As
filed with the Securities and Exchange Commission on September 4,
2019
Registration
No. ____________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
GROWLIFE, INC.
(Exact name of
registrant as specified in its charter)
Delaware
|
|
5261
|
|
90-0821083
|
(State or other
jurisdiction ofincorporation or organization)
|
|
(Primary Standard
IndustrialClassification Code Number)
|
|
(I.R.S. EmployerIdentification
No.)
|
5400
Carillon Point
Kirkland,
WA 98033
(866)
781-5559
(Address, including
zip code, and telephone number, including area code, of
registrant's principal executive offices)
Marco
Hegyi
Chief
Executive Officer
GrowLife, Inc.
5400
Carillon Point
Kirkland,
WA 98033
(Name, address,
including zip code, and telephone number, including area code, of
agent for service)
Copies
to:
Jessica
M. Lockett, Esq.
Horwitz
+ Armstrong, A Professional Law Corporation
14
Orchard, Suite 200
Lake
Forest, California 92630
(949)
540-6540
Approximate date of
commencement of proposed sale to public: As soon as practicable after this Registration
Statement is declared effective.
If any of the
securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following
box. ☒
If this Form is
filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, check the following box
and list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering. ☐
If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective
registration statement for the same
offering. ☐
If this Form is a
post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective
registration statement for the same
offering. ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in
Rule 12b-2 of the Exchange Act.
Large
accelerated filer
|
☐
|
Accelerated
filer
|
☐
|
Non-accelerated
filer
|
☐
|
Smaller
reporting Company
|
☒
|
(Do
not check if a smaller reporting Company)
|
|
|
|
Title
of Each Class
|
|
|
|
|
of
Securities to
|
|
|
|
|
be
Registered
|
|
|
|
|
Common
Stock, $0.0001 par value per share
|
416,666,667
|
$0.006
|
$2,500,000
|
$303.00
|
(1)
This Registration
Statement covers 416,666,667 shares of common stock to be sold to
Triton Funds, LP under the August 29, 2019 Equity Purchase
Agreement.
(2)
This Registration
Statement includes an indeterminate number of additional shares of
common stock issuable for no additional consideration pursuant to
any stock dividend, stock split, recapitalization or other similar
transaction effected without the receipt of consideration, which
results in an increase in the number of outstanding shares of our
common stock. In the event of a stock split, stock dividend or
similar transaction involving our common stock, in order to prevent
dilution, the number of shares registered shall be automatically
increased to cover the additional shares in accordance with Rule
416(a) under the Securities Act of 1933, as amended (the
“Securities Act”).
(3)
Estimated solely
for the purpose of calculating the registration fee pursuant to
Rule 457(o) under the Securities Act.
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY
STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
THE INFORMATION IN
THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL
THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
Subject
to completion, dated September __, 2019
PRELIMINARY PROSPECTUS
GrowLife, Inc.
This prospectus relates to the resale of
(i) 416,666,667 shares of our
Common stock, par value $0.0001 per share (the “Common
Stock”), to be sold to Triton Funds LP, a Delaware limited
partnership (“Triton” or “Selling
Stockholder”), under the August 29, 2019 Equity Purchase
Agreement, and (ii) pursuant to Rule 416 under the Securities Act,
an indeterminate number of shares of common stock that are issuable
upon stock splits, stock dividends, recapitalizations or other
similar transactions affecting the shares of the selling
stockholder. ,by the Selling Stockholder (the “Selling
Stockholder”):
The amount of
shares of Common Stock which may be sold pursuant to this
Prospectus would constitute 9.8% of the Company’s issued and
outstanding Common Stock as of September 4, 2019, assuming that we
sell all 416,666,667 shares to the Selling
Stockholder.
Triton Funds LP is
the Selling Stockholder and as such shall be deemed to be an
“underwriter” within the meaning of the Securities Act
of 1933, as amended (the “Act”) and any broker-dealers
or agents that are involved in selling the shares may be deemed to
be “underwriters” within the meaning of the Act in
connection with such sales. In such event, any commissions received
by such broker-dealers or agents and any profit on the resale of
the shares purchased by them may be deemed to be underwriting
commissions or equivalent expenses and expenses of legal counsel
applicable to the sale of the shares.
Our Common Stock is
subject to quotation the OTC Pink Sheet Market under the symbol
“PHOT”. On September 3, 2019, the last reported sales
price for our Common Stock was $0.005 per share. We urge
prospective purchasers of our Common Stock to obtain current
information about the market prices of our Common Stock. We will
not receive proceeds from the sale of shares of our Common Stock in
the open market or negotiated prices by the Selling Stockholder.
However, we will receive cash proceeds from Triton in the amount of
up to $2,500,000 in proceeds from the sale of the common stock at
$0.006 per share as covered by this prospectus pursuant to Capital
Call Notices we issue to Triton. We intend to use these funds for
general working capital, debt
reduction and other corporate purposes.
We
will pay all the expenses incident to the registration of the
shares; however, we will not pay for sales commissions or other
expenses applicable to the sale of our common stock registered
hereunder.
The
prices at which the Selling Stockholder may sell the shares of
Common Stock in this Offering will be determined by the prevailing
market prices for the shares of Common Stock or in negotiated
transactions.
Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
INVESTING
IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE THE SECTION
ENTITLED "RISK FACTORS" BEGINNING ON PAGE 4 IN THIS PROSPECTUS. YOU
SHOULD CAREFULLY CONSIDER THESE RISK FACTORS, AS WELL AS THE
INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE YOU
INVEST.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
No dealer, salesperson or any other person is authorized to give
any information or make any representations in connection with this
offering other than those contained in this prospectus and, if
given or made, the information or representations must not be
relied upon as having been authorized by us. This prospectus does
not constitute an offer to sell or a solicitation of an offer to
buy any security other than the securities offered by this
prospectus, or an offer to sell or a solicitation of an offer to
buy any securities by anyone in any jurisdiction in which the offer
or solicitation is not authorized or is unlawful.
The
date of this prospectus is September __, 2019
TABLE
OF CONTENTS
|
|
Page
|
Prospectus
Summary
|
|
1
|
Summary of the
Offering
|
|
2
|
Summary Financial
Information
|
|
3
|
Risk
Factors
|
|
4
|
Special Note
Regarding Forward-Looking Statements
|
|
12
|
Use of
Proceeds
|
|
12
|
Price Range of Our
Common Stock
|
|
12
|
Dividend
Policy
|
|
13
|
Capitalization
|
|
13
|
Dilution
|
|
14
|
Selling Security
Holders
|
|
15
|
Plan of
Distribution
|
|
17
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
18
|
Description of Our
Business
|
|
26
|
Management
|
|
30
|
Executive and
Director Compensation
|
|
36
|
Certain
Relationships and Related Party Transactions
|
|
42
|
Principal
Stockholders
|
|
44
|
Description of
Securities Being Registered
|
|
45
|
Legal
Matters
|
|
47
|
Experts
|
|
47
|
Where You Can Find
More Information
|
|
47
|
Index
to Financial Statements
|
|
F-1
|
You should rely
only on the information contained in this prospectus and any
applicable prospectus supplement. We have not authorized anyone to
provide you with different or additional information. If anyone
provides you with different or inconsistent information, you should
not rely on it. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or any sale of securities
described in this prospectus. This prospectus is not an offer to
sell these securities and it is not soliciting an offer to buy
these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this
prospectus or any prospectus supplement, as well as information we
have previously filed with the Securities and Exchange Commission,
is accurate as of the date on the front of those documents only.
Our business, financial condition, results of operations and
prospects may have changed since those dates.
For investors
outside the United States: neither we nor the underwriters have
done anything that would permit this offering or possession or
distribution of this prospectus or any free writing prospectus we
may provide to you in connection with this offering in any
jurisdiction where action for that purpose is required, other than
in the United States. You are required to inform yourselves about
and to observe any restrictions relating to this offering and the
distribution of this prospectus and any such free writing
prospectus outside of the United States.
Unless otherwise
indicated, information contained in this prospectus concerning our
industry and the markets in which we operate, including our general
expectations and market position, market opportunity and market
share, is based on information from our own management estimates
and research, as well as from industry and general publications and
research, surveys and studies conducted by third parties.
Management estimates are derived from publicly available
information, our knowledge of our industry and assumptions based on
such information and knowledge, which we believe to be reasonable.
Our management estimates have not been verified by any independent
source, and we have not independently verified any third-party
information. In addition, assumptions and estimates of our and our
industry's future performance are necessarily subject to a high
degree of uncertainty and risk due to a variety of factors,
including those described in "Risk Factors". These and other
factors could cause our future performance to differ materially
from our assumptions and estimates. See "Special Note Regarding
Forward-Looking Statements".
GrowLife, Inc. is
our trademark that is used in this prospectus. This prospectus also
includes trademarks, tradenames and service marks that are the
property of other organizations. Solely for convenience, trademarks
and tradenames referred to in this prospectus appear without the
® and ™ symbols, but those references are not intended
to indicate, in any way, that we will not assert, to the fullest
extent under applicable law, our rights or that the applicable
owner will not assert its rights, to these trademarks and
tradenames.
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information
you should consider before investing in our common stock. You
should read this entire prospectus carefully, especially the "Risk
Factors" section of this prospectus and our financial statements
and the related notes appearing at the end of this prospectus,
before making an investment decision.
As used in this prospectus, unless the context otherwise requires,
references to "we," "us," "our," "our company" and "GrowLife" refer
to GrowLife, Inc. and its consolidated
subsidiaries.
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.
Toward the end of
2018, we announced the majority acquisition of a company called
EZ-CLONE Enterprises. EZ-CLONE was and is known as an
industry-leading supplier of commercial-grade cloning and
propagation equipment. This was a part of the Company’s
strategic positioning plan to make ourselves 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.
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.
For more
information see “Description of our
Business.”
Risks
That We Face
Our business is
subject to a number of risks of which you should be aware before
making an investment decision. We are
exposed to various risks related to our business and financial
position (specifically our need for additional financing), this
offering, our common stock and our recent reverse stock
split. These risks are discussed more fully in the "Risk
Factors" section of this prospectus beginning on page
4.
Our
Corporate Information
Our principal
executive offices are located at 5400 Carillon Point, Kirkland, WA
98033. Our telephone number is (866) 781-5559. Our principal
website address is located at www.growlifeinc.com. The information
contained on, or that can be accessed through, our website is not
incorporated into and is not a part of this prospectus. We have
included our website address in this prospectus solely as an
inactive textual reference.
Securities
offered:
|
|
Up to 416,666,667
of shares of our common stock.
|
Common stock
outstanding before the offering (1):
|
|
3,817,964,405
shares
|
Offering Price per
share:
|
|
The Selling
Stockholder may sell all or a portion of the shares being offered
pursuant to this prospectus at fixed prices, at prevailing market
prices at the time of sale, at varying prices, or at negotiated
prices.
|
Use of
proceeds
|
|
We will not receive
any of the proceeds from the sale of shares of our common stock by
the Selling Stockholder pursuant to this prospectus, however, we
will receive proceeds from the initial sale of shares to the
Selling Stockholder Any sale of shares by us to the Selling
Stockholder under the Equity Purchase Agreement will be made
pursuant to an exemption from the registration requirements of the
Securities Act. We will use the proceeds from these sales for
general working capital, debt reduction, and other corporate
purposes.
|
Risk
Factors
|
|
You should read the
"Risk Factors" section starting on page 4 of this prospectus for a
discussion of factors to consider carefully before deciding to
invest in shares of our common stock.
|
Symbol
|
|
PHOT
|
(1)
The number of
shares of our common stock outstanding before this offering is
based on 3,817,964,405 shares of our common stock outstanding
as of September 4, 2019, and excludes:
●
________ shares
of our common stock issuable upon the exercise of stock options
outstanding as of September __, 2019 at a weighted-average
exercise price of $0.____ per share;
●
___________ shares
of our common stock issuable upon the exercise of warrants
outstanding as of September __, 2019 (at a weighted-average
exercise price of $0.___ per share. These warrants will expire
between ________, ______ and _________, ________;
●
____________ shares
of common stock to be issued for the
conversion of Convertible Notes Payables as of September __,
2019 with expiration dates between __________
and ___________ at conversion prices of $0.___ per
share;
●
__________ additional
shares of our common stock available for future issuance under our
2017 Amended Stock Incentive Plan;
●
__________ shares
of our common stock issuable upon the conversion of convertible
promissory notes; and,
●
up to 416,666,667
shares of our common stock which may be sold to Triton under the
Equity Purchase Agreement which we are registering pursuant to this
Registration Statement.
Summary Financial Information
The following
tables set forth a summary of our historical financial data as of,
and for the period ended on, the dates indicated. We have derived
the statements of operations data for the years ended December 31,
2018 and 2017 from our audited financial statements included in
this prospectus. Historical results for any prior period are not
necessarily indicative of results to be expected in any future
period. You should read the following summary financial data
together with our financial statements and the related notes
appearing at the end of this prospectus and the
"Capitalization” and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections in this
prospectus.
Statements
of Operations data:
(in thousands,
except for share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENT OF
OPERATIONS DATA:
|
|
|
|
|
|
|
Net
revenue
|
$4,445
|
$4,573
|
$2,452
|
$1,231
|
$3,500
|
$8,538
|
Cost of goods
sold
|
2,998
|
4,105
|
2,181
|
1,276
|
2,981
|
7,173
|
Gross
profit
|
1,447
|
468
|
271
|
(45)
|
519
|
1,365
|
General and
administrative expenses
|
4,179
|
5,017
|
2,320
|
2,764
|
2,684
|
7,851
|
Operating
(loss)
|
(2,732)
|
(4,549)
|
(2,049)
|
(2,809)
|
(2,165)
|
(6,486)
|
Other
expense
|
(1,293)
|
(6,924)
|
(3,272)
|
(4,886)
|
(3,524)
|
(80,140)
|
Net
(loss)
|
$(4,025)
|
$(11,473)
|
$(5,321)
|
$(7,695)
|
$(5,689)
|
$(86,626)
|
Net (loss) per
share
|
$(0.00)
|
$(0.00)
|
$(0.00)
|
$(0.01)
|
$(0.01)
|
$(0.10)
|
Weighted average
number of shares
|
3,716,729,634
|
2,978,812,920
|
2,044,521,389
|
1,197,565,907
|
884,348,627
|
834,503,868
|
Balance
Sheet Data:
(in
thousands)
|
|
|
|
BALANCE SHEET
DATA:
|
|
Total current
assets
|
$1,806
|
Total
assets
|
5,898
|
Total current
liabilities
|
6,909
|
Total current
liabilities without derivative liability, convertible debentures
and right of use
|
379
|
Total
liabilities
|
5,420
|
Stockholder's
(deficiency)
|
(2,936)
|
Non controlling
interest in EZ-Clone Enterprises, Inc.
|
1,925
|
(1)
As adjusted amounts
give effect to the issuance 416.7 million of common stock by us in
this offering, after estimated offering expenses payable by us, as
set forth under "Use of Proceeds". See "Use of Proceeds" and
"Capitalization".
Investing in our common stock involves a high degree of risk. You
should carefully consider the risks and uncertainties described
below, together with all of the other information contained in this
prospectus, including our financial statements and the related
notes appearing at the end of this prospectus, before deciding to
invest in our common stock. If any of the following risks actually
occur, our business, prospects, operating results and financial
condition could suffer materially, the trading price of our common
stock could decline and you could lose all or part of your
investment.
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 OTC Markets
Pink
Sheet because our bid
price had closed below $0.01 for more than 30 consecutive calendar
days.
This action had a
material adverse effect on our business, financial condition and
results of operations. If we are unable to obtain additional
financing when it is needed, we will need to restructure our
operations, and divest all or a portion of our
business.
We
have been involved in Legal Proceedings.
We have been
involved in certain disputes and legal proceedings as discussed in
the section title “Legal Proceedings” within our Form
10-Q for the quarter year ended 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.
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.
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.
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.
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
An investment in our shares is highly speculative.
The
shares of our common stock are highly speculative in nature,
involve a high degree of risk and should be purchased only by
persons who can afford to lose the entire amount invested in the
common stock. Before purchasing any of the shares of common stock,
you should carefully consider the risk factors contained herein
relating to our business and prospects. If any of the risks
presented herein actually occur, our business, financial condition
or operating results could be materially adversely affected. In
such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
The market price of our Common Stock may fluctuate significantly in
the future.
We
expect that the market price of our Common Stock may fluctuate in
response to one or more of the following factors, many of which are
beyond our control:
●
competitive
pricing pressures;
●
our
ability to market our services on a cost-effective and timely
basis;
●
changing
conditions in the market;
●
changes
in market valuations of similar companies;
●
stock
market price and volume fluctuations generally;
●
regulatory
developments;
●
fluctuations
in our quarterly or annual operating results;
●
additions
or departures of key personnel; and
●
future
sales of our Common Stock or other securities.
The
price at which you purchase shares of our Common Stock may not be
indicative of the price that will prevail in the trading market.
Shareholders may experience wide fluctuations in the market price
of our securities. These fluctuations may have a negative effect on
the market price of our securities and may prevent a shareholder
from obtaining a market price equal to the purchase price such
shareholder paid when the shareholder attempts to sell our
securities in the open market. In these situations, the shareholder
may be required either to sell our securities at a market price,
which is lower than the purchase price the shareholder paid, or to
hold our securities for a longer period than planned. An inactive
or low trading market may also impair our ability to raise capital
by selling shares of capital stock. You may be unable to sell your
shares of Common Stock at or above your purchase price, which may
result in substantial losses to you and which may include the
complete loss of your investment. Any of the risks described above
could adversely affect our sales and profitability and the price of
our Common Stock.
Chicago
Venture could have significant influence over matters submitted to
stockholders for approval.
Chicago Venture, Iliad and St. George
As a result of
funding from Chicago Venture, Iliad and St. George as previously
detailed, they exercise significant control over us.
If these persons
were to choose to act together, they would be able to significantly
influence all matters submitted to our stockholders for approval,
as well as our officers, directors, management and affairs. For
example, these persons, if they choose to act together, could
significantly influence the election of directors and approval of
any merger, consolidation or sale of all or substantially all of
our assets. This concentration of voting power could delay or
prevent an acquisition of us on terms that other stockholders may
desire.
Trading
in our stock is limited by the SEC’s penny stock
regulations.
Our stock is
categorized as a penny stock The SEC has adopted Rule 15g-9 which
generally defines "penny stock" to be any equity security that has
a market price (as defined) less than US$ 5.00 per share or an
exercise price of less than US $5.00 per share, subject to certain
exclusions (e.g., net tangible assets in excess of $2,000,000 or
average revenue of at least $6,000,000 for the last three years).
The penny stock rules impose additional sales practice requirements
on broker-dealers who sell to persons other than established
customers and accredited investors. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk
disclosure document in a form prepared by the SEC, which provides
information about penny stocks and the nature and level of risks in
the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market
value of each penny stock held in the customer's account. The bid
and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or
in writing prior to effecting the transaction and must be given to
the customer in writing before or with the customer's confirmation.
In addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from these rules,
the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and
receive the purchaser's written agreement to the transaction.
Finally, broker-dealers may not handle penny stocks under $0.10 per
share.
These disclosure
requirements reduce the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules.
Consequently, these penny stock rules would affect the ability of
broker-dealers to trade our securities if we become subject to them
in the future. The penny stock rules also could discourage investor
interest in and limit the marketability of our common stock to
future investors, resulting in limited ability for investors to
sell their shares.
FINRA
sales practice requirements may also limit a shareholder’s
ability to buy and sell our stock.
In addition to the
“penny stock” rules described above, FINRA has adopted
rules that require that in recommending an investment to a
customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior
to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable
efforts to obtain information about the customer’s financial
status, tax status, investment objectives and other information.
Under interpretations of these rules, FINRA believes that there is
a high probability that speculative low priced securities will not
be suitable for at least some customers. The FINRA requirements
make it more difficult for broker-dealers to recommend that their
customers buy our common stock, which may limit your ability to buy
and sell our stock and have an adverse effect on the market for our
shares.
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.
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.
If
the company were to dissolve or wind-up, holders of our common
stock may not receive a liquidation preference.
If we were too
wind-up or dissolve the Company and liquidate and distribute our
assets, our shareholders would share ratably in our assets only
after we satisfy any amounts we owe to our creditors. If
our liquidation or dissolution were attributable to our inability
to profitably operate our business, then it is likely that we would
have material liabilities at the time of liquidation or
dissolution. Accordingly, we cannot give you any
assurance that sufficient assets will remain available after the
payment of our creditors to enable you to receive any liquidation
distribution with respect to any shares you may hold.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus
includes statements that are, or may be deemed, "forward-looking
statements." In some cases, these forward-looking statements can be
identified by the use of forward-looking terminology, including the
terms "believes", "estimates", "anticipates", "expects", "plans",
"intends", "may", "could", "might", "will", "should",
"approximately" or, in each case, their negative or other
variations thereon or comparable terminology, although not all
forward-looking statements contain these words. They appear in a
number of places throughout this prospectus and include statements
regarding our intentions, beliefs, projections, outlook, analyses
or current expectations concerning, among other things, our results
of operations, financial condition, liquidity, prospects, growth
and strategies, the length of time that we will be able to continue
to fund our operating expenses and capital expenditures, our
expected financing needs and sources of financing, the industry in
which we operate and the trends that may affect the industry or
us.
By their nature,
forward-looking statements involve risks and uncertainties because
they relate to events, competitive dynamics, and market
developments and depend on the economic circumstances that may or
may not occur in the future or may occur on longer or shorter
timelines than anticipated. Although we believe that we have a
reasonable basis for each forward-looking statement contained in
this prospectus, we caution you that forward-looking statements are
not guarantees of future performance and that our actual results of
operations, financial condition and liquidity, and the development
of the industry in which we operate may differ materially from the
forward-looking statements contained in this prospectus. In
addition, even if our results of operations, financial condition
and liquidity, and the development of the industry in which we
operate are consistent with the forward-looking statements
contained in this prospectus, they may not be predictive of results
or developments in future periods.
Any forward-looking
statements that we make in this prospectus speak only as of the
date of such statement, and we undertake no obligation to update
such statements to reflect events or circumstances after the date
of this prospectus.
You should also
read carefully the factors described in the "Risk Factors" section
of this prospectus to better understand the risks and uncertainties
inherent in our business and underlying any forward-looking
statements. As a result of these factors, we cannot assure you that
the forward-looking statements in this prospectus will prove to be
accurate. Furthermore, if our forward-looking statements prove to
be inaccurate, the inaccuracy may be material. In light of the
significant uncertainties in these forward-looking statements, you
should not regard these statements as a representation or warranty
by us or any other person that we will achieve our objectives and
plans in any specified timeframe, or at all. We disclaim any
obligation to update or revise any forward-looking statement as a
result of new information, future events or for any other
reason.
We
will not receive any of the proceeds from the sale of shares of our
common stock by the Selling Stockholder or their transferees
pursuant to this prospectus, however, we will receive cash proceeds
from Triton of up to $2.5 million pursuant to Capital Call Notices
we provide them in connection with the Equity Purchase Agreement.
Any sale of shares by us to Triton Funds LP under the Equity
Purchase Agreement will be made pursuant to an exemption from the
registration requirements of the Securities Act. We will use the
proceeds from these sales for general working capital, debt
reduction, and other corporate purposes. The amounts and timing of
our actual expenditures will depend on numerous factors, such as
the progress of our sales development and cultivation supplier
efforts and the amount of cash used by our operations. We may also
use a portion of the net proceeds to acquire or invest in
businesses, products and technologies that are complementary to our
own, although we currently are not planning or negotiating any such
transactions. As of the date of this prospectus, we cannot specify
with certainty all of the particular uses for the net proceeds to
us from the sale of shares to Triton Funds LP. Accordingly, we will
retain broad discretion over the use of these proceeds, if
any.
PRICE RANGE OF OUR COMMON STOCK
Our common stock is
quoted and trades on the OTC Markets Pink Sheet
under the symbol "PHOT".
The following table
sets forth the range of the high and low sale prices of the common
stock for the periods indicated. The quotations reflect
inter-dealer prices, without retail markup, markdown or commission,
and may not represent actual transactions. Consequently, the
information provided below may not be indicative of our common
stock price under different conditions.
Trades in our
common stock may be subject to Rule 15g-9 of the Exchange Act,
which imposes requirements on broker/dealers who sell securities
subject to the rule to persons other than established customers and
accredited investors. For transactions covered by the rule,
broker/dealers must make a special suitability determination for
purchasers of the securities and receive the purchaser’s
written agreement to the transaction before the sale.
Period
Ended
|
|
|
Year Ending December 31, 2019
|
|
|
Through
the Current Date
|
$0.0074
|
$0.0050
|
June
30, 2019
|
$0.0084
|
$0.0055
|
March
31, 2019
|
$0.0114
|
$0.0070
|
|
|
|
Year Ending December 31, 2018
|
|
|
December
31, 2018
|
$0.0226
|
$0.0063
|
September
30, 2018
|
$0.0185
|
$0.0105
|
June
30, 2018
|
$0.0280
|
$0.0145
|
March
31, 2018
|
$0.0495
|
$0.0139
|
|
|
|
Year Ending December 31, 2017
|
|
|
December
31, 2017
|
$0.0373
|
$0.0010
|
September
30, 2017
|
$0.0116
|
$0.0020
|
June
30, 2017
|
$0.0070
|
$0.0010
|
March
31, 2017
|
$0.0200
|
$0.0050
|
As of September 3,
2019, the closing price of the company's common stock was $0.005
per share. As of September 4, 2019, there were 3,817,964,405 shares
of common stock outstanding. We have approximately
135 stockholders of record. This number does not include up to
approximately 101,000 beneficial owners whose shares are held in
the names of various security brokers, dealers, and registered
clearing agencies.
We have never
declared or paid any cash dividends on our common stock and intend,
for the foreseeable future, to retain any future earnings to
finance the growth and development of our business. Our future
dividend policy will be determined by our Board of Directors on the
basis of various factors, including our results of operations,
financial condition, capital requirements and investment
opportunities.
The following table
sets forth our cash and cash equivalents and capitalization as of
June 30, 2019:
●
on an actual basis;
and
●
on an as adjusted
basis to give effect to this offering.
(In thousands),
except for share and per share data
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$126
|
$2,126
|
Convertible
notes payable
|
2,685
|
2,185
|
|
|
|
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
|
417
|
Additional
paid in capital
|
141,886
|
144,344
|
Accumulated
deficit
|
(145,199)
|
(145,199)
|
Total
stockholders' deficit
|
(2,938)
|
(438)
|
|
|
|
NON
CONTROLLING INTEREST IN EZ-CLONE ENTERPRISES, INC.
|
1,925
|
1,925
|
|
|
|
TOTAL
CAPITALIZATION
|
$1,798
|
$3,873
|
You should read
this table together with the sections entitled "Selected Financial
Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements
and the related notes included elsewhere in this
prospectus.
The outstanding
share information in the table above is based on 3,817,964,405
shares of our common stock outstanding as of September 4, 2019, and
excludes the following:
●
________ shares
of our common stock issuable upon the exercise of stock options
outstanding as of September __, 2019 at a weighted-average
exercise price of $0.____ per share;
●
___________ shares
of our common stock issuable upon the exercise of warrants
outstanding as of September __, 2019 (at a weighted-average
exercise price of $0.___ per share. These warrants will expire
between ________, ______ and _________, ________;
●
____________ shares
of common stock to be issued for the
conversion of Convertible Notes Payables as of September __,
2019 with expiration dates between __________
and ___________ at conversion prices of $0.___ per
share;
●
__________ additional
shares of our common stock available for future issuance under our
2017 Amended Stock Incentive Plan;
●
__________ shares
of our common stock issuable upon the conversion of convertible
promissory notes; and
●
416,666,667 shares
of our common stock issuable to Selling Stockholder under the
Equity Purchase Agreement.
DILUTION
We
are not offering any shares for sale, except to Triton Funds LP. If
you invest in our common stock, your ownership interest will be
immediately diluted to the extent of the difference between the
public offering price per share of our common stock and the pro
forma as adjusted net tangible book value per share of our common
stock immediately after this offering.
Our historical net tangible book value deficit of
($0.001) is the amount of our total tangible assets less our total
liabilities as of June 30, 2019. Net historical tangible book value
(deficit) per share of ($0.001) is our historical net tangible book
value deficit divided by 3,759,717,098 shares of common stock outstanding as of June 30,
2019.
Pro
forma as adjusted net book value is our pro forma net tangible book
value (deficit), after giving effect to the sale of shares of our
common stock by the Selling Stockholder in this offering at a
public offering price of $0.006. Our pro forma as adjusted net book
value as of June 30, 2019, after giving effect to this offering
would have been approximately ($435,892), or ($0.000) per share.
This amount represents an immediate increase in pro forma as
adjusted net tangible book value of $0.001) per share to our
existing stockholders, and an immediate dilution of $0.006 per
share to new investors participating in this offering. Dilution per
share to new investors is determined by subtracting pro forma as
adjusted net tangible book value per share after this offering from
the public offering price per share paid by new
investors.
The following table
illustrates the per share dilution to investors purchasing shares
in the offering:
Assumed public offering
price per share
|
|
$0.006
|
Pro forma net tangible book
value per share as of June 30, 2019
|
$(0.001)
|
|
Increase in net tangible book
value per share attributable to this offering
|
$0.001
|
|
Pro forma as adjusted
net tangible book value per share after this offering
|
|
$(0.000)
|
Amount of dilution in
net tangible book value per share to new investors in this
offering
|
|
$0.006
|
If any shares are issued upon exercise of
outstanding options or warrants, you may experience further
dilution. The number of shares of our common stock
outstanding before this offering is based 3,817,964,405 shares of
our common stock outstanding as of September 4, 2019, and excludes
the following:
●
________ shares
of our common stock issuable upon the exercise of stock options
outstanding as of September __, 2019 at a weighted-average
exercise price of $0.____ per share;
●
___________ shares
of our common stock issuable upon the exercise of warrants
outstanding as of September __, 2019 ( at a weighted-average
exercise price of $0.___ per share. These warrants will expire
between ________, ______ and _________, ________;
●
____________ shares
of common stock to be issued for the
conversion of Convertible Notes Payables as of September __,
2019 with expiration dates between __________
and ___________ at conversion prices of $0.___ per
share;
●
__________ additional
shares of our common stock available for future issuance under our
2017 Amended Stock Incentive Plan;
●
__________ shares
of our common stock issuable upon the conversion of convertible
promissory notes; and
●
416,666,667 shares
of our common stock issuable to Selling Stockholder under the
Equity Purchase Agreement.
The following table sets forth the number of
shares of our common stock which may be sold by the selling
stockholder pursuant to this prospectus, of up to $2,500,000 of
shares of our common stock, $.0001 par value per share issuable
to Triton Funds LP, under an
Equity Purchase Agreement dated August 29, 2019. The shares offered
for resale would represent 9.8% of our outstanding share of common
stock as of the date of this prospectus. The common stock covered
by this prospectus will be offered for sale from time to time by
the selling stockholder identified in this prospectus in accordance
with the terms described in the section entitled Plan of
Distribution. We are not selling any securities under this
prospectus and will not receive any proceeds from the sale of
shares by the selling stockholder, however, we will receive up to
$2.5 million from the sale of the shares to Triton Funds
LP.
We agreed to register for resale the shares
covered by this prospectus as a condition to the Equity Purchase
Agreement with Triton Funds LP.
We are registering these securities in order to permit the selling
stockholder to dispose of the shares of common stock, or interests
therein, from time to time, as provided in the Equity Purchase
Agreement. We may require the selling stockholders to suspend the
sales of the shares of our common stock being offered pursuant to
this prospectus upon the occurrence of any event that makes any
statement in this prospectus or the related registration statement
untrue in any material respect or that requires the changing of
statements in those documents in order to make statements in those
documents not misleading.
The
selling stockholder identified in the table below may from time to
time offer and sell under this prospectus any or all of the shares
of common stock described under the column “Common Stock
Being Offered” in the table below.
Triton
LP will be deemed to be an underwriter within the meaning of the
Securities Act. Any profits realized by the selling stockholder may
be deemed to be underwriting commissions.
We
cannot give an estimate as to the number of shares of common stock
that will actually be held by the selling stockholders upon
termination of this offering, because each selling stockholder may
offer some or all of the common stock being registered on their
individual behalf under the offering contemplated by this
prospectus or acquire additional shares of common stock. The total
number of shares that may be sold hereunder will not exceed the
number of shares offered hereby. Please read the section entitled
“Plan of Distribution” in this prospectus.
The
manner in which the selling stockholders acquired or will acquire
shares of our common stock is discussed below under “The
Offering.”
The
table below lists the selling stockholder and other information
regarding the beneficial ownership of the shares of common stock by
the selling stockholder. Column B lists the number of shares of
common stock beneficially owned by each selling stockholder prior
to this offering. Column C lists the number of shares of common
stock that will be beneficially owned by the selling stockholder
assuming all of the shares covered by this prospectus are
sold. Column D lists the shares of common stock covered by
this prospectus that may be disposed of by the selling stockholder
Column E lists the percentage of shares beneficially owned by the
selling stockholder after and assuming all of the shares covered by
this prospectus are sold. Beneficial ownership has been
determined in accordance with Rule 13d-3 under the Exchange
Act.
Unless
otherwise set forth below, (a) the persons and entities named in
the table have sole voting and sole investment power with respect
to the shares set forth opposite the selling stockholder’s
name, subject to community property laws, where applicable, and (b)
no selling stockholders had any position, office or other material
relationship within the past three years, with us or with any of
our predecessors or affiliates. The number of shares of common
stock shown as beneficially owned before the offering is based on
information furnished to us or otherwise based on information
available to us at the timing of the filing of the registration
statement of which this prospectus forms a part.
Name of Selling
Shareholder (A)
|
Common Stock
Beneficially Owned Prior to this Offering
(B)
|
Common Stock
Beneficially Owned After Offering (C)
|
Common Stock
Being Offered (D)
|
Beneficial
Ownership After Offering (E)
|
Triton Funds LP
(1)
|
-
|
-
|
416,666,667
|
-
|
(1)
Consists of up to
416,666,667 shares of common stock to be sold by Triton LP pursuant
to the Equity Purchase Agreement. Matt George exercises voting and
dispositive power with respect to the shares of our common stock
that are beneficially owned by Triton Funds LP.
Triton Funds LP
Common Stock Purchase Agreement with Triton Funds LP
On
August 29, 2019, we entered into an Equity Purchase Agreement
(“Purchase Agreement”) with Triton Funds LP
(“Triton LP”). Although we are not required to sell
shares under the Purchase Agreement, the Purchase Agreement gives
us the option to sell to Triton LP a Commitment Amount of up to
$2,500,000 worth of our common stock (the “Commitment
Amount”), in increments, over the period from the Execution
Date of the Purchase Agreement and ending on the earlier of: (i)
the date on which Triton LP will have purchased Capital Call Shares
equal to the Commitment Amount , (ii) June 30, 2020, or; (iii) our
written notice of termination to Triton LP upon Triton’s
material breach (the “Commitment Period”).
During
the Commitment Period, we may, in our sole discretion, deliver a
Capital Call Notice to Triton LP setting forth the Capital Call
Shares which we intend to require Triton LP to purchase. The
purchase price of Capital Call Shares shall be $0.006. The
obligation to close on a Capital Call Notice is subject to the
closing price of our Common Stock being equal to or greater than
the $0.006 on the “Clearing Date”, which is the date
that Triton LP receives the Capital Call Shares as DWAC Shares in
its brokerage account. The Closing Date shall mean the date that is
no later than 2 Trading Days after the Clearing Date. The Purchase
Agreement provides that Triton LP cannot own more than 9.99% of our
outstanding Common Stock Shares immediately prior to Common Stock
being issued pursuant to a Capital Call Notice.
Based
on the Purchase Price, the registration statement with respect to
Triton LP, covers the offer and possible sale of up to $2,500,000
worth of our shares or up to 416,666,667 shares.
In
order for us to be eligible to deliver a Capital Call Notice to
Triton LP, the Purchase Agreement requires that the following
conditions must be met: (i) the representations and warranties of
Triton LP must be true and accurate as of the date of each Closing;
(ii) Triton will have performed, satisfied and complied in all
respects with all covenants, agreements and conditions required by
the Purchase Agreement to be performed, satisfied or complied with
by Triton LP at or prior to each Closing; (iii) we will not issue
any Capital Call Shares, and Triton LP will not have the right to
receive any Capital Call Shares, if the issuance of such Capital
Call Shares would exceed the aggregate number of Common Stock
Shares that we may issue without breaching our obligations under
the rules of the Principal Market, which is otcmarkets.com (the
“Exchange Cap”).
Triton
LP’s purchase of the Capital Call Shares is subject to
satisfaction of the following conditions: (i) there is an effective
registration statement, which remains effective for the purchase of
the Capital Call Shares and not subject to a Stop Order,
suspension, or withdrawal by the SEC or otherwise; (ii) our
representations and warranties are true and accurate as of each
Closing; (iii) we have performed, satisfied and complied in all
material respects with all covenants, agreements and conditions in
the Purchase Agreement to be performed, satisfied or complied with;
(iv) no regulations, executive order, decree, ruling or injunction
shall have been enacted or entered or adopted by any Court or
governmental authority that prohibits or directly and materially
adversely affects any of the transactions provided for in the
Purchase Agreement or any schedules and exhibits to the Purchase
Agreement; (v) since the filing of our most recent SEC Documents
(reports, schedules, forms, statements or other documents that we
are required to file under the Securities Act or Exchange Act), no
event has or is reasonably likely to have a Material Adverse Effect
has occurred; (vi) the trading or our common stock has not been the
subject of a suspension of delisting; (vii) Triton LP has not
exceeded the Beneficial Ownership Limitation of 9.99% of our shares
outstanding; (viii) the issuance of the Capital Call Shares has not
exceeded the Exchange Cap; (ix) we have no knowledge of any event
more likely than not to have the effect of causing the Registration
Statement to be suspended or otherwise ineffective, which event is
more likely not to occur within the 15 business days on which the a
Capital Call Notice is deemed delivered; x) the issuance of the
Capital Call Shares does not violate the shareholder approval
requirements of otcmarkets.com; (xi) our Common Stock is DWAC
Eligible and not subject to a “DTC Chill” and (xii) all
reports, schedules, registrations forms, information and other
documents that we are required to file with the SEC as required by
the Exchange Act have been filed with the SEC within the applicable
time periods prescribed for such filings under the Exchange
Act.
Registration Rights Agreement with Triton Funds, LP
In
connection with the Purchase Agreement, we also entered into a
registration rights agreement with Triton LP, pursuant to which we
agreed to use our best efforts to file with the Securities and
Exchange Commission a registration statement, covering the resale
of 416,666,667 shares of our Common Stock underlying the Purchase
Agreement.
Risk Associated Sale of Our Shares into the Open Market by Triton
LP
The
416,666,667 shares of our common stock will be sold into the market
by Triton LP. The sale of these shares could cause our stock price
to decline. In turn, if our stock price declines and we issue more
Capital Call Notices, this would cause more shares to come into the
market, which could cause a further drop in our stock
price.
We
are registering 416,666,667 shares of common stock under this
prospectus on behalf of Triton Funds LP (“selling
stockholder”).The selling stockholder may, from time to time,
sell any or all of its shares of our common stock on otcmarkets.com
or any other stock exchange, market or trading facility on which
the shares of our common stock are traded, or in private
transactions. These sales may be at fixed prices, prevailing market
prices at the time of sale, at varying prices, or at negotiated
prices. The selling stockholder may use any one or more of the
following methods when selling shares:
●
Ordinary brokerage
transactions and transactions in which the broker-dealer solicits
purchases;
●
Block trades in
which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
●
Purchases by a
broker-dealer as principal and resale by the broker-dealer for its
account;
●
Privately
negotiated transactions;
●
Broker-dealers may
agree with the selling stockholders to see a specified number of
such shares at a stipulated price per share; or
●
A combination of
any such methods of sale.
Additionally,
broker-dealers engaged by the selling stockholder may arrange for
other brokers-dealers to participate in sales. Broker-dealers may
receive commissions or discounts from the selling stockholder (or,
if any broker-dealer acts as agent for the purchaser of shares,
from the purchaser) in amounts to be negotiated, but, except as set
forth in a supplement to this prospectus, in the case of an agency
transaction not in excess of a customary brokerage commissions in
compliance with FINRA Rule 2440; and in the case of a principal
transaction, a markup or markdown in compliance with FINRA
IM-2440.
The
Selling Stockholder, Triton LP, is an underwriter within the
meaning of the Securities Act of 1933, and any broker-dealers or
agents that are involved in selling the shares may be deemed to be
“underwriters” within the meaning of the Securities Act
of 1933 in connection with such sales. Any commissions received by
such broker-dealers or agents, and any profit on the resale of the
shares purchased by them, may be deemed to be underwriting
commissions or discounts under the Securities Act of
1933.
Discounts,
concessions, commissions and similar selling expenses, if any,
attributable to the sale of shares will be borne by the selling
stockholders. The selling stockholders may agree to indemnify any
agent, dealer, or broker-dealer that participates in transactions
involving sales of the shares if liabilities are imposed on that
person under the Securities Act of 1933.
We
are required to pay certain fees and expenses incurred by us
incident to the registration of the shares covered by this
prospectus. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act of 1933. We will not receive
any proceeds from the resale of any of the shares of our common
stock by the selling stockholders. We will, however, receive cash
proceeds from Triton LP pursuant to Capital Call Notices issued by
us to Triton LP.
The
Purchase Agreement with Triton LP nor any rights or obligations of
the parties thereunder may be assigned or delegated to any other
person.
We
have entered into agreements with Triton LP to keep this prospectus
effective until Triton LP: (i) has sold all of the common shares
purchased by it and (ii) has no further right to acquire any
additional shares of common stock under the
agreements.
The
resale shares will be sold only through registered or licensed
brokers or dealers if required under applicable state securities
laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or qualified for sale in the
applicable state or an exemption from the registration or
qualification requirement is available and is complied
with.
Under
applicable rules and regulations under the Securities Exchange Act
of 1934, any person engaged in the distribution of the resale
shares may not simultaneously engage in market making activities
with respect to the common stock for the applicable restricted
period, as defined in Regulation M, prior to the commencement of
the distribution. In addition, the selling stockholders will be
subject to applicable provisions of the Securities Exchange Act of
1934 and the rules and regulations thereunder, including Regulation
M, which may limit the timing of purchases and sales of shares of
the common stock by the selling stockholder or any other person. We
will make copies of this prospectus available to the selling
stockholder.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
financial condition and results of operations together with our
financial statements and related notes appearing at the end of this
prospectus. Some of the information contained in this discussion
and analysis or set forth elsewhere in this prospectus, including
information with respect to our plans and strategy for our business
and related financing, includes forward-looking statements that
involve risks and uncertainties. You should read the "Risk Factors"
section of this prospectus for a discussion of important factors
that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements
contained in the following discussion and analysis.
Overview
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.
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.
Results
of Operations
The
following table presents certain consolidated statement of
operations information and presentation of that data as a
percentage of change from year-to-year.
SIX MONTHS ENDED JUNE 30, 2019 AS COMPARED TO THE SIX MONTHS ENDED JUNE
30, 2018
(dollars in
thousands)
|
Six Months Ended
June 30,
|
|
|
|
|
|
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%
|
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.
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.
YEAR ENDED DECEMBER 31, 2018 COMPARED TO THE YEAR ENDED DECEMBER
31, 2017
(dollars
in thousands)
|
|
|
|
|
|
|
Net
revenue
|
$4,573
|
$2,452
|
$2,121
|
86.5%
|
Cost of goods
sold
|
4,105
|
2,181
|
1,924
|
-88.2%
|
Gross
profit
|
468
|
271
|
197
|
72.7%
|
General and
administrative expenses
|
5,017
|
2,320
|
2,697
|
-116.3%
|
Operating
loss
|
(4,549)
|
(2,049)
|
(2,500)
|
-122.0%
|
Other income
(expense):
|
|
|
|
|
Change
in fair value of derivative
|
978
|
496
|
482
|
97.2%
|
Interest
expense, net
|
(1,321)
|
(1,281)
|
(40)
|
-3.1%
|
Other
income
|
-
|
16
|
(16)
|
-100.0%
|
Impairment
of acquired assets
|
(62)
|
-
|
(62)
|
-100.0%
|
Loss on debt
conversions
|
(6,519)
|
(2,503)
|
(4,016)
|
-160.4%
|
Total other
(expense)
|
(6,924)
|
(3,272)
|
(3,652)
|
-111.6%
|
(Loss) before
income taxes
|
(11,473)
|
(5,321)
|
(6,152)
|
-115.6%
|
Income taxes -
current benefit
|
-
|
-
|
-
|
0.0%
|
Net
(loss)
|
$(11,473)
|
$(5,321)
|
$(6,152)
|
-115.6%
|
Revenue
Net revenue for the
year ended December 31, 2018 increased $2,121,000 to $4,573,000 as
compared to $2,452,000 for the year ended December 31, 2017. The
increase resulted from increased sales personnel and channels of
distribution, the development of the reflective tiles and flooring product line which
was acquired on October 3, 2017, the development of the Encino
business and the acquisition of EZ-Clone on October 15,
2018.
Cost
of Goods Sold
Cost of sales for
the year ended December 31, 2018 increased $1,924,000 to $4,105,000
as compared to $2,181,000 for the year ended December 31, 2017. The
increase resulted from increased sales personnel and channels of
distribution, the development of the reflective tiles and flooring product line which
was acquired on October 3, 2017, the development of the Encino
business and the acquisition of EZ-Clone on October 15,
2018.
Gross profit was $468,000 for the year ended
December 31, 2018 as compared to a gross profit of $271,000 for the
year ended December 31, 2017. The gross profit percentage was 10.2%
for the year ended December 31, 2018 as compared to 11.1% for the
year ended December 31, 2017. The increase was due increased
sales, offset by lower cost of sales related to favorable product
mix at the reflective tiles and
flooring product line and the acquisition of EZ-Clone on October
15, 2018. The gross margin % decrease related to an
additional $100,000 reserve for obsolete inventory that was
recorded during the year ended December 31, 2018.
General
and Administrative Expenses
General and
administrative expenses for the year ended December 31, 2018 were
$5,017,000 as compared to $2,320,000 for the year ended December
31, 2017. The variances were as follows: (i) an increase in
insurance of $106,000 (ii) an increase in legal expense of $62,000;
(iii) an increase in payroll of $518,000; (iv) an increase in sales
and marketing of $ 131,000; (v) an increase in consulting of
$142,000; (vi) an increase in non-cash other expenses of $388,000;
(vii) an increase in rent of $189,000; (viii) an increase in
EZ-Clone expenses of $269,000; and (ix) an increase in other
expenses of $892,000. As part of the general and administrative
expenses for the year ended December 31, 2018, we recorded public
relation, investor relation or business development expenses of
$41,000 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 year ended December 31, 2018
were $682,000 including (i) depreciation and amortization of
$223,000; (ii) stock based compensation of $241,000 related to
stock option grants and warrants; (iii) common stock issued for
services of $218,000.
Non-cash general
and administrative expenses for the year ended December 31, 2017
were $294,000 including (i) depreciation and amortization of
$2,000; (ii) stock based compensation of $216,000 related to stock
option grants and warrants; and (iii) common stock issued for
services of $76,000.
Other
Expense
Other expense for
the year ended December 31, 2018 was $6,924,000 as compared to
other expense of $3,272,000 for the year ended December 31, 2017.
The other expense for the year ended December 31, 2018 included (i)
change in derivative liability of $978,000; offset by (ii) interest
expense of $1,321,000; (iii) loss on debt conversions of
$6,519,000; (iv) and impairment of acquired assets of $62,000. 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 the amortization of the debt discount
associated with our convertible notes and accrued interest expense
related to our notes payable. The loss on debt conversions related
to the conversion of our notes payable at prices below the market
price. The impairment of acquired assets related to the Encino
operation.
The other expense
for the year ended December 31, 2017 included (i) change in
derivative liability of $496,000 and (ii) other income of $16,000;
offset by (iii) interest expense of $1,281,000 and (iv) loss on
debt conversions of $2,503,000. 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 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
year ended December 31, 2018 was $11,473,000 as compared to
$5,321,000 for the year ended December 31, 2017 for the reasons
discussed above.
Net loss for the
year ended December 31, 2018 included non-cash expenses of
$7,477,000 including (i) depreciation and amortization of $223,000;
(ii) stock based compensation of $241,000 related to stock option
grants and warrants; (iii) common stock issued for services of
$218,000. (iv) accrued interest and amortization of debt discount
on convertible notes payable of $1,191,000; (v) loss on debt
conversions of $6,519,000; (vi) impairment of acquired assets of
$62,000; offset by (vii) change in derivative liability of
$978,000.
Net loss for the
year ended December 31, 2017 included non-cash expenses of
$3,462,000, (i) depreciation and amortization of $2,000; (ii) stock
based compensation of $216,000 related to stock option grants and
warrants; (iii) common stock issued for services of $76,000. (iv)
accrued interest and amortization of debt discount on convertible
notes payable of $623,000; (v) write-off of derivative liability to
additional paid in capital to of $538,000; and (vi) loss on debt
conversions of 2,503,000, offset by (vii) change in derivative
liability of $496,000.
We expect losses to
continue as we implement our business plan.
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:
|
|
|
|
|
|
Contractual Cash
Obligations
|
|
|
|
|
|
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
|
$-
|
(1) Based on the
end of period exchange rate.
|
|
|
|
|
|
Critical
Accounting Policies and Estimates
Accounts Receivable and Revenue -
Revenue is recognized at the time the Company sells merchandise to
the customer in store. eCommerce sales include shipping revenue and
are recorded upon shipment to the customer. This is when the risk
of loss transfers to our customers, the fee is fixed and
determinable, and collection of the sale is reasonably assured. A
product is not shipped without an order from the customer and the
completion of credit acceptance procedures. The majority of our
sales are cash or credit card; however, we occasionally extend
terms to our customers. Accounts receivable are reviewed
periodically for collectability.
Inventories - Inventories are recorded
on a first in first out basis. Inventory consists of raw materials,
purchased finished goods and components held for resale. Inventory
is valued at the lower of cost or market. The reserve for inventory
was $50,000 and $120,000 as of June 30, 2019 and December 31, 2018,
respectively.
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.
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.
Convertible Securities
– Based upon ASC 815-15,
we have adopted a sequencing approach regarding the application of
ASC 815-40 to convertible securities issued subsequent to December
31, 2015. We will evaluate our contracts based upon the earliest
issuance date. In the event partial reclassification of contracts
subject to ASC 815-40-25 is necessary, due to our inability to
demonstrate we have sufficient shares authorized and unissued,
shares will be allocated on the basis of issuance date, with the
earliest issuance date receiving first allocation of shares. If a
reclassification of an instrument were required, it would result in
the instrument issued latest being reclassified first.
Quantitative
and Qualitative Disclosure about Market Risk
We have no
investments in any market risk sensitive instruments either held
for trading purposes or entered into for other than trading
purposes.
DESCRIPTION OF OUR BUSINESS
Overview
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 an
industry-leading supplier of commercial-grade cloning and
propagation equipment. This was a part of the Company’s
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.
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 unique, and we recently received 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.
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.
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.
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 OTC Markets
Pink
Sheets because our bid
price had closed below $0.01 for more than 30 consecutive calendar
days.
Directors
and Executive Officers
The following table
sets forth certain information about our current directors and
executive officers as of September 4, 2019:
Name
|
Age
|
Positions
and Offices Held
|
Since
|
Management
Directors
|
|
|
|
Marco
Hegyi
|
61
|
Director
|
December 9,
2013
|
|
|
Chairman of the
Board
|
April 1, 2016-
October 23, 2017 and December 6, 2018
|
|
|
Chief Executive
Officer
|
April 1,
2016
|
|
|
President
|
December 4,
2013
|
|
|
Nominations and
Governance Committee Chairman
|
June 3, 2014-
October 23, 2017
|
|
|
Interim Audit
Committee Chairman
|
December 6,
2018
|
Mark E.
Scott
|
66
|
Chief Financial
Officer
|
July 31,
2014
|
|
|
Secretary
|
February 14,
2017
|
|
|
Director
|
February 14,
2017
|
Independent
Directors
|
|
|
|
Katherine
McLain
|
53
|
Director
|
February 14,
2017
|
|
|
Nominations and
Governance Committee Chairman
|
October 23,
2017
|
|
|
Compensation
Committee Chairman
|
December 6,
2018
|
Thom
Kozik
|
59
|
Director
|
October 5,
2017
|
Other Named
Executives
|
|
|
|
Joseph
Barnes
|
46
|
Executive Vice
President of GrowLife Hydroponics, Inc.
|
August 16,
2017
|
|
|
Senior Vice
President of Business Development
|
October 10,
2014
|
Term of Office
Each
of our officers is elected by the Company's Board of Directors to
serve until the next annual meeting of Directors or until their
successors are duly elected and qualified. Each of our directors is
elected by the Company's Board of Directors and shall hold office
until the next annual meeting of stockholders and until his/her
successor shall have been duly elected and qualified.
Marco Hegyi – Mr. Hegyi joined GrowLife as its President and a
Member of its Board of Directors on December 9, 2013 and was
appointed as Chairman of the Nominations and Governance Committee
and a member of the Compensation Committee on June 3, 2014.
Mr. Hegyi was appointed as CEO and Chairman of GrowLife
effective on April 1, 2016. On October 23, 2017, Mr. Hegyi was not
appointed as Chairman of GrowLife, Chairman of the Nominations and
Governance Committee or a member of the Compensation Committee.
Effective December 6, 2018, Mr. Hegyi serves as Chairman of the
Board, a Member of the Board of Directors, Chief Executive Officer,
President, Interim Audit Committee Chairman and as a Member of the
Compensation and Nominations and Governance
Committees.
Mr.
Hegyi served as an independent director of Know Labs, Inc., fka
Visualant, Inc. from February 14, 2008 and as Chairman of the Board
from May 2011, and served at the Chairman of the Audit and
Compensation committees until his departure on February 2015.
Previously, Mr. Hegyi was a principal with the Chasm Group from
2006 to January 2014, where he has provided business consulting
services. As a management consultant, Mr. Hegyi applied his
extensive technology industry experience to help early-stage
companies and has been issued 10 US patents.
Prior
to working as a consultant in 2006, Mr. Hegyi served as Senior
Director of Global Product Management at Yahoo! Prior to Yahoo!,
Mr. Hegyi was at Microsoft leading program management for Microsoft
Windows and Office beta releases aimed at software developers from
2001 to 2006. While at Microsoft, he formed new
software-as-a-service concepts and created operating programs to
extend the depth and breadth of the company’s unparalleled
developer eco-system, including managing offshore, outsource teams
in China and India, and being the named inventor of a filed
Microsoft patent for a business process in service
delivery.
During
Mr. Hegyi’s career, he has served as President and CEO of
private and public companies, Chairman and director of boards,
finance, compensation and audit committee chair, chief operating
officer, vice-president of sales and marketing, senior director of
product management, and he began his career as a systems software
engineer.
Mr.
Hegyi earned a Bachelor of Science degree in Information and
Computer Sciences from the University of California, Irvine, and
has completed advanced studies in innovation marketing, advanced
management, and strategy at Harvard Business School, Stanford
University, UCLA Anderson Graduate School of Management, and MIT
Sloan School of Management.
Mr.
Hegyi’s prior experience as Chairman and Chief Executive
Officer of public companies, combined with his advanced studies in
business management and strategy, were the primary factors in the
decision to add Mr. Hegyi to the Company’s Board of
Directors.
Mark E. Scott
– Mr. Mark E. Scott was
re-appointed to the Board of Directors and Secretary of GrowLife,
Inc. on February 14, 2017. Mr. Scott was previously a member of the
Board of Directors and Secretary of GrowLife, Inc. from May 2014
until his resignation on October 18, 2015. Mr. Scott was appointed
our Consulting Chief Financial Officer on August 31, 2014 and Chief
Financial Officer on November 1, 2017.
Mr.
Scott served as Chief Financial Officer, Secretary and Treasurer of
Know Labs, Inc., from May 2010 to August 31, 2016. Mr. Scott was
Chief Financial Officer of U.S. Rare Earths, Inc., a consulting
position he held December 19, 2011 to April 30, 2014 and Chief
Financial Officer of Sonora Resources Corporation, a consulting
position he held from June 15, 2011 to August 31, 2014. Also, Mr.
Scott was Chief Financial Officer, Secretary and Treasurer of
WestMountain Gold from February 28, 2011 to December 31, 2013 and
was a consultant from December 2010 to February 27, 2011. Mr. Scott
provides consulting services to other entities from time to time.
Mr. Scott has significant financial, capital market and relations
experience in public and private microcap companies.
Mr. Scott is a certified public accountant and received a Bachelor
of Arts in Accounting from the University of
Washington.
Mr.
Scott was appointed to the Board of Directors based on his
financial, SEC and governance skills.
Katherine McLain -
Katherine McLain, Esq. joined GrowLife as a Member of its Board of
Directors on February 14, 2017 and was appointed Chairman of the
Nominations & Governance and Compensation Committees and serves
on the Audit Committee as of December 6, 2018. Ms. McLain has served as Assistant General Counsel
for Intuit, Inc. (known for TurboTax & QuickBooks) since
November 2017. Previously, Ms. McLain was legal counsel for Stripe,
Inc., a financial payments company from 2015-2017. From 2010 to
2015, Ms. McLain was Senior Counsel of Silicon Valley Bank. Ms.
McLain has held legal and compliance roles ranging in both public
and private companies including Silicon Valley Bank, Wells Fargo
Bank, and Obopay. Ms. McLain has over 30 years of experience
as a revenue focused attorney and regulatory professional helping
grow new business lines as well as ground up start-up
ventures. She is a graduate of the University of California,
Berkeley and the Santa Clara University School of Law and lives in
Castro Valley, CA.
Ms.
McLain was appointed to the Board of Directors based on her legal
and regulatory skills.
Thom Kozik - Thom Kozik joined
GrowLife as a Member of its Board of Directors on October 5, 2017
and was appointed a member of the Audit Committee on October 23,
2017. Mr. Kozik was appointed to the Nominations & Governance
and Compensation Committees and serves on the Audit Committee as of
December 6, 2018. From 2013 through 2014, Mr. Kozik served as Chief
Operating Office of Omnia Media in Los Angeles, a leading YouTube
Multichannel Network delivering over 1 billion monthly video views,
and almost 70 million global Millennial subscribers. Thom assisted
the company’s CEO/founder in building the team, refining
product strategy, and securing additional funding. In December
2014, Mr. Kozik took on the role of VP, Global Marketing/Loyalty
for Marriott International, having been recruited to fundamentally
transform the hospitality industry’s longest-running loyalty
program. Thom also led the merging of two of the industry’s
most powerful programs with Marriott’s acquisition of
Starwood Hotels & Resorts in 2016. Since March 1, 2018, Mr.
Kozik serves as Chief Commercial Officer of Loyyal Corporation, a
technology firm providing services to enterprise clients in the
Travel & Hospitality sector. In his decades of experience with
corporations such as Marriott International, Microsoft, Yahoo, and
Atari, along with several startups, he has held executive roles in
marketing, business development, and product development. Over the
past decade Kozik’s core focus has been the behavioral
economics of online consumers and communities, and methods to
maximize their lifetime value, and leveraging technology to reduce
acquisition costs while increasing retention.
Mr.
Kozik was appointed to the Board of Directors based on his
marketing and product brand skills.
Joseph Barnes -
Mr. Barnes was appointed President of
GrowLife Hydroponics, Inc. on August 16, 2017 and was appointed
Senior Vice President of Business Development for GrowLife, Inc. on
October 10, 2014. Mr. Barnes works, Colorado. Mr. Barnes joined
GrowLife in 2010 and is responsible for all GrowLife Hydroponics
operations. He led the sales team that recorded sales in 2014 of
more than $8 million, a 100% increase from the previous
year.
Mr.
Barnes made the progressive and entrepreneurial decision to work
with GrowLife after seeing the agricultural benefits of indoor
growing. He is deeply passionate about clean and sustainable grows,
and has deep relationships with many trusted cultivators. He holds
extensive knowledge of indoor growing methods with
concentrating on maximizing the yields for clean and
healthy crops.
Barnes
was a highly regarded snowboard instructor in Vail, Colorado prior
to joining GrowLife. He worked with many top snowboard
professionals, and received a Level 1 certification from American
Association Snowboard Instructors (AASI). Before his days on the
slopes, Barnes was also a recruiting manager focusing on placing
senior executives with international pharmaceutical/biotech
companies. He also owned and operated Chrome Night Life Arena, a
20,000 square foot indoor/outdoor venue based in Philadelphia with
more than 65 employees.
Certain Significant Employees
There
are no significant employees required to be disclosed under Item
401(c) of Regulation S-K.
Family Relationships
There
are no family relationships among our directors and executive
officers.
Board
Composition and Appointment of Directors
Our business is
managed under the direction of our board of directors. Our board of
directors currently consists of four members. Our board of
directors conducts its business through meetings of our board of
directors and our committees. During 2018, our current board of
directors held five meetings and acted by unanimous written consent
seven times. All members of our current board of directors attended
75% of the meetings of our board during 2015.
There are no family
relationships among any of our directors or executive
officers.
Communication
with our Board of Directors
Our stockholders
and other interested parties may communicate with our board of
directors by sending written communication in an envelope addressed
to "Board of Directors" in care of the Secretary, 5400 Carillon
Point, Kirkland, WA 98033.
Director Independence
The
Board has affirmatively determined that Katherine McLain, and Thom
Kozik are independent as of December 31, 2018. For purposes
of making that determination, the Board used NASDAQ’s Listing
Rules even though the Company is not currently listed on
NASDAQ.
Board
Committees
The
Board has three standing committees to facilitate and assist the
Board in the execution of its responsibilities. The committees are
currently the Audit Committee, the Nominations and Governance
Committee, and the Compensation Committee. The Committees were
formed on June 3, 2014 by the current board of directors. The Audit
Committee, Compensation and Nominations and Governance Committees
each have one management directors and two independent directors.
The table below shows current membership for each of the
standing Board committees.
Audit
|
|
Compensation
|
|
Nominations
and Governance
|
Marco Hegyi
(Interim Chairman)
|
|
Katherine McLain
(Chairman)
|
|
Katherine McLain
(Chairman)
|
Thom
Kozik
|
|
Marco
Hegyi
|
|
Marco
Hegyi
|
Katherine
McLain
|
|
Thom
Kozik
|
|
Thom
Kozik
|
Audit Committee
The Audit Committee
has three members and met four times during the fiscal year that
ended December 31, 2018. The Audit Committee is currently comprised
of Ms. Katherine McLain and Mr. Thom Kozik, each a non-employee
Director and Marco Hegyi, a management director. The Board has
determined that Ms. McLain, Mr. Kozik and Mr. Hegyi are financially
literate. The Board also has determined that Mr. Hegyi, Interim
Chairman of the Audit Committee, is an “audit committee
financial expert” as defined by the Securities and Exchange
Commission (“SEC”) and as adopted under the
Sarbanes-Oxley Act of 2002. The Amended and Restated Audit
Committee charter can be found on the Company’s website at
www.growlifeinc.com
and was filed as Exhibit 99.2 to our Form 8-K filed with the SEC on
October 25, 2015.
The Audit
Committee’s responsibilities, discussed in detail in the
charter include, among other duties, the responsibility
to:
-
appoint the
independent registered accounting firm;
-
review the
arrangements for and scope of the audit by independent registered
accounting firm;
-
review the
independence of the independent registered accounting
firm;
-
consider the
adequacy and effectiveness of the system of internal accounting and
financial controls and review any proposed
corrective actions;
-
review and monitor
our policies regarding business ethics and conflicts of interest,
audit function and internal audit review;
-
discuss with
management and the independent auditors our draft quarterly interim
and annual financial statements and key accounting and reporting
matters, including earnings releases and review of financial
statements; and
-
review the
activities and recommendations of our accounting
department
Nominations and Governance Committee
The Nominations and
Governance Committee currently has three members and did not meet
during the fiscal year that ended on December 31, 2018. Nominations
and Governance Committee is comprised Ms. Katherine McLain and Mr.
Thom Kozik, each a non-employee Director and Marco Hegyi, a
management director. The Committee was formed on June 3,
2014. The Amended and Restated Nominations and Governance Committee
charter can be found on the Company’s website at www.growlifeinc.com
and was filed as Exhibit 99.2 to our Form 8-K filed with the SEC on
October 25, 2015.
The Nominations and
Governance Committee’s responsibilities, discussed in detail
in the charter include, among other duties, the responsibility
to:
●
assist
the Board in identifying individuals qualified to become Board
members, and recommend to the Board the nominees for election as
directors at the next annual meeting of stockholders;
●
Assist
the Board in determining the size and composition of the Board
committees;
●
develop
and recommend to the Board the corporate governance principles
applicable to the Company; and
●
serve
in an advisory capacity to the Board and Chairman of the Board on
matters of organization, management succession plans, major changes
in the organizational structure of the Company and the conduct of
board activities.
Compensation Committee
The Compensation
Committee currently has three members and met two times during the
fiscal year ended December 31, 2018. The Committee was formed on
June 3, 2014. The Compensation Committee is comprised of Ms.
Katherine McLain and Mr. Thom Kozik, each a non-employee Director
and Marco Hegyi, a management director The Compensation committee
charter can be found on the Company’s website at www.growlifeinc.com
and was filed as Exhibit 99.2 to our Form 8-K filed with the SEC on
June 9, 2014.
The Compensation
Committee’s responsibilities, which are discussed in detail
in its charter, include, among other duties, the responsibility
to:
●
Review
and approve corporate goals and objectives relevant to compensation
and benefits for the CEO and all other executive officers,
evaluating the CEO’s and all other executive officer’s
performances in light of those goals and objectives, and
recommending to the Board the level of compensation of the CEO and
all other executive officers based on such
evaluations;
●
Administering
the Company’s stock incentive plans, including the review and
approval of all stock option, restricted stock or other award
grants to executive officers, non-employee directors and
consultants/advisors, and the aggregate number of stock options or
other awards to be granted to employees;
●
Reviewing,
commenting on and recommending to the Board executive compensation
plans, programs and policies of the Company or that the Company
proposes to adopt;
●
Reviewing
and recommended the annual compensation for the Company’s
non-employee directors; and
●
Administering
the Company’s Stock Incentive Plan, including the review of
all stock option, restricted stock, or other award grants pursuant
to the plan.
Compensation Committee Interlocks and Insider
Participation
None of our
executive officers serves as a member of the board of directors or
compensation committee, or other committee serving an equivalent
function, of any other entity that has one or more of its executive
officers serving as a member of our board of directors or our
compensation committee.
Code of Conduct and
Ethics
We have adopted
conduct and ethics standards titled the code of ethics, which is
available at www.growlifeinc.com. These standards were adopted by
our board of directors to promote transparency and integrity. The
standards apply to our board of directors, executives and
employees. Waivers of the requirements of our code of ethics or
associated polices with respect to members of our board of
directors or executive officers are subject to approval of the full
board.
Involvement
in Certain Legal Proceedings
None of our current
directors or executive officers has, to the best of our knowledge,
during the past ten years:
●
Had any petition
under the federal bankruptcy laws or any state insolvency law filed
by or against, or had a receiver, fiscal agent, or similar officer
appointed by a court for the business or property of such person,
or any partnership in which he was a general partner at or within
two years before the time hereof, or any corporation or business
association of which he was an executive officer at or within two
years before the time hereof;
●
Been convicted in a
criminal proceeding or a named subject of a pending criminal
proceeding (excluding traffic violations and other minor
offenses);
●
Been the subject of
any order, judgment, or decree, not subsequently reversed,
suspended, or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining him from, or otherwise
limiting, the following activities:
●
Acting as a futures
commission merchant, introducing broker, commodity trading advisor,
commodity pool operator, floor broker, leverage transaction
merchant, any other person regulated by the Commodity Futures
Trading Commission, or an associated person of any of the
foregoing, or as an investment adviser, underwriter, broker or
dealer in securities, or as an affiliated person, director or
employee of any investment company, bank, savings and loan
association or insurance company, or engaging in or continuing any
conduct or practice in connection with such activity;
●
Engaging in any
type of business practice; or
●
Engaging in any
activity in connection with the purchase or sale of any security or
commodity or in connection with any violation of federal or state
securities laws or federal commodities laws;
●
Been the subject of
any order, judgment, or decree, not subsequently reversed,
suspended, or vacated, of any federal or state authority barring,
suspending, or otherwise limiting for more than 60 days the
right of such person to engage in any activity described in
(i) above, or to be associated with persons engaged in any
such activity;
●
Been found by a
court of competent jurisdiction in a civil action or by the SEC to
have violated any federal or state securities law, where the
judgment in such civil action or finding by the SEC has not been
subsequently reversed, suspended, or vacated; or
●
Been found by a
court of competent jurisdiction in a civil action or by the
Commodity Futures Trading Commission to have violated any federal
commodities law, where the judgment in such civil action or finding
by the Commodity Futures Trading Commission has not been
subsequently reversed, suspended, or vacated.
Section 16(a) Beneficial Ownership Reporting
Compliance
Our
executive officers, directors and 10% stockholders are required
under Section 16(a) of the Exchange Act to file reports of
ownership and changes in ownership with the SEC. Copies of these
reports must also be furnished to us.
Based
solely on a review of copies of reports furnished to us, as of
December 31, 2018 our executive officers, directors and 10% holders
complied with all filing requirements.
EXECUTIVE AND DIRECTOR COMPENSATION
Summary
Compensation Table
The
following table provides information concerning remuneration of the
chief executive officer, the chief financial officer and another
named executive officer for the years ended December 31, 2018 and
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Position
|
|
|
|
|
|
|
|
|
Marco
Hegyi, Chief Excutive Officer, Chairman of the Board and Director
(2)
|
12/31/2018
|
$255,234
|
$20,000
|
$-
|
$-
|
$-
|
$285,023
|
$560,257
|
|
12/31/2017
|
$250,000
|
$-
|
$-
|
$-
|
$-
|
$205,273
|
$455,273
|
|
|
|
|
|
|
|
|
Mark
E. Scott, Chief Financial Officer and Director (3)
|
12/31/2018
|
$147,140
|
$20,000
|
$-
|
$-
|
$40,000
|
$27,018
|
$234,158
|
|
12/31/2017
|
$138,250
|
$-
|
$-
|
$-
|
$18,000
|
$28,047
|
$184,297
|
|
|
|
|
|
|
|
|
Joseph
Barnes,President of GrowLife Hydroponics, Inc. (4)
|
12/31/2018
|
$152,515
|
$20,000
|
$-
|
$-
|
$36,000
|
$-
|
$208,515
|
|
12/31/2017
|
$138,670
|
$-
|
$-
|
$-
|
$24,000
|
$-
|
$162,670
|
(1)
For 2013, reflects the
aggregate grant date fair value of stock awards granted during the
relevant fiscal year calculated in accordance with FASB ASC Topic
718 as reflected in the terms of the August 12, 2012 Compensation
Plan. For 2014, these amounts reflect
the grant date market value as required by Regulation S-K Item
402(n)(2), computed in accordance with FASB ASC Topic
718.
(2)
Mr. Hegyi was paid
a salary of $275,000 during the period October 15, 2018 to December
31, 2018 and a salary of $250,000 during the period January 1, 2018
to October 14, 2018 and the year ended December 31, 2017. Mr. Hegyi
received a discretionary bonus of $20,000 during the year ended
December 31, 2018. We paid life
insurance of $10,273 for Mr. Hegyi during the years ended December
31, 2018 and 2017, respectively. On October 21, 2018 and
2017, a Mr. Hegyi a 5 year Warrant to purchase up to 10,000,000
shares of our common stock at an exercise price of $0.01 per share
vested. The warrants were valued at $390,000 and $192,000 we
recorded $178,750 and $195,000 as compensation expense for the
years ended December 31, 2018 and 2017, respectively.. On October
15, 2018, Mr. Hegyi received Warrants to purchase up to 48,000,000
shares of our common stock at an exercise price of $0.012 per share
and which vest on October 15, 2018, 2019 and 2020. The Warrants are
exercisable for 5 years. The warrant that vested on October 15,
2018 was valued at $96,000 and we recorded this amount compensation
expense for the year ended December 31, 2018.
(3)
Mr. Scott was paid
a salary of $165,000 during the period October 15, 2018 to December
31, 2018 and a salary of $150,000 during the period January 1, 2018
to October 14, 2018 and the year ended December 31, 2017. Mr. Scott
received a discretionary bonus of $20,000 during the year ended
December 31, 2018. Mr. Scott was
reimbursed $27,018 and $28,047 for insurance expenses during the
years ended December 31, 2018 and 2017, respectively.
On October 15, 2018, an entity
controlled by Mr. Scott was granted an option to purchase
20,000,000 shares of common stock at an exercise price of
$0.012 per share. On October 15, 2017,
an entity controlled by Mr. Scott was granted an option to purchase
12,000,000 shares of common stock at an exercise price of
$0.006 per share. The stock option grants vest quarterly over three
years and are exercisable for 5 years. The stock option grants were
valued at $40,000 and $18,000. The Company recorded $8,833 and
$1,500 as compensation expense for the years ended December 31,
2018 and 2017, respectively.
(4)
Mr. Barnes was paid
a salary of $165,000 during the period October 15, 2018 to December
31, 2018 and a salary of $150,000 during the period January 1, 2018
to October 14, 2018 and the year ended December 31, 2017. Mr.
Barnes received a discretionary bonus of $20,000 during the year
ended December 31, 2018. On October
15, 2018, Mr. Barnes was granted an option to purchase 18,000,000
shares of common stock at an exercise price of $0.012 per
share. On October 25, 2017, Mr. Barnes
was granted an option to purchase 10,000,000 shares of common
stock at an exercise price of $0.007 per share. The stock
option grants vest quarterly over three years and are exercisable
for 5 years. The stock option grants were valued at $36,000 and
$24,000. The Company recorded $8,550 and $2,000 as compensation
expense for the years ended December 31, 2018 and 2017,
respectively.
Grants of Stock Based Awards during the year ended December 31,
2018
The
Compensation Committee approved the following performance-based
incentive compensation to the Named Executive Officers for the year
ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Future Payouts Under
|
Estimated Future Payouts Under
|
|
|
|
|
|
|
Non-Equity Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
|
|
|
|
|
|
|
|
|
|
Marco
Hegyi
|
-
|
$-
|
-
|
$-
|
-
|
-
|
-
|
-
|
-
|
$-
|
$-
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark
E. Scott (2)
|
|
$-
|
-
|
$-
|
-
|
-
|
-
|
20,000,000
|
-
|
$0.012
|
$40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Barnes (3)
|
|
$-
|
-
|
$-
|
-
|
-
|
-
|
18,000,000
|
-
|
$0.012
|
$36,000
|
(1)
These
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC
Topic 718.
(2)
On October 15, 2018, an entity controlled by Mr.
Scott was granted an option to purchase 20,000,000 shares of common
stock at an exercise price of $0.012 per share. The stock
option grant vests quarterly over three years and is exercisable
for 5 years. The stock option grant was valued at
$40,000
(3)
On October 15, 2018, Mr. Barnes was granted an
option to purchase 18,000,000 shares of common stock at an
exercise price of $0.012 per share. The stock option grant vests
quarterly over three years and is exercisable for 5 years. The
stock option grant was valued at $36,000.
Outstanding Equity Awards as of December 31, 2018
The
Named Executive Officers had the following outstanding equity
awards as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
Expiration
|
|
|
|
|
Name
|
|
|
|
|
|
|
|
|
|
Marco
Hegyi (2)
|
-
|
-
|
-
|
$-
|
|
-
|
$-
|
-
|
$-
|
|
|
|
|
|
|
|
|
|
|
Mark
E. Scott (3)
|
4,000,000
|
-
|
-
|
$0.010
|
7/30/2019
|
-
|
$-
|
-
|
$-
|
|
5,000,000
|
7,000,000
|
-
|
$0.006
|
10/15/2022
|
-
|
$-
|
-
|
$-
|
|
1,666,667
|
18,333,333
|
-
|
$0.012
|
10/23/2023
|
-
|
$-
|
-
|
$-
|
|
|
|
|
|
|
|
|
|
|
Joseph
Barnes (4)
|
8,000,000
|
-
|
-
|
$0.010
|
10/9/2019
|
-
|
$-
|
-
|
$-
|
|
4,166,667
|
5,833,333
|
-
|
$0.007
|
10/25/2022
|
-
|
$-
|
-
|
$-
|
|
1,500,000
|
16,500,000
|
|
$0.012
|
10/23/2023
|
-
|
$-
|
-
|
$-
|
(1)
These
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC
Topic 718.
(2)
On October 15, 2018, an entity controlled by Mr.
Scott was granted an option to purchase 20,000,000 shares of common
stock at an exercise price of $0.012 per share. On October 15, 2017, an entity controlled by Mr.
Scott was granted an option to purchase 12,000,000 shares of common
stock at an exercise price of $0.006 per share. The stock
option grants vest quarterly over three years and are exercisable
for 5 years. The stock option grants were valued at $40,000 and
$18,000 The Company recorded $8,833 and $1,500 as compensation
expense for the years ended December 31, 2018 and 2017,
respectively. An entity controlled by Mr. Scott has an additional
4,000,000 share stock option grant that is fully
vested.
(3)
On October 15, 2018, Mr. Barnes was granted an
option to purchase 18,000,000 shares of common stock at an
exercise price of $0.012 per share. On
October 25, 2017, Mr. Barnes was granted an option to purchase
10,000,000 shares of common stock at an exercise price of
$0.007 per share. The stock option grants vest quarterly over three
years and are exercisable for 5 years. The stock option grants were
valued at $36,000 and $24,000. The Company recorded $8,550 and
$2,000 as compensation expense for the years ended December 31,
2018 and 2017, respectively. Mr. Barnes stock option grant consists
of 8,000,000 shares of our common stock that vested quarterly over
three years beginning October 1, 2014 and 2,000,000 shares of our
common stock that vested October 10, 2014. On October 12, 2016, we
amended the exercise price of the stock option grants for Mr.
Barnes to $0.010 per share.
Option Exercises and Stock Vested for the year ended December 31,
2018
Mr. Hegyi, Scott
and Barnes did not have any option exercised or stock that vested
during the year ended December 31, 2018.
Pension Benefits
We
do not provide any pension benefits.
Nonqualified Deferred Compensation
We
do not have a nonqualified deferral program.
Employment
and Consulting Agreements
Employment Agreement with Marco Hegyi
On October 15,
2018, the Board of Directors approved an Employment Agreement with
Marco Hegyi pursuant to which we engaged Mr. Hegyi as its Chief
Executive Officer through October 15, 2021. Mr. Hegyi’s
previous Employment Agreement was set to expire on October 21,
2018.
Mr. Hegyi’s
annual compensation is $275,000. Mr. Hegyi is also entitled to
receive an annual bonus equal to four percent (4%) of the
Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
Mr. Hegyi received
a Warrant to purchase up to 16,000,000 shares of our common stock
at an exercise price of $0.012 per share which vest immediately. In
addition, Mr. Hegyi received two Warrants to purchase up to
16,000,000 shares of common stock of the Company at an exercise
price of $0.012 per share which vest on October 15, 2019 and 2020,
respectively. The Warrants are exercisable for 5
years.
Mr. Hegyi will be
entitled to participate in all group employment benefits that are
offered by us to our senior executives and management employees
from time to time, subject to the terms and conditions of such
benefit plans, including any eligibility requirements. In addition,
the Company will purchase and maintain during the Term an insurance
policy on Mr. Hegyi’s life in the amount of $2,000,000
payable to Mr. Hegyi’s named heirs or estate as the
beneficiary.
If we terminate Mr. Hegyi’s employment at
any time prior to the expiration of the Term without Cause, as
defined in the Employment Agreement, or if Mr. Hegyi terminates his
employment at any time for “Good Reason” or due to a
“Disability”, Mr. Hegyi will be entitled to receive (i)
his Base Salary amount through the end of the Term; and (ii) his
Annual Bonus amount for each year during the remainder of the
Term.
Employment Agreement with Mark E. Scott
On October 15,
2018, the Compensation Committee approved an Employment Agreement
with Mark E. Scott pursuant to which the Company engaged Mr. Scott
as its Chief Financial Officer through October 15, 2021. Mr.
Scott’s previous Agreement was cancelled.
Mr. Scott’s
annual compensation is $165,000. Mr. Scott is also entitled to
receive an annual bonus equal to two percent (2%) of the
Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
Our Board of
Directors granted Mr. Scott an option to purchase twenty million
shares of our Common Stock under our 2017 Amended and Restated
Stock Incentive Plan at an exercise price of $0.012 per share. The
Shares vest quarterly over three years. All options will have a
five-year life and allow for a cashless exercise. The stock option
grant is subject to the terms and conditions of our Amended and
Restated Stock Incentive Plan, including vesting requirements. In
the event that Mr. Scott’s continuous status as employee to
us is terminated by us without Cause or Mr. Scott terminates his
employment with us for Good Reason as defined in the Scott
Agreement, in either case upon or within twelve months after a
Change in Control as defined in our amended and Restated Stock
Incentive Plan, then 100% of the total number of Shares shall
immediately become vested.
Mr. Scott is
entitled to participate in all group employment benefits that are
offered by us to our senior executives and management employees
from time to time, subject to the terms and conditions of such
benefit plans, including any eligibility requirements. In addition,
we are required purchase and maintain an insurance policy on Mr.
Scott’s life in the amount of $2,000,000 payable to Mr.
Scott’s named heirs or estate as the beneficiary. Finally,
Mr. Scott is entitled to twenty days of vacation annually and also
has certain insurance and travel employment benefits.
If we terminate Mr. Scott’s employment at
any time prior to the expiration of the Term without Cause, as
defined in the Employment Agreement, or if Mr. Scott terminates his
employment at any time for “Good Reason” or due to a
“Disability”, Mr. Scott will be entitled to receive (i)
his Base Salary amount for ninety days; and (ii) his Annual Bonus
amount for each year during the remainder of the
Term.
Employment Agreement with Joseph Barnes
On October 15,
2018, our Compensation Committee approved an Employment Agreement
with Joseph Barnes pursuant to which we engaged Mr. Barnes as
President of the GrowLife Hydroponics Company through October 15,
2021. Mr. Barnes’s previous Agreement was
cancelled.
Mr. Barnes’s
annual compensation is $165,000. Mr. Barnes is also entitled to
receive an annual bonus equal to two percent (2%) of the
Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
Our Board of
Directors granted Mr. Barnes an option to purchase eighteen million
shares of the Company’s Common Stock under the
Company’s 2017 Amended and Restated Stock Incentive Plan at
an exercise price of $0.012 per share. The Shares vest quarterly
over three years. All options will have a five-year life and allow
for a cashless exercise. The stock option grant is subject to the
terms and conditions of our Amended and Restated Stock Incentive
Plan, including vesting requirements. In the event that Mr.
Barnes’s continuous status as employee to us is terminated by
us without Cause or Mr. Barnes terminates his employment with us
for Good Reason as defined in the Barnes Agreement, in either case
upon or within twelve months after a Change in Control as defined
in our Amended and Restated Stock Incentive, then 100% of the total
number of Shares shall immediately become vested.
Mr. Barnes is
entitled to participate in all group employment benefits that are
offered by us to our senior executives and management employees
from time to time, subject to the terms and conditions of such
benefit plans, including any eligibility requirements. In addition,
the Company is required purchase and maintain an insurance policy
on Mr. Barnes’s life in the amount of $2,000,000 payable to
Mr. Barnes’s named heirs or estate as the beneficiary.
Finally, Mr. Barnes is entitled to twenty days of vacation annually
and also has certain insurance and travel employment
benefits.
If we terminate Mr. Barnes’s employment at
any time prior to the expiration of the Term without Cause, as
defined in the Employment Agreement, or if Mr. Barnes terminates
his employment at any time for “Good Reason” or due to
a “Disability”, Mr. Barnes will be entitled to receive
(i) his Base Salary amount for ninety days; and (ii) his Annual
Bonus amount for each year during the remainder of the
Term.
Potential Payments upon
Termination or Change in Control
The
Company’s Employment Agreement with Marco Hegyi has
provisions providing for severance payments as detailed
below.
Executive
|
|
|
|
|
|
Payments Upon
|
|
|
|
|
|
Separation
|
|
|
|
|
|
Compensation:
|
|
|
|
|
|
Base
salary (1)
|
$-
|
$-
|
$575,000
|
$575,000
|
$-
|
Performance-based
incentive
|
|
|
|
|
|
compensation
|
$-
|
$-
|
$-
|
$-
|
$-
|
Stock
options
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Benefits
and Perquisites:
|
|
|
|
|
|
Health
and welfare benefits
|
$-
|
$-
|
$-
|
$-
|
$-
|
Accrued
vacation pay
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$575,000
|
$575,000
|
$-
|
(1)
Reflects
amounts to be paid upon termination without cause and upon
termination in a change of control, less any months worked. All
outstanding warrants fully vest under certain
conditions.
The
Company’s Employment Agreement with Mark E. Scott has
provisions providing for severance payments as detailed
below.
|
|
|
|
|
|
Executive
|
|
|
|
|
|
Payments Upon
|
|
|
|
|
|
Separation
|
|
|
|
|
|
Compensation:
|
|
|
|
|
|
Base
salary (1)
|
$-
|
$-
|
$41,250
|
$41,250
|
$-
|
Performance-based
incentive
|
|
|
|
|
|
compensation
|
$-
|
$-
|
$-
|
$-
|
$-
|
Stock
options
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Benefits
and Perquisites:
|
|
|
|
|
|
Health
and welfare benefits
|
$-
|
$-
|
$-
|
$-
|
$-
|
Accrued
vacation pay
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$41,250
|
$41,250
|
$-
|
(2)
Reflects
amounts to be paid upon termination without cause and upon
termination in a change of control. All outstanding stock options
vests fully vest under certain conditions.
The
Company’s Employment Agreement with Joe Barnes has provisions
providing for severance payments as detailed below.
|
|
|
|
|
|
Executive
|
|
|
|
|
|
Payments Upon
|
|
|
|
|
|
Separation
|
|
|
|
|
|
Compensation:
|
|
|
|
|
|
Base
salary (1)
|
$-
|
$-
|
$41,250
|
$41,250
|
$-
|
Performance-based
incentive
|
|
|
|
|
|
compensation
|
$-
|
$-
|
$-
|
$-
|
$-
|
Stock
options
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Benefits
and Perquisites:
|
|
|
|
|
|
Health
and welfare benefits
|
$-
|
$-
|
$-
|
$-
|
$-
|
Accrued
vacation pay
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$41,250
|
$41,250
|
$-
|
(1)
Reflects
amounts to be paid upon termination without cause and upon
termination in a change of control. There outstanding stock options
vests fully vest under certain conditions.
DIRECTOR COMPENSATION
We
primarily use stock options grants to incentive compensation to
attract and retain qualified candidates to serve on the Board. This
compensation reflected the financial condition of the Company. In
setting director compensation, we consider the significant amount
of time that Directors expend in fulfilling their duties to the
Company as well as the skill-level required by our members of the
Board. During year ended December 31, 2018, Marco Hegyi and Mark E.
Scott did not receive any compensation for their service as
directors. The compensation disclosed in the Summary
Compensation Table on page 36 represents the total
compensation.
Director Summary Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
$
|
|
|
|
$
|
|
|
Michael
E. Fasci (2)
|
$-
|
$125,781
|
$-
|
$-
|
$-
|
$-
|
$125,781
|
|
|
|
|
|
|
|
|
Katherine
McLean (3)
|
-
|
57,863
|
-
|
-
|
-
|
-
|
57,863
|
|
|
|
|
|
|
|
|
Thom
Kozik (4)
|
-
|
19,562
|
-
|
-
|
-
|
-
|
19,562
|
|
|
|
|
|
|
|
|
|
$-
|
$203,205
|
$-
|
$-
|
$-
|
$-
|
$77,425
|
(1)
These
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC
Topic 718.
(2)
On February 1,
2018, we issued 3,789,041 shares of our common stock to Mr. Fasci
that was valued at $0.02 per share or $75,781. On December 6, 2018,
we issued Mr. Fasci 5,000,000 shares of our common stock that was
valued at $0.01 per share or $50,000. On December 6, 2018, Michael
E. Fasci resigned as a Member of the Board of
Directors.
(3)
On February 1,
2018, we issued 2,893,151 shares of our common stock to Katherine
McLain that was valued at $0.02 per share or $57,863.
(4)
On February 1,
2018, we issued 978,082 shares of our common stock to Thom Kozik
that was valued at $0.02 per share or $19,562.
Compensation Paid to Board Members
Our
independent non-employee directors are not compensated in
cash. The only compensation has been in the form of
stock awards. There is no stock compensation plan for independent
non-employee directors.
CERTAIN RELATIONSHIPS AND RELATED
PARTY TRANSACTIONS
Certain
Relationship
Please see the
transactions with Chicago Venture Partners, L.P. discussed in Notes
10, 11, 13 and 17 of Form 10K as filed with the SEC on March 8,
2019.
Transactions
with Marco Hegyi
On October 21, 2018
and 2017, Mr. Hegyi's Warrant to purchase up to 10,000,000 shares
of our common stock at an exercise price of $0.01 per share vested.
The Warrant is exercisable for 5 years. The warrants were valued at
$390,000 and $192,000 we recorded $178,750 and $195,000 as
compensation expense for the years ended December 31, 2018 and
2017, respectively. On October 15, 2018, Mr. Hegyi received
Warrants to purchase up to 48,000,000 shares of our common stock at
an exercise price of $0.012 per share and which vest on October 15,
2018, 2019 and 2020. The Warrants are exercisable for 5 years. The
warrant that vested on October 15, 2018 was valued at $96,000 and
we recorded this amount compensation expense for the year ended
December 31, 2018.
On October 15,
2018, the Board of Directors approved an Employment Agreement with
Marco Hegyi pursuant to which the Company engaged Mr. Hegyi as its
Chief Executive Officer through October 15, 2021.
Transactions
with an Entity Controlled by Mark E. Scott
On October 15, 2018, an entity controlled by Mr.
Scott was granted an option to purchase 20,000,000 shares of common
stock at an exercise price of $0.012 per share. On October 15, 2017, an entity controlled by Mr.
Scott was granted an option to purchase 12,000,000 shares of common
stock at an exercise price of $0.006 per share. The stock
option grants vest quarterly over three years and are exercisable
for 5 years. The stock option grants were valued at $40,000 and
$18,000. The Company recorded $8,833 and $1,500 as compensation
expense for the years ended December 31, 2018 and 2017,
respectively.
On October 15,
2018, the Compensation Committee of the Company approved an
Employment Agreement with Mark E. Scott pursuant to which the
Company engaged Mr. Scott as its Chief Financial Officer through
October 15, 2021. Mr. Scott’s previous Agreement was
cancelled.
Transaction
with Joseph Barnes
On October 15, 2018, Mr. Barnes was granted an
option to purchase 18,000,000 shares of common stock at an
exercise price of $0.012 per share. On
October 25, 2017, Mr. Barnes was granted an option to purchase
10,000,000 shares of common stock at an exercise price of
$0.007 per share. The stock option grants vest quarterly over three
years and are exercisable for 5 years. The stock option grants were
valued at $36,000 and $24,000, The Company recorded $8,550 and
$2,000 as compensation expense for the years ended December 31,
2018 and 2017, respectively.
On October 15,
2018, the Compensation Committee of the Company approved an
Employment Agreement with Joseph Barnes pursuant to which the
Company engaged Mr. Barnes as President of the GrowLife Hydroponics
Company through October 15, 2021. Mr. Barnes’s previous
Agreement was cancelled.
Transactions
with Michael E. Fasci
On February 4,
2017, we issued 1,000,000 shares of our common stock to Michael E.
Fasci pursuant to a service award for $15,000. The shares were
valued at the fair market price of $0.015 per share. On April 27,
2017, we issued 1,000,000 shares of our common stock to Michael E.
Fasci pursuant to a service award for $9,000. The shares were
valued at the fair market price of $0.009 per share. On April 27,
2017, we issued 2,000,000 shares of our common stock to Michael E.
Fasci pursuant to a consulting agreement for $18,000. The shares
were valued at the fair market price of $0.009 per share. On
November 2, 2017, we issued 2,000,000 shares of our common stock to
Michael E. Fasci pursuant to a consulting agreement for $10,000.
The shares were valued at the fair market price of $0.005 per
share.
On February 1,
2018, we issued 3,789,041 shares of our common stock to Mr. Fasci
that was valued at $0.02 per share or $75,781. On December 6, 2018,
we issued Mr. Fasci 5,000,000 shares of our common stock that was
valued at $0.01 per share or $50,000. On February 6, 2018, Michael
E. Fasci resigned as a Member of the Board of
Directors.
Transactions
with Katherine McLain
Ms. Katherine
McLain was appointed as a director on February 14, 2017. On June
28, 2017, we issued 1,000,000 shares of our common stock to Ms.
McLain pursuant to a service award for $9,000. The shares were
valued at the fair market price of $0.009 per share. On October 23,
2017, we issued 1,000,000 shares of our common stock to Ms. McLain
pursuant to a service award for $5,000. The shares were valued at
the fair market price of $0.005 per share. On February 1, 2018, we
issued 2,893,151 shares of our common stock to Katherine McLain
that was valued at $0.02 per share or $57,863.
On February 22,
2019, we 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 October 23, 2017, we
issued 2,000,000 shares of our common stock to Mr. Kozik pursuant
to a service award for $10,000. The shares were valued at the fair
market price of $0.005 per share. On February 1, 2018, we issued
978,082 shares of our common stock to Thom Kozik that was valued at
$0.02 per share or $19,562.
On February 22,
2019, we issued 8,108,108 shares of our common stock to Mr. Kozik
valued at $0.0074 per share or $60,000.
Indemnification
Our articles of
incorporation provide that we will indemnify our directors and
officers to the fullest extent permitted by Nevada law. In
addition, we have an Indemnification Agreements with the current
Board of Directors.
Review and Approval of Related
Person Transactions
We
have operated under a Code of Conduct for many years. Our Code of
Conduct requires all employees, officers and directors, without
exception, to avoid the engagement in activities or relationships
that conflict, or would be perceived to conflict, with the
Company’s interests or adversely affect its reputation. It is
understood, however, that certain relationships or transactions may
arise that would be deemed acceptable and appropriate upon full
disclosure of the transaction, following review and approval to
ensure there is a legitimate business reason for the transaction
and that the terms of the transaction are no less favorable to the
Company than could be obtained from an unrelated
person.
The
Audit Committee is responsible for reviewing and approving all
transactions with related persons. The Company reviews all
relationships and transactions in which the Company and our
directors and executive officers or their immediate family members
are participants to determine whether such persons have a direct or
indirect material interest. As required under SEC rules,
transactions that are determined to be directly or indirectly
material to the Company or a related person are
disclosed.
Since January 1,
2017, the Company engaged in the following reportable transactions
with our directors, executive officers, holders of more than 5% of
our voting securities, and affiliates or immediately family members
of our directors, executive officers and holders of more than 5% of
our voting securities.
The
following table sets forth certain information regarding the
ownership of our common stock as of June 30, 2019 by:
●
each director and nominee for director;
●
each
person known by us to own beneficially 5% or more of our common
stock;
●
each
officer named in the summary compensation table elsewhere in this
report; and
●
all
directors and executive officers as a group.
The
amounts and percentages of common stock beneficially owned are
reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities. Under the
rules of the SEC, a person is deemed to be a “beneficial
owner” of a security if that person has or shares voting
power,” which includes the power to vote or to direct the
voting of such security, or “investment power,” which
includes the power to dispose of or to direct the disposition of
such security. A person is also deemed to be a beneficial owner of
any securities of which that person has the right to acquire
beneficial ownership within 60 days. Under these rules more than
one person may be deemed a beneficial owner of the same securities
and a person may be deemed to be a beneficial owner of securities
as to which such person has no economic interest.
Unless
otherwise indicated below, each beneficial owner named in the table
has sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable. The address of each beneficial owner is 5400 Carillon
Point, Kirkland, WA 98033 and the address of more than 5% of common
stock is detailed below.
|
Shares Beneficially Owned
|
Name of Beneficial Owner
|
|
|
Directors
and Named Executive Officers-
|
|
Marco
Hegyi (2)
|
46,000,000
|
1.2%
|
Mark
E. Scott (3)
|
26,333,333
|
*
|
Katherine
McLain (4)
|
13,001,259
|
*
|
Thom
Kozik (5)
|
11,086,190
|
*
|
Joseph
Barnes (6)
|
16,300,000
|
*
|
Total
Directors and Officers (5 in total)
|
112,720,782
|
3.0%
|
(1)
Based on
3,759,717,098 shares of common stock outstanding as of June 30,
2019.
(2)
Reflects the shares beneficially owned by Marco
Hegyi, including warrants to purchase 43,500.000 shares of
our common stock.
(3)
Reflects
the shares beneficially owned by Mark E. Scott, including stock
option grants totaling 13,333,333 shares that Mr. Scott has the
right to acquire in sixty days.
(4)
Reflects the shares beneficially owned by
Katherine McLain.
(5)
Reflects the shares beneficially owned by
Thom Kozik.
(6)
Reflects the shares beneficially owned by Joseph
Barnes, including stock option grants totaling 16,000,000 shares
that Mr. Barnes has the right to acquire in sixty
days.
There
are no 5% holders as of June 30, 2019.
DESCRIPTION OF SECURITIES TO BE REGISTERED
General
The following
description of our capital stock and provisions of our articles of
incorporation and bylaws are summaries and are qualified by
reference to our articles of incorporation and the bylaws. We have
filed copies of these documents with the SEC as exhibits to our
registration statement, of which this prospectus forms a
part.
Authorized
Capital Stock
We have 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 we 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.
Capital
Stock Issued and Outstanding
The outstanding
share information in the table above is based on 3,817,964,405
shares of our common stock outstanding as of September 4, 2019, and
excludes the following:
●
________ shares
of our common stock issuable upon the exercise of stock options
outstanding as of September __, 2019 at a weighted-average
exercise price of $0.____ per share;
●
___________ shares
of our common stock issuable upon the exercise of warrants
outstanding as of September __, 2019 (at a weighted-average
exercise price of $0.___ per share. These warrants will expire
between ________, ______ and _________, ________;
●
____________ shares
of common stock to be issued for the
conversion of Convertible Notes Payables as of September __,
2019 with expiration dates between __________
and ___________ at conversion prices of $0.___ per
share;
●
__________ additional
shares of our common stock available for future issuance under our
2017 Amended Stock Incentive Plan;
●
__________ shares
of our common stock issuable upon the conversion of convertible
promissory notes.; and
●
416,666,667 shares
of our common stock issuable under the Equity Purchase
Agreement.
Voting
Common Stock
Holders of our
common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have
cumulative voting rights for the election of directors. An election
of directors by our stockholders shall be determined by a plurality
of the votes cast by the stockholders entitled to vote on the
election. On all other matters, the affirmative vote of the holders
of a majority of the stock present in person or represented by
proxy and entitled to vote is required for approval, unless
otherwise provided in our articles of incorporation, bylaws or
applicable law. Holders of common stock are entitled to receive
proportionately any dividends as may be declared by our Board of
Directors, subject to any preferential dividend rights of
outstanding preferred stock.
In the event of our
liquidation or dissolution, the holders of common stock are
entitled to receive proportionately all assets available for
distribution to stockholders after the payment of all debts and
other liabilities and subject to the prior rights of any
outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The
rights, preferences and privileges of holders of common stock are
subject to and may be adversely affected by the rights of the
holders of shares of any series of preferred stock that we may
designate and issue in the future.
Non-Voting
Preferred Stock
Under the terms of
our articles of incorporation, our board of directors is authorized
to issue shares of non-voting preferred stock in one or more series
without stockholder approval. Our board of directors has the
discretion to determine the rights, preferences, privileges and
restrictions, dividend rights, conversion rights, redemption
privileges and liquidation preferences, of each series of
non-voting preferred stock.
The purpose of
authorizing our board of directors to issue non-voting preferred
stock and determine its 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.
Warrants
to Purchase Common Stock
As of June 30,
2019, warrants to purchase an aggregate of warrants for the
purchase of 362.8 million
common shares at a $0.023 average exercise price.
Options
to Purchase Common Stock
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.
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. We
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.
Dividend
Policy
We have not
previously declared or paid any cash dividends on our common stock
and do not anticipate or contemplate paying dividends on our common
stock in the foreseeable future. We currently intend to use all of
our available funds to finance the growth and development of our
business. We can give no assurances that we will ever have excess
funds available to pay dividends.
Anti-Takeover
Provisions
Delaware Revised Statutes
Articles of Incorporation and Bylaws Provisions
Our articles of
incorporation, as amended, and bylaws contain provisions that could
have the effect of discouraging potential acquisition proposals or
tender offers or delaying or preventing a change in control,
including changes a stockholder might consider favorable. In
particular, our articles of incorporation and bylaws among other
things:
●
permit our board of
directors to alter our bylaws without stockholder approval;
and
●
provide that
vacancies on our board of directors may be filled by a majority of
directors in office, although less than a quorum.
Such provisions may
have the effect of discouraging a third-party from acquiring us,
even if doing so would be beneficial to our stockholders. These
provisions are intended to enhance the likelihood of continuity and
stability in the composition of our board of directors and in the
policies formulated by them, and to discourage some types of
transactions that may involve an actual or threatened change in
control of our company. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal and to
discourage some tactics that may be used in proxy fights. We
believe that the benefits of increased protection of our potential
ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure our company outweigh
the disadvantages of discouraging such proposals because, among
other things, negotiation of such proposals could result in an
improvement of their terms.
However, these
provisions could have the effect of discouraging others from making
tender offers for our shares that could result from actual or
rumored takeover attempts. These provisions also may have the
effect of preventing changes in our management.
Transfer
Agent
The transfer agent
for our common stock is Issuer Direct Corporation located at 500
Perimeter Park, Suite D, Morrisville, NC 27560.
Offer
Restrictions outside the United States
Other than in the
United States, no action has been taken by us or the underwriters
that would permit a public offering of the securities offered by
this prospectus in any jurisdiction where action for that purpose
is required. The securities offered by this prospectus may not be
offered or sold, directly or indirectly, nor may this prospectus or
any other offering material or advertisements in connection with
the offer and sale of any such securities be distributed or
published in any jurisdiction, except under circumstances that will
result in compliance with the applicable rules and regulations of
that jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and to observe any
restrictions relating to the offering and the distribution of this
prospectus. This prospectus does not constitute an offer to sell or
a solicitation of an offer to buy any securities offered by this
prospectus in any jurisdiction in which such an offer or a
solicitation is unlawful.
Unless otherwise
indicated in the applicable prospectus supplement, Horwitz +
Armstrong, A Professional Law Corporation, Lake Forest, California,
will provide opinions regarding the validity of the shares of our
Common Stock. Horwitz + Armstrong, A Professional Law Corporation
may also provide opinions regarding certain other
matters.
SD Mayer and Associates, LLP, independent
registered public accounting firm, has audited our financial
statements at December 31, 2018 and 2017, and for each of the two
years in the period ended December 31, 2018, as set forth in their
report which includes an explanatory paragraph relating to our
ability to continue as a going concern, included elsewhere in this
prospectus. We have included our financial statements in this
prospectus and elsewhere in this Registration Statement in reliance
on SD Mayer and Associates,
LLP’s report, given on their authority as experts in
accounting and auditing.
Except as noted
below, no expert or counsel named in this prospectus as
having prepared or certified any part of this prospectus or having
given an opinion upon the validity of the securities being
registered or upon other legal matters in connection with the
registration or offering of the shares and warrants and its
underlying securities was employed on a contingency basis, or had,
or is to receive, in connection with the offering, a substantial
interest, direct or indirect, in the registrant or any of its
parents or subsidiaries. Nor was any such person connected with the
registrant or any of its parents or subsidiaries as a promoter,
managing or principal underwriter, voting trustee, director,
officer, or employee.
INTERESTS
OF NAMED EXPERTS AND COUNSEL
Horwitz +
Armstrong, A Professional Law Corporation, counsel to the Company,
is a holder of 1,500,000 shares of Common Stock of the Company as
of the date of this filing. Except with respect to Horwitz +
Armstrong, A Professional Law Corporation, no expert named in this
Prospectus as having prepared or certified any part of this
Prospectus or having given an opinion upon the validity of the
securities being registered or upon other legal matters in
connection with the registration or offering of the Common Stock
was employed on a contingency basis, or had, or is to receive, in
connection with the offering, a substantial interest, direct or
indirect, in the Company or any of its subsidiaries.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There
are not and have not been any disagreements between us and our
accountants on any matter of accounting principles, practices, or
financial statement disclosure during our two most recent fiscal
years and subsequent interim period.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with
the SEC a Registration Statement on Form S-1 under the
Securities Act of 1933 with respect to the shares of common stock
we are offering to sell. This prospectus, which constitutes part of
the Registration Statement, does not include all of the information
contained in the Registration Statement and the exhibits, schedules
and amendments to the Registration Statement. For further
information with respect to us and our common stock, we refer you
to the Registration Statement and to the exhibits and schedules to
the Registration Statement. Statements contained in this prospectus
about the contents of any contract, agreement or other document are
not necessarily complete, and, in each instance, we refer you to
the copy of the contract, agreement or other document filed as an
exhibit to the Registration Statement. Each of these statements is
qualified in all respects by this reference.
You may read and
copy the Registration Statement of which this prospectus is a part
at the SEC's public reference room, which is located at 100 F
Street, N.E., Room 1580, Washington, DC 20549. You can request
copies of the Registration Statement by writing to the Securities
and Exchange Commission and paying a fee for the copying cost.
Please call the SEC at 1-800-SEC-0330 for more information about
the operation of the SEC's public reference room. In addition, the
SEC maintains a website, which is located at www.sec.gov,
that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the
SEC. You may access the Registration Statement of which this
prospectus is a part at the SEC's website.
We are subject to
the information reporting requirements of the Securities Exchange
Act of 1934 and are required to file reports, proxy statements and
other information with the SEC. All documents filed with the SEC
are available for inspection and copying at the public reference
room and website of the SEC referred to above. We maintain a
website at www.growlifeinc.com. You may access our reports, proxy
statements and other information free of charge at this website as
soon as reasonably practicable after such material is
electronically filed with, or furnished to, the SEC. The
information on such website is not incorporated by reference and is
not a part of this prospectus.
PROSPECTUS
GROWLIFE, INC.
5400 Carillon Point
Kirkland, WA 98033
DEALER PROSPECTUS DELIVERY OBLIGATION
Until _______________, 2019, all dealers that effect transactions
in these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
____________________, 2019
PART
II—INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND
DISTRIBUTION.
The
expenses payable by us in connection with the issuance and
distribution of the securities being registered are set forth
below. Each item listed is estimated as follows:
Securities
and Exchange Commission registration fee
|
$303
|
Accounting
fees and expenses
|
5,000
|
Legal
fees and expenses
|
15,000
|
Registrar
and transfer agent fees and expenses
|
2,000
|
Miscellaneous
|
7,697
|
|
|
Total
expenses
|
$30,000
|
ITEM
14. INDEMNIFICATION OF DIRECTORS AND
OFFICERS.
Under
Delaware law, a corporation may include in its certificate of
incorporation (“Certificate”) a provision that
eliminates or limits the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of
fiduciary duties as a director, but no such provision may eliminate
or limit the liability of a director (a) for any breach of duty of
loyalty, (b) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (c)
under Section 174 of the Delaware General Corporation Law (the
“DGCL”) (dealing with illegal redemptions and stock
repurchases), or (d) for any transaction from which the director
derived an improper personal benefit. Our Certificate limits
personal liability of directors to the fullest extent permitted by
Delaware law.
The
Certificate also provides that we shall, to the fullest extent
permitted by Section 145 of the DGCL, as amended, indemnify all
persons whom it may indemnify thereto, provided that if such
indemnified person initiates a proceeding, he or she shall be
indemnified only if our board of directors approved such action.
Section 145 of the DGCL permits indemnification against expenses,
fines, judgments and settlements incurred by any director, officer
or employee of a Company in the event of pending or threatened
civil, criminal, administrative or investigative proceedings, if
such person was, or was threatened to be made, a party by reason of
the fact that he or she is or was a director, officer or employee
of the Company. Section 145 and our Certificate also provide that
the indemnification provided for therein shall not be deemed
exclusive of any other rights to which those seeking
indemnification may otherwise be entitled.
We
have a directors’ and officers’ liability insurance
policy in place pursuant to which its directors and officers are
insured against certain liabilities, including certain liabilities
under the Securities Act of 1933, as amended and the Securities and
Exchange Act of 1934, as amended.
ITEM
15. RECENT SALES OF UNREGISTERED
SECURITIES
In
the two years preceding the filing of this Registration Statement,
we have issued the following securities that were not registered
under the Securities Act.
All
of the offerings and sales described below were deemed to be exempt
under Rule 506 of Regulation D and/or Section 4(a)(2) of the
Securities Act. No advertising or general solicitation was employed
in offering the securities, the offerings and sales were made to a
limited number of persons, all of whom were accredited investors
and transfer was restricted by the company in accordance with the
requirements of Regulation D and the Securities Act. All issuances
to accredited and non-accredited investors were structured to
comply with the requirements of the safe harbor afforded by Rule
506 of Regulation D, including limiting the number of
non-accredited investors to no more than 35 investors who have
sufficient knowledge and experience in financial and business
matters to make them capable of evaluating the merits and risks of
an investment in our securities. We have not employed any
underwriters in connection with any of the below transactions, and
the individuals and entities to whom we issued securities are not
affiliated with us. Except as noted below, none of the holders of
the securities have any contractual rights to have such securities
registered with the Securities and Exchange
Commission.
Year Ended December 31, 2017
During the year
ended December 31, 2017, the Company had had the following sales of
unregistered of equity securities to accredited investors unless
otherwise indicated:
On February 28,
2017, Logic Works converted principal and interest of $291,044 into
82,640,392 shares of the Company’s common stock at a per
share conversion price of $0.004.
During the year ended December 31, 2017,
five vendors converted debt of $559,408 into 64,869,517 shares of
the Company’s common stock at the fair market price of
$0.0086 per share.
During the year ended December 31, 2017,
four directors were issued 10,000,000 shares of the Company’s
common stock at the fair market price of $0.0076 per share for 2017
director services.
During the year
ended December 31, 2017, Chicago Venture converted principal and
accrued interest of $2,688,000 into 554,044,030 shares of the
Company’s common stock at a per share conversion price of
$0.0049.
Year Ended December 31, 2018
During
the year ended December 31, 2018, the Company had had the following
sales of unregistered of equity securities to accredited investors
unless otherwise indicated:
On February 7,
2018, the Company issued 7,660,274 shares to three directors. The
shares were valued at the fair market price of $0.020 per share or
$153,205. The shares were issued for annual director service to the
Company.
On February 12,
2018, the Company received a Notice of Conversion from Forglen LLC
converting principal and interest of $321,945 owed under that
certain 7% Convertible Note as amended June 19, 2014 into
127,000,000 shares of the Company’s common stock with a fair
value of $2,235,200.
On March 13, 2018,
the Company, received a Notice of Conversion from Logic Works LLC
converting principal and interest of $41,690 owed under that a 6%
Convertible Note into 16,445,609 shares of our common stock with a
fair value of $248,329. As of March 13, 2018, the outstanding
balance on the Convertible Note was $0.
During the year
ended December 31, 2018, the Company issued 2,400,000 shares of its
common stock to a service provider pursuant to conversions of debt
totaling $33,000. The shares were valued at the fair market price
of $0.0138 per share.
During the year
ended December 31, 2018, the Company issued 6,250,000 shares of its
common stock to a service provider and a former director related to
services. The shares were valued at the fair market price of
$0.0104 per share or $65,000.
During the year
ended December 31, 2018, Chicago Venture converted principal and
interest of $3,104,181 into 525,587,387 shares of our common stock
at a per share conversion price of $0.0059 with a fair value of
$7,756,330. The Company recognized $6,565,415 loss on debt
conversions during the year ended December 31, 2018.
During the year
ended December 31, 2018, an employee exercised a stock option grant
for 1,000,000 shares at $0.006 or $6,000.
Securities Purchase Agreements with St. George Investments,
LLC
On
February 9, 2018, the Company executed the following agreements
with St. George Investments LLC, a Utah limited liability company:
(i) Securities Purchase Agreement; and (ii) Warrant to Purchase
Shares of Common Stock. The Company entered into the St. George
Agreements with the intent to acquire working capital to grow the
Company’s businesses.
Pursuant
to the St. George Agreements, the Company agreed to sell and to
issue to St. George for an aggregate purchase price of $1,000,000:
(a) 48,687,862 Shares of newly issued restricted Common Stock of
the Company; and (b) the Warrant. St. George has paid the entire
Purchase Price for the Securities.
The
Warrant is exercisable for a period of five (5) years from the
Closing, for the purchase of up to 48,687,862 shares of the
Company’s Common Stock at an exercise price of $0.05 per
share of Common Stock. The Warrant is subject to a cashless
exercise option at the election of St. George and other adjustments
as detailed in the Warrant.
On March 20, 2018,
the Company entered into and closed on a Common Stock Purchase
Agreement with St. George Investments, LLC, a Utah limited
liability company. The Company issued St. George 6,410,256 shares
of newly issued restricted Common Stock of the Company at a
purchase price of $0.0156 per share.
On April 26, 2018,
the Company entered into and closed on a Common Stock Purchase
Agreement with St. George Investments, LLC, Pursuant to the St.
George Agreements, the Company sold and agreed to issue to St.
George 4,950,495 shares of newly issued restricted Common Stock of
the Company at a purchase price of $0.0202 per share.
On May 25, 2018,
the Company entered into and closed on a Common Stock Purchase
Agreement with St. George Investments, LLC, Pursuant to the St.
George Agreements, the Company sold and agreed to issue to St.
George 5,128,205 shares of newly issued restricted Common Stock of
the Company at a purchase price of $0.0195 per share.
On October 15,
2018, the Company closed the Purchase and Sale Agreement with
EZ-Clone and issued 107,307,692 restricted shares of our common
stock at a price of $0.013 per share or $1,395,000.
On November 30,
2018, the Company closed its Rights Offering. We received $2,533,648
under the Rights Offering and issued 211,137,293 shares of common
stock at $0.012 per share.
Subsequent to the Year Ended December 31, 2018
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.
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES.
The exhibits to the
Registration Statement are listed in the Exhibit Index attached
hereto and incorporated by reference herein.
ITEM
17. UNDERTAKINGS.
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration
Statement:
(i) To
include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To
reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than 20% change in the maximum aggregate offering price set forth
in the “Calculation of Registration Fee” table in the
effective registration statement;
(iii) To
include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That,
for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To
remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4) That,
for the purpose of determining liability of the registrant under
the Securities Act of 1933 to any purchaser in the initial
distribution of the securities: The undersigned registrant
undertakes that in a primary offering of securities of the
undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities
to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the
undersigned registrant will be a seller to the purchaser and will
be considered to offer or sell such securities to such
purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
(ii)
Any free writing prospectus relating to the offering prepared by or
on behalf of the undersigned registrant or used or referred to by
the undersigned registrant;
(iii)
The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and
(iv)
Any other communication that is an offer in the offering made by
the undersigned registrant to the purchaser.
Insofar
as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that, in the opinion of
the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(5)
For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
(6)
For the purpose of determining any liability
under the Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-1 and has
duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of
Kirkland, State of Washington, on September 4, 2019.
|
GROWLIFE, INC.
|
|
|
|
|
|
|
By:
|
/s/ Marco
Hegyi
|
|
|
|
Marco
Hegyi
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
By:
|
/s/ Mark E.
Scott
|
|
|
|
Mark E.
Scott
|
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
Pursuant to the
requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the
capacities held on the dates indicated.
SIGNATURES
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/
Marco Hegyi
|
|
Chief
Executive Officer and Director
|
|
September
4, 2019
|
Marco
Hegyi
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Mark E. Scott
|
|
Chief
Financial Officer, Director and Secretary
|
|
September
4, 2019
|
Mark
E. Scott
|
|
(Principal
Financial/Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Katherine McLain
|
|
Director
|
|
September
4, 2019
|
Katherine
McLain
|
|
|
|
|
/s/
Thom Kozik
|
|
Director
|
|
September
4, 2019
|
Thom
Kozik
|
|
|
|
|
Exhibit
Index
Exhibt No.
|
|
Description
|
|
|
Certificate
of Incorporation. Filed as an exhibit to the Company’s Form
10-SB General Form for Registration of Securities of Small Business
Issuers filed with the SEC on December 7, 2007, and hereby
incorporated by reference.
|
|
|
Second Amended and
Restated Bylaws of GrowLife, Inc. dated October 16, 2015. Filed as
an exhibit to the Company’s Form 8-K and filed with the SEC
on October 26, 2015, and hereby incorporated by
reference.
|
|
|
Certificate
of Amendment of Certificate of Incorporation of GrowLife, Inc.
dated October 23, 2017 to increase the authorized shares of Common
Stock from 3,000,000,000 to 6,000,000,000 shares. Filed as an
exhibit to the Company’s Form 8-K and filed with the SEC on
October 24, 2017, and hereby incorporated by reference.
|
|
|
GrowLife,
Inc. 2017 Stock Incentive Plan filed as an Annex 1 to the
Company’s Preliminary Schedule 14A filed with the SEC on
September 11, 2018, and hereby incorporated by reference.
|
|
|
Opinion
of Horwitz + Armstrong, A Prof. Law Corp. regarding the legality of
the securities being registered (filed
herewith)
|
|
|
Lease
Amending Agreement dated October 1, 2017 by and between GrowLife,
Inc. and Berezan Management (Alta) Ltd. Filed as an exhibit to the
Company’s Form 10-K and filed with the SEC on March 28, 2018,
and hereby incorporated by reference.
|
|
|
Compilation of
Securities Purchase Agreement, Secured
Promissory Notes, and Security Agreement dated December 22,
2017, entered into by and between GrowLife, Inc. and Chicago
Venture Partners, L.P. Filed as an exhibit to the Company’s
Form 10-K and filed with the SEC on March 28, 2018, and hereby
incorporated by reference
|
10.3
|
|
Asset Purchase
Agreement dated as of October 2, 2017 amongst GrowLife, Inc. and
David Reichwein, GIP International Ltd and DPR International
LLC.
|
10.4
|
|
Texas commercial
Lease Agreement dated October 9, 2017 by and between GrowLife
Innovations, Inc. and All Commercial Flooring Inc.
|
|
|
Compilation of
Securities Purchase Agreement and Warrant to Purchase Common Stock
dated February 9, 2018, entered into by and between GrowLife, Inc.
and St. George Investments LLC. Filed as an exhibit to the
Company’s Form 8-K and filed with the SEC on February 15,
2018, and hereby incorporated by reference.
|
10.6
|
|
First Addendum to
Asset Purchase Agreement and Employment Agreement dated February
18, 2018 amongst Growlife, Inc. and David Reichwein, GIP
International Ltd and DPR International LLC. (filed
herewith).
|
|
|
Second Amendment to
Forglen LLC 7% Convertible Promissory Note. Filed as an exhibit to
the Company’s Form 8-K and filed with the SEC on March 16,
2018, and hereby incorporated by reference.
|
|
|
Common Stock
Purchase Agreement dated March 20, 2018 entered into by and between
GrowLife, Inc. and St. George Investments LLC. Filed as an exhibit
to the Company’s Form 8-K and filed with the SEC on March 23,
2018, and hereby incorporated by reference.
|
|
|
Compilation of
Securities Purchase Agreement, Secured Promissory Notes, and
Security Agreement. Filed as an exhibit to the Company’s Form
8-K and filed with the SEC on August 16, 2018, and hereby
incorporated by reference.
|
|
|
Asset Purchase
Agreement dated August 17, 2018 entered into by and between
GrowLife, Inc. and Go Green Hydroponics, Inc. Filed as an exhibit
to the Company’s Form 8-K and filed with the SEC on August
23, 2018, and hereby incorporated by reference.
|
|
|
Security Agreement
dated August 17, 2018 by and between GrowLife, Inc. and Go Green
Hydroponics, Inc. Filed as an exhibit to the Company’s Form
8-K and filed with the SEC on August 23, 2018, and hereby
incorporated by reference.
|
|
|
Rights Offering to
Shareholders filed in Amendment No.1 of Form S-1. Filed with the
SEC on September 18, 2018, and hereby incorporated by reference.
Filed as an exhibit to the Company’s Form 8-K and filed with
the SEC on September 21, 2018, and hereby incorporated by
reference.
|
|
|
Four Amendment to
Lease Agreement dated August 31, 2018 entered into by and between
GrowLife, Inc., The GST Non-Exempt Marital Trust under the Samuel
and Elaine Rosenthal Revocable Trust and Ackerman-Rosenthal
Property, LLC. Filed as an exhibit to the Company’s Annual
Report on Form 10-K and filed with the SEC on March 8, 2019, and
hereby incorporated by reference.
|
|
|
Assignment and
Assumption of Lease dated August 31, 2018 entered into by and
between GrowLife, Inc., Go Green Hydroponics, Inc., GST Non-Exempt
Marital Trust Under the Samuel and Elaine Rosenthal Revocable Trust
and Ackerman-Rosenthal Property, LLC. Filed as an exhibit to the
Company’s Annual Report on Form 10-K and filed with the SEC
on March 8, 2019, and hereby incorporated by
reference.
|
|
|
Lease Agreement
dated July 2, 2018 entered into by and between GrowLife
Hydroponics, Inc. Inc. and Brixmor SPE 4 LP. Filed as an exhibit to
the Company’s Annual Report on Form 10-K and filed with the
SEC on March 8, 2019, and hereby incorporated by
reference.
|
|
|
Marco Hegyi
Employment Agreement dated October 15, 2018. Filed as an exhibit to
the Company’s Form 8-K and filed with the SEC on October 17,
2018, and hereby incorporated by reference.
|
|
|
Mark Scott
Employment Agreement dated October 15, 2018. Filed as an exhibit to
the Company’s Form 8-K and filed with the SEC on October 17,
2018, and hereby incorporated by reference.
|
|
|
Joseph Barnes
Employment Agreement dated October 15, 2018. Filed as an exhibit to
the Company’s Form 8-K and filed with the SEC on October 17,
2018, and hereby incorporated by reference.
|
|
|
Purchase and Sale
agreement dated October 10, 2018 by and between GrowLife, Inc. and
EZ-Clone Enterprises LLC. Filed as an exhibit to the
Company’s Form 8-K and filed with the SEC on October 18,
2018, and hereby incorporated by reference.
|
|
|
Compilation of
Securities Purchase Agreement, Warrant, Secured Promissory Notes,
and Security Agreement. Filed as an exhibit to the Company’s
Form 8-K and filed with the SEC on October 17, 2018, and hereby
incorporated by reference.
|
|
|
Prospectus
Supplement dated November 8, 2018 to Rights Offering to Shareholders
filed in 424(b)(4) Prospectus filed with the SEC on October 18,
2018, and hereby incorporated by reference. Filed as an
exhibit to the Company’s Form 8-K and filed with the SEC on
November 16, 2018, and hereby incorporated by
reference.
|
|
|
Prospectus
Supplement dated November 16, 2018 to Rights Offering to Shareholders filed in 424(b)(4)
Prospectus filed with the SEC on October 18, 2018, and hereby
incorporated by reference. Filed as an exhibit to the
Company’s Form 8-K and filed with the SEC on November 16,
2018, and hereby incorporated by reference.
|
|
|
Standard and
Industrial Multi-Tenant Lease dated December 18, 2018 by and
between Pensco Trust Company and GrowLife, Inc. Filed as an exhibit
to the Company’s Form 10-K and filed with the SEC on October
17, 2018, and hereby incorporated by reference.
|
|
|
Termination of
Existing Agreements and Release Agreement accepted February 15,
2019 entered into by and between GrowLife, Inc. and CANX USA LLC.
Filed as an exhibit to the Company’s Form 8-K and filed with
the SEC on February 20, 2019, and hereby incorporated by
reference.
|
|
Compilation of Securities Purchase Agreement,
Secured Promissory Notes, and Security Agreement with
Odyssey Research and Trading, LLC. Filed as an exhibit to the
Company’s Form 8-K and filed with the SEC on July 30, 2019,
and hereby incorporated by reference.
|
|
|
Compilation of
Equity Purchase Agreement and Registration Rights Agreement with
Triton Funds LP (Filed herewith)
|
|
|
Code
of Conduct and Ethics dated May 15, 2014. Attached as an exhibit to
the Company’s Form 8-K filed and with the SEC on June 9,
2014, and hereby incorporated by reference.
|
|
|
Subsidiaries of the
Registrant (filed herewith)
|
|
|
Consent of SD Mayer
& Associates, LLP, independent registered public accounting
firm (filed herewith)
|
|
|
Consent of Horwitz
+ Armstrong, A Professional Law Corporation (included in Exhibit
5.1) (filed herewith)
|
|
|
Power of Attorney
(included on the signature page of this registration
statement).
|
|
|
Audited Financial
Statements of EZ-Clone Enterprises, Inc. Filed as an exhibit to the
Company’s Form 8-KA and filed with the SEC on January 24,
2019, and hereby incorporated by reference.
|
|
|
Unaudited Pro Forma Financial Information
of GrowLife, Inc. and EZ-Clone Enterprises, Inc. Filed
as an
exhibit to the Company’s Form 8-KA and filed with the SEC on
January 24, 2019, and hereby incorporated
by reference.
|
|
|
Amended and
Restated Audit Committee Charter, dated October 16, 2015.
Attached as an exhibit to the
Company’s Form 8-K and filed with the SEC on October 26,
2015, and hereby incorporated by reference.
|
|
|
Compensation
Committee Charter dated May 15, 2014. Attached as an exhibit to the Company’s Form
8-K dated June 3, 2014 and filed with the SEC on June 9, 2014, and
hereby incorporated by reference.
|
|
|
Amended and
Restated Nominations and Governance Charter, dated October 16,
2015.Attached as an exhibit to the
Company’s Form 8-K and filed with the SEC on October 26,
2015, and hereby incorporated by reference.
|
|
|
Amended and
Restated Insider Trading Policy, dated October 16, 2015.
Attached as an exhibit to the
Company’s Form 8-K and filed with the SEC on October 26,
2015, and hereby incorporated by reference.
|
|
|
Form
of Notice of Guaranteed Delivery
|
Report of Independent Registered Public Accounting
Firm
The Board of Directors and Shareholders
GrowLife, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of
GrowLife, Inc. as of December 31, 2018 and 2017, and the related
consolidated statements of operations, stockholders’ deficit,
and cash flows for each of the two years in the period ended
December 31, 2018 and the related notes (collectively referred to
as the ‘financial statements’). In our opinion, the
financial statements referred to above present fairly, in all
material respects, the consolidated financial position of GrowLife,
Inc. at December 31, 2018 and 2017, and the consolidated results of
its operations and its cash flows for each of the two years in the
period ended December 31, 2018, in conformity with U.S. generally
accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits. We are a
public accounting firm registered with the PCAOB and required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. Our audit included performing procedures to assess the
risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial
statements, the Company has sustained a net loss from operations
and has an accumulated deficit since inception. These factors
raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in this
regard are also described in Note 2.
The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
/s/ SD Mayer & Associates, LLP
SD Mayer & Associates, LLP
We have served as the Company’s auditor since
2016
Seattle, Washington
March 8, 2019
GROWLIFE, INC. AND
SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
Cash and cash
equivalents
|
$2,334,377
|
$69,191
|
Accounts receivable
- trade
|
42,254
|
-
|
Inventory,
net
|
792,664
|
465,678
|
Prepaid
costs
|
3,418
|
-
|
Deposits
|
51,916
|
24,308
|
Total current
assets
|
3,224,629
|
559,177
|
|
|
|
EQUIPMENT,
NET
|
712,866
|
302,689
|
INTANGIBLE
ASSETS
|
3,280,453
|
-
|
TOTAL
ASSETS
|
$7,217,948
|
$861,866
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT)
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
Accounts payable -
trade
|
$1,054,371
|
$821,398
|
Accrued
expenses
|
261,954
|
133,988
|
Accrued expenses -
related parties
|
73,585
|
37,776
|
Derivative
liability
|
1,795,473
|
2,660,167
|
Current portion of
convertible notes payable
|
3,404,133
|
3,015,021
|
Current portion of
notes payable- related parties
|
100,020
|
-
|
Current portion of
capital lease
|
8,534
|
-
|
Deferred
revenue
|
89,504
|
10,000
|
Total current
liabilities
|
6,787,574
|
6,678,350
|
|
|
|
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,
3,437,599,095
|
|
|
and 2,367,634,022
shares issued and outstanding at 12/31/2018 and 12/31/2017,
respectively
|
343,749
|
236,752
|
Additional paid in
capital
|
139,331,067
|
123,678,069
|
Accumulated
deficit
|
(141,176,087)
|
(129,731,305)
|
Total stockholders'
deficit
|
(1,501,271)
|
(5,816,484)
|
|
|
|
NON CONTROLLING
INTEREST IN EZ-CLONE ENTERPRISES, INC.
|
1,931,645
|
-
|
|
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
$7,217,948
|
$861,866
|
The accompanying notes are an integral part of these consolidated
financial statements.
GROWLIFE, INC. AND
SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
NET
REVENUE
|
$4,573,461
|
$2,452,104
|
COST OF GOODS
SOLD
|
4,105,172
|
2,180,603
|
GROSS
PROFIT
|
468,289
|
271,501
|
GENERAL AND
ADMINISTRATIVE EXPENSES
|
5,016,977
|
2,320,455
|
OPERATING
LOSS
|
(4,548,689)
|
(2,048,954)
|
|
|
|
OTHER INCOME
(EXPENSE):
|
|
|
Change in fair
value of derivative
|
977,732
|
496,306
|
Interest expense,
net
|
(1,320,811)
|
(1,281,083)
|
Impairment of
acquired assets
|
(61,902)
|
-
|
Other (expense)
income
|
-
|
15,577
|
Loss on debt
conversions
|
(6,519,467)
|
(2,502,819)
|
Total other
(expense)
|
(6,924,448)
|
(3,272,019)
|
|
|
|
(LOSS) BEFORE
INCOME TAXES
|
(11,473,137)
|
(5,320,974)
|
|
|
|
Income taxes -
current benefit
|
-
|
-
|
|
|
|
NET
(LOSS)
|
(11,473,137)
|
(5,320,974)
|
|
|
|
Noncontrolling
interest in EZ-Clone Enterprises, Inc.
|
28,355
|
-
|
|
|
|
NET LOSS
ATTRIBUTABLE TO GROWLIFE, INC. AND SUBSIDIARIES
|
$(11,444,782)
|
$(5,320,974)
|
COMMON
SHAREHOLDERS
|
|
|
|
|
|
Basic and diluted
(loss) per share
|
$(0.00)
|
$(0.00)
|
|
|
|
Weighted average
shares of common stock outstanding- basic and diluted
|
2,978,812,920
|
2,044,521,389
|
The accompanying notes are an integral part of these consolidated
financial statements.
GROWLIFE, INC. AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2016
|
51
|
$-
|
1,656,120,083
|
$165,600
|
$117,537,822
|
$(124,410,332)
|
$(6,706,910)
|
|
|
|
|
|
|
|
|
Stock based compensation for stock
options
|
-
|
-
|
-
|
-
|
29,251
|
-
|
29,251
|
Stock based compensation for
warrants
|
-
|
-
|
-
|
-
|
187,292
|
-
|
187,292
|
Shares issued for debt
conversion
|
-
|
-
|
64,869,517
|
6,487
|
542,052
|
-
|
548,539
|
Shares issued for services
rendered
|
-
|
-
|
10,000,000
|
1,000
|
75,000
|
-
|
76,000
|
Shares issued for convertible note
and interest conversion
|
-
|
-
|
636,644,422
|
63,665
|
4,768,954
|
-
|
4,832,619
|
Cancellation of Series C
Convertible Preferred Stock
|
(51)
|
-
|
-
|
-
|
-
|
-
|
-
|
Write-off of derivative liability
to additional paid in capital
|
-
|
-
|
-
|
-
|
537,698
|
-
|
537,698
|
Net loss for the year ended
December 31, 2017
|
-
|
-
|
-
|
-
|
-
|
(5,320,973)
|
(5,320,973)
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2017
|
-
|
-
|
2,367,634,022
|
236,752
|
123,678,069
|
(129,731,305)
|
(5,816,484)
|
Stock based compensation for stock
options
|
-
|
-
|
-
|
-
|
44,682
|
-
|
44,682
|
Stock based compensation for
warrants
|
-
|
-
|
-
|
-
|
196,750
|
-
|
196,750
|
Shares issued for debt
conversion
|
-
|
-
|
2,400,000
|
240
|
32,760
|
-
|
33,000
|
Shares issued for services
rendered
|
-
|
-
|
13,910,274
|
1,391
|
216,815
|
-
|
218,206
|
Shares issued for convertible note
and interest conversion
|
-
|
-
|
669,032,996
|
66,904
|
9,966,328
|
-
|
10,033,232
|
Shares issued for common
stock
|
-
|
-
|
65,176,818
|
6,518
|
1,293,482
|
-
|
1,300,000
|
Rigths offering
|
-
|
-
|
211,137,293
|
21,114
|
2,512,011
|
-
|
2,533,125
|
Stock option
exercise
|
-
|
-
|
1,000,000
|
100
|
5,900
|
-
|
6,000
|
Shares issued for acquisition of
EZ-Clone Enterprises, Inc.
|
-
|
-
|
107,307,692
|
10,731
|
1,384,270
|
-
|
1,395,001
|
Noncontrolling interest in EZ-Clone
Enterprises, Inc.
|
-
|
-
|
-
|
-
|
-
|
28,355
|
28,355
|
Net loss for the year ended
December 31, 2018
|
-
|
-
|
-
|
-
|
-
|
(11,473,137)
|
(11,473,137)
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2018
|
-
|
$-
|
3,437,599,095
|
$343,749
|
$139,331,067
|
$(141,176,087)
|
$(1,501,271)
|
The accompanying notes are an integral part of these consolidated
financial statements.
GROWLIFE, INC. AND
SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$(11,444,782)
|
$(5,320,974)
|
Adjustments to
reconcile net loss to net cash (used in)
|
|
|
operating
activities
|
|
|
Depreciation
|
80,125
|
1,890
|
Amortization
of intangible assets
|
142,628
|
-
|
Stock
based compensation
|
241,433
|
216,543
|
Common
stock issued for services
|
218,206
|
76,000
|
Amortization
of debt discount
|
769,237
|
419,666
|
Change
in fair value of derivative liability
|
(977,732)
|
(496,306)
|
Accrued
interest on convertible notes payable
|
421,666
|
203,697
|
Loss on debt
conversions
|
6,519,467
|
2,502,799
|
Impairment of
acquired assets
|
61,902
|
-
|
Write-off of
derivaive liability to additional paid in capital
|
-
|
537,698
|
Changes in
operating assets and liabilities:
|
|
|
Accounts
receivable
|
42,254
|
-
|
Inventory
|
(326,986)
|
(47,225)
|
Prepaids and other
assets
|
(3,418)
|
-
|
Deposits
|
(27,608)
|
13,145
|
Accounts
payable
|
232,973
|
(170,934)
|
Accrued
expenses
|
116,625
|
19,503
|
Deferred
revenue
|
79,504
|
(37,995)
|
CASH (USED
IN) OPERATING ACTIVITIES
|
(3,854,506)
|
(2,082,493)
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
Investment in
purchased assets
|
(544,432)
|
(302,689)
|
NET CASH (USED IN)
INVESTING ACTIVITIES:
|
(544,432)
|
(302,689)
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
Proceeds from the
issuance of common stock rights
|
2,533,125
|
-
|
Common stock option
exercise
|
6,000
|
-
|
Proceeds from notes
payable, net
|
2,825,000
|
3,860,344
|
Proceeds from the
issuance of common stock
|
1,300,000
|
-
|
Cash payoff to TCA
Global Credit Master Fund, LP
|
-
|
(1,509,041)
|
NET CASH PROVIDED
BY FINANCING ACTIVITIES
|
6,664,125
|
2,351,303
|
|
|
|
NET INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
2,265,187
|
(33,879)
|
|
|
|
CASH AND CASH
EQUIVALENTS, beginning of period
|
69,191
|
103,070
|
|
|
|
CASH AND CASH
EQUIVALENTS, end of period
|
$2,334,377
|
$69,191
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Interest
paid
|
$-
|
$-
|
Taxes
paid
|
$-
|
$-
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
Shares issued for
convertible note and interest conversion
|
$3,338,082
|
$2,329,800
|
Common shares
issued for accounts payable
|
$33,000
|
$548,539
|
Acquisition of
EZ-Clone Erterprises, Inc.- intangible assets
|
$3,423,081
|
$-
|
Acquisition of
EZ-Clone Erterprises, Inc.
|
$1,395,000
|
$-
|
Noncontrolling
interest in EZ-Clone Enterprises, Inc.
|
$1,931,645
|
$-
|
The accompanying notes are an integral part of these consolidated
financial statements.
GROWLIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS AND
ORGANIZATION
GrowLife,
Inc. (“GrowLife” or the “Company”) is
incorporated under the laws of the State of Delaware and is
headquartered in Kirkland, Washington. The Company was founded in
2012 with the Closing of the Agreement and Plan of Merger with SGT
Merger Corporation.
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 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 December 31, 2018, the Company had recorded
investment in purchased assets of $552,689.
On
August 17, 2018, the Company entered into an Asset Purchase
Agreement with Go Green Hydroponics, Inc., a California corporation
and TCA – Go Green SPV, LLC, a Florida limited liability
pursuant to which the Company acquired the intellectual property
and assumed the lease for the property located at 15721 Ventura
Blvd., Encino, CA 91436. The Company intends to operate a retail
store, sale over the internet and sell on a direct basis at this
location.
Concurrently,
the Company and Seller entered into a Security Agreement for
securing the assets of Company as collateral for the obligations of
Company as set forth in the Security Agreement. In consideration
for the sale and assignment of the Purchased Assets, the Company
agreed to pay the Seller: (i) the proceeds generated from the sale
of the closing inventory until all closing inventory has been sold,
and (ii) to pay the Seller 5% of all gross revenue of Company
earned or in any way related to the Purchased Assets generated
between October 1, 2018 and December 31, 2019, up to a maximum of
$200,000.
On
October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-Clone Enterprises, Inc., a California
corporation. EZ-Clone is the manufacturer of multiple
award-winning products specifically designed for the commercial
cloning and propagation stage of indoor plant cultivation including
cannabis, food, and other hydroponic farming. The Company
acquired 51% of EZ-Clone for $2,040,000, payable as follows: (i) a
cash payment of $645,000; and (ii) the issuance of 107,307,692
restricted shares of the Company’s common stock at a price of
$0.013 per share or $1,395,000.
The
Company has the obligation to acquire the remaining 49% of EZ-Clone
within one year for $1,960,000,
payable as follows: (i) a cash payment of $855,000; and (ii) the
issuance of 85,000,000 shares of the Company’s common stock
at a price of $0.013 per share or $1,105,000.
On
October 17, 2017, the Company 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, 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
$11,444,782 and $5,320,974 for the years ended December 31, 2018
and 2017, respectively. Our net cash used in operating activities
was $3,854,506 and $2,082,493 for 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 December 31, 2018, the
accumulated deficit was $141,176,087. 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 December 31, 2018, the Company had uninsured
deposits in the amount of $1,923,046.
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 $120,000 and
$20,000 as of December 31, 2018
and 2017, respectively.
Equipment – Equipment
consists of machinery, equipment, tooling, computer equipment and
leasehold improvements, which are stated at cost less accumulated
depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives or lease
period of the relevant asset, generally 3-10 years, except for
leasehold improvements which are depreciated over the lesser of the
life of the lease or 10 years.
Long Lived Assets – The
Company reviews its long-lived assets for impairment annually or
when changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Long-lived assets under certain
circumstances are reported at the lower of carrying amount or fair
value. Assets to be disposed of and assets not expected to provide
any future service potential to the Company are recorded at the
lower of carrying amount or fair value (less the projected cost
associated with selling the asset). To the extent carrying values
exceed fair values, an impairment loss is recognized in operating
results.
Intangible Assets – Intangible assets are capitalized
and amortized on a straight-line basis over their estimated useful
life, if the life is determinable. If the life is not determinable,
amortization is not recorded. We regularly perform reviews to
determine if facts and circumstances exist which indicate that the
useful lives of our intangible assets are shorter than originally
estimated or the carrying amount of these assets may not be
recoverable. When an indication exists that the carrying amount of
intangible assets may not be recoverable, we assess the
recoverability of our assets by comparing the projected
undiscounted net cash flows associated with the related asset or
group of assets over their remaining lives against their respective
carrying amounts. Such impairment test is based on the lowest level
for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. Impairment,
if any, is based on the excess of the carrying amount over the
estimated fair value of those assets.
Fair Value Measurements and Financial Instruments - ASC
Topic 820 defines fair value, establishes a framework for measuring
fair value, establishes a three-level valuation hierarchy for
disclosure of fair value measurement and enhances disclosure
requirements for fair value measurements. The valuation hierarchy
is based upon the transparency of inputs to the valuation of an
asset or liability as of the measurement date. The three levels are
defined as follows:
Level 1
- Inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active
markets.
Level 2
- Inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial
instrument.
Level 3
- Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
The
carrying value of cash, accounts receivable, investment in a
related party, accounts payables, accrued expenses, due to related
party, notes payable, and convertible notes approximates their fair
values due to their short-term maturities.
Derivative financial instruments -The Company evaluates all
of its financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are
accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the
consolidated statements of operations. For stock-based derivative
financial instruments, the Company uses a weighted average
Black-Scholes-Merton option pricing model to value the derivative
instruments at inception and on subsequent valuation dates. The
classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as
current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within twelve months
of the balance sheet date.
Sales Returns - We allow customers to return defective
products when they meet certain established criteria as outlined in
our sales terms and conditions. It is our practice to regularly
review and revise, when deemed necessary, our estimates of sales
returns, which are based primarily on actual historical return
rates. We record estimated sales returns as reductions to sales,
cost of goods sold, and accounts receivable and an increase to
inventory. Returned products which are recorded as inventory are
valued based upon the amount we expect to realize upon its
subsequent disposition. As of December 31, 2018 and 2017, there was
a reserve for sales returns of $40,000 and $10,000, respectively,
which is minimal based upon our historical experience.
Stock Based Compensation - The
Company has share-based compensation plans under which employees,
consultants, suppliers and directors may be granted restricted
stock, as well as options and warrants to purchase shares of
Company common stock at the fair market value at the time of grant.
Stock-based compensation cost to employees is measured by the
Company at the grant date, based on the fair value of the award,
over the requisite service period under ASC 718. For options issued
to employees, the Company recognizes stock compensation costs
utilizing the fair value methodology over the related period of
benefit. Grants of stock to non-employees and other
parties are accounted for in accordance with the ASC
505.
Net (Loss) Per Share - Under
the provisions of ASC 260, “Earnings per Share,” basic
loss per common share is computed by dividing net loss available to
common shareholders by the weighted average number of shares of
common stock outstanding for the periods presented. Diluted net
loss per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of
common stock that would then share in the income of the Company,
subject to anti-dilution limitations. The common stock equivalents
have not been included as they are
anti-dilutive.
As of
December 31, 2018, there are also (i) stock option grants
outstanding for the purchase of 100 million common shares at a $0.010
average exercise price; (ii) warrants for the purchase of
902.8 million common shares at
a $0.029 average exercise price; and (iii) 112.8 million shares related to convertible debt that can be
converted at $0.002535 per share. In addition, the Company has an
unknown number of common shares to be issued under the Chicago
Venture, Iliad and St. George financing agreements. As of
December 31, 2017, there are
also (i) stock option grants outstanding for the purchase of
56,000,000 common shares at a $0.007 average exercise price; (ii)
warrants for the purchase of 595 million common shares at a $0.031
average exercise price; and (iii) 241,766,075 million shares related to convertible debt that can be
converted at $0.002535 per share. In addition, we have an unknown
number of common shares to be issued under the Chicago
Venture Partners, L.P. financing
agreements.
Dividend Policy - The Company
has never paid any cash dividends and intends, for the foreseeable
future, to retain any future earnings for the development of our
business. Our future dividend policy will be determined by the
board of directors on the basis of various factors, including our
results of operations, financial condition, capital requirements
and investment opportunities.
Use of Estimates - In preparing these unaudited interim
consolidated financial statements in conformity with GAAP,
management is required to make estimates and assumptions that may
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of
the consolidated financial statements and the reported amount of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates. Significant estimates and
assumptions included in our consolidated financial statements
relate to the valuation of long-lived assets, estimates of sales
returns, inventory reserves and accruals for potential liabilities,
and valuation assumptions related to derivative liability, equity
instruments and share based compensation.
Recent Accounting Pronouncements
In July
2015, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2015-11, “Simplifying the
Measurement of Inventory,” Topic 330, “Inventory”
(ASU 2015-11). The amendments in ASU 2015-11, which apply to
inventory that is measured using any method other than the last-in,
first-out (LIFO) or retail inventory method, require that entities
measure inventory at the lower of cost and net realizable value.
The amendments in ASU 2015-11 should be applied on a prospective
basis. ASU 2015-11 is effective for fiscal years beginning after
December 15, 2016 and interim periods within those years. The
Company adopted the amendments of ASU 2015-11 effective January 1,
2018. The adoption of this standard did not have a material impact
on the Company’s consolidated financial statements for the
year ended December 31, 2018.
In
March 2016, the FASB issued ASU 2016-09, “Improvements to
Employee Share-Based Payment Accounting,” Topic 718,
“Compensation-Stock Compensation” (ASU 2016-09). ASU
2016-09 includes provisions intended to simplify various aspects
related to how share-based payments are accounted for and presented
in the Company’s financial statements, including income tax
consequences, forfeitures and classification on the statement of
cash flows. Under previous guidance, excess tax benefits and
deficiencies from share-based compensation arrangements were
recorded in equity when the awards vested or were settled. ASU
2016-09 requires prospective recognition of excess tax benefits and
deficiencies in income tax expense, rather than paid-in-capital.
The Company adopted the amendments of ASU 2016-09 effective January
1, 2018.The adoption of this standard did not have a material
impact on the Company’s consolidated statements of income for
the year ended December 31, 2018.
In
addition, under ASU 2016-09, excess tax income tax benefits from
share-based compensation arrangements are classified as cash flow
from operations, rather than as cash flow from financing
activities. For the year ended December 31, 2018, there were no
excess income tax benefits.
The
Company has elected to continue to estimate the number of
share-based awards expected to vest, as permitted by ASU 2016-09,
rather than electing to account for forfeitures as they
occur.
ASU
2016-09 requires excess tax benefits and deficiencies to be
prospectively excluded from assumed future proceeds in the
calculation of diluted shares, resulting in an immaterial decrease
in diluted weighted average shares outstanding for the year ended
December 31, 2018.
In
January 2017, the FASB issued ASU 2017-04, “Simplifying the
Test for Goodwill Impairment,” Topic 350, “Intangibles
– Goodwill and Other” (ASU 2017-04). The amendments in
ASU 2017-04 simplify the accounting for goodwill impairment for all
entities by requiring impairment charges to be based on the first
step in the current two-step impairment test. An impairment charge
for the amount by which the carrying amount exceeds the reporting
unit’s fair value should be recognized; however, the loss
recognized should not exceed the total amount of goodwill allocated
to that reporting unit. The amendments should be applied on a
prospective basis. Early adoption is permitted for annual and
interim goodwill impairment testing dates after January 1, 2017,
and the ASU is effective for the Company’s first quarter of
the fiscal year ending December 31, 2020. The Company is currently
evaluating the impact that the adoption of these provisions will
have on its consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, “Leases,”
Topic 842, “Leases” (ASU 2016-02). ASU No. 2016-02
requires lessees to recognize a right-of-use asset and
corresponding lease liability for all leases with terms of more
than 12 months. Recognition, measurement and presentation of
expenses will depend on classification as a finance or operating
lease. ASU 2016-02 also requires certain quantitative and
qualitative disclosures. The provisions of ASU 2016-02 are
effective for the Company’s first quarter of the fiscal year
ending December 31, 2020, with early adoption permitted. The
Company will apply the transition provisions of ASU 2016-02 at its
adoption date, rather than the earliest comparative period
presented in the financial statements, as permitted by ASU 2018-11,
“Leases,” Topic 842, “Targeted
Improvements,” released in July 2018.
The
adoption of ASU 2016-02 may result in a material increase to the
Company’s consolidated balance sheets for lease liabilities
and right-of-use assets. The Company is also performing a
comprehensive review of its current processes to determine and
implement changes required to support the adoption of this
standard. The Company is currently evaluating the other effects the
adoption of ASU 2016-02 will have on its consolidated financial
statements.
In
January 2018, the FASB issued ASU 2018-01, “Leases,”
Topic 842, “Land Easement Practical Expedient for Transition
to Topic 842” (ASU 2018-01). ASU 2018-01 permits an entity to
elect a transition practical expedient to not assess, under
Accounting Standards Codification (ASC) 842, land easements that
exist or expired before the standard’s effective date that
were not previously accounted for as leases under ASC 840. The
Company plans to elect this practical expedient in implementing ASU
2016-02.
In May
2014, the FASB issued ASU 2014-09, “Revenue from Contracts
with Customers,” Topic 606, “Revenue from Contracts
with Customers” (ASU 2014-09). ASU 2014-09 provides guidance
for revenue recognition and will replace most existing revenue
recognition guidance in GAAP when it becomes effective. ASU
2014-09’s core principle is that a company will recognize
revenue when it transfers promised goods or services to customers
in an amount that reflects the consideration to which the company
expects to be entitled for the transfer of those goods or services.
ASU 2014-09 permits the use of either the retrospective or
cumulative effect transition method. Additionally, the amendments
in this ASU provide a practical expedient for entities to recognize
the incremental costs of obtaining a contract as an expense when
incurred if the amortization period of the asset that the entity
otherwise would have recognized is one year or less, The Company
plans to elect this practical expedient upon adoption.
In July
2015, the FASB issued ASU 2015-14, “Revenue from Contracts
with Customers – Deferral of the Effective Date.” The
FASB approved the deferral of ASU 2014-09, by extending the new
revenue recognition standard’s mandatory effective date by
one year and permitting public companies to apply the new revenue
standard to annual reporting periods beginning after December 15,
2017. The guidance in ASU 2014-09 will be effective for the Company
in the first quarter of the fiscal year ending December 31,
2019.
Further
to ASU 2014-09 and ASU 2015-14, the FASB issued ASU 2016-08,
“Revenue from Contracts with Customers,” Topic 606,
“Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)” (ASU 2016-08) in March 2016, ASU 2016-12,
“Revenue from Contracts with Customers,” Topic 606,
“Narrow-Scope Improvements and Practical Expedients”
(ASU 2016-12) in May 2016 and ASU 2016-20, “Revenue from
Contracts with Customers,” Topic 606, “Technical
Corrections and Improvements” (ASU 2016-20) in December 2016.
The amendments in ASU 2016-08 clarify the implementation guidance
on principal versus agent considerations, including indicators to
assist an entity in determining whether it controls a specified
good or service before it is transferred to the customers. ASU
2016-12 addresses narrow-scope improvements to the guidance on
collectability, non-cash consideration, and completed contracts at
transition. Additionally, the amendments in this ASU provide a
practical expedient for contract modifications at transition and an
accounting policy election related to the presentation of sales
taxes and other similar taxes collected from customers. The Company
plans to make such election. The Company also plans to elect the
practical expedient in ASU 2016-20 that provides entities do not
need to disclose the transaction price allocated to performance
obligations when the related contracts have a duration of one year
or less. This includes loyalty rewards, which can be redeemed in
the month subsequent to the quarter earned, and marketing
promotions that cross accounting periods. Both of these classes of
transactions are currently immaterial to the Company. The effective
date and transition requirements for ASU 2016-08, ASU 2016-12 and
ASU 2016-20 are the same as for ASU 2014-09.
The
Company does not plan to early adopt the new revenue recognition
guidance; adoption will be on the modified retrospective basis
beginning in fiscal year 2019. The Company has substantially
concluded its assessment of the impact of the adoption of this
standard on its consolidated financial statements. Most of the
Company’s revenue is expected to continue to be generated
from point-of-sale transactions, which ASU 2014-09 treats generally
consistent with current accounting standards. The Company does not
expect this standard will have a material impact on the accounting
for point-of-sale transactions or related areas including the right
of return and customer incentives. Although the impact on the
consolidated financial statements is not expected to be material,
additional disclosures will be required.
In June
2018, the FASB issued ASU 2018-07, “Compensation-Stock
Compensation,” Topic 718, “Improvements to Nonemployee
Share-Based Payment Accounting” (ASU 2018-07) as part of its
Simplification Initiative to reduce complexity when accounting for
share-based payments to non-employees. ASU 2018-07 expands the
scope of Topic 718 to more closely align share-based payment
transactions for acquiring goods and services from non-employees
with the accounting for share-based payments to employees, with
certain exceptions. The provisions of ASU 2018-07 are effective for
the Company’s first quarter of the fiscal year ending
December 31, 2020, with early adoption permitted.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
$4,573,461
|
$1,551,503
|
$6,124,964
|
Net
loss
|
(11,473,137)
|
(111,671)
|
(11,584,808)
|
Net
loss per share
|
$(0.00)
|
|
$(0.00)
|
The unaudited pro-forma financial data for the acquisition for the
year ended December 31, 2017, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
$2,452,104
|
$2,648,873
|
$5,100,977
|
Net
loss
|
(5,320,974)
|
(126,962)
|
(5,447,936)
|
Net
loss per share
|
$(0.00)
|
|
$(0.00)
|
There were no material, nonrecurring items included in the reported
the pro-forma results.
Termination of Agreements with CANX, LLC
On
February 15, 2019, the Company entered into a Termination of
Existing Agreements and Release with CANX USA, LLC, a Nevada
limited liability company. Pursuant to the Agreement, the Parties
agreed to terminate, release and
discharge all existing and further rights and obligations between
the Parties under, arising out of, or in any way related to
that certain Waiver and Modification
Agreement and Amended and Restated Joint Venture Agreement made as
of July 10, 2014, and any ancillary agreements or instruments
thereto, including, but not limited to, the Warrants issued to CANX
entitling CANX to purchase 540,000,000 shares of the
Company’s common stock at an exercise price of
$0.033.
In exchange for the Agreement and cancellation of the CANX
Agreements and Warrants, the Company agreed to issue $1,000,000 of
restricted common stock priced at the February 7, 2019 closing
price of $0.008, or 125,000,000 restricted common stock
shares.
NOTE 5 – INVENTORY
Inventory
as of December 31, 2018 and 2017 consisted of the
following:
|
|
|
|
|
|
|
|
|
Raw
materials
|
$417,570
|
$110,000
|
Work
in process
|
35,280
|
-
|
Finished
goods
|
459,814
|
375,678
|
Inventory
reserve
|
(120,000)
|
(20,000)
|
Total
|
$792,664
|
$465,678
|
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 December 31, 2018 and 2017 consists of the
following:
|
|
|
|
|
|
|
|
|
Machinery,
equipment and tooling
|
$943,326
|
$365,861
|
Furniture
and fixtures
|
-
|
49,787
|
Computer
equipment
|
16,675
|
52,304
|
Leasehold
improvements
|
14,703
|
56,965
|
Total
property and equipment
|
974,704
|
524,917
|
Less
accumulated depreciation and amortization
|
(261,839)
|
(222,228)
|
Net
property and equipment
|
$712,866
|
$302,689
|
Fixed assets, net of accumulated depreciation, were $712,866 and
$302,689 as of December 31, 2018 and 2017, respectively.
Accumulated depreciation was $261,839 and $222,228 as of December
31, 2018 and 2017, respectively. Total depreciation expense was
$80,125 and $1,890 for the years ended December 31, 2018 and 2017,
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. The Company began depreciation on the
purchased machine January 1, 2018 when significant operations
began.
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 December 31, 2018 and 2017 consisted of the
following:
|
Estimated
|
|
|
|
Useful Lives
|
|
|
|
|
|
|
Customer
lists
|
3
years
|
$1,604,341
|
$-
|
Patents
|
3
years
|
1,818,740
|
|
Less:
accumulated amortization
|
|
(142,628)
|
-
|
Intangible
assets, net
|
|
$3,280,453
|
$-
|
Total amortization expense was $142,628 and $0 for the years ended
December 31, 2018 and 2017, respectively.
On
October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-Clone Enterprises, Inc., a California corporation
that was founded in January 2000. The Company acquired 51% of
EZ-Clone for $2,040,000, payable as follows: (i) a cash payment of
$645,000; and (ii) the issuance of 107,307,692 restricted shares of
the Company’s common stock at a price of $0.013 per share or
$1,395,000. The Company has the obligation to acquire the remaining
49% of EZ-Clone within one year for $1,960,000, payable as follows: (i) a cash payment
of $855,000; and (ii) the issuance of 85,000,000 shares of the
Company’s common stock at a price of $0.013 per share or
$1,105,000.
The fair value of the intellectual property associated with the
assets acquired was $3,423,081 estimated by using a discounted cash
flow approach based on future economic benefits. In summary, the
estimate was based on a projected income approach and related
discounted cash flows over five years, with applicable risk factors
assigned to assumptions in the forecasted results.
NOTE 8- ACCOUNTS PAYABLE
Accounts payable were $1,054,371 and $821,398 as of December
31, 2018 and December 31, 2017, respectively. Such liabilities
consisted of amounts due to vendors for inventory purchases, audit,
legal and other expenses incurred by the Company.
NOTE 9- ACCRUED EXPENSES
Accrued expenses were $261,954 and $133,988 as of December 31,
2018 and, 2017, 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 $98,150 as of December 31,
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. In addition, the Company recorded an additional
accrued liability of $1,986 as of December 31, 2018.
NOTE 10 – CONVERTIBLE NOTES PAYABLE, NET
Convertible
notes payable as of December
31, 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% OID Convertible
Promissory Notes
|
$2,982,299
|
$135,780
|
$-
|
$3,118,079
|
7%
Convertible note ($850,000)
|
270,787
|
15,267
|
-
|
286,054
|
|
$3,253,086
|
$151,047
|
$-
|
$3,404,133
|
Convertible
notes payable as of December
31, 2017 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6%
Secured convertible note (2014)
|
$39,251
|
$1,974
|
$-
|
$41,225
|
7%
Convertible note ($850,000)
|
250,000
|
321,652
|
-
|
571,652
|
10% OID Convertible
Promissory Notes
|
2,980,199
|
120,492
|
(698,547)
|
2,402,144
|
|
$3,269,450
|
$444,118
|
$(698,547)
|
$3,015,021
|
6% Secured Convertible Note and Secured Credit Facility
(2014)
On
March 13, 2018, the Company, received a Notice of Conversion from
Logic Works LLC converting principal and interest of $41,690 owed
under that a 6% Convertible Note into 16,445,609 shares of our
common stock with a fair value of $248,329. As of March 13, 2018,
the outstanding balance on the Convertible Note was
$0.
7% Convertible Notes Payable
As of
December 31, 2017, the
outstanding principal on the 7% convertible note was $250,000 and
accrued interest was $321,652, which results in a total liability
of $571,652.
On
February 12, 2018, the Company received a Notice of Conversion from
Forglen LLC converting principal and interest of $321,945 owed
under that 7% Convertible Note as amended June 19, 2014 into
127,000,000 shares of the Company’s common stock with a fair
value of $2,235,200. 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
December 31, 2018, the
outstanding principal on this 7% convertible note was $270,787 and
accrued interest was $15,267, which results in a total liability of
$286,054.
10% Convertible Promissory Notes
Funding from Chicago Venture Partners, L.P. (“Chicago
Venture”)
As
of December 31, 2017, the
outstanding principal balance due to Chicago Venture was
$2,980,199, accrued interest was $120,492, net of the discount of
$698,547, which results in a total amount of
$2,402,144.
As
of December 31, 2018, the
outstanding principal balance due to Chicago Venture is $1,112,200
and accrued interest was $90,931, which results in a total amount
of $1,203,230.
During
the year ended December 31, 2018, Chicago Venture converted
principal and interest of $3,104,181 into 525,587,387 shares of our
common stock at a per share conversion price of $0.0059 with a fair
value of $7,756,330. The Company recognized $6,565,415 loss on debt
conversions during the year ended December 31, 2018.
During
the year ended December 31, 2018, the Company recorded an OID debt
discount expense of $660,472 to interest expense related to the
Chicago Venture financing.
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement with Iliad Research and Trading, L.P.
(“Iliad”)
On
August 10, 2018, the Company closed the transactions described
below with Iliad.
On
August 7, 2018, the Company executed the following agreements with
Iliad: (i) Securities Purchase Agreement; (ii) Secured Promissory
Notes; and (iii) Security Agreement (collectively the “Iliad
Agreements”). The Company entered into the Iliad Agreements
with the intent to acquire working capital to grow our
businesses.
The
total amount of funding under the Iliad Agreements is $1,500,000.
The Convertible Promissory Note carries an original issue discount
of $150,000 and a transaction expense amount of $5,000, for total
debt of $1,655,000. The Company agreed to reserve three times the
number of shares based on the redemption value with a minimum of
150 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 August 7, 2019. The Debt carries an
interest rate of ten percent (10%). The Debt is convertible, at
Iliad’s option, into our common stock at $0.015 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 our assets. The Company has
$504,098 available under this debt financing.
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement with Iliad
On
October 15, 2018, we executed the following agreements with Iliad:
(i) Securities Purchase Agreement; (ii) Secured Promissory Notes;
(iii) Security Agreement; and (iv) Warrant to Purchase Shares of
Common Shares (collectively the “Iliad Agreements”).
The Company entered into the Iliad Agreements with the intent to
acquire EZ-Clone Enterprises, Inc.
The
total amount of funding under the Iliad Agreements is $700,000. The
Convertible Promissory Note carries an original issue discount of
$70,000 and a transaction expense amount of $5,000, for total debt
of $775,000. The Company agreed to reserve 350 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 15, 2018. The Debt carries an interest rate of ten
percent (10%). The Debt is convertible, at Iliad’s option,
into the Company’s common stock at 65% of the lowest trading
prices in the twenty trading days before conversion.
The
Warrant is exercisable for a period of five (5) years from the
Closing, for the purchase of up to $387,500 shares of our Common
Stock at the market price as of the date of exercise as defined in
the agreements. The Warrant is subject to a cashless exercise
option at the election of Iliad and other adjustments as detailed
in the Warrant. The fair value of the warrant is $118,615 at
December 31, 2018.
Our
obligation to pay the Debt, or any portion thereof, is secured by
all of the Company’s assets.
At
December 31, 2018 the outstanding principal balance due to Iliad
Research and Trading, L.P. is $1,870,000, accrued interest of
$44,849 resulting in a total of $1,914,849. On January 17, 2019,
the Company repaid $650,000 to Iliad.
NOTE 11 – DERIVATIVE LIABILITY
In
April 2008, the FASB issued a pronouncement that provides guidance
on determining what types of instruments or embedded features in an
instrument held by a reporting entity can be considered indexed to
its own stock for the purpose of evaluating the first criteria of
the scope exception in the pronouncement on accounting for
derivatives. This pronouncement was effective for financial
statements issued for fiscal years beginning after December 15,
2008.
If the
conversion features of conventional convertible debt provide for a
rate of conversion that is below market value, this feature is
characterized as a beneficial conversion feature (BCF). A BCF is
recorded by the Company as a debt discount pursuant to ASC Topic
470-20. Debt with Conversion and Other Options. In those
circumstances, the convertible debt is recorded net of the discount
related to the BCF and the Company amortizes the discount to
interest expense over the life of the debt using the effective
interest method. The debt is convertible at the lesser of 65% of
the fair value of the Company’s common stock or $0.009
requiring the conversion feature to be bifurcated from the host
debt contract and accounting for separately as a derivative,
resulting in periodic revaluations.
There
was a derivative liability of $1,795,473 as of December 31,
2018. For the year ended
December 31, 2018, the Company recorded non-cash income of $977,732
related to the “change in fair value of derivative”
expense related to the Chicago Venture and Iliad financing. The
income related to a decline in the share price and Chicago Venture
converted principal and interest of $3,104,181 into 525,587,387
shares of our common stock at a per share conversion price of
$0.0059.
Derivative liability as of December 31, 2018 was as
follows:
|
|
|
|
|
|
Fair Value Measurements Using Imputs
|
|
Financial Instruments
|
|
|
|
|
Liabilities:
|
|
|
|
|
Derivative
Instruments
|
$-
|
$1,795,473
|
$-
|
$1,795,473
|
|
|
|
|
|
Total
|
$-
|
$1,795,473
|
$-
|
$1,795,473
|
NOTE 12 – RELATED PARTY
TRANSACTIONS AND CERTAIN RELATIONSHIPS
Since
January 1, 2017, the Company engaged in the following reportable
transactions with our directors, executive officers, holders of
more than 5% of our voting securities, and affiliates or
immediately family members of our directors, executive officers and
holders of more than 5% of our voting securities.
Certain Relationships
Please
see the transactions with Chicago Venture Partners, L.P. discussed
in Notes 10, 11, 13 and 17.
Transactions with Marco Hegyi
On
October 21, 2018 and 2017, a Mr. Hegyi Warrant to purchase up to
10,000,000 shares of our common stock at an exercise price of $0.01
per share vested. The Warrant is exercisable for 5 years. The
warrants were valued at $390,000 and $192,000 we recorded $178,750
and $195,000 as compensation expense for the years ended December
31, 2018 and 2017, respectively. On October 15, 2018, Mr. Hegyi
received Warrants to purchase up to 48,000,000 shares of our common
stock at an exercise price of $0.012 per share and which vest on
October 15, 2018, 2019 and 2020. The Warrants are exercisable for 5
years. The warrant that vested on October 15, 2018 was valued at
$96,000 and we recorded this amount compensation expense for the
year ended December 31, 2018.
On
October 15, 2018, the Board of Directors approved an Employment
Agreement with Marco Hegyi pursuant to which the Company engaged
Mr. Hegyi as its Chief Executive Officer through October 15, 2021.
See Note 15 for additional details.
Transactions with an Entity Controlled by Mark E.
Scott
On October 15, 2018, an entity controlled by Mr. Scott was granted
an option to purchase 20,000,000 shares of common stock at
an exercise price of $0.012 per share. On October 15, 2017, an entity controlled by Mr.
Scott was granted an option to purchase 12,000,000 shares of common
stock at an exercise price of $0.006 per share. The stock
option grants vest quarterly over three years and are exercisable
for 5 years. The stock option grants were valued at $40,000 and
$18,000. The Company recorded $8,833 and $1,500 as compensation
expense for the years ended December 31, 2018 and 2017,
respectively.
On
October 15, 2018, the Compensation Committee of the Company
approved an Employment Agreement with Mark E. Scott pursuant to
which the Company engaged Mr. Scott as its Chief Financial Officer
through October 15, 2021. Mr. Scott’s previous Agreement was
cancelled. See Note 15 for additional details.
Transaction with Joseph Barnes
On October 15, 2018, Mr. Barnes was granted an option to purchase
18,000,000 shares of common stock at an exercise price of
$0.012 per share. On October 25, 2017,
Mr. Barnes was granted an option to purchase 10,000,000 shares of
common stock at an exercise price of $0.007 per share. The
stock option grants vest quarterly over three years and are
exercisable for 5 years. The stock option grants were valued at
$36,000 and $24,000. The Company recorded $8,550 and $2,000 as
compensation expense for the years ended December 31, 2018 and
2017, respectively
On
October 15, 2018, the Compensation Committee of the Company
approved an Employment Agreement with Joseph Barnes pursuant to
which the Company engaged Mr. Barnes as President of the GrowLife
Hydroponics Company through October 15, 2021. Mr. Barnes’s
previous Agreement was cancelled. See Note 15 for additional
details.
Transactions with Michael E. Fasci
On
February 4, 2017, the Company issued 1,000,000 shares of our common
stock to Michael E. Fasci pursuant to a service award for $15,000.
The shares were valued at the fair market price of $0.015 per
share. On April 27, 2017, the Company issued 1,000,000 shares of
our common stock to Michael E. Fasci pursuant to a service award
for $9,000. The shares were valued at the fair market price of
$0.009 per share. On April 27, 2017, the Company issued 2,000,000
shares of our common stock to Michael E. Fasci pursuant to a
consulting agreement for $18,000. The shares were valued at the
fair market price of $0.009 per share. On November 2, 2017, the
Company issued 2,000,000 shares of our common stock to Michael E.
Fasci pursuant to a consulting agreement for $10,000. The shares
were valued at the fair market price of $0.005 per
share.
On
February 1, 2018, the Company issued 3,789,041 shares of our common
stock to Mr. Fasci that was valued at $0.02 per share or $75,781.
On December 6, 2018, the Company issued Mr. Fasci 5,000,000 shares
of our common stock that was valued at $0.01 per share or $50,000.
On December 6, 2018, Michael E. Fasci resigned as a Member of the
Board of Directors.
Transactions with Katherine McLain
Ms.
Katherine McLain was appointed as a director on February 14, 2017.
On June 28, 2017, the Company issued 1,000,000 shares of our common
stock to Ms. McLain pursuant to a service award for $9,000. The
shares were valued at the fair market price of $0.009 per share. On
October 23, 2017, the Company issued 1,000,000 shares of our common
stock to Ms. McLain pursuant to a service award for $5,000. The
shares were valued at the fair market price of $0.005 per share. On
February 1, 2018, the Company issued 2,893,151 shares of our common
stock to Katherine McLain that was valued at $0.02 per share or
$57,863.
Transaction with Thom Kozik
Mr.
Kozik was appointed as a director on October 5, 2017. On October
23, 2017, the Company issued 2,000,000 shares of our common stock
to Mr. Kozik pursuant to a service award for $10,000. The shares
were valued at the fair market price of $0.005 per share. On
February 1, 2018, the Company issued 978,082 shares of our common
stock to Thom Kozik that was valued at $0.02 per share or
$19,562.
NOTE 13 – EQUITY
Authorized Capital Stock
The
Company has authorized 6,010,000,000 shares of capital stock, of
which 6,000,000,000 are shares of voting common stock, par value
$0.0001 per share, and 10,000,000 are shares of preferred stock,
par value $0.0001 per share. On
October 24, 2017 the Company filed a Certificate of Amendment of
Certificate of Incorporation with the Secretary of State of the
State of Delaware to increase the authorized shares of common stock
from 3,000,000,000 to 6,000,000,000 shares.
Non-Voting Preferred Stock
Under
the terms of our articles of incorporation, the Company’s
board of directors is authorized to issue shares of non-voting
preferred stock in one or more series without stockholder approval.
The Company’s board of directors has the discretion to
determine the rights, preferences, privileges and restrictions,
dividend rights, conversion rights, redemption privileges and
liquidation preferences, of each series of non-voting preferred
stock.
The
purpose of authorizing the Company’s board of directors to
issue non-voting preferred stock and determine the Company’s
rights and preferences is to eliminate delays associated with a
stockholder vote on specific issuances. The issuance of non-voting
preferred stock, while providing flexibility in connection with
possible acquisitions, future financings and other corporate
purposes, could have the effect of making it more difficult for a
third party to acquire, or could discourage a third party from
seeking to acquire, a majority of our outstanding voting stock.
Other than the Series B and C Preferred Stock discussed below,
there are no shares of non-voting preferred stock presently
outstanding and we have no present plans to issue any shares of
preferred stock.
Common Stock
Unless otherwise indicated, all of the following sales or issuances
of Company securities were conducted under the exemption from
registration as provided under Section 4(2) of the Securities Act
of 1933 (and also qualified for exemption under 4(5), formerly 4(6)
of the Securities Act of 1933, except as noted below). All of the
shares issued were issued in transactions not involving a public
offering, are considered to be restricted stock as defined in Rule
144 promulgated under the Securities Act of 1933 and stock
certificates issued with respect thereto bear legends to that
effect.
The Company has compensated consultants and service providers with
restricted common stock during the development of our business and
when our capital resources were not adequate to provide payment in
cash.
During the year ended December 31, 2018, the Company had had the
following sales of unregistered of equity securities to accredited
investors unless otherwise indicated:
On
February 7, 2018, the Company issued 7,660,274 shares to three
directors. The shares were valued at the fair market price of
$0.020 per share or $153,205. The shares were issued for annual
director service to the Company.
On
February 12, 2018, the Company received a Notice of Conversion from
Forglen LLC converting principal and interest of $321,945 owed
under that certain 7% Convertible Note as amended June 19, 2014
into 127,000,000 shares of the Company’s common stock with a
fair value of $2,235,200.
On
March 13, 2018, the Company, received a Notice of Conversion from
Logic Works LLC converting principal and interest of $41,690 owed
under that a 6% Convertible Note into 16,445,609 shares of our
common stock with a fair value of $248,329. As of March 13, 2018,
the outstanding balance on the Convertible Note was
$0.
During
the year ended December 31, 2018, the Company issued 2,400,000
shares of its common stock to a service provider pursuant to
conversions of debt totaling $33,000. The shares were valued at the
fair market price of $0.0138 per share.
During
the year ended December 31, 2018, the Company issued 6,250,000
shares of its common stock to a service provider and a former
director related to services. The shares were valued at the fair
market price of $0.0104 per share or $65,000.
During
the year ended December 31, 2018, Chicago Venture converted
principal and interest of $3,104,181 into 525,587,387 shares of our
common stock at a per share conversion price of $0.0059 with a fair
value of $7,756,330. The Company recognized $6,565,415 loss on debt
conversions during the year ended December 31, 2018.
During
the year ended December 31, 2018, an employee exercised a stock
option grant for 1,000,000 shares at $0.006 or $6,000.
Securities Purchase Agreements with St. George Investments,
LLC
On February 9, 2018, the Company executed the following agreements
with St. George Investments LLC, a Utah limited liability company:
(i) Securities Purchase Agreement; and (ii) Warrant to Purchase
Shares of Common Stock. The Company entered into the St. George
Agreements with the intent to acquire working capital to grow the
Company’s businesses.
Pursuant to the St. George Agreements, the Company agreed to sell
and to issue to St. George for an aggregate purchase price of
$1,000,000: (a) 48,687,862 Shares of newly issued restricted Common
Stock of the Company; and (b) the Warrant. St. George has paid the
entire Purchase Price for the Securities.
The Warrant is exercisable for a period of five (5) years from the
Closing, for the purchase of up to 48,687,862 shares of the
Company’s Common Stock at an exercise price of $0.05 per
share of Common Stock. The Warrant is subject to a cashless
exercise option at the election of St. George and other adjustments
as detailed in the Warrant.
On
March 20, 2018, the Company entered into and closed on a Common
Stock Purchase Agreement with St. George Investments, LLC, a Utah
limited liability company. The Company issued St. George 6,410,256
shares of newly issued restricted Common Stock of the Company at a
purchase price of $0.0156 per share.
On
April 26, 2018, the Company entered into and closed on a Common
Stock Purchase Agreement with St. George Investments, LLC, Pursuant
to the St. George Agreements, the Company sold and agreed to issue
to St. George 4,950,495 shares of newly issued restricted Common
Stock of the Company at a purchase price of $0.0202 per
share.
On May
25, 2018, the Company entered into and closed on a Common Stock
Purchase Agreement with St. George Investments, LLC, Pursuant to
the St. George Agreements, the Company sold and agreed to issue to
St. George 5,128,205 shares of newly issued restricted Common Stock
of the Company at a purchase price of $0.0195 per
share.
On
October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-Clone and issued 107,307,692 restricted shares of
our common stock at a price of $0.013 per share or
$1,395,000.
On
November 30, 2018, the Company closed its Rights Offering. We received $2,533,648
under the Rights Offering and issued 211,137,293 shares of common
stock at $0.012 per share.
During
the year ended December 31, 2017, the Company had had the following
sales of unregistered of equity securities to accredited investors
unless otherwise indicated:
On
February 28, 2017, Logic Works converted principal and interest of
$291,044 into 82,640,392 shares of the Company’s common stock
at a per share conversion price of $0.004.
During the year ended December 31, 2017, five vendors
converted debt of $559,408 into 64,869,517 shares of the
Company’s common stock at the fair market price of $0.0086
per share.
During the year ended December 31, 2017, four directors were
issued 10,000,000 shares of the Company’s common stock at the
fair market price of $0.0076 per share for 2017 director
services.
During
the year ended December 31, 2017, Chicago Venture converted
principal and accrued interest of $2,688,000 into 554,044,030
shares of the Company’s common stock at a per share
conversion price of $0.0049.
Warrants
The
Company issued the following warrants during the year ended
December 31, 2018:
On
February 9, 2018, the Company executed the following agreements
with St. George Investments LLC and issued a warrant to purchase of
up to 48,687,862 shares of the Company’s Common Stock at an
exercise price of $0.05 per share. The Warrant is subject to a
cashless exercise option at the election of St. George and other
adjustments as repricing as detailed in the Warrant.
On
October 15, 2018, Mr. Hegyi received Warrants to purchase up to
48,000,000 shares of our common stock at an exercise price of
$0.012 per share and which vest on October 15, 2018, 2019 and 2020.
The Warrants are exercisable for 5 years. The warrant that vested
on October 15, 2018 was valued at $96,000 and we recorded this
amount compensation expense for the year ended December 31,
2018.
The
Warrant is exercisable for a period of five (5) years from the
Closing, for the purchase of up to $387,500 shares of our Common
Stock at the market price as of the date of exercise as defined in
the agreements. The Warrant is subject to a cashless exercise
option at the election of Iliad and other adjustments as detailed
in the Warrant. The fair value of the warrant is $118,615 at
December 31, 2018.
On
November 30, 2018, the Company closed its Rights Offering. The Company received
$2,533,648 under the Rights Offering and issued 211,137,293 shares
of common stock at $0.012 per share. The Company also issued five
year warrants to acquire 105,568,642 shares of common stock
exercisable at $.018 and five year warrants to acquire 105,568,642
shares of common stock exercisable $.024 per
share.
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 December 31, 2018 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
595,000,000
|
$0.029
|
Issued
|
307,825,146
|
0.025
|
Exercised
|
-
|
-
|
Forfeited
|
-
|
-
|
Expired
|
-
|
-
|
Outstanding
at end of period
|
902,825,146
|
$0.029
|
Exerciseable
at end of period
|
902,825,146
|
|
A
summary of the status of the warrants outstanding as of December
31, 2018 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
540,000,000
|
0.33
|
$0.033
|
540,000,000
|
$0.033
|
55,000,000
|
7.67
|
0.010
|
55,000,000
|
0.010
|
48,000,000
|
5.75
|
0.012
|
16,000,000
|
0.012
|
48,687,862
|
4.08
|
0.050
|
48,687,862
|
0.050
|
211,137,284
|
2.92
|
0.021
|
211,137,284
|
0.021
|
902,825,146
|
1.44
|
$0.029
|
870,825,146
|
0.029
|
Warrants
had no intrinsic value as of December 31, 2018.
The
warrants were valued using the following assumptions:
Assumptions
|
|
Dividend
yield
|
0%
|
Expected
life
|
|
Expected
volatility
|
200%
|
Risk
free interest rate
|
0.78%
|
NOTE 14– STOCK OPTIONS
Description of Stock Option Plan
On
December 6, 2018, the Company’s shareholders voted to approve
the First Amended and Restated 2017 Stock Incentive Plan to
increase the shares issuable under the plan from 100 million to 200
million. The Company has 100,000,000 shares available for issuance.
The Company has outstanding unexercised stock option grants
totaling 100,000,000 shares at an average exercise price of $0.010
per share as of December 31, 2018. The Company filed registration
statements on Form S-8 to register 200,000,000 shares of the
Company’s common stock related to the 2017 Stock Incentive
Plan and First Amended and Restated 2017 Stock Incentive
Plan.
Determining Fair Value under ASC 505
The Company records compensation expense associated with stock
options and other equity-based compensation using the
Black-Scholes-Merton option valuation model for estimating fair
value of stock options granted under our plan. The Company
amortizes the fair value of stock options on a ratable basis over
the requisite service periods, which are generally the vesting
periods. The expected life of awards granted represents the period
of time that they are expected to be outstanding. The
Company estimates the volatility of our common stock based on the
historical volatility of its own common stock over the most recent
period corresponding with the estimated expected life of the award.
The Company bases the risk-free interest rate used in the Black
Scholes-Merton option valuation model on the implied yield
currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term equal to the expected life of the award.
The Company has not paid any cash dividends on our common stock and
does not anticipate paying any cash dividends in the foreseeable
future. Consequently, the Company uses an expected dividend yield
of zero in the Black-Scholes-Merton option valuation model and
adjusts share-based compensation for changes to the estimate of
expected equity award forfeitures based on actual forfeiture
experience. The effect of adjusting the forfeiture rate is
recognized in the period the forfeiture estimate is
changed.
Stock Option Activity
During the year ended December 31, 2018, the Company had the
following stock option activity:
On February 23, 2018, an employee was granted an option to purchase
2,000,000 shares of common stock at an exercise price of
$0.020 per share. The stock option grant vests quarterly over two
years and is exercisable for 5 years. The stock option grant was
valued at $13,000.
On February 23, 2018, an employee was granted an option to purchase
1,000,000 shares of common stock at an exercise price of
$0.020 per share. The stock option grant vests quarterly over one
year and is exercisable for 5 years. The stock option grant was
valued at $6,500.
On May 1, 2018, an employee was granted an option to purchase
2,000,000 shares of common stock at an exercise price of
$0.020 per share. The stock option grant vests quarterly over one
year and is exercisable for 5 years. The stock option grant was
valued at $13,000.
On June 1, 2018, an employee was granted an option to purchase
2,000,000 shares of common stock at an exercise price of
$0.020 per share. The stock option grant vests quarterly over one
year and is exercisable for 5 years. The stock option grant was
valued at $13,000.
On October 15, 2018, an entity controlled by Mr. Scott was granted
an option to purchase 20,000,000 shares of common stock at
an exercise price of $0.012 per share. The stock option grant vests
quarterly over three years and are exercisable for 5 years. The
stock option grants were valued at $40,000 and the Company recorded
this amount as compensation expense for the year ended December 31,
2018.
On October 15, 2018, Mr. Barnes was granted an option to purchase
18,000,000 shares of common stock at an exercise price of
$0.012 per share. The stock option grant vests quarterly over three
years and are exercisable for 5 years. The stock option grants were
valued at $36,000 and the Company recorded this amount as
compensation expense for the year ended December 31,
2018.
As of December 31, 2018, there are 100,000,000 options to purchase
common stock at an average exercise price of $0.010 per share
outstanding under the 2017 Amended and Restated Stock Incentive
Plan. The Company recorded $44,682 and $29,250 of compensation
expense, net of related tax effects, relative to stock options for
the years ended December 31, 2018 and 2017 in accordance with ASC
505. Net loss per share (basic and diluted) associated with this
expense was approximately ($0.00). As of December 31, 2018, there
is $140,970 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 3.79 years.
During the year ended December 31, 2017, the Company had the
following stock option activity:
On June
28, 2017, the Company’s Compensation Committee granted four
advisory committee members each an option to purchase 500,000
shares of the Company’s common stock under the
Company’s 2011 Stock Incentive Plan at an exercise price of
$0.009 per share, the fair market price on June 28,
2017.
On
October 1, 2017, Mr. Reichwein was granted an option to purchase
20,000,000 shares of our common stock under our 2011 Stock
Incentive Plan at $0.006 per share. The shares vest as
follows:
|
|
|
|
i
|
Ten
million shares vested immediately;
|
|
|
|
|
ii
|
Ten
million shares vest on a quarterly basis over two years beginning
on the date of grant.
|
The
stock option grants are exercisable for 5 years and were valued at
$20,000.
On October 15, 2017, an entity controlled by Mr. Scott was granted
an option to purchase 12,000,000 shares of common stock at
an exercise price of $0.006 per share. The stock option grant vests
quarterly over three years and is exercisable for 5 years. The
stock option grant was valued at $18,000.
On October 25, 2017, Mr. Barnes was granted an option to purchase
10,000,000 shares of common stock at an exercise price of
$0.007 per share. The stock option grant vests quarterly over three
years and is exercisable for 5 years. The stock option grant was
valued at $24,000.
Stock option activity for the years ended December 31, 2018 and
2017 is as follows:
|
|
|
|
|
|
|
|
Outstanding as of
December 31, 2016
|
12,010,000
|
$0.010
|
$120,500
|
Granted
|
44,000,000
|
0.006
|
280,000
|
Exercised
|
-
|
-
|
-
|
Forfeitures
|
(10,000)
|
(0.050)
|
(500)
|
Outstanding as of
December 31, 2017
|
56,000,000
|
0.007
|
400,000
|
Granted
|
45,000,000
|
0.013
|
596,000
|
Exercised
|
(1,000,000)
|
0.006
|
(6,000)
|
Forfeitures
|
-
|
-
|
-
|
Outstanding as of
December 31, 2018
|
100,000,000
|
$0.010
|
$990,000
|
The following table summarizes information about stock options
outstanding and exercisable at December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.006
|
31,000,000
|
3.75
|
$0.006
|
18,333,333
|
$0.006
|
0.007
|
10,000,000
|
3.75
|
0.007
|
4,166,667
|
0.007
|
0.009
|
2,000,000
|
1.50
|
0.009
|
1,000,000
|
0.009
|
0.010
|
12,000,000
|
0.88
|
0.010
|
12,000,000
|
0.010
|
0.012
|
38,000,000
|
4.75
|
0.012
|
3,166,667
|
0.012
|
|
7,000,000
|
4.39
|
0.020
|
1,416,667
|
0.020
|
|
100,000,000
|
3.79
|
$0.010
|
40,083,333
|
$0.008
|
Stock
option grants totaling 31,000,000 shares of common stock have an
intrinsic value of $18,333 as of December 31, 2018.
The
stock option grants were valued using the following
assumpti0ns:
Assumptions
|
|
Dividend
yield
|
0%
|
Expected
life
|
|
Expected
volatility
|
140%
|
Risk
free interest rate
|
0.02%
|
NOTE 15 – COMMITMENTS,
CONTINGENCIES AND LEGAL PROCEEDINGS
Legal Proceedings
From time to time, the Company may become subject to various legal
proceedings that are incidental to the ordinary conduct of its
business. Although we cannot accurately predict the amount of any
liability that may ultimately arise with respect to any of these
matters, it makes provision for potential liabilities when it deems
them probable and reasonably estimable. These provisions are based
on current information and may be adjusted from time to time
according to developments.
Other
than those certain legal proceedings as reported in the
Company’s annual report on Form 10-K filed with the SEC on
March 8, 2019, the Company’s know of no material, existing or
pending legal proceedings against our Company, nor is the Company
involved as a plaintiff in any material proceeding or pending
litigation. There are no proceedings in which any director, officer
or any affiliates, or any registered or beneficial shareholder, is
an adverse party or has a material interest adverse to the
Company’s interest.
Operating Leases
On May
31, 2018, the Company rented space at 5400 Carillon Point, Kirkland, Washington 98033
for $623 per month for the Company’s corporate office
and use of space in the Regus network, including California. The
Company’s agreement expires May 31, 2019.
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 December 31,
|
|
2019
|
$534,795
|
2020
|
925,511
|
2021
|
549,776
|
2022
|
-
|
2023
|
-
|
Beyond
|
-
|
Total
|
$2,010,082
|
Employment Agreements
Employment Agreement with Marco Hegyi
On
October 15, 2018, the Board of Directors of GrowLife, Inc. (the
“Company”) approved an Employment Agreement with Marco
Hegyi pursuant to which the Company engaged Mr. Hegyi as its Chief
Executive Officer through October 15, 2021. Mr. Hegyi’s
previous Employment Agreement was set to expire on October 21,
2018.
Mr.
Hegyi’s annual compensation is $275,000. Mr. Hegyi is also
entitled to receive an annual bonus equal to four percent (4%) of
the Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
Mr.
Hegyi received a Warrant to purchase up to 16,000,000 shares of
common stock of the Company at an exercise price of $0.012 per
share which vest immediately. In addition, Mr. Hegyi received two
Warrants to purchase up to 16,000,000 shares of common stock of the
Company at an exercise price of $0.012 per share which vest on
October 15, 2019 and 2020, respectively. The Warrants are
exercisable for 5 years.
Mr.
Hegyi will be entitled to participate in all group employment
benefits that are offered by the Company to the Company’s
senior executives and management employees from time to time,
subject to the terms and conditions of such benefit plans,
including any eligibility requirements. In addition, the Company
will purchase and maintain during the Term an insurance policy on
Mr. Hegyi’s life in the amount of $2,000,000 payable to Mr.
Hegyi’s named heirs or estate as the
beneficiary.
If the Company terminates Mr. Hegyi’s employment at any time
prior to the expiration of the Term without Cause, as defined in
the Employment Agreement, or if Mr. Hegyi terminates his employment
at any time for “Good Reason” or due to a
“Disability”, Mr. Hegyi will be entitled to receive (i)
his Base Salary amount through the end of the Term; and (ii) his
Annual Bonus amount for each year during the remainder of the
Term.
Employment Agreement with Mark E. Scott
On
October 15, 2018, the Compensation Committee of the Company
approved an Employment Agreement with Mark E. Scott pursuant to
which the Company engaged Mr. Scott as its Chief Financial Officer
through October 15, 2021. Mr. Scott’s previous Agreement was
cancelled.
Mr.
Scott’s annual compensation is $165,000. Mr. Scott is also
entitled to receive an annual bonus equal to two percent (2%) of
the Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
The
Company’s Board of Directors granted Mr. Scott an option to
purchase twenty million shares of the Company’s Common Stock
under the Company’s 2018 Amended and Restated Stock Incentive
Plan at an exercise price of $0.012 per share. The Shares vest
quarterly over three years. All options will have a five-year life
and allow for a cashless exercise. The stock option grant is
subject to the terms and conditions of the Company’s Amended
and Restated Stock Incentive Plan, including vesting requirements.
In the event that Mr. Scott’s continuous status as employee
to the Company is terminated by the Company without Cause or Mr.
Scott terminates his employment with the Company for Good Reason as
defined in the Scott Agreement, in either case upon or within
twelve months after a Change in Control as defined in the
Company’s Amended and Restated Stock Incentive, then 100% of
the total number of Shares shall immediately become
vested.
Mr.
Scott is entitled to participate in all group employment benefits
that are offered by the Company to the Company’s senior
executives and management employees from time to time, subject to
the terms and conditions of such benefit plans, including any
eligibility requirements. In addition, the Company is required
purchase and maintain an insurance policy on Mr. Scott’s life
in the amount of $2,000,000 payable to Mr. Scott’s named
heirs or estate as the beneficiary. Finally, Mr. Scott is entitled
to twenty days of vacation annually and also has certain insurance
and travel employment benefits.
If the Company terminates Mr. Scott’s employment at any time
prior to the expiration of the Term without Cause, as defined in
the Employment Agreement, or if Mr. Scott terminates his employment
at any time for “Good Reason” or due to a
“Disability”, Mr. Scott will be entitled to receive (i)
his Base Salary amount for ninety days; and (ii) his Annual Bonus
amount for each year during the remainder of the
Term.
Employment Agreement with Joseph Barnes
On
October 15, 2018, the Compensation Committee of the Company
approved an Employment Agreement with Joseph Barnes pursuant to
which the Company engaged Mr. Barnes as President of the GrowLife
Hydroponics Company through October 15, 2021. Mr. Barnes’s
previous Agreement was cancelled.
Mr.
Barnes’s annual compensation is $165,000. Mr. Barnes is also
entitled to receive an annual bonus equal to two percent (2%) of
the Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
The
Company’s Board of Directors granted Mr. Barnes an option to
purchase eighteen million shares of the Company’s Common
Stock under the Company’s 2017 Amended and Restated Stock
Incentive Plan at an exercise price of $0.012 per share. The Shares
vest quarterly over three years. All options will have a five-year
life and allow for a cashless exercise. The stock option grant is
subject to the terms and conditions of the Company’s and
Amended and Restated Stock Incentive Plan, including vesting
requirements. In the event that Mr. Barnes’s continuous
status as employee to the Company is terminated by the Company
without Cause or Mr. Barnes terminates his employment with the
Company for Good Reason as defined in the Barnes Agreement, in
either case upon or within twelve months after a Change in Control
as defined in the Company’s Amended and Restated Stock
Incentive Plan, then 100% of the total number of Shares shall
immediately become vested.
Mr.
Barnes is entitled to participate in all group employment benefits
that are offered by the Company to the Company’s senior
executives and management employees from time to time, subject to
the terms and conditions of such benefit plans, including any
eligibility requirements. In addition, the Company is required
purchase and maintain an insurance policy on Mr. Barnes’s
life in the amount of $2,000,000 payable to Mr. Barnes’s
named heirs or estate as the beneficiary. Finally, Mr. Barnes is
entitled to twenty days of vacation annually and also has certain
insurance and travel employment benefits.
If the Company terminates Mr. Barnes’s employment at any time
prior to the expiration of the Term without Cause, as defined in
the Employment Agreement, or if Mr. Barnes terminates his
employment at any time for “Good Reason” or due to a
“Disability”, Mr. Barnes will be entitled to receive
(i) his Base Salary amount for ninety days; and (ii) his Annual
Bonus amount for each year during the remainder of the
Term.
NOTE 16 – INCOME TAXES
The
Company has incurred losses since inception, which have generated
net operating loss carryforwards. The net operating loss
carryforwards arise from United States
sources.
Pretax
losses arising from United States operations were $11,473,137 for
the year ended December 31, 2018.
Pretax
losses arising from United States operations were approximately
$5,320,974 for the year ended December 31, 2018.
The
Company has net operating loss carryforwards of approximately
$19,101,728, which expire in 2022-2036. Because it is not more
likely than not that sufficient tax earnings will be generated to
utilize the net operating loss carryforwards, a corresponding
valuation allowance of approximately $4,011,363 was established as
of December 31, 2018. Additionally, under the Tax Reform Act of
1986, the amounts of, and benefits from, net operating losses may
be limited in certain circumstances, including a change in
control.
Section 382
of the Internal Revenue Code generally imposes an annual limitation
on the amount of net operating loss carryforwards that may be used
to offset taxable income when a corporation has undergone
significant changes in its stock ownership. There can be no
assurance that the Company will be able to utilize any net
operating loss carryforwards in the future. The Company is subject
to possible tax examination for the years 2012 through
2018
For the year ended December 31, 2018, the Company’s effective
tax rate differs from the federal statutory rate principally due to
net operating losses and equity issued for services.
U.S. Tax Reform
On
December 22, 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the
Tax Reform Act). The Tax Reform Act significantly revises the
future ongoing federal income tax by, among other things, lowering
U.S. corporate income tax rates effective January 1, 2018. The
Company has calculated a blended U.S. federal income tax rate of
approximately 21% for the fiscal year ending December 31, 2018 and
21.0% for subsequent fiscal years. Remeasurement of the
Company’s deferred tax balance under the Tax Reform Act
resulted in a non-cash tax benefit reduction of approximately $2.5
million for the year ended December 31, 2018.
The
changes included in the Tax Reform Act are broad and complex. The
final transition impacts of the Tax Reform Act may differ from the
above estimate due to, among other things, changes in
interpretations of the Tax Reform Act, any legislative action to
address questions that arise because of the Tax Reform Act and any
changes in accounting standards for income taxes or related
interpretations in response to the Tax Reform Act.
The principal components of the Company’s deferred tax assets
at December 31, 2018 and 2017 are as follows:
|
|
|
U.S. operations
loss carry forward and state at statutory rate of 40%
|
$4,011,363
|
$3,068,992
|
Less valuation
allowance
|
4,011,363
|
3,068,992
|
Net deferred tax
assets
|
-
|
-
|
Change in valuation
allowance
|
$4,011,363
|
$3,068,992
|
A reconciliation of the United States Federal Statutory rate to the
Company’s effective tax rate for the years ended December 31,
2018 and 2017 is as follows:
|
|
|
Federal statutory
rate
|
-21.0%
|
-21.0%
|
State income tax
rate
|
-6.0%
|
-6.0%
|
Change
in valuation allowance
|
27.0%
|
27.0%
|
Effective tax
rate
|
0.0%
|
0.0%
|
The
Company’s tax returns for 2012 to 2018 are open to review by
the Internal Revenue Service.
NOTE 17– SUBSEQUENT EVENTS
The Company evaluates subsequent events, for the purpose of
adjustment or disclosure, up through the date the financial
statements are available.
There were the material events subsequent to December 31,
2018:
Transactions 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.
Repayment of Securities Purchase Agreement, Secured Promissory
Notes and Security Agreement with Iliad
On
January 17, 2019, the Company repaid $650,000 to Iliad due under
the October 15, 2018 funding transaction with Iliad.
Trading on Pink Sheet Stock Systems
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.
GROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
ASSETS
|
|
|
|
|
|
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.
GROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
GROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
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.
GROWLIFE, 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.
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.
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.
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
$4,573,461
|
$1,551,503
|
$6,124,964
|
Net
loss
|
(11,473,137)
|
(111,671)
|
(11,584,808)
|
Net
loss per share
|
$(0.00)
|
|
$(0.00)
|
The
unaudited pro-forma financial data for the acquisition for the year
ended December 31, 2017, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
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
|
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
|
|
|
|
Useful
Lives
|
|
|
|
|
|
|
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Convertible notes
payable as of December 31, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% OID Convertible
Promissory Notes
|
$2,982,299
|
$135,780
|
$-
|
$3,118,079
|
7%
Convertible note ($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.
Derivative
liability as of June 30, 2019
was as follows:
|
|
|
|
|
|
Fair
Value Measurements Using Inputs
|
|
Financial
Instruments
|
|
|
|
|
|
|
|
|
|
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
A summary of the
status of the warrants outstanding as of June 30, 2019 is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
-
|
$-
|
-
|
$-
|
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.
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:
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$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%
|
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,
|
|
2020
|
$537,910
|
2021
|
925,511
|
2022
|
549,776
|
2023
|
-
|
2024
|
-
|
Beyond
|
-
|
Total
|
$2,013,196
|
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.
Growlife (CE) (USOTC:PHOT)
Historical Stock Chart
From Apr 2024 to May 2024
Growlife (CE) (USOTC:PHOT)
Historical Stock Chart
From May 2023 to May 2024