy, which requires classification based on observable
and unobservable inputs when measuring fair value. The
fair value hierarchy distinguishes between assumptions based on
market data (observable inputs) and an entity’s own
assumptions (unobservable inputs). The hierarchy
consists of three levels:
Level 1
– Quoted prices in active markets for identical assets and
liabilities;
Level 2
– Inputs other than level one inputs that are either directly
or indirectly observable; and.
Level 3
- Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
The
recorded value of other financial assets and liabilities, which
consist primarily of cash and cash equivalents, accounts
receivable, other current assets, and accounts payable and accrued
expenses approximate the fair value of the respective assets and
liabilities as of June 30, 2020 and December 31, 2019 are based
upon the short-term nature of the assets and
liabilities.
Derivative Financial Instruments –Pursuant to ASC 815
“Derivatives and Hedging”, the Company evaluates all of
its financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded
derivatives. The Company then determines if embedded derivative
must bifurcated and separately accounted for. 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
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 – We have share-based compensation plans
under which employees, consultants, suppliers and directors may be
granted restricted stock, as well as options to purchase shares of
our common stock at the fair market value at the time of grant.
Stock-based compensation cost is measured by us at the grant date,
based on the fair value of the award, over the requisite service
period using an estimated forfeiture rate. For options issued to
employees, we recognize stock compensation costs utilizing the fair
value methodology over the related period of
benefit. Grants of stock options and stock to
non-employees and other parties are accounted for in accordance
with the ASC 718.
Convertible Securities –
Based upon ASC 815-15, we have adopted a sequencing approach
regarding the application of ASC 815-40 to convertible securities
issued subsequent to September 30, 2015. We will evaluate our
contracts based upon the earliest issuance
date.
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 because their impact is
antidilutive.
As of
June 30, 2020, there are also (i) stock option grants outstanding
for the purchase of 513,333 common shares at an $1.494 average
exercise price; and (ii) warrants for the purchase of 2,418,680 shares of common shares at a
$3.465 average exercise price. In
addition, we have an unknown number of common shares to be issued
under the Crossover and 12% convertible promissory note 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
June 30, 2019, there are also (i) stock option grants outstanding
for the purchase of 550,000
common shares at a $1.491 average exercise price; (ii) warrants for
the purchase of 2,418,680
common shares at a $3.465 average exercise price; and (iii)
770,002 shares related to convertible debt that can be
converted at $0.38 per share.
In addition, we have an unknown number of common shares to be
issued under the Chicago Venture, Iliad and St. George financing
agreements because the number of shares ultimately issued to
Chicago Venture depends on the price at which Chicago Venture
converts its debt to shares and exercises its warrants. The lower
the conversion or exercise prices, the more shares that will be
issued to Chicago Venture upon the conversion of debt to shares. We
will not know the exact number of shares of stock issued to Chicago
Venture until the debt is actually converted to
equity.
Dividend Policy - The Company
has never paid any cash dividends and intends, for the foreseeable
future, to retain any future earnings for the development of our
business. Our future dividend policy will be determined by the
board of directors on the basis of various factors, including our
results of operations, financial condition, capital requirements
and investment opportunities.
Use of Estimates - In preparing these consolidated financial
statements in conformity with GAAP, management is required to make
estimates and assumptions that may affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the consolidated financial statements
and the reported amount of revenues and expenses during the
reporting periods. Actual results could differ from those
estimates. Significant estimates and assumptions included in our
consolidated financial statements relate to the valuation of
long-lived assets, estimates of sales returns, inventory reserves
and accruals for potential liabilities, and valuation assumptions
related to derivative liability, equity instruments and share based
compensation.
Recent Accounting Pronouncements
A variety of proposed or otherwise potential accounting standards
are currently under study by standard setting organizations and
various regulatory agencies. Due to the tentative and preliminary
nature of those proposed standards, management has not determined
whether implementation of such proposed standards would be material
to the Company’s consolidated financial
statements.
NOTE 4 –BUSINESS COMBINATIONS, ACQUISITION PAYABLE AND OTHER
TRANSACTION
Acquisition of EZ-CLONE Enterprises, Inc.
On
October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-CLONE Enterprises, Inc., a California corporation
(the “Agreement”). 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 is
primarily focused on the sale of the EZ-CLONE
products.
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 total purchase price was $4 million of which $1,500,000 is
payable in cash and $2.5 million payable in stock. At closing, we
paid 51% of this amount totaling $2,040,000 via a (i) a cash
payment of $645,000; and (ii) the issuance of 715,385 restricted
shares of our common stock valued $1,395,000. The Agreement called
for the Company, upon delivery of the remaining 49% of EZ Clone
stock, to acquire such stock within one year for $1,960,000,
payable as follows: (i) a cash payment of $855,000; and (ii) the
issuance of Company’s common stock at a value of
$1,105,000.
On
November 5, 2019, the Company amended the Agreement with one 24.5%
shareholder of EZ-CLONE Enterprises, Inc. (“EZ-CLONE”),
to extend the date to purchase the remaining 49% of stock of
EZ-CLONE in exchange for a 20% extension fee (a total of $171,000
for the 49% or $85,500 for each 24.5% shareholder) of the $855,000
cash payable at the earlier of the closing of $2,000,000 in funding
or nine months (July 2020). The Company did not finalize the
settlement of the remaining 49% of stock of EZ-CLONE by the July
2020 deadline and is in discussions with the 24.5% shareholder. As
of June 30, 2020, the Company has recorded a liability of
$2,026,000 for acquisition payable of which a $1,000,000 is payable
in stock and $1,026,000 is payable in cash.
The
Company accounted for the acquisition in accordance with ASC 805,
“Business Combinations”. ASC 805 defines the acquirer
in a business combination as the entity that obtains control of one
or more businesses in a business combination and establishes the
acquisition date as the date that the acquirer achieves control.
ASC 805 requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values as
of that date.
For
accounting purposes, from the October 15, 2018 acquisition date and
through September 30, 2019, the Company has consolidated EZ Clone
given their control and have treated its ability to acquire the
remaining 49% interest in EZ Clone as a de facto option to buy and
has thus categorized it as non-controlling until November 5, 2019
when the amended purchase agreement obligates the Company to
purchase the remaining 49%. Effective in the quarter beginning
October 1, 2019, the Company for accounting purposes, considers EZ
Clone to be 100% owned and thus eliminated the non-controlling
interest and recorded an acquisition payable related to the balance
owed. As of December 31, 2019, the Company has an acquisition
payable totaling $1,926,000, of which $1,026,000 is current and
$900,000 is categorized as long term since stock is expected to be
issued to settle this and will not utilize current assets. The
total liability consists of the discounted value of the future
payments of $1,960,000 and the $171,000 extension fee payable. The
Company will accrete the difference between the carrying value of
the acquisition payable and the contractual obligations as interest
expense through July 2020 when payment is due. The Company recorded
the $171,000 as a financing fee and expensed it as interest expense
in 2019. During the fourth quarter of 2019, the Company recorded a
noncash financing charge as interest expense totaling approximately
$410,000 to recognize the acquisition payable and to eliminate the
non-controlling interest.
As of
the acquisition date in October 2018, the Company recognized
approximately $3.4 million of intangible assets and began
amortizing them over 3 years. In the fourth quarter of 2019, the
Company completed its evaluation of assets acquired and finalized
its asset valuation. The finalized valuation resulted in lower
intangible assets from the original assessment, allocating some of
the intangible to Goodwill and determined that the life of definite
life intangibles to be 5 years (See Note 7). The Company adjusted
the cost basis and accumulated amortization, reducing both, but did
not change 2019 amortization expense that had been recorded through
September 30, 2019 which was in excess of $800,000.The change in
the purchase accounting also resulted in the recording of a
deferred tax liability and the lowering of non-controlling interest
by $587,750 and such reclassification was made to the December 31,
2018 balance sheet. During the six months ended June 30, 2020, the
Company recorded a tax benefit of $58,885 related to book versus
tax basis difference from the purchase accounting.
The
summary of assets acquired and liabilities assumed is based upon
the Company final evaluation done in the fourth quarter of 2019 and
is detailed below.
|
Intangible
assets
|
$2,351,000
|
|
Goodwill
|
781,749
|
|
Net working
capital
|
551,000
|
|
Propety and
equipment
|
318,000
|
|
Deferred tax
liability
|
(587,750)
|
|
|
$3,413,999
|
The fair value of the intangible assets associated with the assets
acquired was $2,351,000 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 5 – INVENTORY
Inventory
as of June 30, 2020 and December 31, 2019 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
$467,941
|
$329,482
|
|
Work
in process
|
50,523
|
49,253
|
|
Finished
goods
|
11,164
|
92,703
|
|
Inventory
deposits
|
148,591
|
129,236
|
|
Total
|
$678,219
|
$600,674
|
Raw
materials consist of supplies for product lines at
EZ-CLONE.
Finished
goods inventory relates to product lines EZ- CLONE.
NOTE 6 – PROPERTY AND EQUIPMENT
Property
and equipment as of June 30, 2020 and December 31, 2019 consists of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery,
equipment and tooling
|
$356,867
|
$356,867
|
|
Computer
equipment
|
16,675
|
16,675
|
|
Leasehold
improvements
|
14,702
|
14,702
|
|
Total
property and equipment
|
388,244
|
388,244
|
|
Less
accumulated depreciation and amortization
|
(240,338)
|
(221,763)
|
|
Net
property and equipment
|
$147,906
|
$166,482
|
Total depreciation expense was $18,576 and $50,857 for the six months ended June 30, 2020
and 2019, 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.
NOTE 7 – INTANGIBLE
ASSETS
Intangible assets as of June 30, 2020 and December 31, 2019
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Customer
Lists
|
5 Years
|
$1,297,000
|
$1,297,000
|
|
Intellectual
Property
|
5 Years
|
1,054,000
|
1,054,000
|
|
less accumulated
amortization
|
|
(884,424)
|
(548,566)
|
|
Net Intangible
assets-definitive life
|
|
1,466,576
|
1,802,434
|
|
|
|
|
|
|
Goodwill-indefinite
life
|
N/A
|
781,749
|
781,749
|
|
|
|
|
|
|
Total intangible
assets and goodwill
|
|
$2,248,325
|
$2,584,183
|
As of
the acquisition date in October 2018, the Company originally
recognized approximately $3.4 million of intangible assets and
began amortizing them over 3 years. In the fourth quarter of 2019,
the Company completed its evaluation of assets acquired and
finalized its asset valuation. The finalized valuation resulted in
lower intangible assets from the original assessment, allocated
some of the intangible to Goodwill and determined that the life of
definite life intangibles to be 5 years. In the 4th quarter of 2019,
The Company adjusted the cost basis and accumulated amortization,
reducing both, but did not change 2019 amortization expense that
had been recorded through September 30, 2019 which was in excess of
$800,000. .
Total amortization expense was $335,858 and $570,513 for the six months ended June 30, 2020 and 2019,
respectively.
NOTE 8- LEASES
The
Company previously 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 December
31, 2018 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 December 31,
2018 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 $1,378,000
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 three months ended September 30, 2019
the Company 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 June 30, 2020 and December 31, 2019,
total right-of-use assets and operating lease liabilities for
remaining long term lease was approximately $460,404 and $481,120,
respectively. During the six months ended June 30, 2020 and 2019,
the Company recognized approximately $111,492 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 six months ended June 30, 2020
were as follows:
Cash paid for ROU
operating lease liability $105,000
Weighted-average
remaining lease term 3 years
Weighted-average
discount rate 10%
|
Year
Ended
|
|
|
June
30,
|
|
|
2021
|
$216,300
|
|
2022
|
222,792
|
|
2023
|
159,090
|
|
|
|
|
|
598,182
|
|
Imputed
interest
|
(117,062)
|
|
Total lease
liability
|
$481,120
|
NOTE 9- ACCOUNTS PAYABLE
Accounts payable were $1,101,032 and $1,157,090 as
of June 30, 2020 and
December 31, 2019, respectively. Such liabilities consisted of
amounts due to vendors for inventory purchases, audit, legal and
other expenses incurred by the Company.
NOTE 10- ACCRUED EXPENSES
Accrued expenses were $223,259 and $259,093 as of June 30, 2020 and December
31, 2019, respectively. Such liabilities consisted of amounts due
to sales tax, payroll and
restructuring expense liabilities. 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 of
$209,577 as of June 30, 2020 and December 31, 2020,
respectively.
NOTE 11 – CONVERTIBLE NOTES PAYABLE AND NOTES
PAYABLE
Convertible
notes payable as of June 30,
2020 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes
Payable-
|
|
|
|
|
|
10% OID Convertible
Promissory Notes
|
$2,350,007
|
$360,226
|
$-
|
$2,710,233
|
|
Secured Advance
Note
|
148,082
|
-
|
-
|
148,082
|
|
12% Convertible
Promissory Notes
|
199,100
|
4,628
|
(10,690)
|
193,038
|
|
|
$2,697,189
|
$364,854
|
$(10,690)
|
$3,051,353
|
Convertible
notes payable as of December
31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertile
Notes Payable-
|
|
|
|
|
|
10% OID Convertible
Promissory Notes
|
$2,195,007
|
$220,980
|
$-
|
$2,415,987
|
|
Secured
Advance Note
|
205,228
|
-
|
-
|
205,228
|
|
12%
Convertible Promissory Notes
|
281,600
|
3,055
|
(21,591)
|
263,064
|
|
|
$2,681,835
|
$224,035
|
$(21,591)
|
$2,884,279
|
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”). The Company typically issues original
issuance discount notes with these parties that has a stated
interest rate of typically 10%. Accrued interest represents the
interest to be accreted over the remaining term of the notes. These
notes contain terms and conditions that are deemed beneficial
conversion features and the Company recognizes a derivative
liability related to these terms until the notes are converted.
Upon the conversion of these notes, the Company records a loss on
debt conversion and reduces their derivative liability. The notes
may be converted to common stock after six months until they are
converted.
As
of December 31, 2019, the
outstanding principal balance due to Chicago Venture, Iliad and
Odyssey was $2,195,007 and accrued interest was $220,980, which
results in a total amount of $2,415,987.
During
the year ended December 31, 2019, Chicago Venture and Iliad
converted principal and accrued interest of $1,357,872 into
3,120,521 shares of our common stock at a per share conversion
price of $0.766 with a fair value of $2,284,081. The Company
recognized $926,208 loss on debt conversions during the year ended
December 31, 2019.
As
of June 30, 2020, the
outstanding principal balance due to Chicago Venture, Iliad and
Odyssey was $2,350,007 and accrued interest was $360,226, which
results in a total amount of $2,710,233.
During
the six months ended June 30, 2020, the Company received loans of
$500,000 from Chicago Venture. Also, Chicago Venture converted
principal and accrued interest of $400,000 into 2,963,118 shares of
our common stock at a per share conversion price of $0.135 with a
fair value of $605,608. The Company recognized $205,608 loss on
debt conversions during the six months ended June 30,
2020.
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement with Chicago Venture Partners, L.P (Chicago
Venture)
On January 30, 2020, the Company executed the following agreements
with Chicago Venture: (i) Securities Purchase Agreement; (ii)
Secured Convertible Promissory Notes (“Notes”); and
(iii) Security Agreement (collectively the “Chicago Venture
Agreements”). The Company entered into the Chicago Venture
Agreements with the intent to acquire working capital to grow the
Company’s businesses.
The total amount of funding under the CVP Agreements is $500,000 in
various tranches. The Notes carry an original issue discount of
$50,000 and a transaction expense amount of $5,000, for total debt
of $555,000 (“Debt”). The Company agreed to reserve
53,333 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 January 29, 2021. The Debt carries an
interest rate of ten percent (10%). The Debt is convertible, at
CVP’s option, into the Company’s common stock at $0.30
per share subject to adjustment as provided for in the Notes. The
Company received approximately $500,000 of funding under the
Chicago Venture agreements in 2020.
The Company’s obligation to pay the Debt, or any portion
thereof, is secured by all of the Company’s
assets.
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.
On December 22, 2019, the Note increased by $25,700. The original
issue discount was immediately recorded as interest expense due to
the note maturity being less than one year. 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 December
31, 2019, the outstanding principal balance due Crossover
was $205,228. The Company also issued 33,333 shares of common stock
to Crossover as a commitment fee that was valued at fair market
value at $25,000 or $0.75 per share and expensed as interest
expense during the year ended December 31, 2019.
On
January 14, 2020, the Note increased by $25,700. As of June 30, 2020, the outstanding principal
balance due Crossover was $148,802. The Company is behind on the
weekly payments under this Note as of June 30, 2020.
12% Convertible Promissory Notes
The
Company entered into Convertible Promissory Notes with PowerUp
Lending Group Ltd on November 18, 2019 for $140,800 to fund
short-term working capital. The Notes accrues interest at a rate of
12% per annum and became due in one year and are convertible into
common stock at 75% of market value after six
months. The Company received cash of $125,000, and
recorded interest expense of $2,037, a transaction expense amount
of $3,000 and amortization of debt discount of $15,191. The Company
recorded as interest expense in 2019 the value of the beneficial
conversion feature of $46,933 related to the potential conversion
at a discount after six months. During the six months ended June
30, 2020, the Company recorded interest expense of $5,643 and
amortization of debt discount of $10,409. During the six months
ended June 30, 2020, the Company issued 1,004,625 shares of the
Company’s common stock at $0.148 related to conversion of
principal and interest under the $140,800 Promissory
Note.
The
Company entered into Convertible Promissory Notes with PowerUp
Lending Group Ltd on December 9, 2019 for $140,800 to fund
short-term working capital. The Notes accrues interest at a rate of
12% per annum and became due in one year and are convertible into
common stock at 75% of market value after six
months. The Company received cash of $125,000, and
recorded interest expense of $1,018, a transaction expense amount
of $3,000 and amortization of debt discount of $14,418. The Company
recorded as interest expense in 2019 the value of the beneficial
conversion feature of $46,933 related to the potential conversion
at a discount after six months. During the six months ended June
30, 2020, the Company recorded interest expense of $22,001 and
amortization of debt discount of $11,182. During the six months
ended June 30, 2020, the Company repaid $85,000 and issued 628,659
shares of the Company’s common stock at $0.125 related to
conversion of principal and interest under the remaining $78,819
Promissory Note.
The
Company entered into Convertible Promissory Note with PowerUp
Lending Group Ltd on January 14, 2020 for $58,300 to fund
short-term working capital. The Notes accrues interest at a rate of
12% per annum and became due in one year and are convertible into
common stock at 75% of market value after six
months. The Company received cash of $50,000, and
recorded interest expense of $1,495, a transaction expense amount
of $3,000 and amortization of debt discount of $5,300. The Company
recorded as interest expense in the six months ended June 30, 2020
the value of the beneficial conversion feature of $5,300. related
to the potential conversion at a discount after six
months.
The
Company entered into Convertible Promissory Notes with PowerUp
Lending Group Ltd on June 1, 2020 for $140,800 to fund short-term
working capital. The Notes accrues interest at a rate of 12% per
annum and became due in one year and are convertible into common
stock at 75% of market value after six
months. The Company received cash of $125,000, and
recorded interest expense of $1,389, a transaction expense amount
of $3,000 and amortization of debt discount of $14,910. The Company
recorded as interest expense in 2020 the value of the beneficial
conversion feature of $46,933 related to the potential conversion
at a discount after six months.
During
the six months ended June 30, 2020, PowerUp Lending Group Ltd
converted principal and accrued interest of $227,299 into 1,633,284
shares of our common stock at an average per share conversion price
of $0.139 with a fair value of $313,003. The Company recognized
$85,704 loss on debt conversions during the six months ended June
30, 2020.
Notes Payable
Notes
payable as of June 30, 2020
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
Payable-
|
|
|
|
|
|
1% Note Payble
under Paycheck Protection Program
|
$565,829
|
$1,104
|
$-
|
$566,933
|
|
3.75% Economic
Injury Disaster Loan
|
299,800
|
9
|
-
|
299,809
|
|
Parties related to
shareholders of EZ-CLONE Enterprises, Inc.
|
104,144
|
-
|
-
|
104,144
|
|
|
$969,773
|
$1,113
|
$-
|
$970,886
|
Notes
payable as of December 31, 2019
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
Payable-
|
|
|
|
|
|
Parties related to
shareholders of EZ-CLONE Enterprises, Inc.
|
$104,144
|
$-
|
$-
|
$104,144
|
On April 17, 2020, the Company received $362,500 under the
Paycheck Protection Program of the U.S. Small Business
Administration’s 7(a) Loan Program pursuant to the
Coronavirus, Aid, Relief and Economic Security Act (CARES
Act), Pub. Law 116-136, 134 Stat. 281 (2020). During the six months
ended June 30, 2020, the Company recorded interest expense of $775
at 1%. The Company is utilizing the funds in accordance with the
legal requirements and expects this loan to be forgiven during
2020.
On May 7, 2020, EZ-CLONE received $203,329 under the
Paycheck Protection Program of the U.S. Small Business
Administration’s 7(a) Loan Program pursuant to the
Coronavirus, Aid, Relief and Economic Security Act (CARES
Act), Pub. Law 116-136, 134 Stat. 281 (2020). During the six months
ended June 30, 2020, the Company recorded interest expense of $329
at 1%. The Company is utilizing the funds in accordance with the
legal requirements and expects this loan to be forgiven during
2020.
On June
19, 2020, The Company received $299,800 under the Economic Injury
Disaster Loan Program of the U.S. Small Business
Administration’s 7(a) Loan Program pursuant to the
Coronavirus, Aid, Relief and Economic Security Act (CARES Act),
Pub. Law 116-136, 134 Stat. 281 (2020). Repayment terms on the
loans are over a 30-year term at 3.75%. In addition, the loan
contains a 12-month payment deferral beginning on the loan date.
There is no prepayment penalty on an EIDL loan. During the six
months ended June 30, 2020, the Company recorded interest expense
of $370. These loans were long term as of June 30,
2020.
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 accounts 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 $1.35
requiring the conversion feature to be bifurcated from the host
debt contract and accounting for separately as a derivative,
resulting in periodic revaluations. The notes underlying the
derivatives are short term in nature and generally converted to
stock in less than one year. The derivative is valued at period end
with the key inputs being current stock price and the conversion
feature.
There
was a derivative liability of $1,459,256 and $1,300,915 as of June
30, 2020 and December 31, 2019, respectively. For the six months ended June 30, 2020
and 2019, the Company recorded non-cash expense $158,441 and
non-cash income of $508,730 related to the “change in fair
value of derivative” expense related to the Chicago Venture
and Iliad financing. These were the only changes in level 3 fair
value instruments during such periods.
Derivative
liability as of June 30, 2020
was as follows:
|
|
|
|
|
|
|
|
Fair Value Measurements Using Inputs
|
|
|
Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative
Instruments
|
$-
|
$-
|
$1,459,357
|
$1,459,357
|
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$1,459,357
|
$1,459,357
|
Derivative
liability as of December 31,
2019 was as follows:
|
|
|
|
|
|
|
|
Fair Value Measurements Using Inputs
|
|
|
Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative
Instruments
|
$-
|
$-
|
$1,300,915
|
$1,300,915
|
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$1,300,915
|
$1,300,915
|
NOTE 13 – RELATED PARTY
TRANSACTIONS AND CERTAIN RELATIONSHIPS
Since
January 1, 2019, the Company engaged in the following reportable
transactions with our directors, executive officers, holders of
more than 5% of our voting securities, and affiliates or
immediately family members of our directors, executive officers and
holders of more than 5% of our voting securities.
Certain Relationships
Please
see the transactions with Chicago Venture Partners, L.P. discussed
in Notes 11 and 12.
Related Party Transactions
Transactions with Katherine McLain
On
February 22, 2019, the Company issued 54,054 shares of the
Company’s common stock to Katherine McLain valued at $1.11
per share or $60,000. This issuance was an annual award for
independent director services. On April 16, 2020, the Company
issued 20,000 shares of the Company’s common stock to
Katherine McLain valued at $0.295 per share or $5,900. This
issuance was an annual award for independent director
services.
Transaction with Thom Kozik
On
February 22, 2019, the Company issued 54,054 shares of the
Company’s common stock to Mr. Kozik valued at $1.11 per share
or $60,000. On April 16, 2020, the Company issued 20,000 shares of
the Company’s common stock to Thom Kozik valued at $0.295 per
share or $5,900. This issuance was an annual award for independent
director services.
Notes Payable to Related Parties
EZ-CLONE
has $104,144 due to relatives of the two selling shareholders as of
June 30, 2020 and December 31, 2019, respectively.
NOTE 14 – EQUITY
Authorized Capital Stock
On
October 9, 2019, the Company approved the reduction of authorized
capital stock, whereby the total number of the Company’s
authorized common stock decreased from 6,000,000,000 by a ratio of
1 for 50, to 120,000,000 shares. On
November 20, 2019, the Company filed a Certificate of Amendment of
Certificate of Incorporation with the Secretary of State of the
State of Delaware. As a result of the reduction, we have an
aggregate 130,000,000 authorized shares consisting of: (i)
120,000,000 shares of common stock, par value $0.0001 per share,
and (ii) 10,000,000 shares of preferred stock, par value $0.0001
per share.
The reverse stock split of 1 for 150 was effective at the open of
business on November 27, 2019 whereupon the shares of the
Company’s common stock began trading on a split-adjusted
basis. Our CUSIP number will change to 39985X203.
Non-Voting Preferred Stock
Under
the terms of our articles of incorporation, our board of directors
is authorized to issue shares of non-voting preferred stock in one
or more series without stockholder approval. Our 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 our board of directors to issue non-voting
preferred stock and determine our 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.
Capital Stock Issued and Outstanding
As
of June 30, 2020, the Company had issued and outstanding
securities of 33,313,718 shares of common stock.
Voting Common Stock
Holders
of the Company’s common stock are entitled to one vote for
each share held on all matters submitted to a vote of stockholders
and do not have cumulative voting rights. An election of directors
by our stockholders shall be determined by a plurality of the votes
cast by the stockholders entitled to vote on the election. On all
other matters, the affirmative vote of the holders of a majority of
the stock present in person or represented by proxy and entitled to
vote is required for approval, unless otherwise provided in our
articles of incorporation, bylaws or applicable law. Holders of
common stock are entitled to receive proportionately any dividends
as may be declared by our board of directors, subject to any
preferential dividend rights of outstanding preferred
stock.
In the
event of our liquidation or dissolution, the holders of common
stock are entitled to receive proportionately all assets available
for distribution to stockholders after the payment of all debts and
other liabilities and subject to the prior rights of any
outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The
rights, preferences and privileges of holders of common stock are
subject to and may be adversely affected by the rights of the
holders of shares of any series of preferred stock that we may
designate and issue in the future.
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 six months ended June 30, 2020, the Company had the
following issuances of unregistered equity securities to accredited
investors unless otherwise indicated:
Chicago
Venture converted principal and accrued interest of $400,000 into
2,963,118 shares of our common stock at a per share conversion
price of $0.135.
PowerUp
converted principal and accrued interest of $227,299 into 1,633,284
shares of the Company’s common stock at an average per share
conversion price of $0.139.
The
Company issued 15 shares related to a reverse stock
split.
The
Company issued 154 shares of common stock related to the exercise
of warrants for $485, or $3.151 per share.
On
April 16, 2020, the Company issued 20,000 shares of the
Company’s common stock each to Katherine McLain and Thom
Kozik, directors valued at $0.295 per share or $5,900. This
issuance was an annual award for independent director
services.
Warrants
The
Company no warrant activity during the six months ended June 30,
2020.
A
summary of the warrants issued as of June 30, 2020 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2020
|
2,418,834
|
$3.465
|
|
Issued
|
-
|
$-
|
|
Exercised
|
(154)
|
$(3.151)
|
|
Forfeited
|
-
|
$-
|
|
Expired
|
-
|
$-
|
|
Outstanding
at June 30, 2020
|
2,418,680
|
$3.465
|
|
Exerciseable
at June 30, 2020
|
2,312,168
|
$-
|
A
summary of the status of the warrants outstanding as of June 30,
2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
366,667
|
6.16
|
$1.500
|
366,667
|
$1.500
|
|
320,000
|
4.35
|
1.800
|
213,333
|
1.800
|
|
1,407,428
|
1.33
|
3.150
|
1,407,582
|
3.150
|
|
324,586
|
2.58
|
7.500
|
324,586
|
7.500
|
|
-
|
-
|
-
|
-
|
-
|
|
2,418,680
|
2.27
|
$3.465
|
2,312,168
|
$3.374
|
Warrants
had no intrinsic value as of June 30, 2020.
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
The
Company has 1,333,333 shares available for issuance under the First
Amended and Restated 2017 Stock Incentive Plan. The Company has
outstanding unexercised stock option grants totaling 513,333 shares
at an average exercise price of $1.494 per share as of June 30,
2020. The Company filed registration statements on Form S-8 to
register 1,333,333 shares of our common stock related to the 2017
Stock Incentive Plan and First Amended and Restated 2017 Stock
Incentive Plan.
Determining Fair Value under ASC 718
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
The Company had the following stock option transactions during the
six months ended June 30, 2020:
During the six months ended June 30, 2020, executives and employees
forfeited stock option grants for 36,667 shares with an exercise price of $1.445 per
share.
There are currently 513,333 options to purchase common stock at an average
exercise price of $1.494 per share outstanding as of June
30, 2020 under 2017 Stock
Incentive Plan and First Amended and Restated 2017 Stock Incentive
Plan. The Company recorded
$26,879 and $32,247
of compensation expense, net of
related tax effects, relative to stock options for the six months
ended June 30, 2020 and 2019
and in accordance with ASC 718. As of June 30,
2020, there is approximately
$41,759, net of forfeitures, 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 3.19 years.
Stock option activity for the six months ended June 30, 2020 and
the year ended December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of January 1, 2019
|
666,667
|
$1.410
|
$940,000
|
|
Granted
|
23,333
|
1.457
|
34,000
|
|
Exercised
|
(26,111)
|
(0.900)
|
(23,500)
|
|
Forfeitures
|
(113,889)
|
(1.146)
|
(130,500)
|
|
Outstanding
as of December 31, 2019
|
550,000
|
1.491
|
820,000
|
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeitures
|
(36,667)
|
(1.445)
|
(53,000)
|
|
Outstanding
as of June 30, 2020
|
513,333
|
$1.494
|
$767,000
|
The following table summarizes information about stock options
outstanding and exercisable at June 30, 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.90
|
80,000
|
2.75
|
$0.90
|
73,333
|
$0.90
|
|
1.05
|
66,667
|
2.75
|
1.05
|
61,111
|
1.05
|
|
1.35
|
6,666
|
-
|
1.35
|
6,666
|
1.35
|
|
1.50
|
106,665
|
2.66
|
1.50
|
103,888
|
1.50
|
|
1.80
|
253,335
|
3.75
|
1.80
|
126,667
|
1.80
|
|
|
513,333
|
3.19
|
$1.494
|
371,666
|
$1.41
|
Stock
option grants totaling 513,333 shares of common stock had no
intrinsic value as of June 30, 2020.
The
stock option grants were valued using the following
assumptions:
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 the Company 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
The Company is obligated under the following leases for its various
facilities.
On May
31, 2020, 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, 2021.
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 $17,500 and increased approximately 3% per year. The
lease expires on December 31, 2023.
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.
There were the following material events subsequent to June
30, 2020:
On July
17, 2020, Chicago Venture converted principal and accrued interest
of $100,000 into 934,667 shares of the Company’s common stock
at a per share conversion price of $0.107.
During
July 2020, PowerUp Lending Group Ltd. converted principal and
accrued interest of $58,300 into 510,271 shares of the
Company’s common stock at an average per share conversion
price of $0.114.
On
November 5, 2019, the Company amended the Agreement with one 24.5%
shareholder of EZ-CLONE Enterprises, Inc. (“EZ-CLONE”),
to extend the date to purchase the remaining 49% of stock of
EZ-CLONE in exchange for a 20% extension fee (a total of $171,000
for the 49% or $85,500 for each 24.5% shareholder) of the $855,000
cash payable at the earlier of the closing of $2,000,000 in funding
or nine months (July 2020). The Company did not finalize the
settlement of the remaining 49% of stock of EZ-CLONE by the July
2020 deadline and is in discussions with the 24.5% shareholder. As
of June 30, 2020, the Company has recorded a liability of
$2,026,000 for acquisition payable of which a $1,000 is payable in
stock and $1,206,000 is payable in cash.