UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) 

 

For the fiscal year ended December 31, 2021

 

☐ TRANSACTION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

 

For the transaction period from ________ to ________

 

Commission file number 000-50385

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GrowLife, Inc. 

(Exact name of registrant as specified in its charter) 

 

Delaware

 

 90-0821083

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

11335 NE 122nd Way, Suite 105

Kirkland, WA 98034

(Address of principal executive offices and zip code)

 

(866) 781-5559

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2

 

Large accelerated filer

Accelerated filer

Non-accelerated filer (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

As of June 30, 2021 (the last business day of our most recently completed second fiscal quarter), based upon the last reported trade on that date, the aggregate market value of the voting and non-voting common equity held by non-affiliates (for this purpose, all outstanding and issued common stock minus stock held by the officers, directors and known holders of 10% or more of the Company’s common stock) was $7,176,550.

 

As of May 10, 2022, there were 145,517,397 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

 

 

      

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

The following discussion, in addition to the other information contained in this report, should be considered carefully in evaluating us and our prospects. This report (including without limitation the following factors that may affect operating results) contains forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act") regarding us and our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements but are not the exclusive means of identifying forward-looking statements in this report. Additionally, statements concerning future matters such as revenue projections, projected profitability, growth strategies, development of new products, enhancements or technologies, possible changes in legislation and other statements regarding matters that are not historical are forward-looking statements.

 

Forward-looking statements in this report reflect the good faith judgment of our management and the statements are based on facts and factors as we currently know them. Forward-looking statements are subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, but are not limited to, those discussed below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those discussed elsewhere in this report. Readers are urged not to place undue reliance on these forward-looking statements which speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report.

 

 
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TABLE OF CONTENTS 

 

 

 

Page

PART 1

 

 

 

 

 

 

 

ITEM 1.

Description of Business

 

4

 

 

 

 

ITEM 1A.

Risk Factors

 

6

 

 

 

 

ITEM 1B

Unresolved Staff Comments

 

6

 

 

 

 

ITEM 2.

Properties

 

6

 

 

 

 

ITEM 3.

Legal Proceedings

 

6

 

 

 

 

PART II

 

 

 

 

 

 

 

ITEM 5.

Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

7

 

 

 

 

ITEM 6.

Selected Financial Data

 

 

 

 

 

 

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

10

 

 

 

 

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

14

 

 

 

 

ITEM 8.

Financial Statements and Supplementary Data

 

14

 

 

 

 

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

14

 

 

 

 

ITEM 9A.

Controls and Procedures

 

14

 

 

 

 

ITEM 9B.

Other Information

 

15

 

 

 

 

PART III

 

 

 

 

 

 

 

ITEM 10.

Directors, Executive Officers and Corporate Governance

 

16

 

 

 

 

ITEM 11.

Executive Compensation

 

18

 

 

 

 

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

23

 

 

 

 

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

 

24

 

 

 

 

ITEM 14.

Principal Accounting Fees and Services

 

25

 

 

 

 

PART IV

 

 

 

 

 

 

 

ITEM 15.

Exhibits, Financial Statement Schedules

 

26

 

 

 

 

 

SIGNATURES

 

29

 

 
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PART I

 

ITEM 1. DESCRIPTION OF BUSINESS

 

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.

 

The Company’s total revenue declined 11%. Our revenue reduction of approximately $0.8 million was the result of a major decline of the hydroponics business during 2021. On the positive side, annual sales of our EZ-CLONE subsidiary rose 14% during the year and gross margin increased from 42.6% to 46.3% year to over year and operating expenses were reduced 10% to $4.4 million.

 

Also previously reported, we did not close the purchase of the remaining 49% of stock of EZ-CLONE that was due on July 15, 2020 and the founders of EZ-CLONE entered into litigation against the Company.

 

The GrowLife executive team has focused on exploring new business alternatives for the Company and settlement on the EZ-CLONE litigation matter.  As a result, the Company has decided to divest away from any Cannabis-related investments and focused on functional mushroom business opportunities.  We see a growing market, intend to service our existing distribution channel and will build on opportunities in the medicinal mushroom industry.  We believe this is an opportunity for our customers, shareholders and one where GrowLife is uniquely positioned to capitalize on.  The Company’s goal is to become the nation’s largest mushroom supplier focused on serving more providers of mushroom-based products of high quality, exceptional value and competitive price.

 

FINANCIAL PERFORMANCE

 

Net revenue for the year ended December 31, 2021, decreased by $801,700 to $6,199,000 from $7,001,000 for the year ended December 31, 2020. The decrease resulted a major decline in our involvement in the hydroponics business in 2020. The reduction of the hydroponics sales personnel and the impact of the pandemic on the hydroponics segment during the year ended December 31, 2020 and early 2021, resulted in hydroponics revenue declining to $35,000 in 2021 as compared to $1,568,000 for the year ended December 31, 2020. The EZ-CLONE revenue from its line of products for the year ended December 31, 2021 was $6,164,000 as compared to $5,433,000 for the year ended December 31, 2020.

 

Employees

 

As of December 31, 2021, we had 13 full-time employees. Marco Hegyi, our Chief Executive Officer, and the Company remains based in Kirkland, Washington. In addition, we employ 12 full-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.

 

Key Partners

 

Our key customers have become the cultivation buyers of cloning systems throughout various states and these products are sold through direct sales, retailers and distributors.  Therefore, our key suppliers include distributors and manufacturers including EZ-CLONE. 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 our competition includes 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.growlifeinc.com and www.ezclone.com. We have a policy of entering into confidentiality and non-disclosure agreements with our employees, some of our vendors and customers as necessary.

 

 
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Acquisition of EZ-CLONE

 

On October 15, 2018, we closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation (the “Agreement”). On November 5, 2019, we amended the Agreement with one 24.5% shareholder of EZ-CLONE Enterprises, Inc. (“EZ-CLONE”), to extend the date to purchase the remaining 49% of stock of EZ-CLONE in exchange for a 20% extension fee (a total of $171,000 for the 49% or $85,500 for each 24.5% shareholder) of the $855,000 cash payable at the earlier of the closing of $2,000,000 in funding or nine months (July 2020). The Company did not close the purchase of the remaining 49% of stock of EZ-CLONE by the extended deadline.

 

On September 15, 2020, we received notice that William Blackburn and Brad Mickelsen (“Plaintiffs”), minority shareholders of EZ-CLONE Enterprises, Inc., a majority owned subsidiary of the Company, filed a complaint against the Company and its officers Marco Hegyi and Mark Scott (“Officers”), in the Superior Court of California, County of Sacramento (“Complaint”) for claims related to breach under the Purchase and Sale Agreement dated October 15, 2018 between the Company and Plaintiffs. The Complaint also alleges that the Company and its Officers made certain false representations and other claims to consummate the Transaction and as a result has failed to complete the second closing as required under Purchase and Sale Agreement. As of December 4, 2020, the Company’s officers were dismissed from the case. The Plaintiffs are seeking rescission of the Purchase and Sale Agreement, unspecified damages in excess of ten thousand dollars, and other equitable relief.

 

On September 15, 2020, we filed a notice of removal with the California Superior Court, County of Sacramento and the United States District Court for the Eastern District of California.  The case was removed to Federal District Court for the Eastern District of California and Plaintiffs filed an Ex Parte Application for TRO and an Order for Preliminary Injunction with the Federal Court.  The TRO was granted on September 16, 2020 and a preliminary injunction hearing was scheduled for September 29, 2020.  After reviewing all pleadings and oral arguments at the hearing, the Court issued a ruling granting Plaintiffs’ request for a preliminary injunction.  The parties provided legal briefs to the Federal court to determine if rescission should be granted.  The Court did not reach a decision on this issue, and denied without prejudice, the Company’s effort to reverse the preliminary injunction.  The Company is currently reviewing all options in this matter including settlement discussions.

 

As of December 31, 2021, we have recorded a liability of $2,131,000 related to the acquisition of which a $1,105,000 is payable in stock and $1,026,000 is payable in cash.

 

OUR COMMON STOCK

 

As of March 4, 2019, we began to trade on the Pink Sheet stocks system. Our bid price had closed below $0.01 for more than 30 consecutive calendar days. As of March 17, 2020, we commenced trading on the OTCQB Market ("OTCQB") after successfully up-listing from the OTC Pink Market.

 

PRIMARY RISKS AND UNCERTAINTIES

 

We are exposed to various risks related to legal proceedings, our need for additional financing, the sale of significant numbers of our shares, the potential adjustment in the exercise price of our convertible debentures, including warrants, and a volatile market price for our common stock. These risks and uncertainties are discussed in more detail below in Part II, Item 1A. 

 

WEBSITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION REPORTS

 

We file annual and quarterly reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any document we file at the SEC's Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information concerning filers. We also maintain a web site at http://www.growlifeinc.com that provides additional information about our Company and links to documents we file with the SEC. The Company's charters for the Audit Committee, the Compensation Committee, and the Nominating Committee; and the Code of Conduct & Ethics are also available on our website. The information on our website is not part of this Form 10-K.

 

 
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ITEM 1A. RISK FACTORS

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

Operating Leases

 

The Company is obligated under the following leases for its various facilities.

 

On May 31, 2020, the Company rented space in Kirkland, Washington 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, 2022.

 

On December 14, 2018, GrowLife, Inc. entered into a lease agreement with Pensco Trust Company for a 28,000 square feet industrial space at 10170 Croydon Way, Sacramento, California 95827 used for the assembly and sales of plastic parts by EZ-CLONE. The monthly lease payment is $17,500 and increases approximately 3% per year. The lease expires on December 31, 2023.

 

ITEM 3. LEGAL PROCEEDINGS

 

From time to time, we may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although we cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and may be adjusted from time to time according to developments.

 

On October 15, 2018, we closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation (the “Agreement”). On November 5, 2019, the Company amended the Agreement with one 24.5% shareholder of EZ-CLONE Enterprises, Inc. (“EZ-CLONE”), to extend the date to purchase the remaining 49% of stock of EZ-CLONE in exchange for a 20% extension fee (a total of $171,000 for the 49% or $85,500 for each 24.5% shareholder) of the $855,000 cash payable at the earlier of the closing of $2,000,000 in funding or nine months (July 2020). We did not close the purchase of the remaining 49% of stock of EZ-CLONE by the extended deadline.

 

On September 15, 2020, we received notice that William Blackburn and Brad Mickelsen, minority shareholders of EZ-CLONE Enterprises, Inc. (“Plaintiffs”), a majority owned subsidiary of the Company, filed a complaint against the Company and its officers (“Officers”), in the Superior Court of California, County of Sacramento (“Complaint”) for claims related to breach under the Purchase and Sale Agreement dated October 15, 2018 between the Company and Plaintiffs. On September 15, 2020, the Company filed a notice of removal with the California Superior Court, County of Sacramento and the United States District Court for the Eastern District of California. The case was removed to Federal District Court for the Eastern District of California and Plaintiffs filed an Ex Parte Application for TRO and an Order for Preliminary Injunction with the Federal Court.  The TRO was granted on September 16, 2020 and a preliminary injunction hearing was scheduled for September 29, 2020.  After reviewing all pleadings and oral arguments at the hearing, the Court issued a ruling granting Plaintiffs’ request for a preliminary injunction. The parties provided legal briefs to the Federal court to determine if rescission should be granted. The Court did not reach a decision on this issue, and denied without prejudice, the Company’s effort to reverse the preliminary injunction. The Company is currently reviewing all options in this matter including settlement discussions.

   

The Complaint also alleges that the Company and its Officers made certain false representations and other claims to consummate the Transaction and as a result has failed to complete the second closing as required under Purchase and Sale Agreement. As of December 4, 2020, our Officers were dismissed from the case. The Plaintiffs are seeking rescission of the Purchase and Sale Agreement, unspecified damages in excess of ten thousand dollars, and other equitable relief.

 

 

As of December 31, 2020, we recorded a liability of $2,131,000 for the acquisition payable of which a $1,105,000 is payable in stock and $1,026,000 is payable in cash.

 

 
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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

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 Form 10-K.

 

Authorized Capital Stock

 

On October 9, 2019, we approved the reduction of authorized capital stock, whereby the total number of our authorized common stock decreased from 6,000,000,000 by a ratio of 1 for 50, to 120,000,000 shares. On November 20, 2019, we filed a Certificate of Amendment of Certificate of Incorporation with the Secretary of State of the State of Delaware. The 1 for 150 reverse stock split was effective at the open of business on November 27, 2019, whereupon the shares of common stock began trading on a split-adjusted basis under the new CUSIP, 39985X203.

 

On November 8, 2021, 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 (“Common Stock”) from 120,000,000 to 740,000,000 shares. As a result of the increase, we have an aggregate 750,000,000 authorized shares consisting of: (i) 740,000,000 shares of common stock, par value $0.0001 per share, and (ii) 10,000,000 shares of preferred stock, par value $0.0001 per share.

 

Capital Stock Issued and Outstanding

 

As of December 31, 2021, we have issued and outstanding securities on a fully diluted basis, consisting of:

 

 

·

117,952,697 shares of common stock;

 

·

Warrants to purchase an aggregate of 686,667 shares of common stock with expiration dates between October 2023 and October 2028 at an average exercise price of $1.64 per share; and

 

·

An unknown number of common shares to be issued under the Convertible Notes Payable financing agreements.

 

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. 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.

 

 
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Non-Voting Preferred Stock

 

Under the terms of our articles of incorporation, our board of directors is authorized to issue shares of non-voting preferred stock in one or more series without stockholder approval. Our board of directors has the discretion to determine the rights, preferences, privileges and restrictions, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of non-voting preferred stock.

 

The purpose of authorizing our board of directors to issue non-voting preferred stock and determine our rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of non-voting preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. Other than the Series B and C Preferred Stock discussed below, there are no shares of non-voting preferred stock presently outstanding and we have no present plans to issue any shares of preferred stock.

 

Warrants to Purchase Common Stock

 

As of December 31, 2021, we had warrants to purchase an aggregate of 686,677 shares of common stock with expiration dates between October 2023 and October 2028 at an average exercise price of 1.64 per share. In addition, we have an unknown number of common shares to be issued under the Convertible Notes Payable financing agreements, due to the variable conversion features.

   

Options to Purchase Common Stock

 

On November 5, 2021, at our annual shareholder meeting the Second Amended and Restated 2017 Stock Incentive Plan was adopted to increase the shares issuable under the plan from 1,333,333 to 75,000,000 shares. All terms of the Plan shall remained the same with the exception of the amount of shares reserved for issuance under the Plan. We have 75,000,000 shares available for issuance under the Second Amended and Restated 2017 Stock Incentive Plan. There are no outstanding unexercised stock option grants as of December 31, 2021. The Company filed registration statements on Form S-8 to register 1,333,333 shares of our common stock related to the 2017 Stock Incentive Plan and First Amended and Restated 2017 Stock Incentive Plan.

 

Dividend Policy

 

We have not previously 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 develop our business. We can give no assurances that we will ever have excess funds available to pay dividends.

 

Change in Control Provisions

 

Our articles of incorporation and by-laws provide for a maximum of nine directors, and the size of the Board cannot be increased by more than three directors in any calendar year. There is no provision for classification or staggered terms for the members of the Board of Directors.

 

Our articles of incorporation also provide that except to the extent the provisions of Delaware General Corporation Law require a greater voting requirement, any action, including the amendment of the Company’s articles or bylaws, the approval of a plan of merger or share exchange, the sale, lease, exchange or other disposition of all or substantially all of the Company’s property other than in the usual and regular course of business, shall be authorized if approved by a simple majority of stockholders, and if a separate voting group is required or entitled to vote thereon, by a simple majority of all the votes entitled to be cast by that voting group.

 

Our bylaws provide that only the Chief Executive Officer or a majority of the Board of Directors may call a special meeting. The bylaws do not permit the stockholders of the Company to call a special meeting of the stockholders for any purpose. 

 

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.

 

 
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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.

 

Market Price of and Dividends on Common Equity and Related Stockholder Matters

 

As of March 4, 2019, we began to trade on the OTC Pink Sheet stocks system because our bid price had closed below $0.01 for more than 30 consecutive calendar days. As of March 17, 2020, we commenced trading on the OTCQB Market ("OTCQB") after successfully up-listing from the OTC Pink Market.

 

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.

  

Period Ended

 

High

 

 

Low

 

Year Ending December 31, 2022

 

 

 

 

 

 

March 31, 2022

 

$ 0.043

 

 

$ 0.016

 

 

 

 

 

 

 

 

 

 

Year Ending December 31, 2021

 

 

 

 

 

 

 

 

December 31, 2021

 

$ 0.052

 

 

$ 0.018

 

September 30, 2021

 

$ 0.095

 

 

$ 0.038

 

June 30, 2021

 

$ 0.179

 

 

$ 0.080

 

March 31, 2021

 

$ 0.570

 

 

$ 0.106

 

 

 

 

 

 

 

 

 

 

Year Ending December 31, 2020

 

 

 

 

 

 

 

 

December 31, 2020

 

$ 0.225

 

 

$ 0.097

 

September 30, 2020

 

$ 0.269

 

 

$ 0.107

 

June 30, 2020

 

$ 0.278

 

 

$ 0.152

 

March 31, 2020

 

$ 0.490

 

 

$ 0.130

 

      

Transfer Agent 

 

The transfer agent for our common stock is Direct Transfer, LLC, One Glenwood Avenue, Suite 1001, Raleigh, NC, 27603. Their telephone number is 919.744.2722.

 

Recent Sales of Unregistered Securities

 

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(a)(2) of the Securities Act of 1933. All of the shares issued were issued in transactions not involving a public offering, are considered to be restricted stock as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that effect. 

 

We have compensated consultants and service providers with restricted common stock during the development of our business and when our capital resources were not adequate to provide payment in cash.

 

During the three months ended December 31, 2021, we had the following sales of unregistered sales of equity securities.

 

Lenders converted principal and accrued interest of $422,189 into 19,402,691 shares of our common stock at a per share conversion price of $0.022.

 

EQUITY COMPENSATION PLAN INFORMATION

 

At December 31, 2021 there are no outstanding stock options and there are 686,666 warrants outstanding at an average exercise price of $1.64. The warrants expire from December 2023 to October 2028.

 

 
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ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

 

In 2021 GrowLife experienced a decline in annual revenue of 11% from the year 2020 primarily due to ceasing the hydroponics business by the beginning of 2021 and an increase in EZ-CLONE revenue in 2021. This decline was offset by an improvement in cost of goods sold of 17% and in operating expenses of 10% which resulted in a 21% improvement to operating loss in 2021 compared to 2020. In addition, total other expenses declined 22% in 2021 compared to 2020. A more detailed explanation of these changes are provided below.

 

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.

 

 
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Years ended December 31,

(Dollars in thousamds)

 

 

 

2021

 

 

2020

 

 

$ Variance

 

 

% Variance

 

Net revenue

 

 

6,199

 

 

 

7,001

 

 

 

(802 )

 

 

-11 %

Cost of good sold

 

 

3,406

 

 

 

4,021

 

 

 

(615 )

 

 

-15 %

Gross profit

 

 

2,793

 

 

 

2,980

 

 

 

(187 )

 

 

-6 %

Operating expenses

 

 

4,318

 

 

 

4,870

 

 

 

(552 )

 

 

-11 %

Operating (loss)

 

 

(1,525 )

 

 

(1,890 )

 

 

365

 

 

 

-19 %

Other expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivative

 

 

(973

 

 

199

 

 

 

(1,172

 

 

-589 %

Interest expense, net

 

 

(3,252 )

 

 

(1,090 )

 

 

(2,162 )

 

 

198 %

Loss on debt conversions

 

 

(931 )

 

 

(984 )

 

 

53

 

 

-5 %

Gain on extinguishment of debt

 

 

1,025

 

 

 

39

 

 

 

986

 

 

2528

Loss on debt settlement

 

 

 

 

 

 

(2,422 )

 

 

2,422

 

 

 

-100 %

Gain on debt forgiveness

 

 

206

 

 

 

 

 

 

 

206

 

 

 

100 %

Total othere expenses

 

 

(3,926 )

 

 

(4,258 )

 

 

332

 

 

 

-8 %

(Loss) before income taxes

 

 

(5,451 )

 

 

(6,148 )

 

 

697

 

 

 

-11 %

Income taxes

 

 

(22 )

 

 

(232 )

 

 

210

 

 

 

-91 %

Net (loss)

 

 

(5,473 )

 

 

(6,380 )

 

 

907

 

 

 

-14 %

        

YEAR ENDED DECEMBER 31, 2021 COMPARED TO THE YEAR ENDED DECEMBER 31, 2020

 

Net revenue for the year ended December 31, 2021 decreased by $802,000 to $6,199,000 from $7,001,000 for the year ended December 31, 2020. The decrease resulted from lower hydroponic sales from the decision during 2020 to exit the hydroponics business and the elimination of the hydroponics sales personnel and the impact of the pandemic on the hydroponics segment during the year ended December 31, 2021. The hydroponics revenue for the year ended December 31, 2021 was $35,000 as compared to $1,568,000 for the year ended December 31, 2020. The EZ-CLONE revenue from its line of products for the year ended December 31, 2021 was $6,164,000 as compared to $5,433,000 for the year ended December 31, 2020..

 

Cost of Goods Sold

 

Cost of sales for the year ended December 31, 2021 decreased by $615,000 to $3,406,000 from $4,021,000 for the year ended December 31, 2020. The decrease resulted from lower sales in the hydroponics segment, offset by increased EZ-CLONE sales as discussed above.

 

Gross profit was $2,793,000 for the year ended December 31, 2021 as compared to a gross profit of $2,980,000 for the year ended December 31, 2020. The gross profit percentage was 45.1% for the year ended December 31, 2021 as compared to 42.6% for the year ended December 31, 2020. The increase was due to lower sales in the hydroponics segment, offset by increased EZ-CLONE sales, as discussed above.

 

Operating Expenses

 

Operating expenses for the year ended December 31, 2021 were $4,318,000 as compared to $4,870,000 for the year ended December 31, 2020. The variances were as follows: (i) an increase in EZ-CLONE expenses of $394,000, consisting of increase in rent of $60,000, promotion and trade show expenses of $80,000 and payroll of $243,000; offset by (ii) a decrease in Hydroponic expenses of $156,000; (iii) a decrease in payroll of $905,000; and offset by an increase in professional services of $165,000.

 

Non-cash operating expenses for the year ended December 31, 2021 of $748,000 including (i) depreciation of $37,000; (ii) amortization of intangible assets of $672,000; (iii) stock based compensation of $15,000 related to stock option grants and warrants; and (iv) common stock issued for services of $24,000.

 

Non-cash operating expenses for the year ended December 31, 2020 of $846,000 including (i) depreciation of $37,000; (ii) amortization of intangible assets of $672,000; (iii) stock based compensation of $125,000 related to stock option grants and warrants; and (iv) common stock issued for services of $12,000.

 

 
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Other Expense

 

Other expense for the year ended December 31, 2021, was $3,926,000 as compared to $4,258,000 for the year ended December 31, 2020. The other expense for the year ended December 31, 2021, included (i) loss from the increase in derivative liability of $973,000; (ii) gain on extinguishment of debt of $1,025,000 related to prior shutdown of retail operations; and offset by (iii) interest expense of $3,252,000; (iv) loss on debt conversions of $931,000; and (v) gain on debt forgiveness of $206,000. The change in derivative liability is the non-cash change in the fair value and relates to our derivative instruments.  The increase in non-cash interest related to accrued interest expense, write-off of original issue discount and the derivative liability calculated on our notes payable. The loss on debt conversions related to the conversion of our notes payable at prices below the market price.

 

On April 5, 2021, we entered into a Warrant Settlement Agreement dated March 31, 2021, with St. George and Iliad to resolve a dispute related to the calculation of shares issuable under warrants issued in prior financings whereby we agreed that upon the exercise of the warrant of up 14,250,000 shares of our common stock that the balance of the warrant related to a 2018 financing agreement would be cancelled. We recorded a loss on debt settlement of $2,422,000 as of December 31, 2020.  The 14,250,000 warrants were exercised during 2021. In 2021, the Company recognized a gain on extinguishment of $1,025,000 due to the change in the fair value of the shares.

   

The other expense for the year ended December 31, 2020 included (i) benefit from the reduction in derivative liability of $199,000; offset by (ii) interest expense of $1,090,000; and (iii) loss on debt conversions of $984,000 and gain on debt extinguishment of $37,000. 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.

 

Net Loss

 

Net loss for the year ended December 31, 2021 was $5,473,000 as compared to $6,380,000 for the for the year ended December 31, 2020 for the reasons discussed above.

 

Net loss for the year ended December 31, 2021 included non-cash expenses of $4,267,000 including (i) depreciation of $37,000; (ii) amortization of intangible assets of $672,000; (iii) amortization of debt discount of $644,000; (iv) stock based compensation of $15,000 related to stock option grants; (v) common stock issued for services of $24,000; (vi) non-cash interest of $772,000; (vii) loss on debt conversions of $931,000; (viii) change in derivative liability of $973,000; (ix) fair value of derivatives expensed at issuance of $1,429,000;and offset by (x) gain on debt settlement of current liabilities of $1,025,000; and (xi) gain on debt forgiveness of $206,000.

   

Net loss for the year ended December 31, 2020 included non-cash expenses of $5,076,000 including (i) depreciation of $37,000; (ii) amortization of intangible assets of $672,000; (iii) stock based compensation of $125,000 related to stock option grants and warrants; (iv) common stock issued for services of $12,000; (v) non cash interest and amortization of debt discount of $1,061,000; (vi) loss on debt settlement of $2,422,000; (vii) loss on debt conversion of $945,000; and offset by (vii) benefit from the reduction in derivative liability of $199,000.

 

We expect losses to continue as we implement our business plan.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification (“ASC”) Topic 205-40, Presentation of Financial Statements – Going Concern, requires that management evaluate whether there are relevant conditions and events that, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern and to meet its obligations as they become due within one year after the date that the financial statements are issued.

 

The accompanying financial statements have been prepared assuming that we will continue as a going concern. However, since inception, we have sustained significant operating losses and such losses are expected to continue for the foreseeable future. As of December 31, 2021, we had an accumulated deficit of $160 million, cash and cash equivalents of $364,000 and a working capital deficit of $885,000 excluding derivative liability, convertible debt, acquisition to be paid in stock and right of use liability. Additionally, we used cash in operating activities of $1,463,000 and $1,951,000 for the years ended December 31, 2021 and 2020, respectively. We will require additional cash funding to fund operations beyond May 31, 2022. Accordingly, management has concluded that we do not have sufficient funds to support operations within one year after the date the financial statements are issued and, therefore, we concluded there was substantial doubt about the Company’s ability to continue as a going concern.

   

 
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To fund further operations, we will need to raise additional capital. We may obtain additional financing in the future through the issuance of its common stock, or through other equity or debt financings. Our ability to continue as a going concern or meet the minimum liquidity requirements in the future is dependent on its ability to raise significant additional capital, of which there can be no assurance. If the necessary financing is not obtained or achieved, we will likely be required to reduce its planned expenditures, which could have an adverse impact on the results of operations, financial condition and our ability to achieve its strategic objective. Historically, the Company has been successful in its ability to raise the financing necessary to continue operations without interruption. There can be no assurance that financing will be available on acceptable terms, or at all. The financial statements contain no adjustments for the outcome of these uncertainties. These factors raise substantial doubt about our ability to continue as a going concern and have a material adverse effect on our future financial results, financial position and cash flows.

 

Operating Activities

  

Net cash used in operating activities for the year ended December 31, 2021 was $1,463,000. This amount was primarily related to a (i) net loss of $5,473,000, and (ii) net working capital decrease of $294,000; offset by (iii) non-cash expenses of $4,267,000 including (iv) depreciation of $37,000; (v) amortization of intangible assets of $672,000; (vi) amortization of debt discount of $644,000; (vii) stock based compensation of $15,000 related to stock option grants; (viii) common stock issued for services of $24,000; (ix) non-cash interest of $772,000; (x) loss on debt conversions of $931,000; (xi) change in derivative liability of $973,000; (xii) fair value of derivatives expensed at issuance of $1,429,000;and offset by (xiii) gain on debt settlement of current liabilities of $1,025,000; and (ix) gain on debt forgiveness of $206,000.

 

Financing Activities

 

Net cash provided by financing activities for the year ended December 31, 2021 was $1,463,000. The amount related to proceeds from note payable of $2,066,000, offset by repayment of notes payable of $603,000.

             

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The application of GAAP involves the exercise of varying degrees of judgment. On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies (see summary of significant accounting policies more fully described in Note 3 to Form 10-K for the year ended December 31, 2021), the following policies involve a higher degree of judgment and/or complexity:

 

Accounts Receivable and Revenue – We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which requires the application of the five-step-principles-based-accounting-model for revenue recognition. These steps include (1) a legally enforceable contract, written or unwritten is identified; (2) performance obligations in the contracts are identified; (3) the transaction price reflecting variable consideration, if any, is identified; (4) the transaction price is allocated to the performance obligations; and (5) revenue is recognized when the control of goods is transferred to the customer at a particular time or over time. Our hydroponic sales were cash or credit card. Our EZ-CLONE sales include credit cash, payments in advance, 3% discount upon receipt and, we extend thirty-day terms to select customers. Accounts receivables are reviewed periodically for collectability. As of December 31, 2021 and 2020, the Company has an allowance for doubtful accounts totaling $10,000 and $5,690, respectively.

 

Inventories - Inventories are recorded on a first in first out basis Inventory consists of raw materials, work in process and finished goods and components sold by EZ-CLONE to it distribution customers. Inventory is valued at the lower of cost or market.

   

Fair Value Measurements and Financial Instruments – ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

 

Level 1 – Quoted prices in active markets for identical assets and liabilities; 

 

Level 2 – Inputs other than level one inputs that are either directly or indirectly observable; and.

 

Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.   

  

The recorded value of other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other current assets, and accounts payable and accrued expenses approximate the fair value of the respective assets and liabilities as of December 31, 2021 and 2020 are based upon the short-term nature of the assets and liabilities. 

 

 
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Derivative financial instruments -We evaluate 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 Binomial pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

 

Stock Based Compensation – We have share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options to purchase shares of our common stock at the fair market value at the time of grant. Stock-based compensation cost is measured by us at the grant date, based on the fair value of the award, over the requisite service period using an estimated forfeiture rate. For options issued to employees, we recognize stock compensation costs utilizing the fair value methodology over the related period of benefit. Grants of stock options and stock to non-employees and other parties are accounted for in accordance with the ASC 718.

 

Convertible Securities – Based upon ASC 815-15, we have adopted a sequencing approach regarding the application of ASC 815-40 to convertible securities issued subsequent to December 31, 2015. We will evaluate our contracts based upon the earliest issuance date.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we are not required to provide the information required by this Item. Nevertheless, we have no investments in any market risk sensitive instruments either held for trading purposes or entered into for other than trading purposes.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Reference is made to our consolidated financial statements beginning on page F-1 of this report.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Dismissal of BPM LLP

 

On October 14, 2021, the Company dismissed BPM LLP as the Company’s independent registered public accounting firm. The decision to change accountants was approved by the Company’s Audit Committee.

 

The BPM LLP reports on the Company’s consolidated financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that the audit report of BPM LLP on the Company’s financial statements for fiscal years 2019 and 2020 contained an explanatory paragraph which noted that there was substantial doubt about the Company’s ability to continue as a going concern.

 

During the Company’s fiscal years ended December 31, 2019 and 2020 and through October 14, 2021, (i) there were no “disagreements” (as defined in Item 304(a)(1)(iv) of Regulation S-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) between the Company and BPM LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to BPM LLP’s satisfaction, would have caused BPM LLP to make reference to the subject matter of such disagreements in its reports on the Company’s consolidated financial statements for such years, and (ii) there were no “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K under the Exchange Act) other than the material weaknesses in internal control over financial reporting identified for the years ended December 31, 2019 and 2020 related to: (i) audit committee makeup, and (ii) accounting and reporting governance of complex contractual terms and obligations.

 

Engagement of Macias Gini & O’Connell LLP

 

On October 14, 2021 the Company, upon the Audit Committee’s approval, engaged the services of Macias Gini & O’Connell LLP (“MGO”) and as the Company’s new independent registered public accounting firm to audit the Company’s consolidated financial statements as of December 31, 2021 and for the year then ending. MGO will be performing reviews of the unaudited consolidated quarterly financial statements to be included in the Company’s quarterly reports on Form 10-Q going forward.

 

During each of the Company’s two most recent fiscal years and through the date of this report, (a) the Company has not engaged MGO as either the principal accountant to audit the Company’s financial statements, or as an independent accountant to audit a significant subsidiary of the Company and on whom the principal accountant is expected to express reliance in its report; and (b) the Company or someone on its behalf did not consult with MGO with respect to (i) either: the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements, or (ii) any other matter that was either the subject of a disagreement or a reportable event as set forth in Items 304(a)(1)(iv) and (v) of Regulation S-K.

    

ITEM 9A. CONTROLS AND PROCEDURES

 

a) Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive and principal financial officers concluded as of December 31, 2021, that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses in our internal controls over financial reporting discussed immediately below.

 

 
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Identified Material Weaknesses

 

A material weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

 

Management identified the following material weakness during its assessment of internal controls over financial reporting:

 

Audit Committee:

 

The current Audit Committee has one independent director, and the Chairman is an interim Named Executive Officer. In early January 2021 an additional independent director resigned from the board and audit committee. We expect to expand this committee during 2022 once a qualified candidate is identified.

 

Personnel:  We do not employ a full time Chief Financial Officer. Marco Hegyi serves as both Chief Executive Officer and Interim Chief Financial Officer. We utilize a consultant to assist with our financial reporting. There are limited personnel to assist with the accounting and financial reporting function, which results in: (i) a lack of segregation of duties and (ii) controls that may not be adequately designed or operating effectively and have not been formally documented. Despite the existence of material weaknesses, the Company believes the financial information presented herein is materially correct and fairly presents the financial position and operating results of the year ended December 31, 2021, in accordance with GAAP. During 2022, the Company intends to seek qualified accounting staff to expand its internal accounting and reporting functions.

   

Contractual Terms and Obligations

 

The Company entered into various financing agreements involving stock purchase agreements, notes and warrants. The terms of these legal instruments contain complex legal terms, conditions and calculations. Managements understanding of certain terms and conditions  of the warrant agreements was not adequate to insure proper accounting  and disclosure of the warrant terms.

   

(b) Management's Report on Internal Control Over Financial Reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control-Integrated Framework. Based on its evaluation, management has concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2021.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. A control system, no matter how well designed and operated can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost.

 

c) Changes in Internal Control over Financial Reporting

 

During the quarter ended December 31, 2021, Michael Fasci resigned as our CFO. The Company has a small accounting and finance team. Consulting services provided by independent consultants will be an important element of internal control during this transition.  There were no other changes which were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that materially affected, or is reasonably likely to have a materially affect, on our internal control over financial reporting.

      

ITEM 9B. OTHER INFORMATION

 

There were no disclosures of any information required to be filed on Form 8-K during the year ended December 31, 2021 that were not filed.

 

 
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PART III

 

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

The following table sets forth certain information about our current directors and executive officers as of March 31, 2022:

 

Name

Age

Position and Office Held

Since

Management Directors

 

 

 

Marco Hegyi

64

Director

December 9, 2013

 

 

Chairman of the Board

April 1, 2016-October 23, 2017 and December 6, 2018

 

 

Chief Executive Officer

April 1, 2016

 

 

Interim Chief Financial Officer

December 1, 2021

 

 

Interim Audit Committee Chairman

December 6, 2018

David Dohrmann

55

President

December 1, 2021

Independent Directors

 

 

 

Thom Kozik

61

Director

October 5, 2017

 

 

Audit and Compensation Committee

December 6, 2018

 

 

Interim Secretary

December 1, 2021

 

All directors hold office until their successors are duly appointed or until their earlier resignation or removal.

 

Business Experience Descriptions

 

Set forth below is certain biographical information regarding each of our executive officers and directors.

 

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 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. Mr. Hegyi was a principal with the Chasm Group from 2006 to January 2014, where he 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 from 2001 to 2006 leading program management for Microsoft Windows and Office beta releases aimed at software developers. 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.

 

Mr. Dohrmann – Mr. Dohrmann has served as a General Partner of Penché Partners, a San Francisco based venture capital firm since January 2020. Prior to Penché, he served as the Chief Executive Officer of Gazillion Entertainment from August 2015 until December of 2018. From February 2013 to October 2016, Dohrmann was also a Managing Director at Roth Capital Partners, an Investment Bank, where he focused on Venture Capital investments. From September 2010 to January 2012, Dohrmann was the founder & CEO of Playchemy Inc., a San Francisco based developer of online and mobile games.

 

 
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From 2005 to 2010, Mr. Dohrmann served as a partner and headed the digital media and entertainment practice at Security Research Associates, a San Francisco based investment banking Firm focused on the emerging growth small & microcap Companies. From 2002 until 2005 he served as a partner and investment banker at Halpern Capital, an Investment Banking firm also focused on serving emerging growth Companies in the small and micro cap arena. From 2000 to 2002 Mr. Dohrmann was VP of Corporate Development for Sagent Inc., a Nasdaq traded company acquired by Group 1 Software in 2003. From 1992 to 1997 Mr. Dohrmann was VP of Institutional Sales at the Investment Banking firm Donaldson Lufkin & Jenrette.

 

Mr. Dohrmann received a Bachelor of Arts Degree from the University of Southern California in 1989. Mr. Dohrmann’s public company experience and knowledge of investment banking, corporate development, institutional sales, venture capital, his focus and work with public small and microcap Companies and as an operating executive will provide GrowLife with valuable perspective and guidance for corporate development initiatives as President of the Company.

 

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. From March 1, 2018 to January 2020, Mr. Kozik served 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.

 

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.

 

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.

 

 
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Committees of the Board of Directors

 

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.

 

phot_10-kimg8.jpg

  

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.

 

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, 2021 our executive officers, directors and 10% holders complied with all filing.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Overview of Compensation Program

 

This Compensation Discussion and Analysis describes the material elements of compensation awarded to, earned by or paid to each of our executive officers named in the Compensation Table on page 22 under “Remuneration of Executive Officers” (the “Named Executive Officers”) who served during the year ended December 31, 2021. This compensation discussion primarily focuses on the information contained in the following tables and related footnotes and narrative for the last completed fiscal year. We also describe compensation actions taken after the last completed fiscal year to the extent that it enhances the understanding of our executive compensation disclosure. The principles and guidelines discussed herein would also apply to any additional executive officers that the Company may hire in the future.

 

 
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The Compensation Committee of the Board has responsibility for overseeing, reviewing and approving executive compensation and benefit programs in accordance with the Compensation Committee’s charter. The members of the Compensation Committee are Marco Hegyi and Thom Kozik. We expect to appoint one independent Director to serve on the Compensation Committee during 2022.

 

Compensation Philosophy and Objectives

 

The major compensation objectives for the Company’s executive officers are as follows:

   

 

to attract and retain highly qualified individuals capable of making significant contributions to our long-term success;

 

 

 

 

to motivate and reward named executive officers whose knowledge, skills, and performance are critical to our success;

 

 

 

 

to closely align the interests of our named executive officers and other key employees with those of its shareholders; and

 

 

 

 

to utilize incentive-based compensation to reinforce performance objectives and reward superior performance.

 

Role of Chief Executive Officer in Compensation Decisions

 

The Board approves all compensation for the chief executive officer. The Compensation Committee makes recommendations on the compensation for the chief executive officer and approves all compensation decisions, including equity awards, for our executive officers. Our chief executive officer makes recommendations regarding the base salary and non-equity compensation of other executive officers that are approved by the Compensation Committee in its discretion.

 

Setting Executive Compensation

 

The Compensation Committee believes that compensation for the Company’s executive officers must be managed to what we can afford and in a way that allows for us to meet our goals for overall performance. During 2020 and 2019, the Compensation Committee and the Board compensated its Chief Executive Officers, President and Chief Financial Officer at the salaries indicated in the compensation table. This compensation reflected our financial condition. The Compensation Committee does not use a peer group of publicly traded and privately held companies in structuring the compensation packages.

 

Executive Compensation Components for the Year Ended December 31, 2021

 

The Compensation Committee did not use a formula for allocating compensation among the elements of total compensation during the year that ended December 31, 2021. The Compensation Committee believes that in order to attract and retain highly effective people it must maintain a flexible compensation structure. For the year that ended December 31, 2021, the principal components of compensation for named executive officers were base salary.

 

Base Salary

 

Base salary is intended to ensure that our employees are fairly and equitably compensated. Generally, base salary is used to appropriately recognize and reward the experience and skills that employees bring to the Company and provides motivation for career development and enhancement. Base salary ensures that all employees continue to receive a basic level of compensation that reflects any acquired skills which are competently demonstrated and are consistently used at work.

 

Base salaries for the Company’s named executive officers are initially established based on their prior experience, the scope of their responsibilities and the applicable competitive market compensation paid by other companies for similar positions. Our officers were compensated as described above based on the financial condition of the Company.

 

Performance-Based Incentive Compensation

 

The Compensation Committee believes incentive compensation reinforces performance objectives, rewards superior performance and is consistent with the enhancement of stockholder value. All of the Company’s Named Executive Officers are eligible to receive performance-based incentive compensation. The Compensation Committee did not recommend or approve payment of any performance-based incentive compensation to the Named Executive Officers during the year ended December 31, 2021 based on our financial condition.

 

 
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Ownership Guidelines

 

The Compensation Committee does not require our executive officers to hold a minimum number of our shares. However, to directly align the interests of executive officers with the interests of the stockholders, the Compensation Committee encourages each executive officer to maintain an ownership interest in the Company.

 

Stock Option Program

 

Stock options are an integral part of our executive compensation program. They are intended to encourage ownership and retention of the Company’s common stock by named executive officers and employees, as well as non-employee members of the Board. Through stock options, the objective of aligning employees’ long-term interest with those of stockholders may be met by providing employees with the opportunity to build a meaningful stake in the Company.

 

The Stock Option Program assists us by:

 

 

-

enhancing the link between the creation of stockholder value and long-term executive incentive compensation;

 

 

 

 

-

providing an opportunity for increased equity ownership by executive officers; and

 

 

 

 

-

maintaining competitive levels of total compensation.

 

Stock option award levels are determined by the Compensation Committee and vary among participants’ positions within the Company. Newly hired executive officers or promoted executive officers are generally awarded stock options, at the discretion of the Compensation Committee, at the next regularly scheduled Compensation Committee meeting on or following their hire or promotion date. In addition, such executives are eligible to receive additional stock options on a discretionary basis after performance criteria are achieved.

 

Options are awarded at the closing price of our common stock on the date of the grant or last trading day prior to the date of the grant. The Compensation Committee’s policy is not to grant options with an exercise price that is less than the closing price of our common stock on the grant date.

 

Generally, the majority of the options granted by the Compensation Committee vest quarterly over two to three years of the 5-10-year option term. Vesting and exercise rights cease upon termination of employment and/or service, except in the case of death (subject to a one-year limitation), disability or retirement. Stock options vest immediately upon termination of employment without cause or an involuntary termination following a change of control. Prior to the exercise of an option, the holder has no rights as a stockholder with respect to the shares subject to such option, including voting rights and the right to receive dividends or dividend equivalents.

 

The Named Executive Officers received stock option grants and warrants during the year ended December 31, 2021 as outlined below.

 

Retirement and Other Benefits

 

We have no other retirement, savings, long-term stock award or other type of plans for the Named Executive Officers.

 

Perquisites and Other Personal Benefits

 

During the year ended December 31, 2021, we provided the Named Executive Officers with medical insurance and nominal health club benefits. The Company paid $14,225 in life insurance for Mr. Hegyi. No other perquisites or other personal benefits were provided to Named Executive Officers. The committee expects to review the levels of perquisites and other personal benefits provided to Named Executive Officers annually.

 

Employment and consulting agreements are discussed below.

 

Tax and Accounting Implications

 

Deductibility of Executive Compensation

 

Subject to certain exceptions, Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") generally denies a deduction to any publicly held corporation for compensation paid to its chief executive officer and its three other highest paid executive officers (other than the principal financial officer) to the extent that any such individual's compensation exceeds $1 million. “Performance-based compensation” (as defined for purposes of Section 162(m)) is not taken into account for purposes of calculating the $1 million compensation limit, provided certain disclosure, shareholder approval and other requirements are met. We periodically review the potential consequences of Section 162(m) and may structure the performance-based portion of our executive compensation to comply with certain exceptions to Section 162(m). However, we may authorize compensation payments that do not comply with the exceptions to Section 162(m) when we believe that such payments are appropriate and in the best interests of the stockholders, after taking into consideration changing business conditions or the officer's performance.

   

 
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Accounting for Stock-Based Compensation

 

We account for stock-based payments including its Stock Option Program in accordance with the requirements of ASC 718, “Compensation-Stock Compensation.”

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee, sets and administers policies that govern the Company's executive compensation programs, and incentive and stock programs. The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for year ended December 31, 2021.

 

THE COMPENSATION COMMITTEE

 

Thom Kozik (Chairman)

Marco Hegyi

 

EXECUTIVE COMPENSATION

 

REMUNERATION OF EXECUTIVE OFFICERS

 

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, 2021 and 2020:

 

Summary Compensation Table

   

 

 

 

 

Salary

 

 

Bonus

 

 

Stock

Awards

 

 

Non-Equity Incentive Compensation

 

 

Option Awards

 

 

Other Compensation

 

 

Total

 

Principal Position

 

 

 

 $

 

 

$

 

 

$(1)

 

 

$

 

 

 $

 

 

$

 

 

$

 

Marco Hegyi, Chief Executive Officer, Chairman of the Board and Director (2)

31.12.21

 

 

$ 275,000

 

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

 

$ 88,273

 

 

$ 363,273

 

 

31.12.20

 

 

$ 275,000

 

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

 

$ 88,273

 

 

$ 363,273

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael E. Fasci, Chief Financial Officer (3)

31.12.21

 

 

$ 151,250

 

 

$ -

 

 

$ -

 

 

$ -

 

 

$ 62,185

 

 

$ 25,380

 

 

$ 238,815

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mark E  Scott, Chief Financial Officer and Director (4)

31.12.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.12.20

 

 

$ 165,000

 

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

 

$ 27,688

 

 

$ 192,688

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joseph Barnes, President of Grow Life Hydroponics, Inc (5)

31.12.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.12.20

 

 

$ 165,000

 

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

 

$ 165,000

 

      

(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) Mr. Hegyi was paid a salary of $275,000 during the years ended December 31, 2021 and 2020, respectively. We paid life insurance of $14,225 and $10,273 for Mr. Hegyi during the years ended December 31, 2021 and 2020, respectively. On October 15, 2018, Mr. Hegyi received Warrants to purchase up to 320,000 shares of our common stock at an exercise price of $1.80 per share and which vest on October 15, 2018, 2019 and 2020. The Warrants are exercisable for 5 years. The warrants were valued at $192,000. The Company recorded compensation expense of $78,000 for the year ended December 31, 2020.

 

(3) Mr. Fasci was hired on January 1, 2021, as the Company’s Chief Financial Officer at an annual salary of $165,000. Mr. Fasci was also granted an option to purchase 500,000 shares of the Company’s Common Stock under the Company’s 2018 Stock Incentive Plan at an exercise price of $0.12 per share. Mr. Fasci resigned as Chief Financial Officer on November 4, 2021 effective December 1, 2021.

 

(4) Mr. Scott resigned from the Board of Directors effective December 15, 2020 and as Chief Financial Officer as of December 31, 2020. Mr. Scott was paid a salary of $165,000 during the year ended December 31, 2020. Mr. Scott was reimbursed $27,668 for insurance expenses during the year ended December 31, 2020. Mr. Scott resigned effective December 31, 2020.

 

(5) Mr. Barnes was paid a salary of $165,000 during the year ended December 31, 2020. Barnes resigned effective November 30, 2020.

 

 
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Grants of Stock Based Awards during the year ended December 31, 2021

 

The Compensation Committee did not grant any stock-based awards or performance-based incentive compensation to the Named Executive Officers for the year ended December 31, 2021 or 2020.

 

Pension Benefits

 

We do not provide any pension benefits. 

 

Nonqualified Deferred Compensation

 

We do not have a nonqualified deferral program. 

 

Employment 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 2021.

   

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 320,000 warrants in October 2018 as follows: (i) Warrant to purchase up to 106,667 shares of our common stock at an exercise price of $1.80 per share which vested immediately: and (ii) two Warrants to purchase up to 106,667 shares of our common stock at an exercise price of $1.80 per share. One warrant for 106,667 shares of our common stock vested on October 15, 2019. Additional warrants for 106,667 shares of our common stock vest on October 15, 2020 and 2021, respectively. The Warrants are exercisable for 5 years.

 

Mr. Hegyi is entitled to participate in all group employment benefits that are offered by us to its 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 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

 

Mr. Scott resigned from the Board of Directors effective December 15, 2020 and as Chief Financial Officer as of December 31, 2020.

 

Employment Agreement with Joseph Barnes

 

Mr. Barnes resigned effective November 30, 2020 as President of GrowLife Hydroponics, Inc.

 

Potential Payments upon Termination or Change in Control 

 

The Company’s Employment Agreement with Marco Hegyi has provisions providing for severance payments amounting to $455,208 should he be terminated without cause or as a result of a change in control, less any months worked. All outstanding warrants fully vest under certain conditions.

 

 
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DIRECTOR COMPENSATION

 

We primarily use stock 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. On February 1, 2018, a director compensation program was implemented. The directors are compensated at up to $60,000 annually and the annual share award is based on the close price on January 31 of that year.

 

During year ended December 31, 2021, Marco Hegyi did not receive any compensation for his service as a director. The compensation disclosed in the Summary Compensation Table on page 22 represents the total compensation.

 

Director Summary Compensation

 

 On December 31, 2021, we issued 1,200,000 shares of our common stock to Thom Kozik that was valued at $0.202 per share or $24,000.

 

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 a stock compensation plan for independent non-employee directors.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth certain information regarding the ownership of our common stock as of March 31, 2022 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.

 

Each beneficial owner named 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 11335 NE 122nd Way, Suite 105, Kirkland, WA 98034 and the address of more than 5% of common stock is detailed below.

 

 

 

Shares Beneficially Owned

 

Name of Beneficial Owner

 

Number

 

 

Percentage (1)

 

Directors and Named Executive Officers-

 

 

 

 

 

 

Marco Hegyi (2)

 

 

686,666

 

 

 

%

David Dohrman (3)

 

 

-

 

 

 *

 

Thom Kozik (4)

 

 

1,220,000

 

 

 *

 

 

 

 

 

 

 

 

 

Total Directors and Officers (3 in total)

 

 

-

 

 

 

%

Greater Than 5% Ownership

 

 

 

 

 

 

 

Bucktown Capital LLC

 

 

(5 )

 

 

9.99 %

Silverback Capital Corporation

 

 

(6 )

 

 

9.99 %

 

 
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* Less than 1%.

 

(1) Based on 145,517,397 shares of common stock outstanding as of March 31, 2022.

 

(2) Reflects the shares beneficially owned by Marco Hegyi, the Chairman and CEO of the Company and includes warrants to purchase 686,666 shares of our common stock as of December 31, 2021 .

 

(3) Reflects the shares beneficially owned by David Dohrmann.

 

(4) Reflects the shares beneficially owned by Thom Kozik, a Director of the Company, beneficial ownership includes 1,220,000 common shares issued to him as compensation for his services to the Board represents 1% of the outstanding shares on December 31, 2021.

 

(5) According to the Schedule 13G filed with the SEC on March 7, 2022, by Bucktown Capital LLC (“Bucktown”), on behalf of Bucktown, and Fife Trading Inc. (“Fife Trading”) , sole manager of reporting person Bucktown, and John Fife (“Fife”) as sole member of reporting person Bucktown and the president and sole shareholder of Fife Trading. Mr. Fife has beneficial ownership by virtue of his role as a control person of Fife Trading and Bucktown. The principal business address of each of Bucktown, Fife Trading and Fife is 303 East Wacker Drive, Suite 1040, Chicago, IL 60601. Bucktown has rights to convert a Promissory Note into shares of the Issuer’s common stock which, except for a contractual 9.99% cap on the amount of outstanding shares that Bucktown may own, would exceed the cap. Thus, the number of shares of the Issuer’s common stock beneficially owned by Bucktown as of the date of its 13G filing was 11,052,305 shares, which is 9.99% of the Issuer's 110,633,688 shares outstanding on November 22, 2021 (as reporting in the company's 10-Q filed November 23, 2021).

 

(6) According to the Schedule 13G filed with the SEC on March 3, 2022, by Silverback Capital Corporation (“Silverback”), Silverback has rights to convert a Promissory Note into shares of the Issuer’s common stock which, except for a contractual 9.99% cap on the amount of outstanding shares that Silverback may own. Thus, the number of shares of the Issuer’s common stock beneficially owned by Silverback as of the date of its 13G filing was 14,479,650 shares, which is 9.99% of the Issuer's 134,517,394 shares outstanding on February 15, 2022 (as reported by the OTC Market Group Inc. on February 28, 2022). Gillian Gold acts as Manager and control person of Silverback. The principal business address of Silverback is 614 North Dupont Highway, Suite 210, Dover, Delaware, 19901.

 

There are no other persons known by us who owns beneficially 5% or more of our common stock as of March 31, 2022.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

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, 2019, the Company engaged in the following reportable transactions with our directors, executive officers, holders of more than 5% of our voting securities, and affiliates or immediately family members of our directors, executive officers and holders of more than 5% of our voting securities.

 

Certain Relationships

 

Please see the transactions with Chicago Venture Partner, Iliad, Odyssey, St. George, and Bucktown discussed in Notes 11, 13 and 14.

 

 
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Related Party Transactions

 

Transactions with Marco Hegyi

 

On October 21, 2018, a 5-year Warrant for Mr. Hegyi to purchase up to 66,666 shares of our common stock at an exercise price of $1.50 per share vested. The warrant was valued at $390,000 and we recorded $178,750 as compensation expense for the year ended December 31, 2018. On October 15, 2018, Mr. Hegyi received Warrants to purchase up to 320,000 shares of our common stock at an exercise price of $1.80 per share and which vest on October 15, 2018, 2019 and 2020. The Warrants are exercisable for 5 years. The warrants that vested on October 15, 2019 and 2018 were valued at $192,000 and we recorded compensation expense of $78,000 and $96,000 for the years ended December 31, 2020 and 2019.

 

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. See Note 16 for additional details.

 

Transaction with Thom Kozik

 

Mr. Kozik was appointed as a director on October 5, 2017. On February 22, 2019, we issued 54,054 shares of our common stock to Mr. Kozik valued at $1.11 per share or $60,000. On April 16, 2020, we issued 20,000 shares of our common stock to Mr. Kozik valued at $0.295 per share or $5,900. On December 31, 2021 we issued 1,200,000 shares of our common stock to Mr. Kozik valued at $0.02 per share or $24,000. These issuances were an award for independent director services.

 

Notes Payable to Related Parties

 

EZ-CLONE had $49,144 due to relatives of the EZ-CLONE founders and shareholders as of December 31, 2020. The notes were paid off on May 19, 2021.

 

Director Independence

 

The Board has affirmatively determined that Thom Kozik is independent as of December 31, 2021. For purposes of making that determination, the Board used NASDAQ’s Listing Rules even though the Company is not currently listed on NASDAQ.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Audit Committee Pre-Approval Policy

 

The Audit Committee has established a pre-approval policy and procedures for audit, audit-related and tax services that can be performed by the independent auditors without specific authorization from the Audit Committee subject to certain restrictions. The policy sets out the specific services pre-approved by the Audit Committee and the applicable limitations, while ensuring the independence of the independent auditors to audit the Company's financial statements is not impaired. The pre-approval policy does not include a delegation to management of the Audit Committee’s responsibilities under the Exchange Act. During the year ended December 31, 2021, the Audit Committee pre-approved all audit and permissible non-audit services provided by our independent auditors.

 

Service Fees Paid to the Independent Registered Public Accounting Firm

 

The Audit Committee engaged the CPA firm Macias Gini & O’Connell LLP (“MGO”) on October 14, 2021to perform an annual audit of the Company’s financial statements for the fiscal years ended December 31, 2021. MGO also performed a review of the Company’s financial statements for the three months ended September 30, 2021. BPM, LLP performed the annual audit for 2020 and 2019. BPM also performed a review of the Company’s financial statements each of the first three quarters of 2021.The following is the breakdown of aggregate fees billed for and during the last two fiscal years. The following is the breakdown of aggregate fees paid for the last two fiscal years:

 

 

 

Year Ended

 

 

 

December 31, 2021

 

 

December 31, 2020

 

Audit Fees

 

$ 140,000

 

 

$ 87,626

 

Audit related fees

 

 

 

 

 

 

49,220

 

 

 

$ 140,000

 

 

$ 136,846

 

       

 

-

“Audit Fees” are fees paid for professional services for the audit of our financial statements.

 

 

 

 

-

“Audit-Related fees” are fees paid for professional services not included in the first category, specifically, PCAOB interim reviews for quarterly filings, and accounting consultations on matters addressed during the audit.

     

 
25

Table of Contents

      

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a) FINANCIAL STATEMENTS:

 

The Company’s financial statements, as indicated by the Index to Consolidated Financial Statements set forth below, begin on page F-1 of this Form 10-K, and are hereby incorporated by reference. Financial statement schedules have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

  

Title of Document

 

Page

 

 

 

Report of Independent Registered Public Accounting Firm For the year ended December 31, 2021 (PCAOB ID 324)

 

F-1

 

 

 

Report of Independent Registered Public Accounting Firm For the year ended December 31, 2020

 

F-2

 

 

 

Consolidated Balance Sheets As of December 31, 2021 and 2020

 

F-3

 

 

 

Consolidated Statements of Operations For the years ended December 31, 2021 and 2020

 

F-4

 

 

 

Consolidated Statements of Changes in Stockholders’ Deficit For the years ended December 31, 2021 and 2020

 

F-5

 

 

 

Consolidated Statements of Cash Flows For the years ended December 31, 2021 and 2020

 

F-6

 

 

 

Notes to the Financial Statements

 

F-7

     

 
26

Table of Contents

    

 (b) Exhibits

     

Exhibit No.

 

Description

 

 

 

3.1

 

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.

 

 

 

3.2

 

Second Amended and Restated Bylaws of GrowLife, Inc. dated October 16, 2015. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 26, 2015, and hereby incorporated by reference.

 

 

 

3.3

 

Certificate of Amendment of Certificate of Incorporation of GrowLife, Inc. dated October 23, 2017 to increase the authorized shares of Common Stock from 3,000,000,000 to 6,000,000,000 shares. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 24, 2017, and hereby incorporated by reference.

 

 

 

3.4

 

Amendment to Articles of Incorporation dated November 20, 2019. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 26, 2019, and hereby incorporated by reference.

 

 

 

3.5

 

Certificate of Amendment of Certificate of Incorporation of GrowLife, Inc. dated November 8, 2021, to increase the authorized shares of Common Stock from 120,000,000 to 740,000,000 shares. Filed herewith.

 

 

 

4.1

 

GrowLife, Inc. Second Amended and Restated 2017 Stock Incentive Plan filed as an Annex 1 to the Company’s Definitive Revised Schedule 14A filed with the SEC on September 24, 2021, and hereby incorporated by reference.

 

 

 

4.2

 

Form of Warrants. Filed as exhibits to the Company’s Form 8-K and filed with the SEC on February 28, 2020, and hereby incorporated by reference.

 

 

 

10.1

 

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.

 

 

 

10.2

 

Compilation of Securities Purchase Agreement, Secured Promissory Notes, and Security Agreement by and between GrowLife, Inc. and Iliad Research and Trading, L.P. 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.

 

 

 

10.3

 

Rights Offering to Shareholders filed in Amendment No.1 of Form S-1. Filed with the SEC on September 18, 2018, and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on September 21, 2018, and hereby incorporated by reference.

 

 

 

10.4

 

Rights Offering to Shareholders filed in Amendment No.1 of Form S-1. Filed with the SEC on September 18, 2018, and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on September 21, 2018, and hereby incorporated by reference.

 

 

 

10.5

 

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.

 

 

 

10.6

 

Compilation of Securities Purchase Agreement, Warrant, Secured Promissory Notes, and Security Agreement by and between GrowLife, Inc. and Iliad Research and Trading, L.P. 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.

 

 

 

10.7

 

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.

 

 

 

10.8

 

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.

 

 

 

10.9

 

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.

 

 

 

10.10

 

Compilation of Securities Purchase Agreement, Secured Promissory Notes, and Security Agreement by and between GrowLife, Inc. and 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.

 

 

 

10.11

 

Amendment No. 1 to Purchase and Sale Agreement dated October 23, 2019, entered into by between GrowLife, Inc. and William Blackburn. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 12, 2019, and hereby incorporated by reference.

 

 

 

10.12

 

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 February 5, 2020, and hereby incorporated by reference.

 

 

 

10.13

 

Compilation of Labrys Securities Purchase Agreement, Self-Amortization Promissory Note and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 15, 2020, and hereby incorporated by reference.

 

 

 

10.14

 

Compilation of EMA Securities Purchase Agreement, Self-Amortization Promissory Note and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 15, 2020, and hereby incorporated by reference.

  

 
27

Table of Contents

   

10.15

 

Compilation of FF Securities Purchase Agreement, Self-Amortization Promissory Note and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 15, 2020, and hereby incorporated by reference.

 

 

 

10.16

 

Amendment 2 to Compilation of Labrys Securities Purchase Agreement, Self-Amortization Promissory Note and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on December 7, 2020, and hereby incorporated by reference.

 

 

 

10.17

 

Michael E. Fasci Executive Employment Agreement dated January 1, 2021. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on January 8, 2021, and hereby incorporated by reference.

 

 

 

10.18

 

Amendment 3 to Compilation of Labrys Securities Purchase Agreement, Self-Amortization Promissory Note and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on January 5, 2021, and hereby incorporated by reference.

 

 

 

10.19

 

Compilation of Bucktown Capital, LLC Securities Purchase Agreement, and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 5, 2021, and hereby incorporated by reference.

 

 

 

10.20

 

St. George and Iliad joint Warrant Settlement Agreement. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 9, 2021, and hereby incorporated by reference.

 

 

 

10.21

 

Compilation of Bucktown Capital, LLC Securities Purchase Agreement, and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 5, 2021, and hereby incorporated by reference.

 

 

 

10.22

 

Compilation of Bucktown Capital, LLC Securities Purchase Agreement, and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 12, 2021, and hereby incorporated by reference.

 

 

 

10.23

 

Securities Purchase Agreement and Convertible Promissory Note with Sixth Street Lending LLC dated January 4, 2022.  Filed herewith.

 

 

 

10.24

 

Securities Purchase Agreement and Convertible Promissory Note with Sixth Street Lending LLC dated March 8, 2022.  Filed herewith.

 

 

 

14.1

 

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.

 

 

 

21.1

 

Subsidiaries of the Registrant, Filed herewith.

 

 

 

23.1

 

Consent of Macias Gini & O’Connell LLP Independent Registered Account Firm Relating to the Consolidated Financial Statements of the Company for the year ended December 31, 2021

 

 

 

23.2

 

Consent of BPM LLP Independent Registered Account Firm Relating to the Consolidated Financial Statements of the Company for the year ended December 31, 2020

 

 

 

31.01

 

Certification of Principal Executive Officer Pursuant to Rule 13a-14 *

 

 

 

31.02

 

Certification of Principal Financial Officer Pursuant to Rule 13a-14 *

 

 

 

32.01

 

CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act *

 

 

 

32.02

 

CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act *

 

 

 

99.1

 

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.

 

 

 

99.2

 

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.

 

 

 

99.3

 

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.

 

 

 

99.4

 

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.

 

 

 

101.INS*

 

Inline XBRL Instance Document

 

 

 

101.SCH*

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL*

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.LAB*

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE*

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF*

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

  

 *Filed Herewith.

 

 
28

Table of Contents

 

phot_10kimg12.jpg

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Shareholders

GrowLife, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheet of GrowLife, Inc. (the “Company”) as of December 31, 2021, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

The Company’s Ability to Continue as a Going Concern

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the accompanying financial statements, the Company has suffered recurring losses from operations, incurred negative cash flows from operating activities, and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on the entity’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are 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 audit 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

 

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 audit 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 audit provides a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Valuation of Derivative Liabilities

 

Description of the Matter

 

As disclosed in Note 12 to the financial statements, The Company has issued several convertible notes which were outstanding as of December 31, 2021. Under the terms of the note agreements, she note holders have the right to convert principal and accrued interest outstanding into shares of common stock at a discounted price compared to the market price of the common stock at the date of conversion. The embedded conversion features of the notes are recognized as derivative liabilities and management measures the fair value of the derivative liabilities using a Binomial Option Pricing Model. Auditing the Company’s valuation of its derivatives is challenging as the valuation methodologies used by the Company are complex by their nature and the methodologies incorporate significant assumptions that impact the fair value measurement, including the discount rate and forecasted volatility of the Company’s common stock price.

 

How We Addressed the Matter in Our Audit

 

To test the valuation of the derivative liabilities, our audit procedures included, among others, evaluating the methodologies used in the valuation model and testing the significant assumptions. For example, we compared the forecasted volatility of the Company’s common stock price to its historical volatility. We also assessed the completeness and accuracy of the underlying data and engaged an external valuation specialist to assist in our evaluation of the significant assumptions and methodologies used by the Company. As part of our procedures, we also evaluated the Company’s financial statement disclosures related to derivative liabilities which are included in Note 12 to the financial statements.

 

Macias Gini & O’Connell LLP

We have served as Growlife, Inc.’s auditor since 2021

Irvine, CA

May 16, 2022

   

 
F-1

Table of Contents

           

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

GrowLife, Inc. and Subsidiaries

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of GrowLife, Inc. and Subsidiaries (the Company) as of December 31, 2020, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern Uncertainty

 

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.

 

Emphasis of a Matter-Uncertainty of Litigation

 

As described in notes 1 and 17 to the consolidated financial statements, the Company is in litigation with the Founders of its EZ Clone Enterprises subsidiary for the Company’s failure to pay the remaining 49% of the balance owed under the Purchase and Sale agreement with EZ Clone Enterprises. The Founders are seeking rescission of the Purchase and Sale Agreement, unspecified damages in excess of ten thousand dollars, and other equitable relief. Our audit opinion is not modified for this matter.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are 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 audit 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 consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ BPM LLP

 

BPM LLP

Walnut Creek, California

April 15, 2021

We served as the Company’s auditor from October 2019 to October 2021

 

 
F-2

Table of Contents

    

 GROWLIFE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS   

 

 

 

December 31,

2021

 

 

December 31,

2020

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

 

$ 363,863

 

 

$ 383,144

 

Accounts receivable - trade, net of allowance for doubtful accounts of $10,000 and $5,690 as of 12/31/2021 and 12/31/2020, respectively

 

 

366,789

 

 

 

960,522

 

Other receivables

 

 

161,000

 

 

 

-

 

Inventory

 

 

1,299,560

 

 

 

570,524

 

Deposits

 

 

18,995

 

 

 

18,995

 

Total current assets

 

 

2,210,207

 

 

 

1,933,185

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

249,906

 

 

 

129,330

 

Intangible assets, net

 

 

459,002

 

 

 

1,130,718

 

Goodwill

 

 

781,749

 

 

 

781,749

 

Operating lease right of use asset

 

 

407,166

 

 

 

380,247

 

TOTAL ASSETS

 

$ 4,108,030

 

 

$ 4,355,229

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable - trade

 

 

1,146,344

 

 

 

1,146,195

 

Accrued expenses

 

 

219,398

 

 

 

2,592,251

 

Accrued expenses - related parties

 

 

-

 

 

 

37,394

 

Notes payable- PPP/EIDL loans, current

 

 

1,034,994

 

 

 

390,035

 

Note payable to bank

 

 

137,728

 

 

 

 

 

Derivative liability

 

 

1,698,272

 

 

 

1,101,436

 

Convertible notes payable, net

 

 

2,583,816

 

 

 

2,495,153

 

Notes payable- related party

 

 

-

 

 

 

49,144

 

Acquisition of EZ-CLONE Enterprises, Inc. payable in cash

 

 

1,026,000

 

 

 

1,026,000

 

Acquisition of EZ-CLONE Enterprises, Inc. payable in common stock

 

 

1,105,000

 

 

 

1,105,000

 

Current portion of operating lease right of use liability

 

 

197,915

 

 

 

140,772

 

Federal and state income taxes payable

 

 

556,952

 

 

 

343,125

 

Total current liabilities

 

 

9,706,419

 

 

 

10,426,505

 

 

 

 

 

 

 

 

 

 

LONG TERM LIABILITIES:

 

 

 

 

 

 

 

 

Deferred tax liability

 

 

106,000

 

 

 

352,649

 

Notes payable- PPP/EIDL, less current portion

 

 

-

 

 

 

485,679

 

Non-current portion of operating lease right of use liability

 

 

229,222

 

 

 

264,868

 

Total long term liabilities

 

 

335,222

 

 

 

1,103,196

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Preferred stock - $0.0001 par value, 10,000,000 shares authorized, no shares

 

 

-

 

 

 

-

 

 issued and outstanding at 12/31/2021 and 12/31/2020, respectively

 

 

 

 

 

 

 

 

Common stock - $0.0001 par value, 740,000,000 shares authorized, 117,952,697 and 51,843,221

 

 

 

 

 

 

 

 

shares issued and outstanding at 12/31/2021 and 12/31/2020 , respectively

 

 

395,198

 

 

 

388,587

 

Additional paid in capital

 

 

153,985,229

 

 

 

147,278,311

 

Accumulated deficit

 

 

(160,314,038 )

 

 

(154,841,370 )

Total stockholders' deficit

 

 

(5,933,611 )

 

 

(7,174,472 )

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND  STOCKHOLDERS' DEFICIT

 

$ 4,108,030

 

 

$ 4,355,229

 

    

The accompanying notes are an integral part of these consolidated financial statements.

 

 
F-3

Table of Contents

   

GROWLIFE, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

         

 

 

For Year Ended

 

 

 

December 31,

2021

 

 

December 31,

2020

 

 

 

 

 

 

 

 

NET REVENUE

 

$ 6,199,089

 

 

$ 7,000,812

 

Cost of goods sold

 

 

3,405,655

 

 

 

4,020,570

 

Gross Profit

 

 

2,793,434

 

 

 

2,980,242

 

Operating expenses

 

 

4,318,416

 

 

 

4,870,204

 

Loss from operations

 

 

(1,524,982 )

 

 

(1,889,962 )

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

Change in fair value of derivative

 

 

(973,101

)

 

 

199,479

 

Interest expense, net

 

 

(3,252,191 )

 

 

(1,089,734 )

Loss on debt conversions, net

 

 

(931,494 )

 

 

(945,169 )

Loss on debt settlement, net

 

 

-

 

 

 

(2,422,500 )

Gain on extinguishment of warrants

 

 

1,025,400

 

 

 

-

 

Gain on forgiveness of debt

 

 

206,287

 

 

 

 

 

Total other expense, net

 

 

(3,925,099 )

 

 

(4,257,924 )

 

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAXES

 

 

(5,450,081 )

 

 

(6,147,886 )

 

 

 

 

 

 

 

 

 

Income taxes - current benefit (expense)

 

 

(22,587 )

 

 

(231,952 )

 

 

 

 

 

 

 

 

 

NET LOSS

 

$ (5,472,668 )

 

$ (6,379,838 )

 

 

 

 

 

 

 

 

 

Basic and diluted  loss per share

 

$ (0.07 )

 

$ (0.18 )

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding- basic and diluted

 

 

83,755,630

 

 

 

35,286,804

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
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 GROWLIFE, INC. AND SUBSIDIARIES   

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total

 

 

 

 Common Stock

 

 

 Additional Paid 

 

 

 Accumulated

 

 

 Stockholders'

 

 

 

 Shares

 

 

 Amount

 

 

 in Capital

 

 

 Deficit

 

 

 (Deficit)

 

Balance as of December 31, 2019

 

 

28,677,147

 

 

 

386,269

 

 

 

143,441,047

 

 

 

(148,461,532 )

 

 

(4,634,216 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation for stock options

 

 

-

 

 

 

-

 

 

 

47,169

 

 

 

-

 

 

 

47,169

 

Stock based compensation for warrants

 

 

-

 

 

 

-

 

 

 

78,000

 

 

 

-

 

 

 

78,000

 

Shares issued for services rendered

 

 

40,000

 

 

 

4

 

 

 

11,796

 

 

 

-

 

 

 

11,800

 

Shares issued for convertible note and interest conversion

 

 

19,573,920

 

 

 

1,960

 

 

 

3,113,249

 

 

 

-

 

 

 

3,115,208

 

Shares issued for convertible note commitment fee

 

 

3,552,000

 

 

 

355

 

 

 

586,565

 

 

 

-

 

 

 

586,920

 

Warrant exercise

 

 

154

 

 

 

-

 

 

 

485

 

 

 

-

 

 

 

485

 

Net loss for the year ended December 31, 2020

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,379,838 )

 

 

(6,379,838 )

Balance as of December 31, 2020

 

 

51,843,221

 

 

 

388,587

 

 

 

147,278,311

 

 

 

(154,841,370 )

 

 

(7,174,472 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation for stock options

 

 

 

 

 

 

 

 

 

 

15,476

 

 

 

 

 

 

 

15,476

 

Shares issued for services rendered

 

 

1,200,000

 

 

 

120

 

 

 

23,880

 

 

 

 

 

 

 

24,000

 

Shares issued for convertible note and interest conversion

 

 

49,845,718

 

 

 

4,985

 

 

 

5,234,508

 

 

 

 

 

 

 

5,239,493

 

Shares issued for warrant settlement

 

 

14,250,000

 

 

 

1,425

 

 

 

1,395,675

 

 

 

 

 

 

 

1,397,100

 

Warrant exercise

 

 

813,758

 

 

 

81

 

 

 

37,379

 

 

 

 

 

 

 

37,460

 

Net loss for the year ended December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,472,668 )

 

 

(5,472,668 )

Balance as of December 31, 2021

 

 

117,952,697

 

 

$ 395,198

 

 

$ 153,985,229

 

 

$ (160,314,038 )

 

$ (5,933,611 )

  

The accompanying notes are an integral part of these consolidated financial statements.

 

 
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 GROWLIFE, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

 

 

 

Year Ended

 

 

 

December 31, 2021

 

 

December 31, 2020

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$ (5,472,668 )

 

$ (6,379,838 )

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation expense

 

 

37,152

 

 

 

37,152

 

Amortization of intangible assets

 

 

671,716

 

 

 

671,716

 

Amortization of debt discount

 

 

643,680

 

 

 

 

 

Share-based compensation expense

 

 

15,476

 

 

 

125,169

 

Shares issued for service

 

 

24,000

 

 

 

11,800

 

Non Cash Interest Expense

 

 

772,256

 

 

 

1,061,852

 

Loss on debt Conversion

 

 

931,494

 

 

 

945,169

 

Change in fair value of derivative

 

 

973,101

 

 

 

(199,479 )

Loss on cashless warrant conversion

 

 

37,460

 

 

 

 

 

Loss on debt settlement

 

 

-

 

 

 

2,422,500

 

Gain on forgiveness of debt

 

 

(206,287 )

 

 

-

 

Gain of settlement of accounts payable

 

 

(1,025,400 )

 

 

-

 

Fair value of derivatives expensed upon issuance

 

 

1,429,138

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

593,733

 

 

 

(858,716 )

Inventory

 

 

(729,036 )

 

 

30,150

 

Other assets

 

 

(161,000 )

 

 

-

 

Deposits

 

 

-

 

 

 

-

 

Right of use, net

 

 

(5,422 )

 

 

11,409

 

Accounts payable

 

 

149

 

 

 

28,105

 

Accrued expenses

 

 

40,764

 

 

 

(83,433 )

Change in deferred taxes

 

 

(246,649 )

 

 

(117,551 )

Change in federal and state taxes payable

 

 

213,827

 

 

 

343,125

 

Cash Used in operating activities

 

 

(1,462,515 )

 

 

(1,950,870 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of PP&E

 

 

(20,000 )

 

 

-

 

Cash Used in investing activities

 

 

(20,000 )

 

 

-

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Warrant exercise

 

 

-

 

 

 

(431,151 )

Proceeds from convertible notes

 

 

1,728,873

 

 

 

 

 

Proceeds from notes payable

 

 

337,055

 

 

 

-

 

Repayment of convertible notes

 

 

(553,550 )

 

 

 

 

Repayment of notes

 

 

(49,144 )

 

 

2,723,846

 

Proceeds from issuance of common stock

 

 

-

 

 

 

485

 

Net cash provided by financing activities

 

 

1,463,234

 

 

 

2,293,180

 

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(19,281 )

 

 

342,310

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

 

 

383,144

 

 

 

40,834

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of period

 

$ 363,863

 

 

$ 383,144

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Shares issued for convertible note and interest conversion

 

 

2,502,596

 

 

 

1,947,819

 

Issuance of stock for debt issuance costs

 

 

 

 

 

 

586,565

 

Loss of debt conversions- issuance of  stock

 

 

-

 

 

 

984,169

 

Gain on debt conversions- reduction of accounts payable

 

 

-

 

 

 

39,000

 

Shares issued for liability settlement

 

 

1,397,100

 

 

 

-

 

Purchase of fixed asset for notes payable

 

 

137,725

 

 

 

 

 

Derivative liability settled in shares

 

 

1,805,403

 

 

 

 

 

   

The accompanying notes are an integral part of these consolidated financial statements.

 

 
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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.

 

On October 15, 2018, the Company closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation (the “Agreement”). On November 5, 2019, the Company amended the Agreement with one 24.5% shareholder of EZ-CLONE Enterprises, Inc. (“EZ-CLONE”), to extend the date to purchase the remaining 49% of stock of EZ-CLONE in exchange for a 20% extension fee (a total of $171,000 for the 49% or $85,500 for each 24.5% shareholder) of the $855,000 cash payable at the earlier of the closing of $2,000,000 in funding or nine months (July 2020). The Company did not close the purchase of the remaining 49% of stock of EZ-CLONE by the extended deadline.

 

On September 15, 2020, the Company received notice that William Blackburn and Brad Mickelsen (“Plaintiffs”), minority shareholders of EZ-CLONE Enterprises, Inc., a majority owned subsidiary of the Company, filed a complaint against the Company and its officers Marco Hegyi and Mark Scott (“Officers”), in the Superior Court of California, County of Sacramento (“Complaint”) for claims related to breach under the Purchase and Sale Agreement dated October 15, 2018 between the Company and Plaintiffs. The Complaint also alleges that the Company and its Officers made certain false representations and other claims to consummate the Transaction and as a result has failed to complete the second closing as required under Purchase and Sale Agreement. The Plaintiffs are seeking rescission of the Purchase and Sale Agreement, unspecified damages in excess of ten thousand dollars, and other equitable relief. As of December 4, 2020, the Company’s officers were dismissed from the case. The Plaintiffs are seeking rescission of the Purchase and Sale Agreement, unspecified damages in excess of ten thousand dollars, and other equitable relief. See Note 17 for description of Legal Proceedings.

 

On September 15, 2020, the Company filed a notice of removal with the California Superior Court, County of Sacramento and the United States District Court for the Eastern District of California. The case was removed to Federal District Court for the Eastern District of California and Plaintiffs filed an Ex Parte Application for TRO and an Order for Preliminary Injunction with the Federal Court. The TRO was granted on September 16, 2020 and a preliminary injunction hearing was scheduled for September 29, 2020. After reviewing all pleadings and oral arguments at the hearing, the Court issued a ruling granting Plaintiffs’ request for a preliminary injunction.

 

The parties provided legal briefs to the Federal court to determine if rescission should be granted.  The Court did not reach a decision on this issue, and denied without prejudice, the Company’s effort to reverse the preliminary injunction. The Company is currently reviewing whether to pursue the matter further and engaging in settlement discussions. If we are unsuccessful and the court grants Plaintiffs’ request for rescission the resulting actions are speculative at this time but could include the return of the consideration exchanged as part of the acquisition subject to certain adjustments as the result of several variables which the court will consider. If the court denies Plaintiffs request for rescission the litigation will continue regarding the breach of contract claims and contractual remedies for breach and the Court may or may not dissolve the preliminary injunction as a result.

 

A decision to grant rescission could materially harm our business as EZ-CLONE represents a significant portion of our operations.

 

As of December 31, 2021 and 2020, the Company recorded a liability of $2,131,000 for acquisition payable of which a $1,105,000 is payable in stock and $1,026,000 is payable in cash.

 

As of March 4, 2019, the Company began to trade on the Pink Sheet stocks system. Our bid price had closed below $0.01 for more than 30 consecutive calendar days. As of March 17, 2020, the Company commenced trading on the OTCQB Market ("OTCQB") after successfully up-listing from the OTC Pink Market.

 

On November 5, 2021, the Company held its 2021 Annual Meeting of Stockholders, where stockholders approved an increase in the authorized shares of common stock (“Common Stock”) from 120,000,000 to 740,000,000 shares. As such, the Company filed a Certificate of Amendment of Certificate of Incorporation with the Secretary of State of the State of Delaware on November 8, 2021. As a result of the increase, the Company an aggregate 750,000,000 authorized shares consisting of: (i) 740,000,000 shares of common stock, par value $0.0001 per share, and (ii) 10,000,000 shares of preferred stock, par value $0.0001 per share.

 

 
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NOTE 2  GOING CONCERN 

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred net losses of $5,472,688 and $6,379,838 for the years ended December 31, 2021 and 2020, respectively. Net cash used in operating activities was $1,462,515 and $1,950,870 for the years ended December 31, 2021 and 2020, respectively.

 

The Company anticipates that it will record losses from operations for the foreseeable future. As of December 31, 2021, the Company’s accumulated deficit was $160,314,038. The Company has limited capital resources, and operations to date have been funded with the proceeds from private equity and debt financings. These conditions raise substantial doubt about our ability to continue as a going concern.

 

The Company believes that its cash on hand will be sufficient to fund our operations only until May 31, 2022. The Company needs additional financing to implement our business plan and to service our ongoing operations and pay our current debts. There can be no assurance that we will be able to secure any needed funding, or that if such funding is available, the terms or conditions would be acceptable to us. If we are unable to obtain additional financing when it is needed, we will need to restructure our operations, and divest all or a portion of our business. We may seek additional capital through a combination of private and public equity offerings, debt financings and strategic collaborations. Debt financing, if obtained, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, and could increase our expenses and require that our assets secure such debt. Equity financing, if obtained, could result in dilution to the Company’s then-existing stockholders and/or require such stockholders to waive certain rights and preferences. If such financing is not available on satisfactory terms, or is not available at all, the Company may be required to delay, scale back, eliminate the development of business opportunities and our operations and financial condition may be materially adversely affected.

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS

 

Basis of Presentation - The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. 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 - We classify highly liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit. At December 31, 2021, the Company had uninsured deposits in the amount of $108,948.

 

Accounts Receivable and Revenue – The company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which requires the application of the five-step-principles-based-accounting-model for revenue recognition. These steps include (1) a legally enforceable contract, written or unwritten is identified; (2) performance obligations in the contracts are identified; (3) the transaction price reflecting variable consideration, if any, is identified; (4) the transaction price is allocated to the performance obligations; and (5) revenue is recognized when the control of goods is transferred to the customer at a particular time or over time. Our hydroponic sales are cash or credit card. Our EZ-CLONE sales include credit, cash, 3% discount upon receipt within ten days and, we extend thirty day terms to select customers. We have not incurred any costs to acquire contracts that would require capitalization as of December 31, 2021 and 2020. Accounts receivable are reviewed periodically for collectability. As of December 31, 2021 and December 31, 2020, the Company has an allowance for doubtful accounts totaling $10,000 and $5,690, respectively.

 

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.

 

 
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Concentration of Credit and Sales Risk -

 

The Company had the following concentrations of credit and sales risk-

 

Customers with over 10% of sales- the Company had two customers of EZ-CLONE that represented approximately 53% and 15% of consolidated revenue for the year ended December 31, 2021.

 

Customers with over 10% of outstanding accounts receivable- one customer totaling 84.9% and 88.8% as of December 31, 2021 and 2020, respectively.

 

Inventories - Inventories are recorded on a first in first out basis Inventory consists of raw materials, work in process and finished goods and components sold by EZ-CLONE to it distribution customers. The Company reviews its inventory on a periodic basis to identify products that are slow moving and/or obsolete, and if such products are identified, the Company records the appropriate inventory impairment charge at such time.

 

Property and Equipment – Equipment consists of machinery, equipment, tooling, computer equipment and leasehold improvements, which are stated at cost less accumulated depreciation and amortization. Depreciation is computed by the straight-line method over the estimated useful lives or lease period of the relevant asset, generally 3-10 years, except for leasehold improvements which are depreciated over the lesser of the life of the lease or 10 years. 

 

Long Lived Assets – The Company reviews its long-lived assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.

 

Intangible Assets – Intangible assets are capitalized and amortized on a straight-line basis over their estimated useful life, if the life is determinable. If the life is not determinable, amortization is not recorded. We regularly perform reviews to determine if facts and circumstances exist which indicate that the useful lives of our intangible assets are shorter than originally estimated or the carrying amount of these assets may not be recoverable. When an indication exists that the carrying amount of intangible assets may not be recoverable, we assess the recoverability of our assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Such impairment test is based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Impairment, if any, is based on the excess of the carrying amount over the estimated fair value of those assets.

 

Goodwill - The Company reviews its acquired goodwill for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. In reviewing its goodwill, the Company performs a qualitative analysis to determine if it is more-likely-than-not that the goodwill is impaired. If the qualitative analysis indicates that goodwill is likely impaired, the Company calculates the fair value of its goodwill by allocating the fair value of the business unit containing the goodwill to all its tangible and intangible assets and liabilities, with the residual fair value allocated to goodwill. The excess, if any, of the goodwill carrying value in excess of its fair value would be recognized as an impairment loss. Management has concluded that, based on a qualitative analysis, it is more-likely-than-not that goodwill has not been impaired as of December 31, 2021 and 2020.

 

Fair Value Measurements and Financial Instruments – ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

 

Level 1 – Quoted prices in active markets for identical assets and liabilities; 

 

Level 2 – Inputs other than level one inputs that are either directly or indirectly observable; and.  

 

Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.   

  

The recorded value of other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other current assets, and accounts payable and accrued expenses approximate the fair value of the respective assets and liabilities as of December 31, 2021 and 2020 are based upon the short-term nature of the assets and liabilities. The Company’s derivative financial instruments are considered Level 3 instruments. See Note 12.

 

 
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Table of Contents

 

Derivative Financial Instruments –Pursuant to ASC 815 “Derivatives and Hedging”, the Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. The Company then determines if embedded derivative must bifurcated and separately accounted for. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The variable conversion features of the Convertible Notes Payable  are considered derivatives, see Note 12. For derivative financial instruments, the Company uses the Binomial pricing model to value the derivative instruments at inception and on subsequent valuation dates. The Company uses the following assumptions when using the model: (i)risk-free interest rate of 1%; (ii) expected life of one year; (iii) expected dividend of 0%; and (iv) expected volatility ranging from 140% – 184%.  The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

 

Stock Based Compensation – We have share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options to purchase shares of our common stock at the fair market value at the time of grant. Stock-based compensation cost is measured by us at the grant date, based on the fair value of the award, over the requisite service period using an estimated forfeiture rate. For options issued to employees, we recognize stock compensation costs utilizing the fair value methodology over the related period of benefit. Grants of stock options and stock to non-employees and other parties are accounted for in accordance with the ASC 718.

 

Convertible Securities – Based upon ASC 815-15, we have adopted a sequencing approach regarding the application of ASC 815-40 to convertible securities issued subsequent to September 30, 2015. We will evaluate our contracts based upon the earliest issuance date.

 

Net Loss Per Share - Under the provisions of ASC Topic 260, “Earnings per Share,” basic loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the income of the Company, subject to anti-dilution limitations. The common stock equivalents have not been included as they are anti-dilutive.

 

As of December 31, 2021, there are warrants for the purchase of 686,666 shares of common shares at a $1.64 average exercise price. In addition, we have an unknown number of common shares to be issued under the convertible notes with Bucktown and Silverback Capital financing agreements and warrants because the number of shares ultimately issued depends on the price at which the holder converts its debt to shares and exercises its warrants. The lower the conversion or exercise prices, the more shares that will be issued to the holder upon the conversion of debt to shares. The Company will not know the exact number of shares of stock issued to the holder until the debt is actually converted to equity.

 

As of December 31, 2020, there were (i) stock option grants outstanding for the purchase of 506,667 common shares at an $1.496 average exercise price; and (ii) warrants for the purchase of 3,451,737 shares of common shares at a $2.428 average exercise price. In addition, the Company have an unknown number of common shares to be issued under the Crossover financing agreements in the case of default. In addition, the Company had 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.

 

Dividend Policy - The Company has never paid any cash dividends and intends, for the foreseeable future, to retain any future earnings for the development of our business. Our future dividend policy will be determined by the board of directors on the basis of various factors, including our results of operations, financial condition, capital requirements and investment opportunities.

 

Use of Estimates - In preparing these consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions included in our consolidated financial statements relate to the valuation of long-lived assets, estimates of sales returns, inventory reserves and accruals for potential liabilities, and valuation assumptions related to derivative liability, equity instruments and share based compensation. 

 

Advertising – Advertising costs are charged to selling, general and administrative expenses as incurred. Advertising and marketing costs for the years ended December 31, 2021 and 2020 were $105,621 and $144,964, respectively.

Comprehensive loss – Comprehensive loss is defined as the change in equity of a business during a period from non-owner sources. There were no differences between net loss for the years ended December 31, 2021 and 2020 and comprehensive loss for those periods.

 

Research and Development Expenses – There are no research and development expenses for the years ended December 31, 2021 and 2020, respectively.

 

 
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Table of Contents

 

Recent Accounting Pronouncements

 

Right of Use Assets and Liabilities- ASU 2016-02, Leases (Topic 842), which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are now classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.

 

In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The amendment is meant to simplify the accounting for convertible instruments by removing certain separation models in subtopic 470-20 for convertible instruments. The amendment also changed the method used to calculate dilutes EPS for convertible instruments and for instruments that may be settled in cash. The amendment is effective for years beginning after December 15, 2021, with early adoption for years beginning after December 15, 2020 including interim periods for those fiscal years. We are currently evaluating the impact of adoption this standard on the Company’s consolidated financial statements and related disclosures.

 

Based on the Company’s review of accounting standard updates issued , there have been no other newly issued or newly applicable accounting pronouncements that have had, or are expected to have, a significant impact on the Company’s consolidated financial statements.

 

NOTE 4 –BUSINESS COMBINATIONS, ACQUISITION PAYABLE AND OTHER TRANSACTION

 

Acquisition of EZ-CLONE Enterprises, Inc.

 

On October 15, 2018, the Company closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc. (“EZ-CLONE”), a California corporation (the “Agreement”). The total purchase price was $4 million of which $1,500,000 is payable in cash and $2.5 million payable in stock. At closing, we paid 51% of this amount totaling $2,040,000 via a (i) a cash payment of $645,000; and (ii) the issuance of 715,385 restricted shares of our common stock valued $1,395,000. The Agreement called for the Company, upon delivery of the remaining 49% of EZ-Clone stock, to acquire such stock within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of Company’s common stock at a value of $1,105,000.

 

On November 5, 2019, the Company amended the Agreement with one 24.5% shareholder of EZ-CLONE to extend the date to purchase the remaining 49% of stock of EZ-CLONE in exchange for a 20% extension fee (a total of $171,000 for the 49% or $85,500 for each 24.5% shareholder) of the $855,000 cash payable at the earlier of the closing of $2,000,000 in funding or nine months (July 2020). The Company did not close the purchase of the remaining 49% of stock of EZ-CLONE by the extended deadline.

 

On September 15, 2020, the Company received notice that William Blackburn and Brad Mickelsen (“Plaintiffs”), minority shareholders of EZ-CLONE Enterprises, Inc., a majority owned subsidiary of the Company, filed a complaint against the Company and its officers Marco Hegyi and Mark Scott (“Officers”), in the Superior Court of California, County of Sacramento (“Complaint”) for claims related to breach under the Purchase and Sale Agreement dated October 15, 2018 between the Company and Plaintiffs. As of December 4, 2020, the Company’s officers were dismissed from the case. The Plaintiffs are seeking rescission of the Purchase and Sale Agreement, unspecified damages in excess of ten thousand dollars, and other equitable relief. See Note 17 for description of Legal Proceedings.

 

As of December 31, 2021 and 2020, the Company has recorded a liability of $2,131,000 for acquisition payable of which a $1,105,000 is payable in stock and $1,026,000 is payable in cash.

 

This acquisition accelerated the Company’s revenue growth, increased the Company gross margins and added additional personnel.

 

The Company accounted for the acquisition in accordance with ASC 805, “Business Combinations”. ASC 805 defines the acquirer in a business combination as the entity that obtains control of one or more businesses in a business combination and establishes the acquisition date as the date that the acquirer achieves control. ASC 805 requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date.

 

 

 
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For accounting purposes, from the October 15, 2018 the Company consolidated EZ-Clone given their control and treated its obligation to acquire the remaining interest in EZ-Clone. The Company considers EZ-Clone considers EZ-Clone to be 100% owned. At December 31, 2020 and 2021 the Company has recorded $213,100 as a liability, $1,026,000 of which is due in cash and $1,105,000 is due in stock..

 

 

The fair value of the intangible assets associated with the assets acquired was $2,351,000 estimated by using a discounted cash flow approach based on future economic benefits. In summary, the estimate was based on a projected income approach and related discounted cash flows over five years, with applicable risk factors assigned to assumptions in the forecasted results.

 

NOTE 5 – INVENTORY

 

Inventory as of December 31, 2021 and 2020 consisted of the following:

  

 

 

December 31, 2021

 

 

December 31, 2020

 

Raw materials

 

$ 723,834

 

 

$ 456,723

 

Work in proess

 

 

375,083

 

 

 

83,792

 

Finished goods

 

 

183,318

 

 

 

26,557

 

Inventory deposits

 

 

17,325

 

 

 

3,452

 

 

 

$ 1,299,560

 

 

$ 570,524

 

      

Inventory consist of supplies for product lines at EZ-CLONE.

 

NOTE 6 – PROPERTY AND EQUIPMENT

 

Property and equipment as of December 31, 2021 and 2020 consists of the following:

  

 

 

December 31, 2021

 

 

December 31, 2020

 

Machinery, equipment and tooling

 

$ 356,867

 

 

$ 356,867

 

Computer equipment

 

 

16,675

 

 

 

16,675

 

Leasehold equipment

 

 

14,702

 

 

 

14,702

 

Automobile

 

 

157,728

 

 

 

 

 

Total

 

$ 545,972

 

 

$ 388,244

 

Less accumulated depreciation and amortization

 

 

(296,066 )

 

 

(258,914 )

Net property and equipment

 

$ 249,906

 

 

$ 129,330

 

      

Total depreciation expense was $37,152 and $37,152 for the years ended December 31, 2021 and 2020, 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.

 

 
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NOTE 7 – INTANGIBLE ASSETS

 

Intangible assets as of December 31, 2021 and 2020 consisted of the following: 

   

 

 

Estimated life

 

December 31, 2021

 

 

December 31, 2020

 

Customer lists

 

3.5 Years

 

$ 1,297,000

 

 

$ 1,297,000

 

Intellectual property

 

3.5 Years

 

 

1,054,000

 

 

 

1,054,000

 

Less accumulated amortization

 

 

 

 

(1,891,998 )

 

 

(1,220,282 )

 

 

 

 

$ 459,002

 

 

$ 1,130,718

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

Indefinite

 

$ 781,749

 

 

$ 781,749

 

 

 

 

 

 

 

 

 

 

 

 

Total Intangibles and Goodwill

 

 

 

$ 1,240,751

 

 

$ 1,912,467

 

      

Total amortization expense was $671,716 and $671,716 for the years ended December 31, 2021 and 2020, respectively.

 

NOTE 8- LEASES

 

The Company previously entered into operating leases for warehouse and corporate facilities. These leases have terms which range from less than one to two years, and often include options to renew. These operating leases are listed as a separate line item on the Company's December 31, 2021 Consolidated Balance Sheet and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are also listed as separate line items on the Company's December 31, 2021 Consolidated Balance Sheet. As of December 31, 2021, total right-of-use assets and operating lease liabilities for remaining long-term lease was $407,166 and $427,137, respectively. During the years ended December 31, 2021 and 2020, the Company recognized approximately $232,524 and $222,984, respectively, in total lease costs for the lease.

 

Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.

 

Cash paid for ROU operating lease liability amounted to $230,385 and $211,575 for the years ended December 31, 2021 and December 31, 2020, respectively.

 

Minimum future lease payments as of December 31, 2021 

 

Year ended

 

Amount

 

December 31, 2022

 

$ 232,741

 

December 31, 2023

 

 

236,352

 

 

 

$ 469,093

 

Imputed interest using 10%

 

 

(41,956 )

Right of Use Liability

 

$ 427,137

 

 

NOTE 9- ACCOUNTS PAYABLE

 

Accounts payable were $1,146,344 and $1,146,195 as of December 31, 2021 and 2020, respectively. Such liabilities consisted of amounts due to vendors for inventory purchases, audit, legal and other expenses incurred by the Company.

 

NOTE 10- ACCRUED EXPENSES

 

Accrued expenses were $219,398 and $2,592,251 as of December 31, 2021 and 2020, respectively. Such liabilities consisted of amounts due to sales tax, payroll and restructuring expense liabilities. On April 5, 2021, the Company entered into a Warrant Settlement Agreement dated March 31, 2021 with St. George and Iliad to resolve a dispute regarding prior financings. The Company entered into a joint warrant settlement agreement with St. George and Iliad to resolve a dispute regarding prior financings wherein St. George and Iliad agreed once they have exercised the warrants for an aggregate 14,250,000 shares of stock valued at approximately $2,423,000, the balance of the warrant would be cancelled so long as the Company has increased its authorized common stock. This amount was adjusted in 2021 due to the fair value of the stock resulted in a gain (reversal of original amount recorded as a loss/liability) of $1,025,000.

 

 
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NOTE 11 –NOTES PAYABLE

 

Notes Payable as of December 31, 2021 consisted of the following:

 

 

 

Inteerest Rate

 

 

Principal

 

 

Accrued Interest

 

 

Balance

 

Government Assistance Notes

 

 

 

 

 

 

 

 

 

 

 

 

Economic Injury Disaster Loan (EZC)

 

 

3.75 %

 

$ 149,900

 

 

$ 10,524

 

 

$ 160,424

 

Economic Injury Disaster Loan (GLI)

 

 

3.75 %

 

 

149,900

 

 

 

15,652

 

 

 

165,552

 

Paycheck Protection Program

 

 

1 %

 

 

362,500

 

 

 

6,350

 

 

 

368,850

 

Paycheck Protection Program

 

 

1 %

 

 

337,050

 

 

 

3,118

 

 

 

340,168

 

 

 

 

 

 

 

$ 999,350

 

 

$ 35,644

 

 

$ 1,034,994

 

Secured Promisory Note

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coomercial Bank

 

 

3.44 %

 

$ 137,728

 

 

$ -

 

 

$ 137,728

 

   

 

 

Inteerest Rate

 

 

Principal

 

 

Accrued Interest

 

 

Discount

 

 

Balance

 

Convertible Promisory Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bucktown 2-6-21

 

 

8 %

 

$ 780,791

 

 

$ 10,303

 

 

$ -

 

 

$ 791,094

 

Silverback 2-12-21

 

 

10 %

 

 

1,125,118

 

 

 

82,308

 

 

 

-

 

 

 

1,207,426

 

Bucktown 8-25-21

 

 

8 %

 

 

335,000

 

 

 

9,511

 

 

 

-

 

 

 

344,511

 

Bucktown 11-5-21

 

 

8 %

 

 

225,000

 

 

 

2,665

 

 

 

-

 

 

 

227,665

 

 

 

 

 

 

 

$ 2,465,909

 

 

$ 104,788

 

 

$ -

 

 

$ 2,570,697

 

Amortizing Promisory Note

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Fire

 

 

12 %

 

 

12,141

 

 

 

978

 

 

 

-

 

 

 

13,119

 

 

 

 

 

 

 

$ 2,478,050

 

 

$ 105,766

 

 

$ -

 

 

$ 2,583,816

 

        

Notes payable as of December 31, 2020 consisted of the following:

 

 

 

Inteerest Rate

 

 

Principal

 

 

Accrued Interest

 

 

Balance

 

Government Assistance Notes

 

 

 

 

 

 

 

 

 

 

 

 

Economic Injury Disaster Loan (EZC)

 

 

3.75 %

 

$ 149,900

 

 

$ 3,075

 

 

$ 152,975

 

Economic Injury Disaster Loan

 

 

3.75 %

 

 

149,900

 

 

 

3,001

 

 

 

152,901

 

Paycheck Protection Program

 

 

1 %

 

 

362,500

 

 

 

2,638

 

 

 

365,138

 

Paycheck Protection Program (EZC)

 

 

1 %

 

 

203,329

 

 

 

1,371

 

 

 

204,700

 

 

 

 

 

 

 

$ 865,629

 

 

$ 10,085

 

 

$ 875,714

 

Less long-term portion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

485,679

 

Current portion of Government Assistance Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

$ 390,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Parties related to EZC founders

 

 

 

 

 

$ 49,144

 

 

$ -

 

 

$ 49,144

 

    

 
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Inteerest Rate

 

 

Principal

 

 

Accrued Interest

 

 

Discount

 

 

Balance

 

Convertible Promisory Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Iliad 8-17-18

 

 

10 %

 

$ 250,637

 

 

$ 319,982

 

 

 

 

 

$ 570,619

 

Odyssey 7-22-19

 

 

10 %

 

$ 390,000

 

 

$ 59,595

 

 

 

 

 

$ 449,595

 

CVP 1-29-20

 

 

10 %

 

$ 555,000

 

 

$ 50,088

 

 

 

 

 

$ 605,088

 

Silverback 9-1-20 (from Iliad)

 

 

10 %

 

 

140,146

 

 

 

585

 

 

 

 

 

 

140,731

 

Silverback 11-18-20 (from Iliad)

 

 

10 %

 

 

117,380

 

 

 

1,894

 

 

 

 

 

 

119,274

 

PowerUp Lending Group

 

 

12 %

 

 

253,000

 

 

 

5,888

 

 

 

(13,912 )

 

 

244,976

 

 

 

 

 

 

 

$ 1,706,163

 

 

$ 438,032

 

 

$ (13,912 )

 

$ 2,130,283

 

Amortizing Promisory Note

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Labrys

 

 

12 %

 

 

592,144

 

 

 

986

 

 

 

(454,430 )

 

 

138,700

 

EMA

 

 

12 %

 

 

221,000

 

 

 

6,030

 

 

 

(87,535 )

 

 

139,495

 

First Fire

 

 

12 %

 

 

156,602

 

 

 

3,964

 

 

 

(73,891 )

 

 

86,675

 

 

 

 

 

 

 

$ 2,675,909

 

 

$ 449,012

 

 

$ (629,768 )

 

$ 2,495,153

 

  

Government Assistance Notes Payable

 

On April 17, 2020, the Company received $362,500 under the Paycheck Protection Program of the U.S. Small Business Administration’s (SBA) 7(a) Loan Program pursuant to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Pub. Law 116-136, 134 Stat. 281 (2020). The interest rate is one percent (1%). At December 31, 2021 and December 31, 2020, the Company recorded interest expense of $3,712 and $2,638, respectively. The loan is due April 2022. The Company is utilizing the funds in accordance with the legal requirements and expects this loan to be forgiven during 2022.

 

On May 7, 2020, EZ-CLONE received $203,329 under the Paycheck Protection Program of the U.S. Small Business Administration’s 7(a) Loan Program pursuant to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Pub. Law 116-136, 134 Stat. 281 (2020). The interest rate is one percent (1%). At December 31, 2021 and December 31, 2020, the Company recorded interest expense of $1,587 and $1,371, respectively. The loan is due April 2022. The Company is utilizing the funds in accordance with the legal requirements. This loan was forgiven in October 2021.

 

On June 19, 2020, the Company, including its EZ-CLONE subsidiary, received two loans totaling $299,800 under the Economic Injury Disaster Loan Program of the U.S. Small Business Administration’s 7(a) Loan Program pursuant to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Pub. Law 116-136, 134 Stat. 281 (2020). Repayment terms on the loans are monthly principal and interest totaling approximately $1,392 over a 30-year term at 3.75%. In addition, the loan contains a 12-month payment deferral beginning on the loan date. There is no prepayment penalty on the EIDL loans. At December 31, 2021 and December 31, 2020, the Company recorded interest expense of $11,856 and $7,152, respectively.

 

On February 3, 2021, the Company received $337,050 under the Paycheck Protection Program of the U.S. Small Business Administration’s (SBA) 7(a) Loan Program pursuant to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Pub. Law 116-136, 134 Stat. 281 (2020). The interest rate is one percent (1%). At December 31, 2021, the Company recorded interest expense of $3,113 at 1%. The loan is due February 2023. The Company is utilizing the funds in accordance with the legal requirements and expects this loan to be forgiven during 2023.

 

Convertible Promissory Notes

 

Chicago Venture Partners, L.P.

 

Funding from Chicago Venture Partners, L.P. (“Chicago Venture” or “CVP”), Iliad Research and Trading, L.P. (“Iliad”) and Odyssey Research and Trading, LLC, (“Odyssey”). The Company typically issues original issuance discount notes with these parties that has a stated interest rate of typically 10%. Accrued interest represents the interest to be accreted over the remaining term of the notes. These notes contain terms and conditions that are deemed beneficial conversion features and the Company recognizes a derivative liability related to these terms until the notes are converted. Upon the conversion of these notes, the Company records a loss on debt conversion and reduces their derivative liability. The notes may be converted to common stock after six months until they are converted.

 

 

 
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On April 5, 2021, the Company finalized a a joint Warrant Settlement Agreement with St. George Investments LLC (“St. George”) and Iliad Research and Trading, L.P. (“Iliad”) to resolve a dispute related the calculation of shares issuable under warrants issued in prior financings. In the Warrant Settlement Agreement, in exchange for certain covenants by the Company, St. George and Iliad agreed that upon the exercise of its warrant of up to 14,250,000 shares of the Company’s common stock they would cancel the balance of the warrant related to a February 9, 2018, subscription agreement. The Company recorded a loss on debt settlement of $2,423,000 for the year ended December 31, 2020 and accrued a liability for the future issuance of shares. During 2021, the Company issued the 14,250,000 shares of common stock in connection with the warrant settlement. The Company recognized a gain on settlement of $1,025,400 in 2021 when the fair value of the common shares issued were based on the stock price on the date of settlement.

 

As of December 31, 2020, the outstanding principal balance due to Chicago Venture, Iliad and Odyssey was $1,195,637 and accrued interest was $429,665 which results in a total amount of $1,625,302.

 

During the year ended December 31, 2020, Chicago Venture and Iliad converted principal and accrued interest of $600,000 into 4,882,919 shares of our common stock at a per share conversion price of $0.123 with a fair value of $1,006,518. The Company recognized $287,466 loss on debt conversions during the year ended December 31, 2020.

 

Odyssey Research and Trading, LLC, (“Odyssey”)

 

On July 23, 2019, the Company executed the following agreements with Odyssey: (i) Securities Purchase Agreement; (ii) Secured Promissory Notes; and (iii) Security Agreement (collectively the “Odyssey Agreements”). The Company entered into the Odyssey Agreements with the intent to acquire working capital to grow the Company’s businesses.

 

The total amount of funding under the Odyssey Agreements is $1,105,000. The Convertible Promissory Note carries an original issue discount of $100,000 and a transaction expense amount of $5,000, for total debt of $1,105,000. As of December 31, 2020 the principal balance owed Odyssey is $390,000. The Company agreed to reserve three times the number of shares based on the redemption value with a minimum of 3,333,334 shares of its common stock for issuance upon conversion of the Debt, if that occurs in the future. 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 $1.50 per share subject to adjustment as provided for in the Secured Promissory Notes.

 

Labrys Fund L.P.

 

On August 31, 2020, the Company executed the following agreements with Labrys: (i) Securities Purchase Agreement; and (ii) Self-Amortization Promissory Note for $750,000 (“Note”); (collectively the “Labrys Agreements”). The Company entered into the Labrys Agreements with the intent to acquire working capital to grow the Company’s businesses and complete the EZ-CLONE Enterprises, Inc. acquisition.

 

The total amount of funding received under the Labrys Agreements, after deducting the $75,000 original issue discount and $42,250 of fees was $632,750. The Note required a payment of $250,000 on November 30, 2020, and $51,042 at each month end from December 2020 through November 30, 2021. The Company issued commitment shares of 1,662,000 shares related to the Labrys Agreement and the value of such shares are being treated as a discount and being amortized over the term of the note. The Debt was due on or before November 30, 2021. The Debt carried an interest rate of twelve percent (12%). Upon an event of default as defined in the agreement, the Debt was convertible into the Company’s common stock at the closing price the day before the conversion, subject to adjustment as provided for in the Note. The Company agreed to reserve 5,043,859 shares of its common stock for issuance if any Debt is converted.

 

Labrys Fund Amendment #2

 

On November 30, 2020, the Company entered into Amendment No. 2 of the Self-Amortization Promissory Note (“Amendment No. 2”) amendment that certain Self-Amortization Promissory Note originally issued by the Company to Labrys on August 31, 2020 (the “Note”). Amendment No. 2 included the following amendments to the Note:

 

1. The Company issued 550,000 restricted shares of the Company’s common stock (the “Amendment Shares”) to the Holder on or before December 2, 2020, and the value of such shares are being amortized as a debt discount through the remaining term of the note.

2. The first Amortization Payment (as defined in the Note) of $250,000 originally due on November 30, 2020, shall instead be due as follows: $125,000 was paid by December 3, 2020, and $125,000 is due on or before December 31, 2020.

 

Labrys Fund Amendment #3

 

On December 31, 2020, the Company entered into Amendment No. 3.  Pursuant to Amendment No. 3 the Company issued 340,000 restricted shares of the Company’s common stock (the “Amendment Shares”) and issued a common stock purchase warrant for the purchase of 1,033,057 shares of the Company’s common stock (the “Warrant”). The value of the Amendment shares, and the Warrant are being amortized as a debt discount through the remaining term of the note. In exchange for the Warrant and Amendment Shares, the outstanding payment of $125,000 owed on or before December 31, 2020 (as described in Amendment No. 2) (“Outstanding Payment”), was amended so that no payment was required and that the future monthly payments beginning in January 2021 through November 30, 2022, have been increased to $61,458 from $51,042. This Note was assumed by Silverback in 2021.

 

 

 
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EMA Financial LLC

 

On October 2, 2020, the Company executed the following agreements with EMA Financial LLC : (i) Securities Purchase Agreement; and (ii) Self-Amortization Promissory Note for $221,000 (“Note”). The Note has an interest rate of twelve percent (12%). The Company made monthly payments in the amount of $19,550. The final payment was made on December 30, 2021.

 

FirstFire Global Opportunities Fund, LLC

 

On October 2, 2020, the Company executed the following agreements with FirstFire Global Opportunities Fund, LLC: (i) Securities Purchase Agreement; and (ii) Self-Amortization Promissory Note for $156,600 (“Note”). The Note has an interest rate of twelve percent (12%). The Company made monthly payments in the amount of $13,851. The final payment was made on January 12, 2022.

 

Silverback Capital Corporation

 

During 2020 Silverback Capital Corporation (“Silverback”) purchased from Iliad $993,855 of Iliad’s outstanding note balance with the Company. During the year ended December 31, 2020, Silverback Capital Corporation converted principal and accrued interest of $746,632 into 9,510,000 shares of our common stock at an average per share conversion price of $0.0757. The Company recognized $447,324 loss on Silverback debt conversions during the year ended December 31, 2020.

 

During the three months ended March 31, 2021, Silverback purchased all of the remaining outstanding notes the Company had with Chicago Ventures, Iliad and Odyssey of $1,139,182. Silverback assumed the terms of the original notes. On March 16, 2021, the Company executed the following agreements with Silverback: (i) Securities Purchase Agreement; and (ii) Convertible Promissory Note for $165,000.

 

The 10% Notes are convertible at the holder’s option into the Company’s common stock at 65% of the lower of $1.35 or the current fair market value of the stock. During the year ended December 31, 2021, Silverback converted principal and interest of $2,217,916 into 40,223,000 shares of our common stock at an average per share conversion price of $0.055. The Company recognized $2,442,903 loss on Silverback debt conversions during the year ended December 31, 2021.

 

Power Up Lending Group Ltd.

 

As of the beginning of 2020, the Company owed Power Up Lending Group Ltd (“Power Up”) $281,600. During 2020 the Company entered an additional $199,100 of convertible notes which were settled by year end. These $480,700 of notes were settled when $395,700 of notes were converted to common stock and a cash payment of $85,000 was made. As of December 31, 2020 the following Power Up convertible notes that the Company also entered into with Power Up on July 13, 2020, November 30, 2020, and December 8, 2020 for $253,000 to fund short-term working capital were still outstanding The Notes accrue interest at a rate of 12% per annum and became due in one year and are convertible into common stock at 75% of market value after six months. The Company received cash of $220,000 under these three notes after deducting original issue discount and fees.

 

During the year ended December 31, 2021, Power Up converted principal of $84,680 into 1,039,018 shares of our common stock at a per share conversion price of $0.082. The Company recognized a loss on the conversion of $87,698 which represents the difference between the closing price of the shares and the exercise price.

 

Bucktown Capital LLC

 

On February 26, 2021, the Company executed the following agreements with Bucktown Capital LLC (“Bucktown”): (i) Securities Purchase Agreement; (ii) Secured Convertible Promissory Note; and (iii) Security Agreement (collectively the “Bucktown Agreements”). The Company entered the Bucktown Agreements with the intent to acquire working capital to grow the Company’s businesses and to repay all outstanding obligations owed to: (i) Labrys in the amount of $615,333; and (ii) Power Up in the amount of $128,858. 

 
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The total amount of funding under the Bucktown Agreements is $3,088,000 as represented in the Secured Convertible Promissory Note (“Note”). The total purchase price for this Note is $2,850,000; the Note carries an aggregate original issue discount of $228,000 and a transaction expense amount of $10,000. The Note is comprised of two (2) tranches (each, a “Tranche”), consisting of (i) an initial Tranche in an amount equal to $928,000 and any interest, costs, fees or charges accrued thereon or added thereto under the terms of the Note and the Bucktown Agreements (the “Initial Tranche”), and (ii) an additional Tranche, which is exclusively dedicated for the purchase of the remaining equity interest in EZ-CLONE, in the amount of $2,160,000.00, plus any interest, costs, fees or charges accrued thereon or added thereto under the terms of the Note and the Bucktown Agreements (the “Subsequent Tranche”). The Initial Tranche shall correspond to $68,000 of the OID and the Transaction Expense Amount and may be converted into shares of Common Stock at any time after the Purchase Price Date. The Subsequent Tranche corresponds to the Investor Note and $160,000 of the aggregate OID. The Bucktown Agreement limits the shares to be held at any time not to exceed 9.9% of the Company’s outstanding shares.

 

The Company agreed to reserve three times the number of shares based on the redemption value with a minimum of 23,340,000 shares of its common stock for issuance upon conversion of the Note, if that occurs in the future. If not converted sooner, the Note is due on or before February 26, 2022. The Note has an interest rate of eight percent (8%). The Note is convertible, at Bucktown’s option, into the Company’s common stock at $0.30 per share (“Lender Conversion Price”), subject to adjustment as provided for in the Note. However, in the event the Market Capitalization (as defined in the Note) falls below the Minimum Market Capitalization the Lender Conversion Price shall equal the lower of the Lender Conversion Price and the Market Price as of any applicable date of Conversion.

 

On August 25, 2021, and on November 5, 2021, the Company entered into the following agreements with Bucktown: (i) Securities Purchase Agreements; (ii) Secured Convertible Promissory Notes; and (iii) Security Agreements. The total amount for these Notes is $560,000; the Note carries an aggregate original issue discount of $50,000 and a transaction expense amount of $10,000. The Notes have an interest rate of eight percent (8%). The Note is convertible, at Bucktown’s option, into the Company’s common stock at $0.10 per share (“Lender Conversion Price”), subject to adjustment as provided for in the Note. However, in the event the Market Capitalization (as defined in the Note) falls below the Minimum Market Capitalization the Lender Conversion Price shall equal the lower of the Lender Conversion Price and the Market Price as of any applicable date of Conversion.

 

During the year ended December 31, 2021, Bucktown converted principal of $200,000 into 8,583,691 shares of our common stock at a per share conversion price of $0.023. The Company recognized on loss on the conversion of $117,597 which represents the difference between the closing price of the shares and the exercise price.

 

The Company’s obligation to pay the Notes, or any portion thereof, are secured by all the Company’s assets.

 

NOTE 12 – DERIVATIVE LIABILITY

 

The Convertible Notes payable include a conversion feature that pursuant ASC 815 “Derivatives and Hedging”, has been identified as an embedded derivative financial instrument and which the Company accounts for under the fair value method of accounting.

 

If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (BCF). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20. Debt with Conversion and Other Options. In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method. The debt is convertible at range of 75% to 65% of the fair value of the Company’s common stock requiring the conversion feature to be bifurcated from the host debt contract and accounting for separately as a derivative, resulting in periodic revaluations. The notes underlying the derivatives are short term in nature and generally converted to stock in less than one year. The derivative is valued at period end with the key inputs being current stock price and the conversion feature.

 

There was a derivative liability of $2,583,816 and $1,101,436 as of December 31, 2021 and December 31, 2020, respectively. For the year ended December 31, 2021 and December 31, 2020, the Company recorded non-cash income of $973,101 and $199,479, respectively, related to the “change in fair value of derivative” expense related to the convertible note financing. These were the only changes in level 3 fair value instruments during such periods.

 

 
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Derivative liability as of December 31, 2021 was as follows:

 

Balance, December 31, 2020

 

$ 1,101,436

 

Additions

 

 

1,402,519

 

Conversions

 

 

(1,778,784 )

Change in fair value

 

 

973,101

 

Balance, December 31, 2021

 

$ 1,698,272

 

 

NOTE 13 – RELATED PARTY TRANSACTIONS AND CERTAIN RELATIONSHIPS

 

Since January 1, 2019, the Company engaged in the following reportable transactions with our directors, executive officers, holders of more than 5% of our voting securities, and affiliates or immediately family members of our directors, executive officers and holders of more than 5% of our voting securities.

 

Certain Relationships

  

Please see the transactions with Chicago Venture Partners, L.P. discussed in Notes 11 and 14.

 

Transactions with Marco Hegyi

 

On October 21, 2018, a 5-year Warrant for Mr. Hegyi to purchase up to 66,666 shares of our common stock at an exercise price of $1.50 per share vested. The warrant was valued at $390,000 and we recorded $178,750 as compensation expense for the year ended December 31, 2018. On October 15, 2018, Mr. Hegyi received Warrants to purchase up to 320,000 shares of the Company’s common stock at an exercise price of $1.80 per share and which vest on October 15, 2018, 2019 and 2020. The Warrants are exercisable for 5 years. The warrants that vested on October 15, 2019 and 2018 were valued at $192,000 and the Company recorded compensation expense of $78,000 for the year ended December 31, 2020.

 

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 17 for additional details.

 

Transaction with Thom Kozik

 

Mr. Kozik was appointed as a director on October 5, 2017. On April 16, 2020, the Company issued 20,000 shares of the Company’s common stock to Mr. Kozik valued at $0.295 per share or $5,900. On December 31, 2021, the Company issued 1,200,000 shares of the Company’s common stock to Mr. Kozik valued at $0.02 per share or $24,000. This issuance was an award for independent director services.

 

 
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Notes Payable and Receivable Related Parties

 

EZ-CLONE had $49,144 due to relatives of the shareholders as of December 31, 2020. The amounts were repaid on May 10, 2021. At December 31, 2021 EZ-CLONE has $161,000 due from the two founders. The notes bear interest at 3% and are due in July 2041.

 

NOTE 14 – EQUITY

 

Authorized Capital Stock

 

On November 5, 2021, the Company held its 2021 Annual Meeting of Stockholders, where stockholders approved an increase in the authorized shares of common stock (“Common Stock”) from 120,000,000 to 740,000,000 shares. As such, the Company filed a Certificate of Amendment of Certificate of Incorporation with the Secretary of State of the State of Delaware on November 8, 2021. As a result of the increase, the Company an aggregate 750,000,000 authorized shares consisting of: (i) 740,000,000 shares of common stock, par value $0.0001 per share, and (ii) 10,000,000 shares of preferred stock, par value $0.0001 per share.

 

On October 9, 2019, the Company approved the reduction of authorized capital stock, whereby the total number of the Company’s authorized common stock decreased from 6,000,000,000 by a ratio of 1 for 50, to 120,000,000 shares. On November 20, 2019, the Company filed a Certificate of Amendment of Certificate of Incorporation with the Secretary of State of the State of Delaware. The reverse stock split of 1 for 150 was effective at the open of business on November 27, 2019 whereupon the shares of the Company’s common stock began trading on a split-adjusted basis. Our CUSIP number will change to 39985X203.

 

Preferred Stock

 

Under the terms of our articles of incorporation, our board of directors is authorized to issue shares of non-voting preferred stock in one or more series without stockholder approval. Our board of directors has the discretion to determine the rights, preferences, privileges and restrictions, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of non-voting preferred stock.

 

The purpose of authorizing our board of directors to issue non-voting preferred stock and determine our rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of non-voting preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. Other than the Series B and C Preferred Stock discussed below, there are no shares of preferred stock presently outstanding, and we have no present plans to issue any shares of preferred stock.

 

Capital Stock Issued and Outstanding

 

As of December 31, 2021, the Company had issued and outstanding securities of 117,952,697 shares of common stock.

 

Voting Common Stock

 

Holders of the Company’s common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. An election of directors by our stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote on the election. On all other matters, the affirmative vote of the holders of a majority of the stock present in person or represented by proxy and entitled to vote is required for approval, unless otherwise provided in our articles of incorporation, bylaws or applicable law. Holders of common stock are entitled to receive proportionately any dividends as may be declared by our board of directors, subject to any preferential dividend rights of outstanding preferred stock.

 

In the event of our liquidation or dissolution, the holders of common stock are entitled to receive proportionately all assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.

 

Unless otherwise indicated, all of the following sales or issuances of Company securities were conducted under the exemption from registration as provided under Section 4(2) of the Securities Act of 1933 (and also qualified for exemption under 4(5), formerly 4(6) of the Securities Act of 1933, except as noted below). All of the shares issued were issued in transactions not involving a public offering, are considered to be restricted stock as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that effect. 

 

The Company has compensated consultants and service providers with restricted common stock during the development of our business and when our capital resources were not adequate to provide payment in cash.

 

 
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During the year ended December 31, 2021, the Company had the following issuances of unregistered equity securities to accredited investors unless otherwise indicated:

 

Debt and accrued interest of $2,502,596 was converted into 49,845,718 shares of our common stock at an average per share conversion price of $0.099.

 

Liability settlements of $2,442,500 was converted into 14,250,000 shares of our common stock at an average per share conversion price of $0.097.

 

The Company issued 813,758 shares of the Company’s common stock in a cashless exercise of warrants.

 

The Company issued 1,200,000 shares of the Company’s common stock to Thom Kozik, valued at $0.02 per share or $24,000. This issuance was an annual award for independent director services.

 

During the year ended December 31, 2020, the Company had the following issuances of unregistered equity securities to accredited investors unless otherwise indicated:

 

Debt and accrued interest of $1,947,819 was converted into 19,573,905 shares of our common stock at an average per share conversion price of $0.099.

 

The Company issued 15 shares related to a previous reverse stock split.

 

The Company issued 154 shares of common stock related to the exercise of warrants for $485, or $3.151 per share.

 

On April 16, 2020, the Company issued 20,000 shares of the Company’s common stock each to Katherine McLain and Thom Kozik, directors valued at $0.295 per share or $5,900. This issuance was an annual award for independent director services.

 

Warrants

 

The Company had the following warrant activity during the year ended December 31, 2021:

 

On April 5, 2021, the Company finalized a joint Warrant Settlement Agreement with St. George Investments LLC (“St. George”) and Iliad Research and Trading, L.P. (“Iliad”) to resolve a dispute related the calculation of shares issuable under warrants issued in prior financings. In the Warrant Settlement Agreement, in exchange for certain covenants by the Company, St. George and Iliad agreed that upon the issuance of 14,250,000 shares of the Company’s common stock it would cancel the balance of the warrants related to previous subscription agreements. The Company recorded a loss on debt settlement of $2,423,000 for the year ended December 31, 2020 and accrued a liability for the future issuance of shares. On April 5, 2021, the Company issued 2,500,000 shares upon the exercise of the warrant to reduce by $425,000 its obligation. On May 7, 2021, the Company issued another 3,500,000 shares upon the exercise of the warrant to further reduce by $595,000 its debt settlement obligation. On June 10, 2021, the Company issued 3,750,000 shares upon the exercise of the warrant to reduce its obligation by $637,500. On August 23, 2021, the Company issued another 2,300,000 shares upon the exercise of the warrant to reduce its obligation by $391,000. On September 29, 2021, the Company issued 2,200,000 shares upon the exercise of the warrant to reduce its obligation by $374,000 and completely payoff the balance of its obligation. The Company received no proceeds from these April, May, June, August, and September 2021 cashless warrant exercises. During the quarter ended September 30, 2021, the Company recognized a gain on settlement of $571,060 when the fair value of the common shares issued were based on the stock price on the date of settlement. In addition, as final settlement the Company issued 813,758 shares of common stock related to the cashless exercise of warrants

 

The Company had the following warrant activity during the year ended December 31, 2020:

 

On December 31, 2020, the Company entered into Amendment No. 3 to the Self-Amortization Promissory Note (“Amendment No. 3”) as originally issued by the Company to Labrys on August 31, 2020 (the “Note”), Pursuant to Amendment No. 3 the Company issued a common stock purchase warrant for the purchase of 1,033,057 shares of the Company’s common stock (the “Warrant”) to the Holder on December 31, 2020. The exercise price is $0.121 or $125,000. The three year warrant expires on December 31, 2023.

 

The Company issued 154 shares of common stock related to the exercise of warrants for $485, or $3.151 per share.

 

On April 5, 2021, the Company finalized a joint Warrant Settlement Agreement dated March 31, 2021 with St. George and Iliad to settle a dispute regarding prior financings. The Company agreed to issue St. George 11,750,000 shares of the Company’s common stock to cancel a warrant related to a February 9, 2018 subscription agreement. The Company agreed to issue Iliad 2,500,000 shares of the Company’s common stock to cancel a warrant related to a October 15, 2018 securities Purchase agreement. We recorded a loss on debt settlement of $2,423,000 for the year ended December 31, 2020 and accrued the liability as of December 31, 2020.

 

 
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A summary of the warrants activity as of December 31, 2021 is as follows:

 

 

 

December 31, 2021

 

 

 

Shares

 

 

Weighted Average Exercise Price

 

Outstanding on January 1, 2021

 

 

3,451,736

 

 

$ 2.464

 

Exercised

 

 

(1,138,344 )

 

 

2.225

 

Forefeited

 

 

(1,626,726 )

 

 

2.742

 

 

 

 

686,666

 

 

$ 1.640

 

Exerciseable on December 31, 2021

 

 

686,666

 

 

 

 

 

      

Warrants had no intrinsic value as of December 31, 2021.

 

NOTE 15– STOCK OPTIONS

 

Description of Stock Option Plan

 

On November 5, 2021, at our annual shareholder meeting the Second Amended and Restated 2017 Stock Incentive Plan was adopted to increase the shares issuable under the plan from 1,333,333 to 75,000,000 shares. All terms of the Plan shall remain the same with the exception of the amount of shares reserved for issuance under the Plan. We have 75,000,000 shares available for issuance under the Second Amended and Restated 2017 Stock Incentive Plan. The Company had no outstanding stock options as of December 31, 2021; and, had outstanding unexercised stock option grants totaling 506,667 shares at an average exercise price of $1.496 per share as of December 31, 2020, all of which were forfeited in 2021. The Company filed registration statements on Form S-8 to register 1,333,333 shares of our common stock related to the 2017 Stock Incentive Plan and First Amended and Restated 2017 Stock Incentive Plan.

 

Determining Fair Value under ASC 718

 

The Company records compensation expense associated with stock options and other equity-based compensation using the Black-Scholes-Merton option valuation model for estimating fair value of stock options granted under our plan. The Company amortizes the fair value of stock options on a ratable basis over the requisite service periods, which are generally the vesting periods. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company estimates the volatility of our common stock based on the historical volatility of its own common stock over the most recent period corresponding with the estimated expected life of the award. The Company bases the risk-free interest rate used in the Black Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid any cash dividends on our common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model and adjusts share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed.

 

Stock Option Activity

 

During the year ended December 31, 2020, the Company had the following stock option activity:

 

Stock option grants for 506,667 and 43,333 shares of common stock expired in the year ended December 31, 2021 and December 31, 2020, respectively. No options to purchase common shares were exercised during either year.

 

As of December 31, 2021, and December 31, 2020, there are zero and 506,667, respectively, options to purchase common stock at an average exercise price of $1.496 per share outstanding under the 2017 Amended and Restated Stock Incentive Plan. The Company recorded $15,475 and $47,170 of compensation expense, net of related tax effects, relative to stock options for the year ended December 31, 2021and 2020 in accordance with ASC Topic 718.

 

NOTE 16 - SEGMENT REPORTING

 

The management of the Company consider the business to have one operating segment for the year ended December 31, 2021. The management of the Company considers the business to have two operating segments (i) the distribution of GrowLife products and GrowLife, Inc. and (ii) EZ-CLONE, a manufacturer of cloning products. EZ-CLONE has provided the majority of the Company’s gross margins during 2020. The financial results from GrowLife products has been diminishing with the Company’s focus on EZ-CLONE.

 

 
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The reporting for the year ended December 31, 2020, was as follows (in thousands):

 

Segment

 

Revenue

 

 

Gross Margin

 

 

Operating Profit (Loss)

 

 

Assets

 

GrowLife

 

$ 1,568

 

 

$ 314

 

 

$ (2,465 )

 

$ 108

 

EZ-CLONE Enterprises

 

 

5,433

 

 

 

2,666

 

 

 

575

 

 

 

4,247

 

Total

 

$ 7,001

 

 

$ 2,980

 

 

$ (1,890 )

 

$ 4,355

 

       

 

NOTE 17 – 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 the Company’s 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.

 

As of September 30, 2019, the Company closed retail stores in Portland, Maine, Encino, California and Calgary, Canada. The Company has recorded restructuring reserves related to the store closures. The Company cannot determine the outcome of these proceedings.

 

On October 15, 2018, the Company closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation (the “Agreement”). On November 5, 2019, the Company amended the Agreement with one 24.5% shareholder of EZ-CLONE Enterprises, Inc. (“EZ-CLONE”), to extend the date to purchase the remaining 49% of stock of EZ-CLONE in exchange for a 20% extension fee (a total of $171,000 for the 49% or $85,500 for each 24.5% shareholder) of the $855,000 cash payable at the earlier of the closing of $2,000,000 in funding or nine months (July 2020). The Company did not close the purchase of the remaining 49% of stock of EZ-CLONE by the extended deadline.

 

On September 15, 2020, the Company received notice that William Blackburn and Brad Mickelsen, minority shareholders of EZ-CLONE Enterprises, Inc. (“Plaintiffs”), a majority owned subsidiary of the Company, filed a complaint against the Company and its officers Marco Hegyi and Mark Scott (“Officers”), in the Superior Court of California, County of Sacramento (“Complaint”) for claims related to breach under the Purchase and Sale Agreement dated October 15, 2018 between the Company and Plaintiffs. On September 15, 2020, the Company filed a notice of removal with the California Superior Court, County of Sacramento and the United States District Court for the Eastern District of California. The case was removed to Federal District Court for the Eastern District of California and Plaintiffs filed an Ex Parte Application for TRO and an Order for Preliminary Injunction with the Federal Court. The TRO was granted on September 16, 2020 and a preliminary injunction hearing was scheduled for September 29, 2020. After reviewing all pleadings and oral arguments at the hearing, the Court issued a ruling granting Plaintiffs’ request for a preliminary injunction. After reviewing all pleadings and oral arguments at the hearing, the Court issued a ruling granting Plaintiffs’ request for a preliminary injunction.

 

The Complaint also alleges that the Company and its Officers made certain false representations and other claims to consummate the Transaction and as a result has failed to complete the second closing as required under Purchase and Sale Agreement. As of December 4, 2020, the company’s officers were dismissed from the case. The Plaintiffs are seeking rescission of the Purchase and Sale Agreement, unspecified damages in excess of ten thousand dollars, and other equitable relief. The parties provided legal briefs to the Federal court to determine if rescission should be granted.  The Court did not reach a decision on this issue, and denied without prejudice, the Company’s effort to reverse the preliminary injunction. The Company is currently reviewing whether to pursue the matter further and engaging in settlement discussions. We cannot determine the outcome of these proceedings.

 

As of December 31, 2021, the Company recorded a liability of $2,131,000 for acquisition payable of which a $1,105,000 is payable in stock and $1,026,000 is payable in cash.

 

On April 23, 2021, the Company was notified that it was in default on its notes held by Silverback Capital Corporation. The reason for the default was the Company’s inability to provide the reserve share requirement as specified in the notes. The penalty for the reserve share default was an increase in the outstanding note balances by 15%, an increase in the conversion discount by 5%, and a default interest rate on the outstanding note balances of 22%. The company recorded such amounts as debt extinguishment and as all amount were considered due on demand, such amount was expensed.

 

 

 
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As a result of the reserve share default, on May 7, 2021, Silverback demanded immediate payment in full of all their notes. On May 10, 2021, when Silverback had not been paid in full, Silverback presented another default notice for lack of payment. The penalty for the non-payment default was an increase in the outstanding note balances by another 15%, an additional increase in the conversion discount by 5%, and a default interest rate on the outstanding note balances of 22%. The company recorded such amount as debt extinguishment and as all amounts were considered due in demand, such amount was immediately expensed.

 

Operating Leases

 

The Company is obligated under the following leases for its various facilities.

 

On May 31, 2021, the Company rented space at 11335 NE 122nd Way, Suite 105, Kirkland, Washington 98034 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, 2022.

 

On December 14, 2018, GrowLife, Inc. entered into a lease agreement with Pensco Trust Company for a 28,000 square feet industrial space at 10170 Croydon Way, Sacramento, California 95827 used for the assembly and sales of plastic parts by EZ-CLONE. The monthly lease payment is $17,500 and increases approximately 3% per year. The lease expires on December 31, 2023.

 

Employment 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 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 320,000 warrants in October 2018 as follows: (i) Warrant to purchase up to 106,667 shares of our common stock at an exercise price of $1.80 per share which vested immediately; and (ii) two Warrants to purchase up to 106,667 shares of common stock of the Company at an exercise price of $1.80 per share. One warrant for 106,667 shares of our common stock vested on October 15, 2019. Additional warrants for 106,667 shares of the Company’s common stock vest on October 15, 2020 and 2021, respectively. The Warrants are exercisable for 5 years.

 

Mr. Hegyi is entitled to participate in all group employment benefits that are offered by the Company to its 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. 

 

The Employment Agreements for Mr. Hegyi expired October 15, 2021

 

NOTE 18 – INCOME TAXES

 

The Company has incurred losses since inception, which have generated net operating loss carryforwards. The net operating loss carryforwards arise solely from United States sources. EZ-CLONE currently files its own separate tax return as it does not meet the qualifications for being included in the Company’s consolidated tax returns. Taxable losses and the future benefit of EZ-CLONE losses since our transaction with them in October 2018 have not been material through 2019. During 2021 and 2020 EZ-CLONE generated taxable income and our current tax expense below relates to estimated taxes owed by EZ-CLONE.  

 

The Company has net operating loss carryforwards of approximately $25.8 million of which $14.1 million related to years prior to 2018 which expire in 2022 through -2038. Because it is not more likely than not that sufficient tax earnings will be generated to utilize the net operating loss carryforwards, the deferred tax asset related to the net operating loss carryforwards has a corresponding 100% valuation allowance. 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.

 

 
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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 2014 through 2021. 

 

For the year ended December 31, 2020 the Company’s effective tax rate was 4% which is higher than expected because the Company’s subsidiary EZ-CLONE files its own tax return and generated taxable income for the year. In accordance with the ASC 740, “Accounting for income taxes”, and in connection with the acquisition of EZ-CLONE the Company recorded a deferred tax liability of $587,750 related to the inside basis difference between book and tax basis of intangible assets acquired. Beginning in 2019, the deferred tax liability is reduced as the intangible assets are reduced. The reduction of the deferred tax liability resulted in a tax benefit of $117,550 in 2021 and 2020. As of December 31, 2021 and 2020 the deferred tax liability totals $235,097 and $352,649, respectively.

 

For the years ended December 31, 2021 and 2020, income tax (expense) benefit consisted of the following:

 

 

 

2021

 

 

2020

 

Current income tax (expense)

 

 

 

 

 

 

Federal

 

 

(189,333 )

 

$ (263,982 )

State

 

 

(79,905 )

 

 

(85,520 )

Total current tax (expense)

 

 

(269,238 )

 

 

(349,502 )

Deferred tax benefit

 

 

 

 

 

 

 

 

Federal

 

 

210,925

 

 

 

117,550

 

State

 

 

80,900

 

 

 

-

 

Total deferred benefit

 

 

291,825

 

 

 

117,550

 

Total income tax (expense)

 

$ (22,587 )

 

$ (231,952 )

      

The principal components of the Company’s deferred tax assets and liabilities at December 31, 2021 and 2020 are as follows:

 

 

 

2021

 

 

2020

 

Net operating loss carryforwards

 

$ 7,018,000

 

 

$ 5,232,524

 

Less valuation allowance

 

 

(7,018,000 )

 

 

(5,232,524 )

Net deferred tax asset

 

 

-

 

 

 

-

 

Deferred tax liability - intangible basis

 

 

(106,000 )

 

 

(352,649 )

Net deferred tax liability

 

$ (106,000 )

 

$ (352,649 )

     

A reconciliation of the United States Federal Statutory rate to the Company’s effective tax rate for the years ended December 31, 2021 and 2020 is as follows:

 

 

 

2021

 

 

2020

 

Federal statutory rate

 

 

21 %

 

 

21 %

State statutory rate

 

 

6 %

 

 

6 %

Non-deductible interest and loss on extinguishment

 

 

-24 %

 

 

-27 %

Change in valuation allowance

 

 

-6 %

 

 

-6 %

Change in fair value of derivatives

 

 

3 %

 

 

2 %

Effective tax (expense) rate

 

 

0 %

 

 

-4 %

     

NOTE 19– SUBSEQUENT EVENTS

 

The Company evaluates subsequent events, for the purpose of adjustment or disclosure, up through the date the financial statements are available.

  

 
F-25

Table of Contents

 

These were the material events after December 31, 2021:

 

Securities Purchase Agreements and Convertible Promissory Notes

 

On January 4, 2022 and on March 8, 2022 the Company executed the following agreements with Sixth Street Lending, LLC:  

   

(i) Securities Purchase Agreement; and (ii) Convertible Promissory Note; an (collectively the “Sixth Street Agreements”).

 

The total amount of funding under the Sixth Street Agreements is $275,000 as represented in the Convertible Promissory Notes (“Note”). The total purchase price for these Notes are $310,200; the Notes carry an aggregate original issue discount of $28,200 and a transaction expense amount of $7,000. The Notes have maturity dates one year from the date of execution. The Notes have an interest rate of eight percent (8%). The Notes are convertible, at Sixth Street’s option, into the Company’s common stock at a 25% discount to market price (“Lender Conversion Price”), subject to adjustment as provided for in the Note.

 

Debt Conversions

 

On January 4, 2022, Silverback Capital Corporation converted principal and accrued interest of $50,400 into 4,800,000 shares of the Company’s common stock at a per share conversion price of $0.0105.

 

On February 10, 2022, Bucktown converted principal and accrued interest of $180,000 into 11,764,706 shares of the Company’s common stock at a per share conversion price of $0.0153.

 

On March 22, 2022, Silverback converted principal and accrued interest of $126,500 into 11,000,000 shares of the Company’s common stock at a per share conversion price of $0.0115.

 

 
F-26

Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, GrowLife, Inc. (the "Registrant") has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

GROWLIFE, INC.

 

 

 

 

 

Date: May 16, 2022

By:

/s/ Marco Hegyi

 

 

 

Marco Hegyi

 

 

 

Chief Executive Officer and Director

(Principal Executive Officer)

 

 

 

 

 

 

By:

/s/ Marco Hegyi

 

 

 

Marco Hegyi

 

 

 

(Interim Principal Financial and Accounting Officer)

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

SIGNATURES

 

TITLE

DATE

 

 

 

 

/s/ Marco Hegyi

 

Chief Executive Officer and Director

May 16, 2022

Marco Hegyi

 

(Principal Executive Officer)

 

 

 

 

 

/s/ Marco Hegyi

 

Interim Principal Financial/Accounting Officer

May 16, 2022

Marco Hegyi

 

 

 

 

/s/ Thom Kozik

 

Director

May 16, 2022

Thom Kozik

 

 

 

 

 
29

 

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