Quarterly Report (10-q)

Date : 08/09/2019 @ 9:19PM
Source : Edgar (US Regulatory)
Stock : Growlife Inc. (QB) (PHOT)
Quote : 0.0051  -0.00008 (-1.54%) @ 9:59PM

Quarterly Report (10-q)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
 ☒
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2019
OR
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
 
Commission file number 000-50385
GrowLife, Inc. 
(Exact name of registrant as specified in its charter)
 
Delaware
90-0821083
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
5400 Carillon Point
Kirkland, WA 98033
(Address of principal executive offices and zip code)
 
(866) 781-5559
 (Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2
 
Large accelerated filer
Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
 
As of August 9, 2019 , there were 3,759,717,098 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.
 

 
 
 
 
 
TABLE OF CONTENTS
 
 
Page Number
PART I FINANCIAL INFORMATION
 
 3
 3
 4
 5
 6
 21
 29
 29
PART II OTHER INFORMATION
 
 30
 30
 38
 38
 38
 38
 39
 42
 
 
 
 
2
 
 
I TEM 1. FINANCIAL STATEMENTS
 
G ROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
 
June 30,
2019
 
 
December 31,
2018
 
ASSETS
 
(Unaudited)
 
 
 (Audited)
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
Cash and cash equivalents
  $ 126,302  
  $ 2,334,377  
Accounts receivable - trade, net of allowance for doubtful accounts of $5,690 as of 6/30/2019 and 12/31/2018
    323,425  
    42,254  
Inventory, net
    942,694  
    792,664  
Prepaid costs
    17,983  
    3,418  
Deposits
    58,416  
    51,916  
Current portion of right of use asset
    336,681  
    -  
Total current assets
    1,805,501  
    3,224,629  
 
       
       
EQUIPMENT, NET
    633,507  
    712,866  
INTANGIBLE ASSETS
    2,709,939  
    3,280,453  
NON-CURRENT PORTION OF RIGHT OF USE ASSET
    748,729  
    -  
TOTAL ASSETS
  $ 5,897,676  
  $ 7,217,948  
 
       
       
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
       
       
 
       
       
CURRENT LIABILITIES:
       
       
Accounts payable - trade
  $ 1,430,201  
  $ 1,054,371  
Accrued expenses
    285,884  
    261,954  
Accrued expenses - related parties
    24,793  
    73,585  
Derivative liability
    1,286,743  
    1,795,473  
Current portion of convertible notes payable
    2,685,122  
    3,404,133  
Current portion of notes payable- related parties
    102,830  
    100,020  
Current portion of capital lease
    3,780  
    8,534  
Deferred revenue
    -  
    89,504  
Current portion of right of use liability
    328,923  
    -  
Total current liabilities
    6,148,276  
    6,787,574  
 
       
       
NON-CURRENT PORTION OF RIGHT OF USE LIABILITY
    760,366  
    -  
 
       
       
COMMITMENTS AND CONTINGENCIES
    -  
    -  
 
       
       
STOCKHOLDERS' DEFICIT
       
       
Preferred stock - $0.0001 par value, 10,000,000 shares authorized, no shares
       
       
 issued and outstanding
    -  
    -  
Common stock - $0.0001 par value, 6,000,000,000 shares authorized, 3,759,717,098
       
       
and 3,437,599,095 shares issued and outstanding at 6/30/2019 and 12/31/2018, respectively
    375,960  
    343,749  
Additional paid in capital
    141,886,782  
    139,331,067  
Accumulated deficit
    (145,198,634 )
    (141,176,087 )
Total stockholders' deficit
    (2,935,892 )
    (1,501,271 )
 
       
       
NON CONTROLLING INTEREST IN EZ-CLONE ENTERPRISES, INC.
    1,924,926  
    1,931,645  
 
       
       
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 5,897,676  
  $ 7,217,948  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
3
 
 
G ROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
Three Months Ended,
 
 
Six Months Ended,
 
 
 
June 30,
2019
 
 
June 30,
2018
 
 
June 30,
2019
 
 
June 30,
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET REVENUE
  $ 2,200,733  
  $ 1,208,415  
  $ 4,445,012  
  $ 1,917,351  
COST OF GOODS SOLD
    1,524,960  
    1,096,934  
    2,998,331  
    1,729,451  
GROSS PROFIT
    675,773  
    111,481  
    1,446,681  
    187,900  
GENERAL AND ADMINISTRATIVE EXPENSES
    2,052,769  
    924,813  
    4,182,725  
    2,104,270  
OPERATING LOSS
    (1,376,996 )
    (813,332 )
    (2,736,044 )
    (1,916,370 )
 
       
       
       
       
OTHER INCOME (EXPENSE):
       
       
       
       
Change in fair value of derivative
    21,457  
    (703,346 )
    508,730  
    1,655,098  
Interest expense, net
    (107,303 )
    (320,929 )
    (227,343 )
    (709,233 )
Loss on debt conversions
    (228,099 )
    (244,549 )
    (1,574,609 )
    (5,353,526 )
Total other (expense)
    (313,945 )
    (1,268,824 )
    (1,293,222 )
    (4,407,661 )
 
       
       
       
       
(LOSS) BEFORE INCOME TAXES
    (1,690,941 )
    (2,082,156 )
    (4,029,266 )
    (6,324,031 )
 
       
       
       
       
Income taxes - current benefit
    -  
    -  
    -  
    -  
 
       
       
       
       
NET (LOSS)
    (1,690,941 )
    (2,082,156 )
    (4,029,266 )
    (6,324,031 )
 
       
       
       
       
Noncontrolling interest in EZ-Clone Enterprises, Inc.
    (18,809 )
    -  
    6,719  
    -  
 
       
       
       
       
NET LOSS ATTRIBUTABLE TO GROWLIFE, INC. AND SUBSIDIARIES
  $ (1,709,750 )
  $ (2,082,156 )
  $ (4,022,547 )
  $ (6,324,031 )
COMMON SHAREHOLDERS
       
       
       
       
 
       
       
       
       
Basic and diluted (loss) per share
  $ (0.00 )
  $ (0.00 )
  $ (0.00 )
  $ (0.00 )
 
       
       
       
       
Weighted average shares of common stock outstanding- basic and diluted
    3,639,091,893  
    2,938,882,290  
    3,716,729,634  
    2,824,194,733  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
4
 
 
G ROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Six Months Ended,
 
 
 
June 30,
2019
 
 
June 30,
2018
 
 
 
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net loss
  $ (4,022,547 )
  $ (6,324,031 )
Adjustments to reconcile net loss to net cash (used in)
       
       
operating activities
       
       
Depreciation
    84,678  
    30,553  
Amortization of intangible assets
    570,514  
    -  
Stock based compensation
    80,247  
    113,629  
Common stock issued for services
    174,362  
    153,206  
Amortization of debt discount
    -  
    498,658  
Change in fair value of derivative liability
    (508,730 )
    (1,662,346 )
Accrued interest on convertible notes payable
    126,898  
    101,674  
Loss on debt conversions
    1,574,609  
    5,529,319  
Noncontrolling interest in EZ-Clone Enterprises, Inc.
    6,719  
    -  
Changes in operating assets and liabilities:
       
       
Accounts receivable
    (281,171 )
    -  
Inventory
    (150,030 )
    30,010  
Prepaids and other assets
    (14,565 )
    -  
Deposits
    (6,500 )
    -  
Right of use, net
    3,879  
    -  
Accounts payable
    375,830  
    (14,951 )
Accrued expenses
    (22,052 )
    (123,964 )
Deferred revenue
    (89,504 )
    -  
 CASH (USED IN) OPERATING ACTIVITIES
    (2,097,363 )
    (1,668,243 )
 
       
       
CASH FLOWS FROM INVESTING ACTIVITIES:
       
       
Investment in purchased assets
    (5,319 )
    (250,000 )
NET CASH (USED IN) INVESTING ACTIVITIES:
    (5,319 )
    (250,000 )
 
       
       
CASH FLOWS FROM FINANCING ACTIVITIES:
       
       
Repayment of convertible notes payable
    (590,909 )
    -  
Proceeds from notes payable
    490,000  
    -  
Repayment on capital lease
    (4,754 )
    -  
Cash provided from Convertible Promissory Note with Chicago Venture Partners, L.P.
    -  
    685,000  
Share issuances to St. George Investments LLC
    -  
    1,300,000  
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    (105,663 )
    1,985,000  
 
       
       
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (2,208,345 )
    66,757  
 
       
       
CASH AND CASH EQUIVALENTS, beginning of period
    2,334,377  
    69,191  
 
       
       
CASH AND CASH EQUIVALENTS, end of period
  $ 126,032  
  $ 135,947  
 
       
       
Supplemental disclosures of cash flow information:
       
       
Interest paid
  $ -  
  $ -  
Taxes paid
  $ -  
  $ -  
 
       
       
Non-cash investing and financing activities:
       
       
Shares issued for convertible note and interest conversion
  $ 368,000  
  $ 2,673,590  
Common shares issued for accounts payable
  $ -  
  $ 18,000  
Shares issued for purchase of warrant
  $ 1,000,000  
  $ -  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
5
 
 
G ROWLIFE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
 
The accompanying unaudited consolidated condensed financial statements have been prepared by GrowLife, Inc. (“us,” “we,” or “our”) in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of our management, all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of the financial position, results of operations, and cash flows for the fiscal periods presented have been included.
 
These financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report filed on Form 10-K for the year ended December 31, 2018. The results of operations for the six months ended June 30, 2019 are not necessarily indicative of the results expected for the full fiscal year, or for any other fiscal period.
 
GrowLife, Inc. (“GrowLife” or the “Company”) is incorporated under the laws of the State of Delaware and is headquartered in Kirkland, Washington. The Company was founded in 2012 with the Closing of the Agreement and Plan of Merger with SGT Merger Corporation .
 
The Company’s goal of becoming the nation’s largest cultivation facility service provider for the production of organics, herbs and greens and plant-based medicines has not changed. The Company’s mission is to best serve more cultivators in the design, build-out, expansion and maintenance of their facilities with products of high quality, exceptional value and competitive price. Through a nationwide network of knowledgeable representatives, regional centers and its e-commerce website, GrowLife provides essential and hard-to-find goods including media (i.e., farming soil), industry-leading hydroponics equipment, organic plant nutrients, and thousands more products to specialty grow operations across the United States.
 
The Company primarily sells through its wholly owned subsidiary, GrowLife Hydroponics, Inc. GrowLife companies distribute and sell over 15,000 products through its e-commerce distribution channel, GrowLifeEco.com, and through our regional retail storefronts. GrowLife and its business units are organized and directed to operate strictly in accordance with all applicable state and federal laws.
 
On June 7, 2013, GrowLife Hydroponics completed the purchase of Rocky Mountain Hydroponics, LLC, a Colorado limited liability company (“RMC”), and Evergreen Garden Center, LLC, a Maine limited liability company (“EGC”). The effective date of the purchase was June 7, 2013.
 
On October 3, 2017, the Company closed the acquisition of 51% of the Purchased Assets from David Reichwein, a Pennsylvania resident, GIP International Ltd, a Hong Kong corporation and DPR International LLC, a Pennsylvania limited liability corporation. The Purchased Assets include intellectual property, copy rights and trademarks related to reflective tiles and flooring.
The Company did not acquire business, customer lists or employees.
 
The Company acquired its 51% interest in the Purchased Assets for $400,000. The Company funded equipment and rent of an office lease.   On February 16, 2018, the Company purchased the remaining 49% of the Purchased Assets in exchange for a one-time payment of $250,000. As of December 31, 2018, the Company had recorded investment in purchased assets of $552,689.
 
On August 17, 2018, the Company entered into an Asset Purchase Agreement with Go Green Hydroponics, Inc., a California corporation and TCA – Go Green SPV, LLC, a Florida limited liability pursuant to which the Company acquired the intellectual property and assumed the lease for the property located at 15721 Ventura Blvd., Encino, CA 91436. The Company intends to operate a retail store, sale over the internet and sell on a direct basis at this location.
 
Concurrently, the Company and Seller entered into a Security Agreement for securing the assets of Company as collateral for the obligations of Company as set forth in the Security Agreement. In consideration for the sale and assignment of the Purchased Assets, the Company agreed to pay the Seller: (i) the proceeds generated from the sale of the closing inventory until all closing inventory has been sold, and (ii) to pay the Seller 5% of all gross revenue of Company earned or in any way related to the Purchased Assets generated between October 1, 2018 and December 31, 2019, up to a maximum of $200,000.
 
On October 15, 2018, the Company closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation. EZ-CLONE is the manufacturer of multiple award-winning products specifically designed for the commercial cloning and propagation stage of indoor plant cultivation including cannabis, food, and other hydroponic farming. The Company acquired 51% of EZ-CLONE for $2,040,000, payable as follows: (i) a cash payment of $645,000; and (ii) the issuance of 107,307,692 restricted shares of the Company’s common stock at a price of $0.013 per share or $1,395,000.
 
 
 
 
6
 
 
The Company has the obligation to acquire the remaining 49% of EZ-CLONE within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000.
 
On October 17, 2017, the Company was informed by Alpine Securities Corporation (“Alpine”) that Alpine has demonstrated compliance with the Financial Industry Regulatory Authority (“FINRA”) Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of 1934. We filed an amended application with the OTC Markets to list the Company’s common stock on the OTCQB and begin to trade on this market as of March 20, 2018. As of March 4, 2019, the Company began to trade on the Pink Sheet stocks system. The Company’s bid price had closed below $0.01 for more than 30 consecutive calendar days. 
 
NOTE 2 – GOING CONCERN
 
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred net losses of $4,029,266, $11,444,782, and $5,320,974 for the six months ended June 30, 2019 and the years ended December 31, 2018 and 2017 respectively. Our net cash used in operating activities was $2,097,363, $3,854,506, and $2,082,493 for the six months ended June 30, 2019 and the years ended December 31, 2018 and 2017 respectively.
 
The Company anticipates that it will record losses from operations for the foreseeable future. As of June 30, 2019, the accumulated deficit was $145,198,634.   The Company has experienced recurring operating losses and negative operating cash flows since inception and has financed its working capital requirements during this period primarily through the recurring issuance of convertible notes payable and advances from a related party. The audit opinion prepared by our independent registered public accounting firm relating to our financial statements for the year ended December 31, 2018 and 2017 filed with the SEC on March 8, 2019 includes an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern.
 
Continuation of the Company as a going concern is dependent upon obtaining additional working capital.  The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
 
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS
 
Basis of Presentation - The accompanying consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”).
 
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. Inter-Company items and transactions have been eliminated in consolidation.
 
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 June 30, 2019, the Company had uninsured deposits in the amount of $0.
 
Accounts Receivable and Revenue - Revenue is recognized at the time the Company sells merchandise to the customer in store. eCommerce sales include shipping revenue and are recorded upon shipment to the customer. This is when the risk of loss transfers to our customers, the fee is fixed and determinable, and collection of the sale is reasonably assured. A product is not shipped without an order from the customer and the completion of credit acceptance procedures. The majority of our sales are cash or credit card; however, we occasionally extend terms to our customers. Accounts receivable are reviewed periodically for collectability.
 
Inventories - Inventories are recorded on a first in first out basis. Inventory consists of raw materials, purchased finished goods and components held for resale. Inventory is valued at the lower of cost or market. The reserve for inventory was $30,000 and $120,000 as of June 30, 2019 and December 31, 2018, respectively.
 
Equipment – Equipment consists of machinery, equipment, tooling, computer equipment and leasehold improvements, which are stated at cost less accumulated depreciation and amortization. Depreciation is computed by the straight-line method over the estimated useful lives or lease period of the relevant asset, generally 3-10 years, except for leasehold improvements which are depreciated over the lesser of the life of the lease or 10 years. 
 
 
 
 
7
 
 
Long Lived Assets – The Company reviews its long-lived assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.
 
Intangible Assets – Intangible assets are capitalized and amortized on a straight-line basis over their estimated useful life, if the life is determinable. If the life is not determinable, amortization is not recorded. We regularly perform reviews to determine if facts and circumstances exist which indicate that the useful lives of our intangible assets are shorter than originally estimated or the carrying amount of these assets may not be recoverable. When an indication exists that the carrying amount of intangible assets may not be recoverable, we assess the recoverability of our assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Such impairment test is based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Impairment, if any, is based on the excess of the carrying amount over the estimated fair value of those assets.
 
Fair Value Measurements and Financial Instruments - ASC Topic 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
 
Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
 
The carrying value of cash, accounts receivable, investment in a related party, accounts payables, accrued expenses, due to related party, notes payable, and convertible notes approximates their fair values due to their short-term maturities.
 
Derivative financial instruments - The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
 
Sales Returns - We allow customers to return defective products when they meet certain established criteria as outlined in our sales terms and conditions. It is our practice to regularly review and revise, when deemed necessary, our estimates of sales returns, which are based primarilyon 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, 2019, and December 31, 2018, there was a reserve for sales returns of $0, respectively, which is minimal based upon our historical experience.
 
Stock Based Compensation - The Company has share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options and warrants to purchase shares of Company common stock at the fair market value at the time of grant. Stock-based compensation cost to employees is measured by the Company at the grant date, based on the fair value of the award, over the requisite service period under ASC 718. For options issued to employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit.  Grants of stock to non-employees and other parties are accounted for in accordance with the ASC 505.
 
Net (Loss) Per Share - Under the provisions of ASC 260, “Earnings per Share,” basic loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the income of the Company, subject to anti-dilution limitations. The common stock equivalents have not been included as they are anti-dilutive.
 
 
 
 
8
 
 
As of June 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) 116.5 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, Iliad and St. George financing agreements because the number of shares ultimately issued to Chicago Venture depends on the price at which Chicago Venture converts its debt to shares and exercises its warrants. The lower the conversion or exercise prices, the more shares that will be issued to Chicago Venture upon the conversion of debt to shares. We won’t know the exact number of shares of stock issued to Chicago Venture until the debt is actually converted to equity.
 
As of June 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.
 
 
 
 
9
 
 
NOTE 4 – TRANSACTIONS
 
Acquisition of 51% of EZ-CLONE Enterprises, Inc.
 
On October 15, 2018, the Company closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation that was founded in January 2000. EZ-CLONE is the manufacturer of multiple award-winning products specifically designed for the commercial cloning and propagation stage of indoor plant cultivation including cannabis, food, and other hydroponic farming. The Company has proprietary products and services such as the Commercial Pro System, Hobbyist Cloning Systems, Cloning Tents, Coco Collars, Coco Seed Starters, Rooting Gel, and Clear Rez. Technical Support, know-how and overall knowledge is also considered proprietary. The Company trademarks are EZ-CLONE and EZ-CLONE CRIB.
 
This acquisition is expected to accelerate the Company’s revenue growth, increase the Company gross margins and add additional manufacturing and research and development personnel.
 
The Company acquired 51% of EZ-CLONE for $2,040,000, payable as follows: (i) a cash payment of $645,000; and (ii) the issuance of 107,307,692 restricted shares of the Company’s common stock at a price of $0.013 per share or $1,395,000. The Company has the obligation to acquire the remaining 49% of EZ-CLONE within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000.
 
The cost to acquire these assets has been preliminarily allocated to the assets acquired according to estimated fair values and is subject to adjustment when additional information concerning asset valuations is finalized, but no later than October 15, 2019. The preliminary allocation is as follows:
 
Purchase Price Allocation
  $  
Common Stock
  $ 1,395,000  
Cash
    645,000  
Assets acquired
    (911,294 )
Liabilities acquired
    939,375  
Non-controlling interest
    1,960,000  
EZ-CLONE equity
    (605,000 )
 
       
 
       
 
       
 
       
Total purchase price
  $ 3,423,081  
 
The results of operations of EZ-CLONE were included in the Consolidated Statements of Operations for the period October 15, 2018 to December 31, 2018.
 
The unaudited pro-forma financial data for the acquisition for the year ended December 31, 2018, were as follows:
 
 
 
 
 
 
Pre-Acquisition
 
 
 
 
 
 
 
 
 
Operations of EZ-
 
 
Pro Forma
 
 
 
As Reported
 
 
January 1, 2018 to
 
 
Year Ended
 
 
 
December 31,
2018
 
 
October 14,
2018
 
 
December 31,
2018
 
Net revenue
  $ 4,573,461  
  $ 1,551,503  
  $ 6,124,964  
Net loss
    (11,473,137 )
    (111,671 )
    (11,584,808 )
Net loss per share
  $ (0.00 )
       
  $ (0.00 )
  
 
 
 
10
 
 
The unaudited pro-forma financial data for the acquisition for the year ended December 31, 2017, were as follows:
 
 
 
 
 
 
Pre-Acquisition
 
 
 
 
 
 
 
 
 
Operations of EZ-
 
 
Pro Forma
 
 
 
As Reported
 
 
January 1, 2017 to
 
 
Year Ended
 
 
 
December 31,
2017
 
 
December 31,
2017
 
 
December 31,
2017
 
Net revenue
  $ 2,452,104  
  $ 2,648,873  
  $ 5,100,977  
Net loss
    (5,320,974 )
    (126,962 )
    (5,447,936 )
Net loss per share
  $ (0.00 )
       
  $ (0.00 )
 
There was no material, nonrecurring items included in the reported the pro-forma results.
 
Termination of Agreements with CANX, LLC
 
On February 15, 2019, the Company entered into a Termination of Existing Agreements and Release with CANX USA, LLC, a Nevada limited liability company. Pursuant to the Agreement, the Parties agreed to terminate, release and discharge all existing and further rights and obligations between the Parties under, arising out of, or in any way related to that certain Waiver and Modification Agreement and Amended and Restated Joint Venture Agreement made as of July 10, 2014, and any ancillary agreements or instruments thereto, including, but not limited to, the Warrants issued to CANX entitling CANX to purchase 540,000,000 shares of the Company’s common stock at an exercise price of $0.033.
 
In exchange for the Agreement and cancellation of the CANX Agreements and Warrants, the Company agreed to issue $1,000,000 of restricted common stock priced at the February 7, 2019 closing price of $0.008, or 125,000,000 restricted common stock shares.
 
NOTE 5 – INVENTORY
 
Inventory as of June 30, 2019 and December 31, 2018 consisted of the following:
 
 
 
June 30,
 
 
December 31,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Raw materials
  $ 479,305  
  $ 417,570  
Work in process
    88,475  
    35,280  
Finished goods
    404,914  
    459,814  
Inventory reserve
    (30,000 )
    (120,000 )
   Total
  $ 942,694  
  $ 792,664  
 
Raw materials consist of supplies for the flooring product line and EZ-CLONE.
 
Finished goods inventory relates to product at the Company’s retail stores, which is product purchased from distributors, and in some cases directly from the manufacturer, and resold at our stores and EZ-CLONE.
 
The Company reviews its inventory on a periodic basis to identify products that are slow moving and/or obsolete, and if such products are identified, the Company records the appropriate inventory impairment charge at such time.
 
NOTE 6 – PROPERTY AND EQUIPMENT
 
Property and equipment as of June 30, 2019 and December 31, 2018 consists of the following:
 
 
 
June 30,
 
 
December 31,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Machinery, equipment and tooling
  $ 909,556  
  $ 943,326  
Computer equipment
    16,675  
    16,675  
Leasehold improvements
    19,971  
    14,703  
     Total property and equipment
    946,203  
    974,704  
Less accumulated depreciation and amortization
    (312,696 )
    (261,839 )
     Net property and equipment
  $ 633,507  
  $ 712,866  
 
 
 
 
11
 
 
Fixed assets, net of accumulated depreciation, were $633,507 and $712,866 as of June 30, 2019 and December 31, 2018, respectively. Accumulated depreciation was $312,696 and $261,839 as of June 30, 2019 and December 31, 2018, respectively. Total depreciation expense was $50,857 and $30,553 for the six months ended June 30, 2019 and December 31, 2018, respectively. All equipment is used for manufacturing, selling, general and administrative purposes and accordingly all depreciation is classified in cost of goods sold, selling, general and administrative expenses.
 
On October 3, 2017, the Company closed the acquisition of 51% of the Purchased Assets from David Reichwein, a Pennsylvania resident, GIP International Ltd, a Hong Kong corporation and DPR International LLC, a Pennsylvania limited liability corporation. The Purchased Assets include intellectual property, copy rights and trademarks related to reflective tiles and flooring.
The Company did not acquire business, customer list or employees.
 
The Company acquired its 51% interest in the Purchased Assets for $400,000. The Company funded equipment and rent of an office lease.   On February 16, 2018, the Company purchased the remaining 49% of the Purchased Assets in exchange for a one-time payment of $250,000. As of December 31, 2018, the Company had recorded investment in purchased assets of $552,689.
 
On October 15, 2018, the Company acquired 51% of EZ-CLONE Enterprises, Inc. and acquired $244,203 of net property and equipment.
 
During the year ended December 31, 2018, the Company retired fully depreciated assets of $358,156.
 
NOTE 7 – INTANGIBLE ASSETS
 
Intangible assets as of June 30, 2019 and December 31, 2018 consisted of the following: 
 
 
Estimated
 
June 30,
 
 
December 31,
 
 
Useful Lives
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
Customer lists
3 years
  $ 1,604,341  
  $ 1,604,341  
Patents
3 years
    1,818,740  
    1,818,740  
Less: accumulated amortization
 
    (713,142 )
    (142,628 )
    Intangible assets, net
 
  $ 2,709,939  
  $ 3,280,453  
 
Total amortization expense was $570,513 and $0 for the six months ended June 30, 2019 and 2018, respectively.
 
On October 15, 2018, the Company closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation that was founded in January 2000. The Company acquired 51% of EZ-CLONE for $2,040,000, payable as follows: (i) a cash payment of $645,000; and (ii) the issuance of 107,307,692 restricted shares of the Company’s common stock at a price of $0.013 per share or $1,395,000. The Company has the obligation to acquire the remaining 49% of EZ-CLONE within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000.
 
The fair value of the intellectual property associated with the assets acquired was $3,423,081 estimated by using a discounted cash flow approach based on future economic benefits. In summary, the estimate was based on a projected income approach and related discounted cash flows over five years, with applicable risk factors assigned to assumptions in the forecasted results.
 
NOTE 8- 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 June 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 June 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. As of June 30, 2019, total right-of-use assets and operating lease liabilities were approximately $1,085,000 and $1,089,000, respectively. In the six months ended June 30, 2019, the Company recognized approximately $399,000 in total lease costs.
 
 
 
 
12
 
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, 2019 were as follows:
 
Cash paid for operating lease liabilities
$ 227,000
Weighted-average remaining lease term
3.2 years
Weighted-average discount rate
10 %
Minimum future lease payments
-
 
Minimum future lease payments as of June 30, 2019 are as follows:
 
Year
  $    
2019
  $ 227,149  
2020
    461,360  
2021
    464,150  
2022
    303,687  
2023
    236,352  
Total lease liability
    1,692,699  
Less imputed interest
    (603,410 )
Net lease liability
  $ 1,089,289  
 
NOTE 9- ACCOUNTS PAYABLE
 
Accounts payable were $1,430,201 and $1,054,371 as of June 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 three months ended September 30, 2019.
 
NOTE 10- ACCRUED EXPENSES
 
Accrued expenses were $285,884 and $261,954 as of June 30, 2019 and December 31, 2018, respectively. Such liabilities consisted of amounts due to Go Green Hydroponics, Inc. and TCA – Go Green SPV, LLC and sales tax and payroll liabilities.
 
On August 17, 2018, the Company entered into an Asset Purchase Agreement with Go Green Hydroponics, Inc. and TCA – Go Green SPV, LLC. The Company acquired the inventory of Go Green but agreed to pay the Seller 100% of the proceeds generated from the sale of the closing inventory until all closing inventory has been sold. The Company recorded accrued expenses $134,497 as of September 30, 2018 related to the sale of inventory. Also, the Company agreed to pay 5% of all gross revenue of Company earned or in any way related to the Purchased Assets generated between October 1, 2018 and December 31, 2019, up to a maximum of $200,000. The Company estimated gross revenue for that period to be approximately $1,200,000 and recorded a $60,000 liability. The Company recorded an impairment of acquired assets in the amount of $60,000 as of December 31, 2018.
 
NOTE 11– CONVERTIBLE NOTES PAYABLE, NET
 
Convertible notes payable as of June 30, 2019 consisted of the following:
 
 
 
 
 
 
 
 
 
 
 
 
Balance
 
 
 
 
 
 
Accrued
 
 
Debt
 
 
As of
 
 
 
Principal
 
 
Interest
 
 
Discount
 
 
June 30, 2019
 
10% OID Convertible Promissory Notes
  $ 2,156,669  
  $ 232,997  
  $ -  
  $ 2,389,666  
7% Convertible note ($850,000)
    270,787  
    24,669  
    -  
    295,456  
 
  $ 2,427,456  
  $ 257,666  
  $ -  
  $ 2,685,122  
 
 
 
 
 
13
 
Convertible notes payable as of December 31, 2018 consisted of the following:
 
 
 
 
 
 
 
 
 
 
 
 
Balance
 
 
 
 
 
 

 
 

 
 
As of
 
 
 
Principal
 
 
Accrued
Interest
 
 
Debt
Discount
 
 
December 31, 2018
 
10% OID Convertible Promissory Notes
  $ 2,982,299  
  $ 135,780  
  $ -  
  $ 3,118,079  
7% Convertible note ($850,000)
    270,787  
    15,267  
    -  
    286,054  
 
  $ 3,253,086  
  $ 151,047  
  $ -  
  $ 3,404,133  
 
7% Convertible Notes Payable
 
On March 12, 2018, the Company entered into a Second Amendment to the Note. Pursuant to the Amendment, the Note’s maturity date has been extended to December 31, 2019, and interest accrues at 7% per annum, compounding on the maturity date. Additionally, after review of the Note and accrued interest, the Parties agreed that as of March 12, 2018, the outstanding balance on the Note was $270,787.
 
As of June 30, 2019 , the outstanding principal on this 7% convertible note was $270,787 and accrued interest was $24,669, which results in a total liability of $295,456.
 
10% Convertible Promissory Notes
 
Funding from Chicago Venture Partners, L.P. (“Chicago Venture”) and Iliad Research and Trading, L.P. (“Iliad”)
 
As of December 31, 2018 , the outstanding principal balance due to Chicago Venture and Iliad 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 June 30, 2019 , the outstanding principal balance due to Chicago Venture and Iliad was $2,156,669 and accrued interest was $232,997, which results in a total amount of $2,389,666.
 
During the six months ended June 30, 2019, Chicago Venture and Iliad converted principal and accrued interest of $745,000 into 171,017,865 shares of our common stock at a per share conversion price of $.0044 with a fair value of $1,293,341. The Company recognized $1,574,609 loss on debt conversions during the six months ended June 30, 2019.
 
NOTE 12 – DERIVATIVE LIABILITY
 
In April 2008, the FASB issued a pronouncement that provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008.
 
If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (BCF). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20. Debt with Conversion and Other Options. In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method. The debt is convertible at the lesser of 65% of the fair value of the Company’s common stock or $0.009 requiring the conversion feature to be bifurcated from the host debt contract and accounting for separately as a derivative, resulting in periodic revaluations.
 
There was a derivative liability of $1,286,743 as of June 30, 2019 . For the six months ended June 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 six months ended June 30, 2019, Chicago Venture and Iliad converted principal and accrued interest of $745,000 into 171,017,865 shares of our common stock at a per share conversion price of $.0044 with a fair value of $1,293,341. The Company recognized $1,574,609 loss on debt conversions during the six months ended June 30, 2019.
 
 
 
 
14
 
 
Derivative liability as of June 30, 2019 was as follows:
 
 
 
 
 
 
 
 
 
 
 
 
Carrying
 
 
 
Fair Value Measurements Using Inputs
 
 
Amount at
June 30,
 
Financial Instruments
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Instruments
  $ -  
  $ 1,286,743  
  $ -  
  $ 1,286,743  
 
       
       
       
       
Total
  $ -  
  $ 1,286,743  
  $ -  
  $ 1,286,743  
 
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.
 
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.
 
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. 

 
 
 
15
 
 
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, 2019, the Company had the following sales of unregistered equity securities to accredited investors unless otherwise indicated:
 
During the six months ended June 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 six months ended June 30, 2019, Chicago Venture and Iliad converted principal and accrued interest of $745,000 into 171,017,865 shares of our common stock at a per share conversion price of $.0044 with a fair value of $1,293,341. The Company recognized $582,246 loss on debt conversions during the six months ended June 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. Pursuant to the Agreement, the Parties agreed to terminate, release and discharge all existing and further rights and obligations between the Parties under, arising out of, or in any way related to that certain Waiver and Modification Agreement and Amended and Restated Joint Venture Agreement made as of July 10, 2014, and any ancillary agreements or instruments thereto, including, but not limited to, the Warrants issued to CANX entitling CANX to purchase 540,000,000 shares of the Company’s common stock at an exercise price of $0.033.
 
In exchange for the Agreement and cancellation of the CANX Agreements and Warrants, the Company agreed to issue $1,000,000 of restricted common stock priced at the February 7, 2019 closing price of $0.008, or 125,000,000 restricted common stock shares The Company recorded a loss on settlement of $986,363.
 
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. We cancelled a stock option grant for 15,083,333 shares issued at $0.006.
 
Warrants
 
The Company had the following warrant activity during the six months ended June 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. Pursuant to the Agreement, the Parties agreed to terminate, release and discharge all existing and further rights and obligations between the Parties under, arising out of, or in any way related to that certain Waiver and Modification Agreement and Amended and Restated Joint Venture Agreement made as of July 10, 2014, and any ancillary agreements or instruments thereto, including, but not limited to, the Warrants issued to CANX entitling CANX to purchase 540,000,000 shares of the Company’s common stock at an exercise price of $0.033.
 
In exchange for the Agreement and cancellation of the CANX Agreements and Warrants, the Company agreed to issue $1,000,000 of restricted common stock priced at the February 7, 2019 closing price of $0.008, or 125,000,000 restricted common stock shares.
 
A summary of the warrants issued as of June 30, 2019 is as follows:
 
 
 
 
June 30, 2019
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
Average
 
 
 
 
 
 
Exercise
 
 
 
Shares
 
 
Price
 
Outstanding at beginning of period
    902,825,146  
  $ 0.029  
Issued
    -  
    -  
Exercised
    -  
    -  
Forfeited
    (540,000,000 )
    (0.033 )
Expired
    -  
    -  
Outstanding at end of period
    362,825,146  
  $ 0.023  
Exerciseable at end of period
    362,825,146  
       
 
 
 
 
16
 
 
A summary of the status of the warrants outstanding as of June 30, 2019 is presented below:
 
 
 
June 30, 2019
 
 
 
 
 
Weighted
 
 
Weighted
 
 
 
 
 
Weighted
 
 
 
 
 
Average
 
 
Average
 
 
 
 
 
Average
 
 
Number of
 
 
Remaining
 
 
Exercise
 
 
Shares
 
 
Exercise
 
 
Warrants
 
 
Life
 
 
Price
 
 
Exerciseable
 
 
Price
 
    -  
    -  
  $ -  
    -  
  $ -  
    55,000,000  
    7.16  
    0.010  
    55,000,000  
    0.010  
    48,000,000  
    5.25  
    0.012  
    16,000,000  
    0.012  
    48,687,862  
    3.58  
    0.050  
    48,687,862  
    0.050  
    211,137,284  
    2.32  
    0.021  
    211,137,284  
    0.021  
    362,825,146  
    3.30  
  $ 0.023  
    330,825,146  
  $ 0.023  
 
Warrants had no intrinsic value as of June 30, 2019.
 
The warrants were valued using the following assumptions:
 
0%
1-5 Years
70-200%
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 six months ended June 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.
 
 
 
17
 
 
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. We cancelled a stock option grant for 15,083,333 shares issued at $0.006.
 
During the three months ended June 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 June 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 $32,247 and $16,129 of compensation expense, net of related tax effects, relative to stock options for the six months ended June 30, 2019 and 2018 in accordance with ASC 505. Net loss per share (basic and diluted) associated with this expense was approximately ($0.00). As of June 30, 2019, there is $112,624 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 3.87 years.
 
Stock option activity for the period ended June 30, 2019 is as follows:
 
 
 
 
 
 
 Weighted Average
 
 
 
 
 
 
 Options
 
 
 Exercise Price
 
 
$
 
Outstanding as of December 31, 2018
    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 June 30, 2019
    82,500,000  
  $ 0.0099  
  $ 820,000  
 
The following table summarizes information about stock options outstanding and exercisable at June 30, 2019:
 
 
 
 
 
 
 
 
Weighted
 
 
Weighted
 
 
 
 
 
Weighted
 
 
 
 
 
 
 
 
Average
 
 
Average
 
 
 
 
 
Average
 
 
Range of
 
 
Number
 
 
Remaining Life
 
 
Exercise Price
 
 
Number
 
 
Exercise Price
 
 
Exercise Prices
 
 
Outstanding
 
 
In Years
 
 
Exerciseable
 
 
Exerciseable
 
 
Exerciseable
 
  $ 0.006  
    12,000,000  
    3.36  
  $ 0.006  
    6,000,000  
  $ 0.006  
    0.007  
    10,000,000  
    3.50  
    0.007  
    5,000,000  
    0.007  
    .008-.009  
    2,500,000  
    1.55  
    .008-.009  
    1,375,000  
    0.008  
    0.010  
    20,000,000  
    3.36  
    0.010  
    14,916,667  
    0.010  
    0.012  
    38,000,000  
    4.00  
    0.012  
    9,500,000  
    0.012  
       
    82,500,000  
    3.87  
  $ 0.010  
    36,791,667  
  $ 0.009  
  
Stock option grants totaling 82,500,000 shares of common stock no intrinsic value as of June 30, 2019.
 
The stock option grants were valued using the following assumptions:
 
0%
1-5 Years
70-200%
0.78-2.6%
 
 
 
 
18
 
 
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.
 
Other than those certain legal proceedings as reported in the Company’s annual report on Form 10-K filed with the SEC on March 8, 2019, the Company’s know of no material, existing or pending legal proceedings against our Company, nor is the Company involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any director, officer or any affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to the Company’s interest.
 
Operating Leases
 
On May 31, 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 October 1, 2017, GrowLife Hydroponics, Inc. entered into a lease in Calgary, Canada. The monthly lease is approximately $3,246. The lease expires September 30, 2022.
 
On December 19, 2017, GrowLife Innovations, Inc. entered into a lease in Grand Prairie, Texas dated October 9, 2017, for 5,000 square feet for the manufacturing and distribution of its flooring products. The monthly lease payment is $15,000. The lease expires December 1, 2022 and can be renewed.
 
On July 2, 2018, GrowLife Hydroponics, Inc. entered into a store lease for 1,950 square feet in Portland, Maine. The monthly lease is approximately $2,113, with 3% increases in year two and three. The lease expires July 2, 2021 and can be extended.
 
On August 31, 2018, GrowLife, Inc. entered into the Fourth Amendment to the Lease Agreement for the store in Encino, California. The monthly lease is approximately $6,720, with a 3% increase on March 1, 2019. The lease expires September 1, 2019 and the Company is required to provide six months’ notice to terminate the lease.
 
On December 14, 2018, GrowLife, Inc. entered into a lease agreement with Pensco Trust Company for a 28,000 square feet industrial space at 10170 Croydon Way, Sacramento, California 95827 used for the assembly and sales of plastic parts by EZ-CLONE. The monthly lease payment is $17,000 and increased approximately 3% per year. The lease expires on December 31, 2023.
 
The aggregate future minimum lease payments under operating leases, to the extent the leases have early cancellation options and excluding escalation charges, are as follows:
 
 
Years Ended June 30,
 
Total
 
2020
  $ 537,910  
2021
    925,511  
2022
    549,776  
2023
    -  
2024
    -  
Beyond
    -  
Total
  $ 2,013,196  
  
 
 
 
19
 
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 June 30, 2019:
 
On July 23, 2019, the Company 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, 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.
 
 
 
 
20
 
 
I TEM 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
 
Fundamentals, or “are we growing throughout our business,” review how the business itself is performing. First, our revenue in the last quarter was $2.2 million and our first half of the year totaled $4.4 million. In comparison we generated $4.6 million ALL of last year. If you add the uncounted over $500,000 of unshipped orders we received last quarter, that brings us to about $5 million for just the first half of this year , well outpacing all of last year.
 
Next, gross profits, or revenue after our cost of sales, was reported at $1.4 million for the first half of 2019 in comparison to last year’s $188,000; a 670% year-over-year increase . This is attributed to the EZ-CLONE business contribution, which brought in significantly higher margins along with our continuing GrowLife business revenue, which is still split evenly, resulting in blended margins in the 30-32.5% range, up from GrowLife’s 10%. 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 first half of the year.  We believe that expansion spending is necessary in a high-growth market such as the cannabis, hemp and CBD-related businesses.
   
SO WHERE ARE WE INVESTING? CLONING AND CBD
 
We see the greatest opportunity for our Company in further positioning ourselves as the industry leaders in plant cloning, and more specifically, as the leader in cloning of hemp plants that are being grown for CBD extraction. Hemp production was recently legalized in the US, 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 most 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.
 
As an industry leader, we knew that we would need the foresight to project the cannabis growing 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 now, 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, as will the demand for more and more starters, whether CLONEs or seeds. And while cloning is the most preferred method of production for many growers, cloning can be time and labor intensive, and takes a lot of space in most grow facilities.
 
 
 
 
21
 
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%.
 
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, we’re not going to get lost in that. We are not going to create the best LED light, or trimming machine. We are going to stick with focusing on our core competencies; which is 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. As such, we are seeking additional financing tools and are happy to share that our existing funding partners continue to support our vision by giving us a $1 million bridge as we finalize potential other investments. We believe this illustrates the confidence large investors have in our refreshed business model.
   
Please follow our shareholder updates for more to come on our financing. With it we will be able to 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.
 
 
 
 
22
 
Employees
 
As of June 30, 2019 , we had thirty eight full-time and part-time employees. Marco Hegyi, our Chief Executive Officer, is based in Kirkland, Washington. Mark E. Scott, our Chief Financial Officer, is based primarily in Seattle, Washington. In addition, we have approximately 26 full and part time employees located throughout the United States and Canada who operate our businesses. We employ 12 full-time and part-time employees at EZ-CLONE in Sacramento, CA. None of our employees are subject to a collective bargaining agreement or represented by a trade or labor union. We believe that we have a good relationship with our employees.
 
Key Partners
 
Our key customers vary by state and are expected to be more defined as the company moves from its retail walk-in purchasing sales strategy to serving cultivation facilities directly and under predictable purchasing contracts.  
 
Our key suppliers include distributors such as HydroFarm, Urban Horticultural Supply and Hawthorne to product-specific suppliers. Our key EZ-CLONE suppliers are Custom-Pak, Roseville Precision, Inc. and Veritiv. 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.
 
Closed Transactions Expected to Grow the Company
 
On October 3, 2017, we closed the acquisition of 51% of the Purchased Assets from David Reichwein, a Pennsylvania resident, GIP International Ltd, a Hong Kong corporation and DPR International LLC, a Pennsylvania limited liability corporation. The Purchased Assets include intellectual property, copy rights and trademarks related to reflective tiles and flooring.
 
On February 16, 2018, we entered into an Addendum (the “First Addendum”) to amend the terms between the Company and David Reichwein. Pursuant to the First Addendum, we purchased the remaining 49% of the Purchased Assets in exchange for a one-time payment of $250,000 and the cancellation of Mr. Reichwein’s right to receive a 10% commission on certain sales of Free Fit products as was set forth in Mr. Reichwein’s employment agreement. In exchange for the cancellation of the commission in the employment agreement, Mr. Reichwein was granted the opportunity to earn up to two $100,000 cash bonuses and an aggregate common stock bonus of up to 7,500,000 shares if certain revenue and gross margin goals are met in 2018.
 
On August 17, 2018, we entered into an Asset Purchase Agreement with Go Green Hydroponics, Inc., a California corporation and TCA – Go Green SPV, LLC, a Florida limited liability pursuant to which the Company acquired the intellectual property and assumed the lease for the property located at 15721 Ventura Blvd., Encino, CA 91436. We intend to operate a retail store, internet sales and direct sales from this location.
 
Concurrently, the Company and Seller entered into a Security Agreement for securing our assets as collateral for the obligations of Company as set forth in the Security Agreement. In consideration for the sale and assignment of the Purchased Assets, we agreed to pay the Seller: (i) the proceeds generated from the sale of the closing inventory until all closing inventory has been sold, and (ii) to pay the Seller 5% of all gross revenue of our earned or in any way related to the Purchased Assets generated between October 1, 2018 and December 31, 2019, up to a maximum of $200,000.
 
 
 
 
23
 
On October 15, 2018, we closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation. EZ-CLONE is the manufacturer of multiple award-winning products specifically designed for the commercial cloning and propagation stage of indoor plant cultivation including cannabis, food, and other hydroponic farming. We acquired 51% of EZ-CLONE for $2,040,000, payable as follows: (i) a cash payment of $645,000; and (ii) the issuance of 107,307,692 restricted shares of our common stock at a price of $0.013 per share or $1,395,000.
 
We have the obligation to acquire the remaining 49% of EZ-CLONE before October 15, 2019 for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000.
 
 
 
 
 
Government Regulation
 
Currently, there are thirty three states plus the District of Columbia that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. There are currently ten states and the District of Columbia that allow recreational use of cannabis. As of June 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. We filed an amended application with the OTC Markets to list the Company’s common stock on the OTCQB and begin to trade on this market as of March 20, 2018. As of March 4, 2019, we began to trade on the Pink Sheet stocks system. Our bid price had closed below $0.01 for more than 30 consecutive calendar days. 
 
PRIMARY RISKS AND UNCERTAINTIES
 
We are exposed to various risks related to legal proceedings, our need for additional financing, the sale of significant numbers of our shares, the potential adjustment in the exercise price of our convertible debentures and a volatile market price for our common stock. These risks and uncertainties are discussed in more detail below in Part II, Item 1A. 
 
 
 
 
24
 
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 June 30,
 
 
 
2019
 
 
2018
 
 
$ Variance
 
 
% Variance
 
Net revenue
  $ 2,201  
  $ 1,208  
  $ 993  
    82.2 %
Cost of goods sold
    1,525  
    1,097  
    428  
    -39.0 %
Gross profit
    676  
    111  
    565  
    509.0 %
General and administrative expenses
    2,053
    925  
    1,128
    -121.9 %
Operating loss
    (1,377 )
    (814 )
    (563 )
    -69.2 %
Other income (expense):
       
       
       
       
Change in fair value of derivative
    21  
    (703 )
    724  
    103.0 %
Interest expense, net
    (107 )
    (320 )
    213  
    66.6 %
Loss on debt conversions
    (228 )
    (245 )
    17  
    6.9 %
Total other (expense)
    (314 )
    (1,268 )
    954  
    75.2 %
(Loss) before income taxes
    (1,691 )
    (2,082 )
    391
    18.8 %
Income taxes - current benefit
    -  
    -  
    -  
    0.0 %
Net (loss)
  $ (1,691 )
  $ (2,082 )
  $ 391
    18.8 %
 
THREE MONTHS ENDED JUNE 30, 2019 AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2018
 
Revenue
 
Net revenue for the three months ended June 30, 2019 increased by $993,000 to $2,201,000 from $1,208,000 for the three months ended June 30, 2018. The increase resulted from increased sales personnel and the acquisition of EZ-CLONE on October 15, 2018.
 
Cost of Goods Sold
 
Cost of sales for the three months ended June 30, 2019 increased by $428,000 to $1,525,000 from $1,097,000 for the three months ended June 30, 2018. The increase resulted the acquisition of EZ-CLONE on October 15, 2018.
 
Gross profit was $676,000 for the three months ended June 30, 2019 as compared to a gross profit of $111,000 for the three months ended June 30, 2018. The gross profit percentage was 30.7% for the three months ended June 30, 2019 as compared to 9.2% for the three months ended June 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 52.0%.
 
General and Administrative Expenses
 
General and administrative expenses for the three months ended June 30, 2019 were $2,053,000 as compared to $925,000 for the three months ended June 30, 2018. The variances were as follows: (i) an increase in non-cash other expenses of $389,000; (ii) an increase in EZ-CLONE expenses (primarily payroll and rent) of $514,000; and (iii) an increase in other expenses of $218,000 (primary payroll and sales and marketing expenses). As part of the general and administrative expenses for the three months ended June 30, 2019, we recorded public relation, investor relation or business development expenses of $27,000 and $0 respectively. The increase resulted from increased sales personnel and channels of distribution, the development of the reflective tiles and flooring product line which was acquired on October 3, 2017, the development of the Encino business and the acquisition of EZ-CLONE on October 15, 2018.
 
Non-cash general and administrative expenses for the three months ended June 30, 2019 were $389,000 including (i) depreciation and amortization of $55,000); (ii) amortization of intangible assets of $286,000; (iii) stock based compensation of $40,000 related to stock option grants and warrants; and (iv) common stock issued for services of $9,000.
 
Non-cash general and administrative expenses for the three months ended June 30, 2018 were $79,000 including (i) depreciation and amortization of $20,000; and (ii) stock based compensation of $59,000 related to stock option grants and warrants.
 
 
 
 
25
 
Other Expense
 
Other expense for the three months ended June 30, 2019 was $314,000 as compared to other expense of $1,268,000 for the three months ended June 30, 2018. The other expense for the three months ended June 30, 2019 included (i) change in derivative liability of $21,000; offset by (ii) interest expense of $107,000; and (iii) loss on debt conversions of $228,000. 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 June 30, 2018 included (i) interest expense of $320,000; (ii) loss on debt conversions of $245,000; and (iii) change in fair value of derivative of $703,000 The non-cash interest related to the amortization of the debt discount associated with our convertible notes and accrued interest expense related to our notes payable. The loss on debt conversions related to the conversion of our notes payable at prices below the market price.
 
Net (Loss)
 
Net loss for the three months ended June 30, 2019 was $1,691,000 as compared to $2,082,000 for the three months ended June 30, 2018 for the reasons discussed above.
 
Net loss for the three months ended June 30, 2019 included non-cash expenses of $611,000 including (i) depreciation and amortization of $54,000; (ii) amortization of intangible assets of $286,000; (iii) stock based compensation of $40,000 related to stock option grants and warrants; (iv) common stock issued for services of $9,000; (v) accrued interest on convertible notes payable of $62,000; (vi) loss on debt conversions of $215,000; and; offset by (vii) noncontrolling interest in EZ-CLONE Enterprises, Inc. of $33,000 and (viii) change in derivative liability of $22,000.
 
Net loss for the three months ended June 30, 2018 included non-cash expenses of $1,513,000 including (i) depreciation and amortization of $20,000; (ii) stock based compensation of $59,000 related to stock option grants and warrants; (iii) accrued interest and amortization of debt discount on convertible notes payable of $318,000; (iv) loss on debt conversions of $420,000; and (v) change in derivative liability of $696,000.
 
We expect losses to continue as we implement our business plan.
 
(dollars in thousands)
 
 
 
Six Months Ended June 30,
 
 
 
2019
 
 
2018
 
 
$ Variance
 
 
% Variance
 
Net revenue
  $ 4,445  
  $ 1,917  
  $ 2,528  
    131.9 %
Cost of goods sold
    2,998  
    1,729  
    1,269  
    -73.4 %
Gross profit
    1,447  
    188  
    1,259  
    669.7 %
General and administrative expenses
    4,183  
    2,104  
    2,079  
    -98.8 %
Operating loss
    (2,736 )
    (1,916 )
    (820 )
    -42.8 %
Other income (expense):
       
       
       
       
Change in fair value of derivative
    509  
    1,655  
    (1,146 )
    -69.2 %
Interest expense, net
    (227 )
    (709 )
    482  
    68.0 %
Loss on debt conversions
    (1,575 )
    (5,354 )
    3,779  
    70.6 %
Total other (expense) income
    (1,293 )
    (4,408 )
    3,115  
    70.7 %
(Loss) before income taxes
    (4,029 )
    (6,324 )
    2,295  
    36.3 %
Income taxes - current benefit
    -  
    -  
    -  
    0.0 %
Net (loss)
  $ (4,029 )
  $ (6,324 )
  $ 2,295  
    36.3 %
 
SIX MONTHS ENDED JUNE 30, 2019 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2018
 
Revenue
 
Net revenue for the six months ended June 30, 2019 increased by $2,528,000 to $4,445,000 from $1,917,000 for the six months ended June 30, 2018. The increase resulted from increased sales personnel and the acquisition of EZ-CLONE on October 15, 2018.
 
 
 
 
26
 
Cost of Goods Sold
 
Cost of sales for the six months ended June 30, 2019 increased by $1,269,000 to $2,998,000 from $1,729,000 for the six months ended June 30, 2018. The increase resulted from the acquisition of EZ-CLONE on October 15, 2018.
 
Gross profit was $1,447,000 for the six months ended June 30, 2019 as compared to a gross profit of $188,000 for the six months ended June 30, 2018. The gross profit percentage was 32.5% for the six months ended June 30, 2019 as compared to 9.8% for the six months ended June 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 51.6%.
 
General and Administrative Expenses
 
General and administrative expenses for the six months ended June 30, 2019 were $4,183,000 as compared to $2,104,000 for the six months ended June 30, 2018. The variances were as follows: (i) an increase in non-cash other expenses of $910,000; (ii) an increase in EZ-CLONE expenses (primarily payroll and rent) of $940,000; and (iii) an increase in other expenses of $229,000 (primary payroll and sales and marketing expenses). As part of the general and administrative expenses for the six months ended June 30, 2019, we recorded public relation, investor relation or business development expenses of $60,000 and $0 respectively. The increase resulted from increased sales personnel and channels of distribution, the development of the reflective tiles and flooring product line which was acquired on October 3, 2017, the development of the Encino business and the acquisition of EZ-CLONE on October 15, 2018.
 
Non-cash general and administrative expenses for the six months ended June 30, 2019 were $910,000 including (i) depreciation and amortization of $85,000; (ii) amortization of intangible assets of $571,000; (iii) stock based compensation of $80,000 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 six months ended June 30, 2018 were $300,000 including (i) depreciation and amortization of $31,000; (ii) stock based compensation of $114,000 related to stock option grants and warrants; (iii) common stock issued for services of $155,000.
 
Other Expense
 
Other expense for the six months ended June 30, 2019 was $1,293,000 as compared to other expense of $4,408,000 for the six months ended June 30, 2018. The other expense for the three months ended June 30, 2019 included (i) change in derivative liability of $509,000; offset by (ii) interest expense of $227,000; and (iii) loss on debt conversions of $1,575,000. 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 six months ended June 30, 2018 included (i) interest expense of $709,000; (ii) loss on debt conversions of $5,354,000; and (iii) change in fair value of derivative of $1,655,000 The non-cash interest related to the amortization of the debt discount associated with our convertible notes and accrued interest expense related to our notes payable. The loss on debt conversions related to the conversion of our notes payable at prices below the market price.
 
Net (Loss)
 
Net loss for the six months ended June 30, 2019 was $4,023,000 as compared to $6,324,000 for the six months ended June 30, 2018 for the reasons discussed above.
 
Net loss for the six months ended June 30, 2019 included non-cash expenses of $2,109,000 including (i) depreciation and amortization of $84,000; (ii) amortization of intangible assets of $571,000; (iii) stock based compensation of $80,000 related to stock option grants and warrants; (iv) common stock issued for services of $174,000; (v) accrued interest on convertible notes payable of $127,000; (vi) loss on debt conversions of $1,575,000; and (vii) noncontrolling interest in EZ-CLONE Enterprises, Inc. of $7,000; offset by (viii) change in derivative liability of $509,000.
 
Net loss for the six months ended June 30, 2018 included non-cash expenses of $4,765,000 including (i) depreciation and amortization of $31,000; (ii) stock based compensation of $114,000 related to stock option grants and warrants; (iii) common stock issued for services of $154,000; (iv) accrued interest and amortization of debt discount on convertible notes payable of $601,000; and (v) loss on debt conversions of $5,529,000; offset by (vi) change in derivative liability of $1,662,000.
 
We expect losses to continue as we implement our business plan.
 
 
 
 
27
 
LIQUIDITY AND CAPITAL RESOURCES
 
We had cash of $126,000 and a working capital deficit of approximately $379,000 (less derivative liability, convertible debt, right of use liability and deferred revenue) as of June 30, 2019.  We expect losses to continue as we grow our business. Our cash used in operations for the six months ended June 30, 2019 and for the years ended December 31, 2018 and 2017 was $2,097,000, $3,855,000 and $2,082,000, respectively. We expect the cash used in operations to decline with increased sales, gross margin and reduced expenses.
 
We will need to obtain additional financing in the future. There can be no assurance that we will be able to secure funding, or that if such funding is available, the terms or conditions would be acceptable to us. If we are unable to obtain additional financing, we may need to restructure our operations, divest all or a portion of our business or file for bankruptcy. We have financed our operations through the issuance of convertible debentures and the sale of common stock.
 
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.
 
Operating Activities
 
Net cash used in operating activities for the six months ended June 30, 2019 was $2,097,000. This amount was primarily related to a net loss of $4,023,000 and (i) net working capital of $183,000; offset by (ii) non-cash expenses of $2,109,000 including (i) depreciation and amortization of $84,000; (ii) amortization of intangible assets of $571,000; (iii) stock based compensation of $80,000 related to stock option grants and warrants; (iv) common stock issued for services of $174,000; (v) accrued interest on convertible notes payable of $127,000; (vi) loss on debt conversions of $1,575,000; and (vii) noncontrolling interest in EZ-CLONE Enterprises, Inc. of $7,000; offset by (viii) change in derivative liability of $509,000.
 
Investment Activities
 
Net cash used in investing activities for the six months ended June 30, 2019 was $5,000. The amount related to the investment in purchased assets.
 
Financing Activities
 
Net cash used in financing activities for the six months ended June 30, 2019 was $106,000. The amount related to proceeds from note payable of $490,000, offset by repayment of convertible notes payable of $591,000 and repayment of capital lease of $5,000.
 
Our contractual cash obligations as of June 30, 2019 are summarized in the table below:
 
 
 
 
 
 
Less Than
 
 
 
 
 
 
 
 
Greater Than
 
Contractual Cash Obligations
 
Total
 
 
1 Year
 
 
1-3 Years
 
 
3-5 Years
 
 
5 Years
 
Operating leases
  $ 2,013,196  
  $ 537,910  
  $ 925,511  
  $ 549,776  
  $ -  
Convertible notes payable
    2,685,122  
    2,685,122  
    -  
    -  
    -  
Notes payable and capital leases
    106,610  
    106,610  
    -  
    -  
    -  
Capital expenditures
    300,000  
    100,000  
    100,000  
    100,000  
    -  
 
  $ 5,104,928  
  $ 3,429,642  
  $ 1,025,511  
  $ 649,776  
  $ -  
 
 
 
 
 
 
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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.
 
I TEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
This item is not applicable. 
 
I TEM 4.     CONTROLS AND PROCEDURES
 
a) Evaluation of Disclosure Controls and Procedures
 
We conducted an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive and principal financial officers concluded as of June 30, 2019, that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses in our internal controls over financial reporting discussed immediately below.
 
Identified Material Weakness
 
A material weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.
 
Management identified the following material weakness during its assessment of internal controls over financial reporting:
 
Audit Committee :
 
The current Audit Committee has two independent directors, but the Chairman is an interim Named Executive Officer. We expect to expand this committee during 2019.
 
b) Changes in Internal Control over Financial Reporting
 
During the quarter ended June 30, 2019 , there were no changes in our internal controls over financial reporting during this fiscal quarter, which were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that materially affected, or is reasonably likely to have a materially affect, on our internal control over financial reporting.
 
 
 
 
29
 
PART II.     OTHER INFORMATION
 
I tem 1.  Legal Proceedings.
 
From time to time, we may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although we cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and may be adjusted from time to time according to developments.
 
Other than those certain legal proceedings as reported in our annual report on Form 10-K filed with the SEC on March 8, 2019, we know of no material, existing or pending legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any director, officer or any affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
 
I tem 1A. Risk Factors.
 
There are certain inherent risks which will have an effect on the Company’s development in the future and the most significant risks and uncertainties known and identified by our management are described below.
 
Risks Related to Our Business
 
There are certain inherent risks which will have an effect on the Company’s development in the future and the most significant risks and uncertainties known and identified by our management are described below.
 
Risks Associated with Securities Purchase Agreement with Chicago Venture
 
The Securities Purchase Agreement with Chicago Venture will terminate if we file protection from its creditors, a Registration Statement on Form S-1 is not effective, and our market capitalization or the trading volume of our common stock does not reach certain levels. If terminated, we will be unable to draw down all or substantially all of our Chicago Venture Notes.
 
Our ability to require Chicago Venture to fund the Chicago Venture Note is at our discretion, subject to certain limitations. Chicago Venture is obligated to fund if each of the following conditions are met; (i) the average and median daily dollar volumes of our common stock for the twenty (20) and sixty (60) trading days immediately preceding the funding date are greater than $100,000; (ii) our market capitalization on the funding date is greater than $17,000,000; (iii) we are not in default with respect to share delivery obligations under the note as of the funding date; and (iv) we are current in our reporting obligations.
 
There is no guarantee that we will be able to meet the foregoing conditions or any other conditions under the Securities Purchase Agreement and/or Chicago Venture Note or that we will be able to draw down any portion of the amounts available under the Securities Purchase Agreement and/or Chicago Venture Note.
 
If we not able to draw down all due under the Securities Purchase Agreement or if the Securities Purchase Agreement is terminated, we may be forced to curtail the scope of our operations or alter our business plan if other financing is not available to us.
 
Our common stock.
 
On October 17, 2017, we were informed by Alpine Securities Corporation (“Alpine”) that Alpine has demonstrated compliance with the Financial Industry Regulatory Authority (“FINRA”) Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of 1934. We filed an amended application with the OTC Markets to list the Company’s common stock on the OTCQB and begin to trade on this market as of March 20, 2018. As of March 4, 2019, we began to trade on the Pink Sheet stocks system. Our bid price had closed below $0.01 for more than 30 consecutive calendar days. 
 
This action had a material adverse effect on our business, financial condition and results of operations. If we are unable to obtain additional financing when it is needed, we will need to restructure our operations, and divest all or a portion of our business.
 
 
 
30
 
 
We have been involved in Legal Proceedings.
 
We have been involved in certain disputes and legal proceedings as discussed in the section title “Legal Proceedings” within our Form 10-Q for the quarter year ended June 30, 2019. In addition, as a public company, we are also potentially susceptible to litigation, such as claims asserting violations of securities laws. Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. There can be no assurance that an adverse result in any future proceeding would not have a potentially material adverse on our business, results of operations or financial condition.
 
We may engage in acquisitions, mergers, strategic alliances, joint ventures and divestures that could result in final results that are different than expected.
 
In the normal course of business, we engage in discussions relating to possible acquisitions, equity investments, mergers, strategic alliances, joint ventures and divestitures. Such transactions are accompanied by a number of risks, including the use of significant amounts of cash, potentially dilutive issuances of equity securities,   incurrence of debt on potentially unfavorable terms as well as impairment expenses related to goodwill and amortization expenses related to other intangible assets, the possibility that we may pay too much cash or issue too many of our shares as the purchase price for an acquisition relative to the economic benefits that we ultimately derive from such acquisition, and various potential difficulties involved in integrating acquired businesses into our operations.
 
From time to time, we have also engaged in discussions with candidates regarding the potential acquisitions of our product lines, technologies and businesses. If a divestiture such as this does occur, we cannot be certain that our business, operating results and financial condition will not be materially and adversely affected. A successful divestiture depends on various factors, including our ability to effectively transfer liabilities, contracts, facilities and employees to any purchaser; identify and separate the intellectual property to be divested from the intellectual property that we wish to retain; reduce fixed costs previously associated with the divested assets or business; and collect the proceeds from any divestitures.
 
If we do not realize the expected benefits of any acquisition or divestiture transaction, our financial position, results of operations, cash flows and stock price could be negatively impacted.
 
Our proposed business is dependent on laws pertaining to the marijuana industry.
 
Continued development of the marijuana industry is dependent upon continued legislative authorization of the use and cultivation of marijuana at the state level.  Any number of factors could slow or halt progress in this area.  Further, progress, while encouraging, is not assured.  While there may be ample public support for legislative action, numerous factors impact the legislative process.  Any one of these factors could slow or halt use of marijuana, which would negatively impact our proposed business.
 
Currently, thirty three states and the District of Columbia allow its citizens to use medical cannabis.  Additionally, ten states and the District of Columbia have legalized cannabis for adult use.  The state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. The Obama administration previously effectively stated that it is not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana.  The Trump administration position is unknown. However, there is no guarantee that the Trump administration will not change current policy regarding the low-priority enforcement of federal laws.  Additionally, any new administration that follows could change this policy and decide to enforce the federal laws strongly.  Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us and its shareholders.
 
Further, while we do not harvest, distribute or sell marijuana, by supplying products to growers of marijuana, we could be deemed to be participating in marijuana cultivation, which remains illegal under federal law, and exposes us to potential criminal liability, with the additional risk that our business could be subject to civil forfeiture proceedings.
 
The marijuana industry faces strong opposition. 
 
It is believed by many that large, well-funded businesses may have a strong economic opposition to the marijuana industry.  We believe that the pharmaceutical industry clearly does not want to cede control of any product that could generate significant revenue.  For example, medical marijuana will likely adversely impact the existing market for the current “marijuana pill” sold by mainstream pharmaceutical companies.  Further, the medical marijuana industry could face a material threat from the pharmaceutical industry, should marijuana displace other drugs or encroach upon the pharmaceutical industry’s products.  The pharmaceutical industry is well funded with a strong and experienced lobby that eclipses the funding of the medical marijuana movement.  Any inroads the pharmaceutical industry could make in halting or impeding the marijuana industry harm our business, prospects, results of operation and financial condition.
 
 
 
 
31
 
 
Marijuana remains illegal under Federal law.  
 
Marijuana is a Schedule-I controlled substance and is illegal under federal law.  Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal law.  Since federal law criminalizing the use of marijuana preempts state laws that legalize its use, strict enforcement of federal law regarding marijuana would harm our business, prospects, results of operation and financial condition.
 
Raising additional capital to implement our business plan and pay our debts will cause dilution to our existing stockholders, require us to restructure our operations, and divest all or a portion of our business.
 
We need additional financing to implement our business plan and to service our ongoing operations and pay our current debts. There can be no assurance that we will be able to secure any needed funding, or that if such funding is available, the terms or conditions would be acceptable to us.
 
If we raise additional capital through borrowing or other debt financing, we may incur substantial interest expense. Sales of additional equity securities will dilute on a pro rata basis the percentage ownership of all holders of common stock. When we raise more equity capital in the future, it will result in substantial dilution to our current stockholders.
 
If we are unable to obtain additional financing when it is needed, we will need to restructure our operations, and divest all or a portion of our business.
 
Closing of bank and merchant processing accounts could have a material adverse effect on our business, financial condition and/or results of operations.
 
As a result of the regulatory environment, we have experienced the closing of several of our bank and merchant processing accounts since March 2014. We have been able to open other bank accounts. However, we may have other banking accounts closed. These factors impact management and could have a material adverse effect on our business, financial condition and/or results of operations.
 
Federal regulation and enforcement may adversely affect the implementation of medical marijuana laws and regulations may negatively impact our revenues and profits. 
 
Currently, there are thirty three states plus the District of Columbia that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering legislation to similar effect. As of the date of this writing, the policy and regulations of the Federal government and its agencies is that cannabis has no medical benefit and a range of activities including cultivation and use of cannabis for personal use is prohibited on the basis of federal law and may or may not be permitted on the basis of state law. Active enforcement of the current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the willingness of customers of GrowLife to invest in or buy products from GrowLife that may be used in connection with cannabis. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect revenues and profits of the GrowLife companies.
 
Our history of net losses has raised substantial doubt regarding our ability to continue as a going concern. If we do not continue as a going concern, investors could lose their entire investment.
 
Our history of net losses has raised substantial doubt about our ability to continue as a going concern, and as a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the years ended December 31, 2018 and 2017 with respect to this uncertainty. Accordingly, our ability to continue as a going concern will require us to seek alternative financing to fund our operations. This going concern opinion could materially limit our ability to raise additional funds through the issuance of new debt or equity securities or otherwise. Future reports on our financial statements may include an explanatory paragraph with respect to our ability to continue as a going concern.
 
We have a history of operating losses and there can be no assurance that we can again achieve or maintain profitability.
 
We have experienced net losses since inception. As of June 30, 2019, we had an accumulated deficit of $ 145.2 million. There can be no assurance that we will achieve or maintain profitability.
 
 
 
 
32
 
We are subject to corporate governance and internal control reporting requirements, and our costs related to compliance with, or our failure to comply with existing and future requirements, could adversely affect our business.
 
We must comply with corporate governance requirements under the Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, as well as additional rules and regulations currently in place and that may be subsequently adopted by the SEC and the Public Company Accounting Oversight Board. These laws, rules, and regulations continue to evolve and may become increasingly stringent in the future. We are required to include management’s report on internal controls as part of our annual report pursuant to Section 404 of the Sarbanes-Oxley Act. We strive to continuously evaluate and improve our control structure to help ensure that we comply with Section 404 of the Sarbanes-Oxley Act. The financial cost of compliance with these laws, rules, and regulations is expected to remain substantial.
 
We cannot assure you that we will be able to fully comply with these laws, rules, and regulations that address corporate governance, internal control reporting, and similar matters. Failure to comply with these laws, rules and regulations could materially adversely affect our reputation, financial condition, and the value of our securities.
 
Our inability or failure to effectively manage our growth could harm our business and materially and adversely affect our operating results and financial condition.
 
Our strategy envisions growing our business. We plan to expand our product, sales, administrative and marketing organizations. Any growth in or expansion of our business is likely to continue to place a strain on our management and administrative resources, infrastructure and systems. As with other growing businesses, we expect that we will need to further refine and expand our business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise and manage new and retain contributing employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. We cannot assure you that we will be able to:
 
expand our products effectively or efficiently or in a timely manner;
allocate our human resources optimally;
meet our capital needs;
identify and hire qualified employees or retain valued employees; or
incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth.
 
Our operating results may fluctuate significantly based on customer acceptance of our products. As a result, period-to-period comparisons of our results of operations are unlikely to provide a good indication of our future performance. Management expects that we will experience substantial variations in our net sales and operating results from quarter to quarter due to customer acceptance of our products. If customers don’t accept our products, our sales and revenues will decline, resulting in a reduction in our operating income.
 
Customer interest for our products could also be impacted by the timing of our introduction of new products. If our competitors introduce new products around the same time that we issue new products, and if such competing products are superior to our own, customers’ desire for our products could decrease, resulting in a decrease in our sales and revenues. To the extent that we introduce new products and customers decide not to migrate to our new products from our older products, our revenues could be negatively impacted due to the loss of revenue from those customers. In the event that our newer products do not sell as well as our older products, we could also experience a reduction in our revenues and operating income.
 
If we do not successfully generate additional products and services, or if such products and services are developed but not successfully commercialized, we could lose revenue opportunities.
 
Our future success depends, in part, on our ability to expand our product and service offerings. To that end we have engaged in the process of identifying new product opportunities to provide additional products and related services to our customers. The process of identifying and commercializing new products is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed. We may have to commit significant resources to commercializing new products before knowing whether our investments will result in products the market will accept. Furthermore, we may not execute successfully on commercializing those products because of errors in product planning or timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors providing those solutions before we do and a reduction in net sales and earnings.
 
 
 
33
 
 
The success of new products depends on several factors, including proper new product definition, timely completion and introduction of these products, differentiation of new products from those of our competitors, and market acceptance of these products. There can be no assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.
 
Our future success depends on our ability to grow and expand our customer base.  Our failure to achieve such growth or expansion could materially harm our business.
 
To date, our revenue growth has been derived primarily from the sale of our products and through the purchase of existing businesses. Our success and the planned growth and expansion of our business depend on us achieving greater and broader acceptance of our products and expanding our customer base. There can be no assurance that customers will purchase our products or that we will continue to expand our customer base. If we are unable to effectively market or expand our product offerings, we will be unable to grow and expand our business or implement our business strategy. This could materially impair our ability to increase sales and revenue and materially and adversely affect our margins, which could harm our business and cause our stock price to decline.
 
If we incur substantial liability from litigation, complaints, or enforcement actions resulting from misconduct by our distributors, our financial condition could suffer. We will require that our distributors comply with applicable law and with our policies and procedures. Although we will use various means to address misconduct by our distributors, including maintaining these policies and procedures to govern the conduct of our distributors and conducting training seminars, it will still be difficult to detect and correct all instances of misconduct. Violations of applicable law or our policies and procedures by our distributors could lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or foreign regulatory authorities against us and/or our distributors. and could consume considerable amounts of financial and other corporate resources, which could have a negative impact on our sales, revenue, profitability and growth prospects. As we are currently in the process of implementing our direct sales distributor program, we have not been, and are not currently, subject to any material litigation, complaint or enforcement action regarding distributor misconduct by any federal, state or foreign regulatory authority.
 
Our future manufacturers could fail to fulfill our orders for products, which would disrupt our business, increase our costs, harm our reputation and potentially cause us to lose our market.
 
We may depend on contract manufacturers in the future to produce our products. These manufacturers could fail to produce products to our specifications or in a workmanlike manner and may not deliver the units on a timely basis. Our manufacturers may also have to obtain inventories of the necessary parts and tools for production. Any change in manufacturers to resolve production issues could disrupt our ability to fulfill orders. Any change in manufacturers to resolve production issues could also disrupt our business due to delays in finding new manufacturers, providing specifications and testing initial production. Such disruptions in our business and/or delays in fulfilling orders would harm our reputation and would potentially cause us to lose our market. 
 
Our inability to effectively protect our intellectual property would adversely affect our ability to compete effectively, our revenue, our financial condition and our results of operations.
 
We may be unable to obtain intellectual property rights to effectively protect our business. Our ability to compete effectively may be affected by the nature and breadth of our intellectual property rights. While we intend to defend against any threats to our intellectual property rights, there can be no assurance that any such actions will adequately protect our interests. If we are unable to secure intellectual property rights to effectively protect our technology, our revenue and earnings, financial condition, and/or results of operations would be adversely affected.
 
We may also rely on nondisclosure and non-competition agreements to protect portions of our technology. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, that third parties will not otherwise gain access to our trade secrets or proprietary knowledge, or that third parties will not independently develop the technology.
 
We do not warrant any opinion as to non-infringement of any patent, trademark, or copyright by us or any of our affiliates, providers, or distributors. Nor do we warrant any opinion as to invalidity of any third-party patent or unpatentability of any third-party pending patent application. 
 
 
 
 
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Our industry is highly competitive and we have less capital and resources than many of our competitors, which may give them an advantage in developing and marketing products similar to ours or make our products obsolete.
 
We are involved in a highly competitive industry where we may compete with numerous other companies who offer alternative methods or approaches, may have far greater resources, more experience, and personnel perhaps more qualified than we do. Such resources may give our competitors an advantage in developing and marketing products similar to ours or products that make our products obsolete. There can be no assurance that we will be able to successfully compete against these other entities.
 
Transfers of our securities may be restricted by virtue of state securities “blue sky” laws, which prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states.
 
Transfers of our common stock may be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to as "blue sky" laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because the securities held by many of our stockholders have not been registered for resale under the blue sky laws of any state, the holders of such shares and persons who desire to purchase them should be aware that there may be significant state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions may prohibit the secondary trading of our common stock. Investors should consider the secondary market for our securities to be a limited one.
 
We are dependent on key personnel.
 
Our success depends to a significant degree upon the continued contributions of key management and other personnel, some of whom could be difficult to replace. We do not maintain key man life insurance covering our officers. Our success will depend on the performance of our officers and key management and other personnel, our ability to retain and motivate our officers, our ability to integrate new officers and key management and other personnel into our operations, and the ability of all personnel to work together effectively as a team. Our failure to retain and recruit officers and other key personnel could have a material adverse effect on our business, financial condition and results of operations.
 
We have limited insurance.
 
We have limited directors’ and officers’ liability insurance and limited commercial liability insurance policies. Any significant claims would have a material adverse effect on our business, financial condition and results of operations.  
 
Risks Related to our Common Stock
 
Chicago Venture could have significant influence over matters submitted to stockholders for approval.
 
Chicago Venture, Iliad and St. George
 
As a result of funding from Chicago Venture, Iliad and St. George as previously detailed, they exercise significant control over us.
 
If these persons were to choose to act together, they would be able to significantly influence all matters submitted to our stockholders for approval, as well as our officers, directors, management and affairs. For example, these persons, if they choose to act together, could significantly influence the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of us on terms that other stockholders may desire.
 
Trading in our stock is limited by the SEC’s penny stock regulations.
 
Our stock is categorized as a penny stock The SEC has adopted Rule 15g-9 which generally defines "penny stock" to be any equity security that has a market price (as defined) less than US$ 5.00 per share or an exercise price of less than US $5.00 per share, subject to certain exclusions (e.g., net tangible assets in excess of $2,000,000 or average revenue of at least $6,000,000 for the last three years). The penny stock rules impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Finally, broker-dealers may not handle penny stocks under $0.10 per share.
 
 
 
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These disclosure requirements reduce the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules would affect the ability of broker-dealers to trade our securities if we become subject to them in the future. The penny stock rules also could discourage investor interest in and limit the marketability of our common stock to future investors, resulting in limited ability for investors to sell their shares.
 
FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.
 
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
 
The market price of our common stock may be volatile.
 
The market price of our common stock has been and is likely in the future to be volatile. Our common stock price may fluctuate in response to factors such as: 
 
Halting of trading by the SEC or FINRA.
 
Announcements by us regarding liquidity, legal proceedings, significant acquisitions, equity investments and divestitures, strategic relationships, addition or loss of significant customers and contracts, capital expenditure commitments, loan, note payable and agreement defaults, loss of our subsidiaries and impairment of assets,
 
Issuance of convertible or equity securities for general or merger and acquisition purposes,
 
Issuance or repayment of debt, accounts payable or convertible debt for general or merger and acquisition purposes,
 
Sale of a significant number of shares of our common stock by shareholders,
 
General market and economic conditions,
 
Quarterly variations in our operating results,
 
Investor relation activities,
 
Announcements of technological innovations,
 
New product introductions by us or our competitors,
 
Competitive activities, and
 
Additions or departures of key personnel.
 
These broad market and industry factors may have a material adverse effect on the market price of our common stock, regardless of our actual operating performance. These factors could have a material adverse effect on our business, financial condition, and/or results of operations.
 
The sale of a significant number of our shares of common stock could depress the price of our common stock.
 
Sales or issuances of a large number of shares of common stock in the public market or the perception that sales may occur could cause the market price of our common stock to decline. As of June 30, 2019, there were approximately 3.76 billion shares of our common stock issued and outstanding.  In addition, as of June 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) 116.5 million shares related to convertible debt that can be converted at $0.0025 per share.
 
 
 
 
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In addition, we have an unknown number of common shares to be issued under the Chicago Venture, Iliad and St. George financing agreements because the number of shares ultimately issued to Chicago Venture depends on the price at which Chicago Venture converts its debt to shares and exercises its warrants. The lower the conversion or exercise prices, the more shares that will be issued to Chicago Venture upon the conversion of debt to shares. We won’t know the exact number of shares of stock issued to Chicago Venture until the debt is actually converted to equity. If all stock option grant and warrant and contingent shares are issued, approximately 4.537 billion of our currently authorized 6 billion shares of common stock will be issued and outstanding.   For purposes of estimating the number of shares issuable upon the exercise/conversion of all stock options, warrants and contingent shares, we assumed the number of shares and average share prices detailed above.
 
These stock option grant, warrant and contingent shares could result in further dilution to common stockholders and may affect the market price of the common stock.
 
Significant shares of common stock are held by our principal shareholders, other Company insiders and other large shareholders. As affiliates as defined under Rule 144 of the Securities Act or Rule 144 of the Company, our principal shareholders, other Company insiders and other large shareholders may only sell their shares of common stock in the public market pursuant to an effective registration statement or in compliance with Rule 144.
 
These stock option grant, warrant and contingent shares could result in further dilution to common stockholders and may affect the market price of the common stock.
 
Some of our convertible debentures and warrants may require adjustment in the conversion price.
 
Our Convertible Notes Payable may require an adjustment in the current conversion price of $0.002535 per share if we issue common stock, warrants or equity below the price that is reflected in the convertible notes payable. Our warrant with St. George may require an adjustment in the exercise price. The conversion price of the convertible notes and warrants will have an impact on the market price of our common stock. Specifically, if under the terms of the convertible notes the conversion price goes down, then the market price, and ultimately the trading price, of our common stock will go down. If under the terms of the convertible notes the conversion price goes up, then the market price, and ultimately the trading price, of our common stock will likely go up. In other words, as the conversion price goes down, so does the market price of our stock. As the conversion price goes up, so presumably does the market price of our stock. The more the conversion price goes down, the more shares are issued upon conversion of the debt which ultimately means the more stock that might flood into the market, potentially causing a further depression of our stock.
 
We do not anticipate paying any cash dividends on our capital stock in the foreseeable future.
 
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business, and we do not anticipate paying any cash dividends on our capital stock in the foreseeable future. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
 
Anti-takeover provisions may limit the ability of another party to acquire our company, which could cause our stock price to decline.
 
Our certificate of incorporation, as amended, our bylaws and Delaware law contain provisions that could discourage, delay or prevent a third party from acquiring our company, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our common stock.
 
We may issue preferred stock that could have rights that are preferential to the rights of common stock that could discourage potentially beneficially transactions to our common shareholders.
 
An issuance of additional shares of preferred stock could result in a class of outstanding securities that would have preferences with respect to voting rights and dividends and in liquidation over our common stock and could, upon conversion or otherwise, have all of the rights of our common stock.  Our Board of Directors' authority to issue preferred stock could discourage potential takeover attempts or could delay or prevent a change in control through merger, tender offer, proxy contest or otherwise by making these attempts more difficult or costly to achieve.  The issuance of preferred stock could impair the voting, dividend and liquidation rights of common stockholders without their approval.
 
 
 
 
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If the company were to dissolve or wind-up, holders of our common stock may not receive a liquidation preference.