As filed with the Securities and Exchange Commission on
November 12, 2019
Registration No. 333-234277
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT NO. 1
TO
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
GROWLIFE, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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5261
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90-0821083
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(State
or other jurisdiction ofincorporation or organization)
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(Primary Standard IndustrialClassification Code
Number)
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(I.R.S. EmployerIdentification No.)
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5400 Carillon Point
Kirkland, WA 98033
(866) 781-5559
(Address,
including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Marco Hegyi
Chief Executive Officer
GrowLife, Inc.
5400 Carillon Point
Kirkland, WA 98033
(Name,
address, including zip code, and telephone number, including area
code, of agent for service)
Copies
to:
Jessica M. Lockett, Esq.
Horwitz + Armstrong, A Professional Law Corporation
14 Orchard, Suite 200
Lake Forest, California 92630
(949) 540-6540
Approximate
date of commencement of proposed sale to public: As soon as practicable after this Registration
Statement is declared effective.
If any
of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following
box. ☒
If this
Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. ☐
If this
Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box
and list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering. ☐
If this
Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box
and list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering. ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated
filer," "accelerated filer" and "smaller reporting company" in
Rule 12b-2 of the Exchange Act.
Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☐
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Smaller
reporting company
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☒
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Emerging
growth company
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☐
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CALCULATION OF REGISTRATION FEE
Title of Each
Class
of Securities to
be
Registered
(1)
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Amount to
be
Registered
(2)
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Proposed Maximum
Offering Price Per Share (3)
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Proposed
MaximumAggregate Offering Price
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Amount of
Registration Fee (4)
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Common stock, par
value $0.0001 per share
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625,000,000
Shares
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$0.004
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$2,500,000
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$324.50
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(1)
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This
Registration Statement covers a direct public offering by the
Company of up to 625,000,000 shares of our common
stock.
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(2)
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This
Registration Statement includes an indeterminate number of
additional shares of common stock issuable for no additional
consideration pursuant to any stock dividend, stock split,
recapitalization or other similar transaction effected without the
receipt of consideration, which results in an increase in the
number of outstanding shares of our common stock. In the event of a
stock split, stock dividend or similar transaction involving our
common stock, in order to prevent dilution, the number of shares
registered shall be automatically increased to cover the additional
shares in accordance with Rule 416(b) under the Securities Act of
1933, as amended (the “Securities Act”).
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(3)
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Estimated
solely for purposes of calculating the registration fee pursuant to
Rule 457(a) under the Securities Act, using the approximate closing
price as reported on the OTC on October 18, 2019, which was $0.004
per share.
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(4)
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$303.00 has been previously paid to
the commission via a withdrawn registration statement filed on
September 4, 2019 (file number
333-233618).
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The registrant hereby amends this registration statement on such
date or dates as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically
states that this registration statement shall thereafter become
effective in accordance with section 8(a) of the Securities Act of
1933 or until the registration statement shall become effective on
such date as the commission, acting pursuant to said section 8(a),
may determine.
The information in this prospectus is not complete and may be
changed. These securities may not be sold (except pursuant to a
transaction exempt from the registration requirements of the
Securities Act) until this registration statement filed with the
Securities and Exchange Commission is declared effective. This
prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
Subject to completion, dated ____________.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PRELIMINARY PROSPECTUS
GrowLife, Inc.
625,000,000 Shares of Common Stock
$0.004 per share
We are
offering for sale up to 625,000,000 shares of our common stock (the
“Shares”) with an offering price of $0.004 per Share
(the “Offering”) . This Offering shall be conducted by
the Company in a direct offering. Should all Shares being offered
by the Company hereunder be sold, the Company would receive an
aggregate of $2,500,000 at an offering price of $0.004 per Share.
There is no minimum number of Shares that must be sold by us for
the Offering to proceed, and we will retain the proceeds from
the sale of any of the offered Shares. The Offering is being
conducted on a self-underwritten, best efforts basis, which means
our officers and directors will attempt to sell the
Shares. This Prospectus will permit our officers and directors
to sell the Shares directly to the public, with no commission or
other remuneration payable to them for any Shares they may
sell. The Offering will terminate twelve months (12) months
from the date that the registration statement relating to the
Shares is declared effective, unless earlier fully subscribed or
terminated by the Company. In offering the securities on our
behalf, our Officers and Directors will rely on the safe harbor
from broker-dealer registration set out in Rule 3a4-1 under the
Securities and Exchange of 1934.
As of October 18, 2019, the Company had 3,858,188,075 shares of
Common Stock outstanding. Our securities are not listed on any
national securities exchange. Our common stock is presently quoted
for trading on the OTC Market under the symbol "PHOT”.
On October 18, 2019, the last reported sales price for our Common
Stock was $0.004 per share. We intend to use these funds for
general working capital, debt
reduction and other corporate purposes.
Our auditor has expressed substantial doubt about our ability to
continue as a going concern. As discussed in the Notes to the
financial statements, the Company has suffered losses and has
experienced negative cash flows from operations, which raises
substantial doubt about the Company's ability to continue as a
going concern.
This prospectus covers the primary direct public offering by the
Company of 625,000,000 shares of common stock.
THE
PURCHASE OF THE SECURITIES OFFERED THROUGH THIS PROSPECTUS INVOLVES
A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY READ THIS ENTIRE
PROSPECTUS, INCLUDING THE SECTION ENTITLED “RISK
FACTORS” BEGINNING ON PAGE 4 HEREOF BEFORE BUYING ANY SHARES
OF GROWLIFE’S COMMON STOCK.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
No dealer, salesperson or any other person is authorized to give
any information or make any representations in connection with this
offering other than those contained in this prospectus and, if
given or made, the information or representations must not be
relied upon as having been authorized by us. This prospectus does
not constitute an offer to sell or a solicitation of an offer to
buy any security other than the securities offered by this
prospectus, or an offer to sell or a solicitation of an offer to
buy any securities by anyone in any jurisdiction in which the offer
or solicitation is not authorized or is unlawful.
The date of this prospectus is _____________.
TABLE OF CONTENTS
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3
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4
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14
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14
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16
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17
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F-1
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You
should rely only on the information contained in this prospectus
and any applicable prospectus supplement. We have not authorized
anyone to provide you with different or additional information. If
anyone provides you with different or inconsistent information, you
should not rely on it. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or any sale of securities
described in this prospectus. This prospectus is not an offer to
sell these securities and it is not soliciting an offer to buy
these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this
prospectus or any prospectus supplement, as well as information we
have previously filed with the Securities and Exchange Commission,
is accurate as of the date on the front of those documents only.
Our business, financial condition, results of operations and
prospects may have changed since those dates.
For
investors outside the United States: neither we nor the
underwriters have done anything that would permit this offering or
possession or distribution of this prospectus or any free writing
prospectus we may provide to you in connection with this offering
in any jurisdiction where action for that purpose is required,
other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to this
offering and the distribution of this prospectus and any such free
writing prospectus outside of the United States.
Unless
otherwise indicated, information contained in this prospectus
concerning our industry and the markets in which we operate,
including our general expectations and market position, market
opportunity and market share, is based on information from our own
management estimates and research, as well as from industry and
general publications and research, surveys and studies conducted by
third parties. Management estimates are derived from publicly
available information, our knowledge of our industry and
assumptions based on such information and knowledge, which we
believe to be reasonable. Our management estimates have not been
verified by any independent source, and we have not independently
verified any third-party information. In addition, assumptions and
estimates of our and our industry's future performance are
necessarily subject to a high degree of uncertainty and risk due to
a variety of factors, including those described in "Risk Factors".
These and other factors could cause our future performance to
differ materially from our assumptions and estimates. See "Special
Note Regarding Forward-Looking Statements".
GrowLife,
Inc. is our trademark that is used in this prospectus. This
prospectus also includes trademarks, tradenames and service marks
that are the property of other organizations. Solely for
convenience, trademarks and tradenames referred to in this
prospectus appear without the ® and ™ symbols, but those
references are not intended to indicate, in any way, that we will
not assert, to the fullest extent under applicable law, our rights
or that the applicable owner will not assert its rights, to these
trademarks and tradenames.
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information
you should consider before investing in our common stock. You
should read this entire prospectus carefully, especially the "Risk
Factors" section of this prospectus and our financial statements
and the related notes appearing at the end of this prospectus,
before making an investment decision.
As used in this prospectus, unless the context otherwise requires,
references to "we," "us," "our," "our company" and "GrowLife" refer
to GrowLife, Inc. and its consolidated
subsidiaries.
The Company and Our Business
GrowLife,
Inc. (“GrowLife” or the “Company”) is
incorporated under the laws of the State of Delaware and is
headquartered in Kirkland, Washington. We were founded in 2012 with
the Closing of the Agreement and Plan of Merger with SGT Merger
Corporation.
Toward
the end of 2018, we announced the majority acquisition of a company
called EZ-CLONE Enterprises. EZ-CLONE was and is known as an
industry-leading supplier of commercial-grade cloning and
propagation equipment. This was a part of the Company’s
strategic positioning plan to make ourselves the industry leaders
in plant cloning, and more specifically, as the leader in cloning
of hemp plants that are being grown for CBD extraction. Hemp
production was recently legalized in the US, creating a completely
new market opportunity where countless farmers are switching their
operations to hemp. Some conservative reports estimate that more
than 500 million hemp plants will be planted in 2019, with most
farmers looking to grow hemp to provide raw materials to the
exploding CBD market. Unfortunately, a lot of hemp growers do not
understand the intricacies of growing hemp, especially for CBD
extraction. Not all hemp plants can be used to create CBD products.
Plants need to be rich in CBD, not THC, be the correct gender, and
be healthy and large enough to process. In order to achieve this,
the only way to start plants is by using genetically modified and
feminized seeds or through cloning.
Our
revenue in the last quarter ended June 30, 2019 was $2.2 million
and our first half of the year totaled $4.4 million. In comparison
we generated $4.6 million ALL of last year. If you add the
uncounted over $500,000 of unshipped orders we received last
quarter, that brings us to about $5 million for just the first half
of this year, well outpacing all of last year.
For
more information see “Description of our
Business.”
Financing Requirements
The company needs to raise capital in the amount of $2,500,000 to
fully execute on its business plans. The $2,500,000 would be
utilized for general working capital to increase inventory,
complete the acquisition of EZ-Clone, and further develop our CBD
plant cloning operations. The Company has not secured the financing
necessary to execute on its business plan as stated above. If the
Company cannot raise the full amount of capital necessary, then it
will take longer than expected for the Company to implement its
growth plan.
Risks That We Face
Our
business is subject to a number of risks of which you should be
aware before making an investment decision. We are exposed to various risks related to our
business and financial position (specifically our need for
additional financing), this offering, our common stock and our
recent reverse stock split. These risks are discussed more
fully in the "Risk Factors" section of this prospectus beginning on
page 4.
Going Concern
Our auditor has expressed substantial doubt about our ability to
continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered losses and has
experienced negative cash flows from operations, which raises
substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to those matters are
also described in Note 2 to the financial statements. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
Our Direct Public Offering
We are offering for sale up to a maximum of 625,000,000 shares of
our Common Stock directly to the public. There is no underwriter
involved in this offering. We are offering the shares without any
underwriting discounts or commissions. The purchase price is $0.004
per share. The expenses associated with this offering are estimated
to be $10,000. As of October 18, 2019 the Company
had 3,858,188,075 shares of Common Stock outstanding. Our
securities are not listed on any national securities exchange. Our
common stock is presently quoted for trading on the OTC Markets
under the symbol "PHOT". On October 18, 2019 the last sales price
of our common stock as reported was $0.004 per
share.
Our Corporate Information
Our
principal executive offices are located at 5400 Carillon Point,
Kirkland, WA 98033. Our telephone number is (866) 781-5559. Our
principal website address is located at www.growlifeinc.com. The
information contained on, or that can be accessed through, our
website is not incorporated into and is not a part of this
prospectus. We have included our website address in this prospectus
solely as an inactive textual reference.
Issuer:
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GrowLife,
Inc.
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Securities
offered:
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Up to
625,000,000 of shares of our common stock. Our Common Stock is
described in further detail in the section of this prospectus
titled "DESCRIPTION OF SECURITIES
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Offering Price per
share:
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$0.004
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Common
stock outstanding before the offering (1):
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3,858,188,075
shares
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Shares
of Common Stock being offered:
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625,000,000
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Net
Proceeds to the Company; Use of proceeds
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The
Company is offering a maximum of 625,000,000 shares of Common Stock
at an offering price of $0.004 per Share for net proceeds to the
Company of $2,500,000. The full subscription price will be payable
at the time of subscription and accordingly, funds received from
subscribers in this Offering will be released to the Company when
subscriptions are received and accepted.
No
assurance can be given that the net proceeds from the total number
of shares offered hereby or any lesser net amount will be
sufficient to accomplish our goals. If proceeds from this offering
are insufficient, we may be required to seek additional capital. No
assurance can be given that we will be able to obtain such
additional capital, or even if available, that such additional
capital will be available on terms acceptable to us.
See
"Use of Proceeds" beginning on page 14. We will use the proceeds
from these sales for general working capital, debt reduction, and
other corporate purposes.
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Risk
Factors
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You
should read the "Risk Factors" section starting on page 4 of this
prospectus for a discussion of factors to consider carefully before
deciding to invest in shares of our common stock.
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Symbol
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PHOT
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(1)
The number of shares of our common
stock outstanding before this offering is based
on 3,858,188,075 shares of our common stock outstanding as
of October 18, 2019, and excludes:
●
________ shares of our common stock issuable upon the exercise
of stock options outstanding as of October __, 2019 at a
weighted-average exercise price of $0.____ per
share;
●
___________ shares of our common stock issuable upon the
exercise of warrants outstanding as of October __, 2019 (at a
weighted-average exercise price of $0.___ per share. These
warrants will expire between ________, ______ and _________,
________;
●
____________ shares of common stock to be issued for the conversion of Convertible Notes
Payables as of October __, 2019 with expiration dates
between __________ and ___________ at conversion
prices of $0.___ per share;
●
__________ additional shares of our common stock available for
future issuance under our 2017 Amended Stock Incentive
Plan;
●
__________ shares of our common stock issuable upon the conversion
of convertible promissory notes; and,
●up to
625,000,000 shares of our common stock pursuant to this
Registration Statement.
Investing in our common stock is highly
speculative and involves a high degree of
risk. You should carefully consider the risks and uncertainties
described below, together with all of the other information
contained in this prospectus, including our financial statements
and the related notes appearing at the end of this prospectus,
before deciding to invest in our common stock. If any of the
following risks actually occur, our business, prospects, operating
results and financial condition could suffer materially, the
trading price of our common stock could decline and you could lose
all or part of your investment. There are
certain inherent risks which will have an effect on the
Company’s development in the future and the most significant risks
and uncertainties known and identified by our management are
described below.
Risks Related to Our Business
There are certain inherent risks which will have an effect on the
Company’s development in the future and the most
significant risks and uncertainties known and identified by our
management are described below.
Risks Associated with Securities Purchase Agreement with Chicago
Venture.
The
Securities Purchase Agreement with Chicago Venture will terminate
if we file protection from its creditors, a Registration Statement
on Form S-1 is not effective, and our market capitalization or the
trading volume of our common stock does not reach certain levels.
If terminated, we will be unable to draw down all or substantially
all of our Chicago Venture Notes.
Our
ability to require Chicago Venture to fund the Chicago Venture Note
is at our discretion, subject to certain limitations. Chicago
Venture is obligated to fund if each of the following conditions
are met; (i) the average and median daily dollar volumes of our
common stock for the twenty (20) and sixty (60) trading days
immediately preceding the funding date are greater than $100,000;
(ii) our market capitalization on the funding date is greater than
$17,000,000; (iii) we are not in default with respect to share
delivery obligations under the note as of the funding date; and
(iv) we are current in our reporting obligations.
There
is no guarantee that we will be able to meet the foregoing
conditions or any other conditions under the Securities Purchase
Agreement and/or Chicago Venture Note or that we will be able to
draw down any portion of the amounts available under the Securities
Purchase Agreement and/or Chicago Venture Note.
If we
not able to draw down all due under the Securities Purchase
Agreement or if the Securities Purchase Agreement is terminated, we
may be forced to curtail the scope of our operations or alter our
business plan if other financing is not available to
us.
Our common stock.
On
October 17, 2017, we were informed by Alpine Securities Corporation
(“Alpine”) that Alpine has demonstrated compliance with
the Financial Industry Regulatory Authority (“FINRA”)
Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of
1934. We filed an amended application with the OTC Markets to list
the Company’s common stock on the OTCQB and begin to trade on
this market as of March 20, 2018. As
of March 4, 2019, we began to trade on the OTC Markets
Pink
Sheet because our bid
price had closed below $0.01 for more than 30 consecutive calendar
days.
This
action had a material adverse effect on our business, financial
condition and results of operations. If we are unable to obtain
additional financing when it is needed, we will need to restructure
our operations, and divest all or a portion of our
business.
We have been involved in Legal Proceedings.
We have
been involved in certain disputes and legal proceedings as
discussed in the section title “Legal Proceedings”
within our Form 10-Q for the quarter year ended June 30, 2019. In
addition, as a public company, we are also potentially susceptible
to litigation, such as claims asserting violations of securities
laws. Any such claims, with or without merit, if not resolved,
could be time-consuming and result in costly litigation. There can
be no assurance that an adverse result in any future proceeding
would not have a potentially material adverse on our business,
results of operations or financial condition.
We may engage in acquisitions, mergers, strategic alliances, joint
ventures and divestures that could result in final results that are
different than expected.
In the normal course of business, we engage in discussions relating
to possible acquisitions, equity investments, mergers, strategic
alliances, joint ventures and divestitures. Such transactions are
accompanied by a number of risks, including the use of significant
amounts of cash, potentially dilutive issuances of equity
securities, incurrence of
debt on potentially unfavorable terms as well as impairment
expenses related to goodwill and amortization expenses related to
other intangible assets, the possibility that we may pay too much
cash or issue too many of our shares as the purchase price for an
acquisition relative to the economic benefits that we ultimately
derive from such acquisition, and various potential difficulties
involved in integrating acquired businesses into our
operations.
From time to time, we have also engaged in discussions with
candidates regarding the potential acquisitions of our product
lines, technologies and businesses. If a divestiture such as this
does occur, we cannot be certain that our business, operating
results and financial condition will not be materially and
adversely affected. A successful divestiture depends on various
factors, including our ability to effectively transfer liabilities,
contracts, facilities and employees to any purchaser; identify and
separate the intellectual property to be divested from the
intellectual property that we wish to retain; reduce fixed costs
previously associated with the divested assets or business; and
collect the proceeds from any divestitures.
If we do not realize the expected benefits of any acquisition or
divestiture transaction, our financial position, results of
operations, cash flows and stock price could be negatively
impacted.
Our proposed business is dependent on laws pertaining to the
marijuana industry.
Continued
development of the marijuana industry is dependent upon continued
legislative authorization of the use and cultivation of marijuana
at the state level. Any number of factors could slow or
halt progress in this area. Further, progress, while
encouraging, is not assured. While there may be ample
public support for legislative action, numerous factors impact
the legislative process. Any one of these factors could
slow or halt use of marijuana, which would negatively impact our
proposed business.
Currently,
thirty three states and the District of Columbia allow its citizens
to use medical cannabis. Additionally, ten states and
the District of Columbia have legalized cannabis for adult
use. The state laws are in conflict with the federal
Controlled Substances Act, which makes marijuana use and possession
illegal on a national level. The Obama administration previously
effectively stated that it is not an efficient use of resources to
direct law federal law enforcement agencies to prosecute those
lawfully abiding by state-designated laws allowing the use and
distribution of medical marijuana. The Trump
administration position is unknown. However, there is no
guarantee that the Trump administration will not change current
policy regarding the low-priority enforcement of federal
laws. Additionally, any new administration that follows
could change this policy and decide to enforce the federal laws
strongly. Any such change in the federal
government’s enforcement of current federal laws could cause
significant financial damage to us and its
shareholders.
Further,
while we do not harvest, distribute or sell marijuana, by supplying
products to growers of marijuana, we could be deemed to be
participating in marijuana cultivation, which remains illegal under
federal law, and exposes us to potential criminal liability, with
the additional risk that our business could be subject to civil
forfeiture proceedings.
The marijuana industry faces strong opposition.
It is
believed by many that large, well-funded businesses may have a
strong economic opposition to the marijuana industry. We
believe that the pharmaceutical industry clearly does not want to
cede control of any product that could generate significant
revenue. For example, medical marijuana will likely
adversely impact the existing market for the current
“marijuana pill” sold by mainstream pharmaceutical
companies. Further, the medical marijuana industry could
face a material threat from the pharmaceutical industry, should
marijuana displace other drugs or encroach upon the pharmaceutical
industry’s products. The pharmaceutical industry
is well funded with a strong and experienced lobby that eclipses
the funding of the medical marijuana movement. Any
inroads the pharmaceutical industry could make in halting or
impeding the marijuana industry harm our business, prospects,
results of operation and financial condition.
Marijuana remains illegal under Federal
law.
Marijuana
is a Schedule-I controlled substance and is illegal under federal
law. Even in those states in which the use of marijuana
has been legalized, its use remains a violation of federal
law. Since federal law criminalizing the use of
marijuana preempts state laws that legalize its use, strict
enforcement of federal law regarding marijuana would harm our
business, prospects, results of operation and financial
condition.
Raising additional capital to implement our business plan and pay
our debts will cause dilution to our existing stockholders, require
us to restructure our operations, and divest all or a portion of
our business.
We need
additional financing to implement our business plan and to service
our ongoing operations and pay our current debts. There can be no
assurance that we will be able to secure any needed funding, or
that if such funding is available, the terms or conditions would be
acceptable to us.
If we
raise additional capital through borrowing or other debt financing,
we may incur substantial interest expense. Sales of additional
equity securities will dilute on a pro rata basis the percentage
ownership of all holders of common stock. When we raise more equity
capital in the future, it will result in substantial dilution to
our current stockholders.
If we
are unable to obtain additional financing when it is needed, we
will need to restructure our operations, and divest all or a
portion of our business.
Closing of bank and merchant processing accounts could have a
material adverse effect on our business, financial condition and/or
results of operations.
As a
result of the regulatory environment, we have experienced the
closing of several of our bank and merchant processing accounts
since March 2014. We have been able to open other bank accounts.
However, we may have other banking accounts closed. These factors
impact management and could have a material adverse effect on our
business, financial condition and/or results of
operations.
Federal regulation and enforcement may adversely affect the
implementation of medical marijuana laws and regulations may
negatively impact our revenues and
profits.
Currently,
there are thirty three states plus the District of Columbia that
have laws and/or regulation that recognize in one form or another
legitimate medical uses for cannabis and consumer use of cannabis
in connection with medical treatment. Many other states are
considering legislation to similar effect. As of the date of this
writing, the policy and regulations of the Federal government and
its agencies is that cannabis has no medical benefit and a range of
activities including cultivation and use of cannabis for personal
use is prohibited on the basis of federal law and may or may not be
permitted on the basis of state law. Active enforcement of the
current federal regulatory position on cannabis on a regional or
national basis may directly and adversely affect the willingness of
customers of GrowLife to invest in or buy products from GrowLife
that may be used in connection with cannabis. Active enforcement of
the current federal regulatory position on cannabis may thus
indirectly and adversely affect revenues and profits of the
GrowLife companies.
Our history of net losses has raised substantial doubt regarding
our ability to continue as a going concern. If we do not continue
as a going concern, investors could lose their entire
investment.
Our
history of net losses has raised substantial doubt about our
ability to continue as a going concern, and as a result, our
independent registered public accounting firm included an
explanatory paragraph in its report on our financial statements as
of and for the years ended December 31, 2018 and 2017 with
respect to this uncertainty. Accordingly, our ability to continue
as a going concern will require us to seek alternative financing to
fund our operations. This going concern opinion could materially
limit our ability to raise additional funds through the issuance of
new debt or equity securities or otherwise. Future reports on our
financial statements may include an explanatory paragraph with
respect to our ability to continue as a going concern.
We have a history of operating losses and there can be no assurance
that we can again achieve or maintain profitability.
We have
experienced net losses since inception. As of June 30, 2019, we had
an accumulated deficit of $145.2 million. There can be no assurance
that we will achieve or maintain profitability.
We are subject to corporate governance and internal control
reporting requirements, and our costs related to compliance with,
or our failure to comply with existing and future requirements,
could adversely affect our business.
We must
comply with corporate governance requirements under the
Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street
Reform and Consumer Protection Act of 2010, as well as additional
rules and regulations currently in place and that may be
subsequently adopted by the SEC and the Public Company Accounting
Oversight Board. These laws, rules, and regulations continue to
evolve and may become increasingly stringent in the future. We are
required to include management’s report on internal controls
as part of our annual report pursuant to Section 404 of the
Sarbanes-Oxley Act. We strive to continuously evaluate and improve
our control structure to help ensure that we comply with Section
404 of the Sarbanes-Oxley Act. The financial cost of compliance
with these laws, rules, and regulations is expected to remain
substantial.
We
cannot assure you that we will be able to fully comply with these
laws, rules, and regulations that address corporate governance,
internal control reporting, and similar matters. Failure to comply
with these laws, rules and regulations could materially adversely
affect our reputation, financial condition, and the value of our
securities.
Our inability or failure to effectively manage our growth could
harm our business and materially and adversely affect our operating
results and financial condition.
Our
strategy envisions growing our business. We plan to expand our
product, sales, administrative and marketing organizations. Any
growth in or expansion of our business is likely to continue to
place a strain on our management and administrative resources,
infrastructure and systems. As with other growing businesses, we
expect that we will need to further refine and expand our business
development capabilities, our systems and processes and our access
to financing sources. We also will need to hire, train, supervise
and manage new and retain contributing employees. These processes
are time consuming and expensive, will increase management
responsibilities and will divert management attention. We cannot
assure you that we will be able to:
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expand
our products effectively or efficiently or in a timely
manner;
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allocate
our human resources optimally;
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meet
our capital needs;
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identify
and hire qualified employees or retain valued employees;
or
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incorporate
effectively the components of any business or product line that we
may acquire in our effort to achieve growth.
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Our
operating results may fluctuate significantly based on customer
acceptance of our products. As a result, period-to-period
comparisons of our results of operations are unlikely to provide a
good indication of our future performance. Management expects that
we will experience substantial variations in our net sales and
operating results from quarter to quarter due to customer
acceptance of our products. If customers don’t accept our
products, our sales and revenues will decline, resulting in a
reduction in our operating income.
Customer
interest for our products could also be impacted by the timing of
our introduction of new products. If our competitors introduce new
products around the same time that we issue new products, and if
such competing products are superior to our own, customers’
desire for our products could decrease, resulting in a decrease in
our sales and revenues. To the extent that we introduce new
products and customers decide not to migrate to our new products
from our older products, our revenues could be negatively impacted
due to the loss of revenue from those customers. In the event that
our newer products do not sell as well as our older products, we
could also experience a reduction in our revenues and operating
income.
If we do not successfully generate additional products and
services, or if such products and services are developed but not
successfully commercialized, we could lose revenue
opportunities.
Our
future success depends, in part, on our ability to expand our
product and service offerings. To that end we have engaged in the
process of identifying new product opportunities to provide
additional products and related services to our customers. The
process of identifying and commercializing new products is complex
and uncertain, and if we fail to accurately predict
customers’ changing needs and emerging technological trends
our business could be harmed. We may have to commit significant
resources to commercializing new products before knowing whether
our investments will result in products the market will accept.
Furthermore, we may not execute successfully on commercializing
those products because of errors in product planning or timing,
technical hurdles that we fail to overcome in a timely fashion, or
a lack of appropriate resources. This could result in competitors
providing those solutions before we do and a reduction in net sales
and earnings.
The
success of new products depends on several factors, including
proper new product definition, timely completion and introduction
of these products, differentiation of new products from those of
our competitors, and market acceptance of these products. There can
be no assurance that we will successfully identify new product
opportunities, develop and bring new products to market in a timely
manner, or achieve market acceptance of our products or that
products and technologies developed by others will not render our
products or technologies obsolete or noncompetitive.
Our future success depends on our ability to grow and expand our
customer base. Our failure to achieve such growth or
expansion could materially harm our business.
To
date, our revenue growth has been derived primarily from the sale
of our products and through the purchase of existing businesses.
Our success and the planned growth and expansion of our business
depend on us achieving greater and broader acceptance of our
products and expanding our customer base. There can be no assurance
that customers will purchase our products or that we will continue
to expand our customer base. If we are unable to effectively market
or expand our product offerings, we will be unable to grow and
expand our business or implement our business strategy. This could
materially impair our ability to increase sales and revenue and
materially and adversely affect our margins, which could harm our
business and cause our stock price to decline.
If we
incur substantial liability from litigation, complaints, or
enforcement actions resulting from misconduct by our distributors,
our financial condition could suffer. We will require that our
distributors comply with applicable law and with our policies and
procedures. Although we will use various means to address
misconduct by our distributors, including maintaining these
policies and procedures to govern the conduct of our distributors
and conducting training seminars, it will still be difficult to
detect and correct all instances of misconduct. Violations of
applicable law or our policies and procedures by our distributors
could lead to litigation, formal or informal complaints,
enforcement actions, and inquiries by various federal, state, or
foreign regulatory authorities against us and/or our distributors.
and could consume considerable amounts of financial and other
corporate resources, which could have a negative impact on our
sales, revenue, profitability and growth prospects. As we are
currently in the process of implementing our direct sales
distributor program, we have not been, and are not currently,
subject to any material litigation, complaint or enforcement action
regarding distributor misconduct by any federal, state or foreign
regulatory authority.
Our
future manufacturers could fail to fulfill our orders for products,
which would disrupt our business, increase our costs, harm our
reputation and potentially cause us to lose our
market.
We may
depend on contract manufacturers in the future to produce our
products. These manufacturers could fail to produce products to our
specifications or in a workmanlike manner and may not deliver the
units on a timely basis. Our manufacturers may also have to obtain
inventories of the necessary parts and tools for production. Any
change in manufacturers to resolve production issues could disrupt
our ability to fulfill orders. Any change in manufacturers to
resolve production issues could also disrupt our business due to
delays in finding new manufacturers, providing specifications and
testing initial production. Such disruptions in our business and/or
delays in fulfilling orders would harm our reputation and would
potentially cause us to lose our market.
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition and our results of
operations.
We may
be unable to obtain intellectual property rights to effectively
protect our business. Our ability to compete effectively may be
affected by the nature and breadth of our intellectual property
rights. While we intend to defend against any threats to our
intellectual property rights, there can be no assurance that any
such actions will adequately protect our interests. If we are
unable to secure intellectual property rights to effectively
protect our technology, our revenue and earnings, financial
condition, and/or results of operations would be adversely
affected.
We may
also rely on nondisclosure and non-competition agreements to
protect portions of our technology. There can be no assurance that
these agreements will not be breached, that we will have adequate
remedies for any breach, that third parties will not otherwise gain
access to our trade secrets or proprietary knowledge, or that third
parties will not independently develop the technology.
We do
not warrant any opinion as to non-infringement of any patent,
trademark, or copyright by us or any of our affiliates, providers,
or distributors. Nor do we warrant any opinion as to invalidity of
any third-party patent or unpatentability of any third-party
pending patent application.
Our industry is highly competitive and we have less capital and
resources than many of our competitors, which may give them an
advantage in developing and marketing products similar to ours or
make our products obsolete.
We are
involved in a highly competitive industry where we may compete with
numerous other companies who offer alternative methods or
approaches, may have far greater resources, more experience, and
personnel perhaps more qualified than we do. Such resources may
give our competitors an advantage in developing and marketing
products similar to ours or products that make our products
obsolete. There can be no assurance that we will be able to
successfully compete against these other entities.
Transfers of our securities may be restricted by virtue of state
securities “blue sky” laws, which prohibit trading
absent compliance with individual state laws. These restrictions
may make it difficult or impossible to sell shares in those
states.
Transfers
of our common stock may be restricted under the securities or
securities regulations laws promulgated by various states and
foreign jurisdictions, commonly referred to as "blue sky" laws.
Absent compliance with such individual state laws, our common stock
may not be traded in such jurisdictions. Because the securities
held by many of our stockholders have not been registered for
resale under the blue sky laws of any state, the holders of such
shares and persons who desire to purchase them should be aware that
there may be significant state blue sky law restrictions upon the
ability of investors to sell the securities and of purchasers to
purchase the securities. These restrictions may prohibit the
secondary trading of our common stock. Investors should consider
the secondary market for our securities to be a limited
one.
We are dependent on key personnel.
Our
success depends to a significant degree upon the continued
contributions of key management and other personnel, some of whom
could be difficult to replace. We do not maintain key man life
insurance covering our officers. Our success will depend on the
performance of our officers and key management and other personnel,
our ability to retain and motivate our officers, our ability to
integrate new officers and key management and other personnel into
our operations, and the ability of all personnel to work together
effectively as a team. Our failure to retain and recruit
officers and other key personnel could have a material adverse
effect on our business, financial condition and results of
operations.
We have limited insurance.
We have
limited directors’ and officers’ liability insurance
and limited commercial liability insurance policies. Any
significant claims would have a material adverse effect on our
business, financial condition and results of
operations.
Risks Related to our Common Stock
An investment in our shares is highly speculative.
The shares of our common stock are highly speculative in nature,
involve a high degree of risk and should be purchased only by
persons who can afford to lose the entire amount invested in the
common stock. Before purchasing any of the shares of common stock,
you should carefully consider the risk factors contained herein
relating to our business and prospects. If any of the risks
presented herein actually occur, our business, financial condition
or operating results could be materially adversely affected. In
such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
The market price of our Common Stock may fluctuate significantly in
the future.
We expect that the market price of our Common Stock may fluctuate
in response to one or more of the following factors, many of which
are beyond our control:
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competitive
pricing pressures;
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our
ability to market our services on a cost-effective and timely
basis;
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changing
conditions in the market;
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changes
in market valuations of similar companies;
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stock
market price and volume fluctuations generally;
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regulatory
developments;
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fluctuations
in our quarterly or annual operating results;
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additions
or departures of key personnel; and
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future
sales of our Common Stock or other securities.
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The price at which you purchase shares of our Common Stock may not
be indicative of the price that will prevail in the trading market.
Shareholders may experience wide fluctuations in the market price
of our securities. These fluctuations may have a negative effect on
the market price of our securities and may prevent a shareholder
from obtaining a market price equal to the purchase price such
shareholder paid when the shareholder attempts to sell our
securities in the open market. In these situations, the shareholder
may be required either to sell our securities at a market price,
which is lower than the purchase price the shareholder paid, or to
hold our securities for a longer period than planned. An inactive
or low trading market may also impair our ability to raise capital
by selling shares of capital stock. You may be unable to sell your
shares of Common Stock at or above your purchase price, which may
result in substantial losses to you and which may include the
complete loss of your investment. Any of the risks described above
could adversely affect our sales and profitability and the price of
our Common Stock.
Chicago Venture could have significant influence over matters
submitted to stockholders for approval.
Chicago Venture, Iliad and St. George
As a
result of funding from Chicago Venture, Iliad and St. George as
previously detailed, they exercise significant control over
us.
If
these persons were to choose to act together, they would be able to
significantly influence all matters submitted to our stockholders
for approval, as well as our officers, directors, management and
affairs. For example, these persons, if they choose to act
together, could significantly influence the election of directors
and approval of any merger, consolidation or sale of all or
substantially all of our assets. This concentration of voting power
could delay or prevent an acquisition of us on terms that other
stockholders may desire.
Trading in our stock is limited by the SEC’s penny stock
regulations.
Our
stock is categorized as a penny stock The SEC has adopted Rule
15g-9 which generally defines "penny stock" to be any equity
security that has a market price (as defined) less than US$ 5.00
per share or an exercise price of less than US $5.00 per share,
subject to certain exclusions (e.g., net tangible assets in excess
of $2,000,000 or average revenue of at least $6,000,000 for the
last three years). The penny stock rules impose additional sales
practice requirements on broker-dealers who sell to persons other
than established customers and accredited investors. The penny
stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the
SEC, which provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer
also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly
account statements showing the market value of each penny stock
held in the customer's account. The bid and offer quotations, and
the broker-dealer and salesperson compensation information, must be
given to the customer orally or in writing prior to effecting the
transaction and must be given to the customer in writing before or
with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not
otherwise exempt from these rules, the broker-dealer must make a
special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written
agreement to the transaction. Finally, broker-dealers may not
handle penny stocks under $0.10 per share.
These
disclosure requirements reduce the level of trading activity in the
secondary market for the stock that is subject to these penny stock
rules. Consequently, these penny stock rules would affect the
ability of broker-dealers to trade our securities if we become
subject to them in the future. The penny stock rules also could
discourage investor interest in and limit the marketability of our
common stock to future investors, resulting in limited ability for
investors to sell their shares.
FINRA sales practice requirements may also limit a
shareholder’s ability to buy and sell our stock.
In
addition to the “penny stock” rules described above,
FINRA has adopted rules that require that in recommending an
investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low priced securities
to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s
financial status, tax status, investment objectives and other
information. Under interpretations of these rules, FINRA believes
that there is a high probability that speculative low priced
securities will not be suitable for at least some customers. The
FINRA requirements make it more difficult for broker-dealers to
recommend that their customers buy our common stock, which may
limit your ability to buy and sell our stock and have an adverse
effect on the market for our shares.
The market price of our common stock may be volatile.
The
market price of our common stock has been and is likely in the
future to be volatile. Our common stock price may fluctuate in
response to factors such as:
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Halting of trading by the SEC or FINRA.
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Announcements
by us regarding liquidity, legal proceedings, significant
acquisitions, equity investments and divestitures, strategic
relationships, addition or loss of significant customers and
contracts, capital expenditure commitments, loan, note payable and
agreement defaults, loss of our subsidiaries and impairment of
assets,
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Issuance
of convertible or equity securities for general or merger and
acquisition purposes,
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Issuance
or repayment of debt, accounts payable or convertible debt for
general or merger and acquisition purposes,
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Sale of
a significant number of shares of our common stock by
shareholders,
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General
market and economic conditions,
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Quarterly
variations in our operating results,
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Investor
relation activities,
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Announcements
of technological innovations,
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New
product introductions by us or our competitors,
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Competitive
activities, and
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Additions
or departures of key personnel.
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These
broad market and industry factors may have a material adverse
effect on the market price of our common stock, regardless of our
actual operating performance. These factors could have a material
adverse effect on our business, financial condition, and/or results
of operations.
The sale of a significant number of our shares of common stock
could depress the price of our common stock.
Sales
or issuances of a large number of shares of common stock in the
public market or the perception that sales may occur could cause
the market price of our common stock to decline. As of June 30,
2019, there were approximately 3.76 billion shares of our common stock
issued and outstanding. In addition, as of June 30,
2019, there are also (i) stock option grants outstanding for the
purchase of 82.5 million common
shares at a $0.010 average exercise price; (ii) warrants for the
purchase of 362.8 million
common shares at a $0.023 average exercise price; and (iii)
116.5 million shares related to convertible debt that can be
converted at $0.0025 per share.
In addition, we have an unknown number of common shares to be
issued under the Chicago Venture, Iliad and St. George financing
agreements because the number of shares ultimately issued to
Chicago Venture depends on the price at which Chicago Venture
converts its debt to shares and exercises its warrants. The lower
the conversion or exercise prices, the more shares that will be
issued to Chicago Venture upon the conversion of debt to shares. We
won’t know the exact number of shares of stock issued to
Chicago Venture until the debt is actually converted to
equity. If all stock option grant and warrant and contingent
shares are issued, approximately 4.537 billion of our currently
authorized 6 billion shares of common stock will be issued and
outstanding. For purposes
of estimating the number of shares issuable upon the
exercise/conversion of all stock options, warrants and contingent
shares, we assumed the number of shares and average share prices
detailed above.
These
stock option grant, warrant and contingent shares could result in
further dilution to common stockholders and may affect the market
price of the common stock.
Significant
shares of common stock are held by our principal shareholders,
other Company insiders and other large shareholders. As affiliates
as defined under Rule 144 of the Securities Act or Rule 144 of the
Company, our principal shareholders, other Company insiders and
other large shareholders may only sell their shares of common stock
in the public market pursuant to an effective registration
statement or in compliance with Rule 144.
These
stock option grant, warrant and contingent shares could result in
further dilution to common stockholders and may affect the market
price of the common stock.
Some of our convertible debentures and warrants may require
adjustment in the conversion price.
Our
Convertible Notes Payable may require an adjustment in the current
conversion price of $0.002535 per share if we issue common stock,
warrants or equity below the price that is reflected in the
convertible notes payable. Our warrant with St. George may require
an adjustment in the exercise price. The conversion price of the
convertible notes and warrants will have an impact on the market
price of our common stock. Specifically, if under the terms of the
convertible notes the conversion price goes down, then the market
price, and ultimately the trading price, of our common stock will
go down. If under the terms of the convertible notes the conversion
price goes up, then the market price, and ultimately the trading
price, of our common stock will likely go up. In other words, as
the conversion price goes down, so does the market price of our
stock. As the conversion price goes up, so presumably does the
market price of our stock. The more the conversion price goes down,
the more shares are issued upon conversion of the debt which
ultimately means the more stock that might flood into the market,
potentially causing a further depression of our stock.
We do not anticipate paying any cash dividends on our capital stock
in the foreseeable future.
We have
never declared or paid cash dividends on our capital stock. We
currently intend to retain all of our future earnings, if any, to
finance the growth and development of our business, and we do not
anticipate paying any cash dividends on our capital stock in the
foreseeable future. In addition, the terms of any future debt
agreements may preclude us from paying dividends. As a result,
capital appreciation, if any, of our common stock will be your sole
source of gain for the foreseeable future.
Anti-takeover provisions may limit the ability of another party to
acquire our company, which could cause our stock price to
decline.
Our
certificate of incorporation, as amended, our bylaws and Delaware
law contain provisions that could discourage, delay or prevent a
third party from acquiring our company, even if doing so may be
beneficial to our stockholders. In addition, these provisions could
limit the price investors would be willing to pay in the future for
shares of our common stock.
We may issue preferred stock that could have rights that are
preferential to the rights of common stock that could discourage
potentially beneficially transactions to our common
shareholders.
An
issuance of additional shares of preferred stock could result in a
class of outstanding securities that would have preferences with
respect to voting rights and dividends and in liquidation over our
common stock and could, upon conversion or otherwise, have all of
the rights of our common stock. Our Board of Directors'
authority to issue preferred stock could discourage potential
takeover attempts or could delay or prevent a change in control
through merger, tender offer, proxy contest or otherwise by making
these attempts more difficult or costly to achieve. The
issuance of preferred stock could impair the voting, dividend and
liquidation rights of common stockholders without their
approval.
If the company were to dissolve or wind-up, holders of our common
stock may not receive a liquidation preference.
If we
were too wind-up or dissolve the Company and liquidate and
distribute our assets, our shareholders would share ratably in our
assets only after we satisfy any amounts we owe to our
creditors. If our liquidation or dissolution were
attributable to our inability to profitably operate our business,
then it is likely that we would have material liabilities at the
time of liquidation or dissolution. Accordingly, we
cannot give you any assurance that sufficient assets will remain
available after the payment of our creditors to enable you to
receive any liquidation distribution with respect to any shares you
may hold.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This
prospectus includes statements that are, or may be deemed,
"forward-looking statements." In some cases, these forward-looking
statements can be identified by the use of forward-looking
terminology, including the terms "believes", "estimates",
"anticipates", "expects", "plans", "intends", "may", "could",
"might", "will", "should", "approximately" or, in each case, their
negative or other variations thereon or comparable terminology,
although not all forward-looking statements contain these words.
They appear in a number of places throughout this prospectus and
include statements regarding our intentions, beliefs, projections,
outlook, analyses or current expectations concerning, among other
things, our results of operations, financial condition, liquidity,
prospects, growth and strategies, the length of time that we will
be able to continue to fund our operating expenses and capital
expenditures, our expected financing needs and sources of
financing, the industry in which we operate and the trends that may
affect the industry or us.
By
their nature, forward-looking statements involve risks and
uncertainties because they relate to events, competitive dynamics,
and market developments and depend on the economic circumstances
that may or may not occur in the future or may occur on longer or
shorter timelines than anticipated. Although we believe that we
have a reasonable basis for each forward-looking statement
contained in this prospectus, we caution you that forward-looking
statements are not guarantees of future performance and that our
actual results of operations, financial condition and liquidity,
and the development of the industry in which we operate may differ
materially from the forward-looking statements contained in this
prospectus. In addition, even if our results of operations,
financial condition and liquidity, and the development of the
industry in which we operate are consistent with the
forward-looking statements contained in this prospectus, they may
not be predictive of results or developments in future
periods.
Any
forward-looking statements that we make in this prospectus speak
only as of the date of such statement, and we undertake no
obligation to update such statements to reflect events or
circumstances after the date of this prospectus.
You
should also read carefully the factors described in the "Risk
Factors" section of this prospectus to better understand the risks
and uncertainties inherent in our business and underlying any
forward-looking statements. As a result of these factors, we cannot
assure you that the forward-looking statements in this prospectus
will prove to be accurate. Furthermore, if our forward-looking
statements prove to be inaccurate, the inaccuracy may be material.
In light of the significant uncertainties in these forward-looking
statements, you should not regard these statements as a
representation or warranty by us or any other person that we will
achieve our objectives and plans in any specified timeframe, or at
all. We disclaim any obligation to update or revise any
forward-looking statement as a result of new information, future
events or for any other reason.
Our
offering is being made in a direct public offering on a
self-underwritten basis - no minimum of shares must be sold in
order for the offering to proceed. The offering price per share is
$0.004 There is no assurance that we will raise the full $2,500,000
as anticipated.
Not
taking into account any possible additional funding or revenues,
the Company intends to use the proceeds from this offering as
follows. The following chart indicates the amount of funds that we
will allocate to each item, but does not indicate the total
fee/cost of each item. The amount of proceeds we allocate to
each item is dependent upon the amount of proceeds we receive from
this offering:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Use of Proceeds
|
$
|
|
$
|
|
$
|
|
Gross Proceeds from Offering
|
$2,500,000
|
|
$1,250,000
|
|
$625,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Use of Proceeds
|
|
|
|
|
|
|
Debt
reduction
|
$1,000,000
|
40.0%
|
$500,000
|
40.0%
|
$250,000
|
50.0%
|
EZ-Clone
Enterprises, Inc.extension fee
|
171,000
|
6.8%
|
85,500
|
6.8%
|
-
|
0.0%
|
Sales
and marketing
|
250,000
|
10.0%
|
125,000
|
10.0%
|
-
|
0.0%
|
Expansion
into clone business
|
250,000
|
10.0%
|
250,000
|
20.0%
|
125,000
|
25.0%
|
Payment
of liabilities
|
200,000
|
8.0%
|
100,000
|
8.0%
|
100,000
|
20.0%
|
Working
capital
|
629,000
|
25.2%
|
189,500
|
15.2%
|
25,000
|
5.0%
|
|
|
|
|
|
|
|
Total
use of proceeds
|
$2,500,000
|
100.0%
|
$1,250,000
|
100.0%
|
$500,000
|
100.0%
|
|
|
|
|
|
|
|
Offering Expenses (1)
|
|
|
|
|
|
|
Securities
and Exchange Commission registration fee
|
$303
|
|
$303
|
|
$303
|
|
Accounting
fees and expenses
|
5,000
|
|
5,000
|
|
5,000
|
|
Legal
fees and expenses
|
15,000
|
|
15,000
|
|
15,000
|
|
Registrar
and transfer agent fees and expenses
|
2,000
|
|
2,000
|
|
2,000
|
|
Miscellaneous
|
7,697
|
|
7,697
|
|
7,697
|
|
|
|
|
|
|
|
|
Total
offering expenses
|
$-
|
|
$-
|
|
$-
|
|
|
|
|
|
|
|
|
(1) Offering expenses will not be paid from procedds received from
the offering.
|
|
|
We
believe that our current cash and cash equivalents, anticipated
cash flow from operations and the proceeds from the sale of the
maximum amount of shares being offered hereunder will only be
sufficient to meet our anticipated cash needs for the next 12
months. Our management has determined that the maximum amount of
funds received from this offering would be sufficient to cover our
intended plan of operations contemplated hereby. The Company will
use any proceeds received to file reports with the Securities and
Exchange Commission, as well as to proceed with the Company’s
intended business. However, there can be no assurance that the
Company will raise any funds through its direct participation
offering. As with any form of financing, there are uncertainties
concerning the availability of such funds and the likelihood that
such funds will be available to the Company on terms acceptable to
us.
DETERMINATION OF
OFFERING PRICE
The offering price is based on the approximate closing market price
for the common stock on October 18, 2019 on the OTC
Markets.
We intend to sell 625,000,000 shares of our Common Stock. The
following table sets forth the number of shares of Common Stock
purchased from us, the total consideration paid and the price per
share. The table assumes all 625,000,000 shares of Common Stock
will be sold.
|
|
|
|
|
|
|
|
|
|
Existing
Shareholders
|
-
|
-%
|
$-(1)
|
-%
|
$-(2)
|
Purchasers of
Shares
|
625,000,000
|
-%
|
$2,500,000
|
-%
|
$0.004
|
Total
|
-
|
100%
|
$-
|
100%
|
$-
|
_________
(1) This includes $____ in stock issued for
compensation.
(2) Price per share has varied.
The following table sets forth the difference between the offering
price of the shares of our Common Stock being offered by us, the
net tangible book value per share, and the net tangible book value
per share after giving effect to the offering by us, assuming that
100%, 50%, and 25% of the offered shares are sold. Net tangible
book value per share represents the amount of total tangible assets
less total liabilities divided by the number of shares outstanding
as of June 30, 2019. Totals may vary due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
public offering price per share $
|
$0.004
|
$0.004
|
0.004
|
Pro
forma net tangible book value per share as of June 30,
2019
|
(0.001)
|
(0.001)
|
(0.001)
|
Increase
in net tangible book value per share attributable to this
offering
|
0.001
|
0.000
|
0.000
|
Pro
forma as adjusted net tangible book value per share after this
offering
|
(0.000)
|
(0.000)
|
(0.001)
|
Amount
of dilution in net tangible book value per share to new investors
in this offering
|
0.004
|
0.004
|
0.005
|
If any shares are issued upon exercise of outstanding options
or warrants, you may experience further dilution. The number
of shares of our common stock outstanding before this offering is
based 3,858,188,075 shares of our common stock outstanding as of
October 18, 2019, and excludes the following:
●
________ shares of our common stock issuable upon the exercise
of stock options outstanding as of October __, 2019 at a
weighted-average exercise price of $0.____ per
share;
●
___________ shares of our common stock issuable upon the
exercise of warrants outstanding as of October __, 2019 ( at a
weighted-average exercise price of $0.___ per share. These
warrants will expire between ________, ______ and _________,
________;
●
____________ shares of common stock to be issued for the conversion of Convertible Notes
Payables as of October __, 2019 with expiration dates
between __________ and ___________ at conversion
prices of $0.___ per share;
●
__________ additional shares of our common stock available for
future issuance under our 2017 Amended Stock Incentive
Plan;
●
__________ shares of our common stock issuable upon the conversion
of convertible promissory notes; and
●
up to 625,000,000 shares of our common stock pursuant to this
Registration Statement.
Not Applicable.
We are offering for sale a maximum of 625,000,000 shares of our
Common Stock in a self-underwritten offering directly to the public
at a price of $0.004 per share. There is no minimum amount of
shares that we must sell in our direct offering, and therefore no
minimum amount of proceeds will be raised. No arrangements have
been made to place funds into escrow or any similar account. Upon
receipt, offering proceeds will be deposited into our operating
account and used to conduct our business and operations. We are
offering the shares without any underwriting discounts or
commissions. The purchase price is $0.004 per share. The
Offering will terminate twelve (12) months from the date that the
registration statement relating to the Shares is declared
effective, unless earlier fully subscribed or terminated by the
Company. The offering may be extended.
In connection with the Company's selling efforts in the offering,
the Company's officers and directors will not register as a
broker-dealer pursuant to Section 15 of the Exchange Act, but
rather will rely upon the "safe harbor" provisions of SEC Rule
3a4-1, promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Generally speaking, Rule 3a4-1
provides an exemption from the broker-dealer registration
requirements of the Exchange Act for persons associated with an
issuer that participate in an offering of the issuer's securities.
The Company's officers and directors are not subject to any
statutory disqualification, as that term is defined in Section
3(a)(39) of the Exchange Act. Our officers and directors will not
be compensated in connection with their participation in the
offering by the payment of commissions or other remuneration based
either directly or indirectly on transactions in our securities.
Our officers and directors are not now, nor has he been within the
past 12 months, a broker or dealer, and he has not been, within the
past 12 months, an associated person of a broker or dealer. At the
end of the offering, our officers and directors will continue to
primarily perform substantial duties for the Company or on its
behalf otherwise than in connection with transactions in
securities. Our officers and directors will not participate in
selling an offering of securities for any issuer more than once
every 12 months other than in reliance on Exchange Act Rule
3a4-1(a)(4)(i) or (iii).
In
order to comply with the applicable securities laws of certain
states, the securities will be offered or sold in those states only
if they have been registered or qualified for sale; exempted from
such registration or if a qualification requirement is available
and with which the Company has complied. In addition, and without
limiting the foregoing, the Company will be subject to applicable
provisions, rules and regulations under the Exchange Act with
regard to security transactions during the period of time when this
Registration Statement is effective.
Penny Stock Regulation
The SEC
has adopted rules that regulate broker-dealer practices in
connection with transactions in penny stocks. Penny stocks are
generally equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges
or quoted on the NASDAQ system, provided that current price and
volume information with respect to transactions in such securities
is provided by the exchange system).
The
penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from those rules, to deliver
a standardized risk disclosure document prepared by the SEC,
that:
|
●
|
contains
a description of the nature and level of risk in the market for
penny stocks in both public offerings and secondary
trading;
|
|
●
|
contains
a description of the broker's or dealer's duties to the customer
and of the rights and remedies available to the customer with
respect to a violation of such duties;
|
|
●
|
contains
a brief, clear, narrative description of a dealer market, including
"bid" and "ask" prices for penny stocks and the significance of the
spread between the bid and ask price;
|
|
●
|
contains
a toll-free telephone number for inquiries on disciplinary
actions;
|
|
●
|
defines
significant terms in the disclosure document or in the conduct of
trading penny stocks; and,
|
|
●
|
contains
such other information and is in such form (including language,
type, size, and format) as the SEC shall require by rule or
regulation.
|
The
broker-dealer also must provide the customer with the following,
prior to proceeding with any transaction in a penny
stock:
|
●
|
bid and
offer quotations for the penny stock;
|
|
●
|
details
of the compensation of the broker-dealer and its salesperson in the
transaction;
|
|
●
|
the
number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the
market for such stock; and,
|
|
●
|
monthly
account statements showing the market value of each penny stock
held in the customer's account.
|
In
addition, the penny stock rules require that prior to a transaction
in a penny stock not otherwise exempt from those rules, the
broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive
the purchaser's written acknowledgment of the receipt of a risk
disclosure statement and a signed and dated copy of a written
suitability statement. These disclosure requirements will have the
effect of reducing the trading activity in the secondary market for
our stock because it will be subject to these penny stock rules.
Therefore, stockholders may have difficulty selling those
securities.
Offering Period and Expiration Date
This offering will start on the date of this Registration Statement
is declared effective by the SEC and continue for a period of 12
months. We may extend the offering period for an additional 90
days, unless the offering is completed or otherwise terminated by
us.
Procedures for Subscribing
We will not accept any money until this Registration Statement is
declared effective by the SEC. Once the Registration Statement is
declared effective by the SEC, if you decide to subscribe for any
shares in this offering, you must:
|
1.
|
execute
and deliver a Subscription Agreement;
|
|
|
|
|
2.
|
deliver
payment to us for acceptance or rejection,
|
|
|
|
|
3.
|
documents
delivered to: GrowLife, Inc., 5400 Carillon Point, Kirkland, WA
98033:
|
*All checks for subscriptions must be made payable to "
GrowLife, Inc."
Right to Reject Subscriptions
We have the right to accept or reject subscriptions in whole or in
part, if our management believes that accepting the subscription
from the potential investor is not in the Company's best interests.
All monies from rejected subscriptions will be returned immediately
by us to the subscriber, without interest or deductions. The
Company will accept or reject any subscriptions within ten days of
receipt, and any funds received related to the rejected
subscription agreement will be return promptly without interest or
deduction.
Underwriters
We have no underwriter and do not intend to have one. In the event
that we sell or intend to sell by means of any arrangement with an
underwriter, then we will file a post-effective amendment to this
S-1 to accurately reflect the changes to us and our financial
affairs and any new risk factors, and in particular to disclose
such material relevant to this Plan of Distribution.
Regulation M
We are subject to Regulation M of the Securities Exchange Act of
1934. Regulation M governs activities of underwriters, issuers,
selling security holders, and others in connection with offerings
of securities. Regulation M prohibits distribution participants and
their affiliated purchasers from bidding for, purchasing or
attempting to induce any person to bid for or purchase the
securities being distributed.
Section 15(G) of the Exchange Act
Our shares are covered by Section 15(g) of the Securities Exchange
Act of 1934, as amended, and Rules 15g-1 through 15g-6 promulgated
thereunder. They impose additional sales practice requirements on
broker/dealers who sell our securities to persons other than
established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals
with net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouses).
Rule 15g-1 exempts a number of specific transactions from the scope
of the penny stock rules.
Rule 15g-2 declares unlawful broker/dealer transactions in penny
stocks unless the broker/dealer has first provided to the customer
a standardized disclosure document.
Rule 15g-3 provides that it is unlawful for a broker/dealer to
engage in a penny stock transaction unless the broker/dealer first
discloses and subsequently confirms to the customer current
quotation prices or similar market information concerning the penny
stock in question.
Rule 15g-4 prohibits broker/dealers from completing penny stock
transactions for a customer unless the broker/dealer first
discloses to the customer the amount of compensation or other
remuneration received as a result of the penny stock
transaction.
Rule 15g-5 requires that a broker/dealer executing a penny stock
transaction, other than one exempt under Rule 15g-1, disclose to
its customer, at the time of or prior to the transaction,
information about the salesperson’s
compensation.
Rule 15g-6 requires broker/dealers selling penny stocks to provide
their customers with monthly account statements.
Rule 15g-9 requires broker/dealers to approve the transaction for
the customer's account; obtain a written agreement from the
customer setting forth the identity and quantity of the stock being
purchased; obtain from the customer information regarding his
investment experience; make a determination that the investment is
suitable for the investor; deliver to the customer a written
statement for the basis for the suitability determination; notify
the customer of his or her rights and remedies in cases of fraud in
penny stock transactions; and FINRA's toll free telephone number
and the central number of the North American Administrators
Association, for information on the disciplinary history of
broker/dealers and their associated persons.
DESCRIPTION OF SECURITIES TO BE
REGISTERED
General
The
following description of our capital stock and provisions of our
articles of incorporation and bylaws are summaries and are
qualified by reference to our articles of incorporation and the
bylaws. We have filed copies of these documents with the SEC as
exhibits to our registration statement, of which this prospectus
forms a part.
Authorized Capital Stock
We have
authorized 6,010,000,000 shares of capital stock, of which
6,000,000,000 are shares of voting common stock, par value $0.0001
per share, and 10,000,000 are shares of preferred stock, par value
$0.0001 per share. On October 24, 2017
we filed a Certificate of Amendment of Certificate of Incorporation
with the Secretary of State of the State of Delaware to increase
the authorized shares of common stock from 3,000,000,000 to
6,000,000,000 shares.
Capital Stock Issued and Outstanding
The
outstanding share information in the table above is based on
3,858,188,075 shares of our common stock outstanding as of October
18, 2019, and excludes the following:
●
________ shares of our common stock issuable upon the exercise
of stock options outstanding as of October __, 2019 at a
weighted-average exercise price of $0.____ per
share;
●
___________ shares of our common stock issuable upon the
exercise of warrants outstanding as of October __, 2019 (at a
weighted-average exercise price of $0.___ per share. These
warrants will expire between ________, ______ and _________,
________;
●
____________ shares of common stock to be issued for the conversion of Convertible Notes
Payables as of October __, 2019 with expiration dates
between __________ and ___________ at conversion
prices of $0.___ per share;
●
__________ additional shares of our common stock available for
future issuance under our 2017 Amended Stock Incentive Plan;
and
●
__________ shares of our common stock issuable upon the conversion
of convertible promissory notes.; and
●
625,000,000 shares of our common stock pursuant to this
Registration Statement.
Voting Common Stock
Holders
of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have
cumulative voting rights for the election of directors. An election
of directors by our stockholders shall be determined by a plurality
of the votes cast by the stockholders entitled to vote on the
election. On all other matters, the affirmative vote of the holders
of a majority of the stock present in person or represented by
proxy and entitled to vote is required for approval, unless
otherwise provided in our articles of incorporation, bylaws or
applicable law. Holders of common stock are entitled to receive
proportionately any dividends as may be declared by our Board of
Directors, subject to any preferential dividend rights of
outstanding preferred stock.
In the
event of our liquidation or dissolution, the holders of common
stock are entitled to receive proportionately all assets available
for distribution to stockholders after the payment of all debts and
other liabilities and subject to the prior rights of any
outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The
rights, preferences and privileges of holders of common stock are
subject to and may be adversely affected by the rights of the
holders of shares of any series of preferred stock that we may
designate and issue in the future.
Non-Voting Preferred Stock
Under
the terms of our articles of incorporation, our board of directors
is authorized to issue shares of non-voting preferred stock in one
or more series without stockholder approval. Our board of directors
has the discretion to determine the rights, preferences, privileges
and restrictions, dividend rights, conversion rights, redemption
privileges and liquidation preferences, of each series of
non-voting preferred stock.
The
purpose of authorizing our board of directors to issue non-voting
preferred stock and determine its rights and preferences is to
eliminate delays associated with a stockholder vote on specific
issuances. The issuance of non-voting preferred stock, while
providing flexibility in connection with possible acquisitions,
future financings and other corporate purposes, could have the
effect of making it more difficult for a third party to acquire, or
could discourage a third party from seeking to acquire, a majority
of our outstanding voting stock.
Warrants to Purchase Common Stock
As of
June 30, 2019, warrants to purchase an aggregate of warrants for
the purchase of 362.8 million
common shares at a $0.023 average exercise price.
Options to Purchase Common Stock
On
December 6, 2018, the Company’s shareholders voted to approve
the First Amended and Restated 2017 Stock Incentive Plan to
increase the shares issuable under the plan from 100 million to 200
million. The Company has 100,000,000 shares available for issuance.
The Company has outstanding unexercised stock option grants
totaling 100,000,000 shares at an average exercise price of $0.010
per share as of December 31, 2018. The Company filed registration
statements on Form S-8 to register 200,000,000 shares of the
Company’s common stock related to the 2017 Stock Incentive
Plan and First Amended and Restated 2017 Stock Incentive
Plan.
As of June 30, 2019, there are 82,500,000 options to purchase
common stock at an average exercise price of $0.0099 per share
outstanding under the 2017 Amended and Restated Stock Incentive
Plan. We recorded $32,247 and $16,129 of compensation expense, net
of related tax effects, relative to stock options for the six
months ended June 30, 2019 and 2018 in accordance with ASC 505. Net
loss per share (basic and diluted) associated with this expense was
approximately ($0.00). As of June 30, 2019, there is $112,624 of
total unrecognized costs related to employee granted stock options
that are not vested. These costs are expected to be recognized over
a period of approximately 3.87 years.
Dividend Policy
We have
not previously declared or paid any cash dividends on our common
stock and do not anticipate or contemplate paying dividends on our
common stock in the foreseeable future. We currently intend to use
all of our available funds to finance the growth and development of
our business. We can give no assurances that we will ever have
excess funds available to pay dividends.
Anti-Takeover Provisions -
Our
articles of incorporation, as amended, and bylaws contain
provisions that could have the effect of discouraging potential
acquisition proposals or tender offers or delaying or preventing a
change in control, including changes a stockholder might consider
favorable. In particular, our articles of incorporation and bylaws
among other things:
●
permit our board of directors to alter our bylaws without
stockholder approval; and
●
provide that vacancies on our board of directors may be filled by a
majority of directors in office, although less than a
quorum.
Such
provisions may have the effect of discouraging a third-party from
acquiring us, even if doing so would be beneficial to our
stockholders. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of our
board of directors and in the policies formulated by them, and to
discourage some types of transactions that may involve an actual or
threatened change in control of our company. These provisions are
designed to reduce our vulnerability to an unsolicited acquisition
proposal and to discourage some tactics that may be used in proxy
fights. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly
or unsolicited proposal to acquire or restructure our company
outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals could result in
an improvement of their terms.
However,
these provisions could have the effect of discouraging others from
making tender offers for our shares that could result from actual
or rumored takeover attempts. These provisions also may have the
effect of preventing changes in our management.
Offer Restrictions outside the United States
Other
than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the securities
offered by this prospectus in any jurisdiction where action for
that purpose is required. The securities offered by this prospectus
may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisements in
connection with the offer and sale of any such securities be
distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable
rules and regulations of that jurisdiction. Persons into whose
possession this prospectus comes are advised to inform themselves
about and to observe any restrictions relating to the offering and
the distribution of this prospectus. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy
any securities offered by this prospectus in any jurisdiction in
which such an offer or a solicitation is unlawful.
INTERESTS OF NAMED EXPERTS AND
COUNSEL
SD Mayer and Associates, LLP, independent registered public
accounting firm, has audited our financial statements at December
31, 2018 and 2017, and for each of the two years in the period
ended December 31, 2018, as set forth in their report which
includes an explanatory paragraph relating to our ability to
continue as a going concern, included elsewhere in this prospectus.
We have included our financial statements in this prospectus and
elsewhere in this Registration Statement in reliance on
SD Mayer and Associates,
LLP’s report, given on their authority as experts in
accounting and auditing.
Unless
otherwise indicated in the applicable prospectus supplement,
Horwitz + Armstrong, A Professional Law Corporation, Lake Forest,
California, will provide opinions regarding the validity of the
shares of our Common Stock and may also provide opinions regarding
certain other matters. Our legal
counsel, Horwitz + Armstrong is a holder of 1,500,000 shares
of Common Stock of the Company as of the date of this
filing.
Except
as noted herein, no expert or counsel named in this
prospectus as having prepared or certified any part of this
prospectus or having given an opinion upon the validity of the
securities being registered or upon other legal matters in
connection with the registration or offering of the shares and
warrants and its underlying securities was employed on a
contingency basis, or had, or is to receive, in connection with the
offering, a substantial interest, direct or indirect, in the
registrant or any of its parents or subsidiaries. Nor was any such
person connected with the registrant or any of its parents or
subsidiaries as a promoter, managing or principal underwriter,
voting trustee, director, officer, or employee.
INFORMATION WITH RESPECT TO THE
REGISTRANT
DESCRIPTION OF OUR
BUSINESS
FINANCIAL PERFORMANCE
Fundamentals,
or “are we growing throughout our business,” review how
the business itself is performing. First, our revenue in the last
quarter was $2.2 million and our first half of the year totaled
$4.4 million. In comparison we generated $4.6 million ALL of last
year. If you add the uncounted over $500,000 of unshipped orders we
received last quarter, that brings us to about $5 million for just
the first half of this year, well outpacing all of last
year.
Next,
gross profits, or revenue after our cost of sales, was reported at
$1.4 million for the first half of 2019 in comparison to last
year’s $188,000; a 670% year-over-year increase. This is
attributed to the EZ-CLONE business contribution, which brought in
significantly higher margins along with our continuing GrowLife
business revenue, which is still split evenly, resulting in blended
margins in the 30-32.5% range, up from GrowLife’s 10%. The
EZ-CLONE business represents a greater percentage of our sales, we
expect to see these gross margins increase
further.
Finally,
the Company continues to generate growth by investing in its
EZ-CLONE acquisition, sales and marketing efforts and thus reports
a loss for the first half of the year. We believe that
expansion spending is necessary in a high-growth market such as the
cannabis, hemp and CBD-related businesses.
SO WHERE ARE WE INVESTING? CLONING AND CBD
We see
the greatest opportunity for our Company in further positioning
ourselves as the industry leaders in plant cloning, and more
specifically, as the leader in cloning of hemp plants that are
being grown for CBD extraction. Hemp production was recently
legalized in the US, creating a completely new market opportunity
where countless farmers are switching their operations to hemp.
Some conservative reports estimate that more than 500 million hemp
plants will be planted in 2019, with most farmers looking to grow
hemp to provide raw materials to the exploding CBD market.
Unfortunately, a lot of hemp growers do not understand the
intricacies of growing hemp, especially for CBD extraction. Not all
hemp plants can be used to create CBD products. Plants need to be
rich in CBD, not THC, be the correct gender, and be healthy and
large enough to process. In order to achieve this, the only way to
start plants is by using genetically modified and feminized seeds
or through cloning.
As an
industry leader, we knew that we would need the foresight to
project the cannabis growing industry of the future and to stay
ahead of trends, and to strategically position our company
accordingly. This includes the booming need for CBD-rich
hemp.
Toward
the end of 2018, we announced the majority acquisition of a company
called EZ-CLONE Enterprises. EZ-CLONE was and is known as an
industry-leading supplier of commercial-grade cloning and
propagation equipment. This was a part of the Company’s
strategic positioning plan.
Cannabis
cultivators have been cloning their favorite strains from mother
plants for years now, using various methods like tabletop growing.
These methods are extremely labor and space intensive. As the
demand for cannabis and CBD-rich hemp increases through further
legalization, as will the demand for more and more starters,
whether clones or seeds. And while cloning is the most preferred
method of production for many growers, cloning can be time and
labor intensive, and takes a lot of space in most grow
facilities.
In late
2017, EZ-CLONE developed its Pro unit, which is one of the largest
and the most efficient cloning systems on the market. It is
commercially scalable and allows cultivators to clone high volumes
of plants, in a short timeframe, as short as 14 days, with the
least amount of human and environmental resources consumed than
ever previously seen. These systems decrease the need for resources
such as labor and planting area, and we estimate that cultivators
reduce their costs by over 20% per plant using clones vs. seed
while simultaneously producing the highest-quality plants possible.
This system is unique, and we recently received a patent issuance
on this system and hope to secure further intellectual property
protection on EZ-CLONE products in the coming months and
years.
We
believe this illustrates how GrowLife is positioned as an innovator
of this industry-leading cloning solution, to capitalize not only
on the emerging cannabis industry but now the exploding hemp CBD
industry. Since taking over operations at EZ-CLONE, we have seen an
increase in revenue of over 130%.
In
addition to the Pro unit, the EZ-CLONE product line has systems of
all sizes designed for any size grow room or facility, consumable
products such as rooting compound, and everything needed to operate
these systems. Since our acquisition, we have added a
subscription-based service to provide monthly shipments to
cultivators with everything necessary to clone in our systems, as
well as struck a deal with technology company Emerald Metrics to
add spectral imaging add-ons to our Pro systems that allow growers
to see the health of their clones through any computer or mobile
device.
We have
all heard statistics such as “the CBD industry will reach $20
billion by 2024”. We believe these forecasts could be
understated. Analysts continue to be shocked at the rise of
consumer acceptance of CBD products, and more and more large
companies will begin to debut CBD products, and demand for raw
hemp-based CBD will grow accordingly. Additionally, we are seeing
many hemp growers losing crop viability due to the way they are
starting plants, some losing crops to cross-pollination and some
even being burned down by the DEA when they have too high of levels
of THC. We believe this is a testament as to how much demand for
hemp crops will continue to grow, and growers will continue to
search for the best way to grow hemp to avoid these issues. And I
reiterate that cloning is really the best way to ensure a healthy
crop with the proper CBD content. We plan to be the hemp CBD heroes
with our, for lack of a better word, revolutionary cloning
products. We have made strides to reach hemp farmers and educate
them on the benefits of cloning, launching our resource and sales
channel at EZCLONEHemp.com, attending hemp-focused tradeshows, and
ramping up our sales force in hemp-heavy states where traditional
agricultural is making the switch to hemp.
IN SUMMARY
Moving
forward, we believe there will continue to be innovation in
plant-growing equipment after the planting stage, we’re not
going to get lost in that. We are not going to create the best LED
light, or trimming machine. We are going to stick with focusing on
our core competencies; which is helping cultivators with
jump-starting their crops, reduce their costs and grow better
plants. We’re going to help them with the equipment needed to
grow their own clones, address innovation in the cloning process
and educate cultivators on the necessity of cloning in order to
maximize yield and grow high CBD strains, and even potentially
provide the clones themselves.
We
believe that through our strategic investment in EZ-CLONE, we have
positioned ourselves very well to capitalize on this expanding
market opportunity. Where EZ-CLONE was able to create a quality
product with steady growth, GrowLife has propelled it into an
international brand being utilized by some of the largest grow
operations in the world.
Recently
we have been investing capital into building out our manufacturing
capacity for the EZ-CLONE product line to prepare for this
continued growth. We currently have a sizable backlog of orders and
need to have the manufacturing capacity to not only fulfill these
orders but keep up with demand. Growth on this scale requires
capital. As such, we are seeking additional financing tools and are
happy to share that our existing funding partners continue to
support our vision by giving us a $1 million bridge as we finalize
potential other investments. We believe this illustrates the
confidence large investors have in our refreshed business
model.
Please
follow our shareholder updates for more to come on our financing.
With it we will be able to dedicate funds toward increasing our
manufacturing capacity, hiring additional sales and support staff
and actualize on our vision of being the leading source of plant
starters and equipment for the hemp and cannabis market and meet
the demand as it continues to rise.
We
believe with the revenue growth and increased margins described,
our fundamentals are strong, our positioning is focused and
trajectory is encouraging. To put it is simply, we are ready and
prepared to make our place in one of the largest shifts in
mainstream wellness and agriculture in history.
Employees
As of
September 30, 2019, we had
twenty six full-time and part-time employees. Marco Hegyi, our
Chief Executive Officer, is based in Kirkland, Washington. Mark E.
Scott, our Chief Financial Officer, is based primarily in Seattle,
Washington. In addition, we have approximately 14 full and part
time employees located throughout the United States who operate our
businesses. We employ 12 full-time and part-time employees at
EZ-CLONE in Sacramento, CA. None of our employees are subject to a
collective bargaining agreement or represented by a trade or labor
union. We believe that we have a good relationship with our
employees.
Key Partners
Our key
customers vary by state and are expected to be more defined as the
company moves from its retail walk-in purchasing sales strategy to
serving cultivation facilities directly and under predictable
purchasing contracts.
Our key
suppliers include distributors such as HydroFarm, Urban
Horticultural Supply and Hawthorne to product-specific suppliers.
Our key EZ-CLONE suppliers are Custom-Pak, Roseville Precision,
Inc. and Veritiv. All the products purchased and resold are
applicable to indoor growing for organics, greens, and plant-based
medicines.
Competition
Covering
two countries across all cultivator segments creates competitors
that also serve as partners. Large commercial cultivators have
found themselves willing to assume their own equipment support by
buying large volume purchased directly from certain suppliers and
distributors such as Hawthorne and HydroFarm. Other key competitors
on the retail side consist of local and regional hydroponic
resellers of indoor growing equipment. On the e-commerce business,
GrowersHouse.com, Hydrobuilder.com and smaller online resellers
using Amazon and eBay e-commerce market systems.
Intellectual Property and Proprietary Rights
Our
intellectual property consists of brands and their related
trademarks and websites, customer lists and affiliations, product
know-how and technology, and marketing intangibles.
Our
other intellectual property is primarily in the form of trademarks
and domain names. We also hold rights to several website addresses
related to our business including websites that are actively used
in our day-to-day business such as www.shopgrowlife.com,
www.growlifeinc.com,
www.growlifeeco.com
and www.greners.com.
We have applied for two patents related to the vertical room
product previously discussed.
We have
a policy of entering into confidentiality and non-disclosure
agreements with our employees, some of our vendors and customers as
necessary.
Closed Transactions Expected to Grow the Company
On October 3, 2017, we closed the acquisition of 51% of the
Purchased Assets from David Reichwein, a Pennsylvania resident, GIP
International Ltd, a Hong Kong corporation and DPR International
LLC, a Pennsylvania limited liability corporation. The Purchased
Assets include intellectual property, copy rights and trademarks
related to reflective tiles and flooring.
On
February 16, 2018, we entered into an Addendum (the “First
Addendum”) to amend the terms between the Company and David
Reichwein. Pursuant to the First
Addendum, we purchased the remaining 49% of the Purchased Assets in
exchange for a one-time payment of $250,000 and the cancellation of
Mr. Reichwein’s right to receive a 10% commission on certain
sales of Free Fit products as was set forth in Mr.
Reichwein’s employment agreement. In exchange for the
cancellation of the commission in the employment agreement, Mr.
Reichwein was granted the opportunity to earn up to two $100,000
cash bonuses and an aggregate common stock bonus of up to 7,500,000
shares if certain revenue and gross margin goals are met in
2018.
On
August 17, 2018, we entered into an Asset Purchase Agreement with
Go Green Hydroponics, Inc., a California corporation and TCA
– Go Green SPV, LLC, a Florida limited liability pursuant to
which the Company acquired the intellectual property and assumed
the lease for the property located at 15721 Ventura Blvd., Encino,
CA 91436. We intend to operate a retail store, internet sales and
direct sales from this location.
Concurrently,
the Company and Seller entered into a Security Agreement for
securing our assets as collateral for the obligations of Company as
set forth in the Security Agreement. In consideration for the sale
and assignment of the Purchased Assets, we agreed to pay the
Seller: (i) the proceeds generated from the sale of the closing
inventory until all closing inventory has been sold, and (ii) to
pay the Seller 5% of all gross revenue of our earned or in any way
related to the Purchased Assets generated between October 1, 2018
and December 31, 2019, up to a maximum of $200,000.
On
October 15, 2018, we closed the Purchase and Sale Agreement with
EZ-CLONE Enterprises, Inc., a California corporation. EZ-CLONE is
the manufacturer of
multiple award-winning products specifically designed for the
commercial cloning and propagation stage of indoor plant
cultivation including cannabis, food, and other hydroponic farming.
We acquired 51% of EZ-CLONE for $2,040,000, payable as
follows: (i) a cash payment of $645,000; and (ii) the issuance of
107,307,692 restricted shares of our common stock at a price of
$0.013 per share or $1,395,000.
We have
the obligation to acquire the remaining 49% of EZ-CLONE before
October 15, 2019 for $1,960,000,
payable as follows: (i) a cash payment of $855,000; and (ii) the
issuance of 85,000,000 shares of the Company’s common stock
at a price of $0.013 per share or $1,105,000. The Company is
negotiating an extension of the deadline to acquire the remaining
interests in EZ-CLONE.
Government Regulation
Currently,
there are thirty three states plus the District of Columbia that
have laws and/or regulation that recognize in one form or another
legitimate medical uses for cannabis and consumer use of cannabis
in connection with medical treatment. There are currently ten
states and the District of Columbia that allow recreational use of
cannabis. As of June 30, 2019, the policy and regulations of the
Federal government and its agencies is that cannabis has no medical
benefit and a range of activities including cultivation and use of
cannabis for personal use is prohibited on the basis of federal law
and may or may not be permitted on the basis of state law. Active
enforcement of the current federal regulatory position on cannabis
on a regional or national basis may directly and adversely affect
the willingness of customers of GrowLife to invest in or buy
products from GrowLife. Active enforcement of the current federal
regulatory position on cannabis may thus indirectly and adversely
affect revenues and profits of the GrowLife companies.
All
this being said, many reports show that the majority of the
American public is in favor of making medical cannabis available as
a controlled substance to those patients who need it. The need and
consumption will then require cultivators to continue to provide
safe and compliant crops to consumers. The cultivators will then
need to build facilities and use consumable products, which
GrowLife provides.
Market Price and Dividends
Market Information
Our
common stock is quoted and trades on the OTC Markets Pink Sheet
under the symbol "PHOT".
The
following table sets forth the range of the high and low sale
prices of the common stock for the periods indicated. The
quotations reflect inter-dealer prices, without retail markup,
markdown or commission, and may not represent actual transactions.
Consequently, the information provided below may not be indicative
of our common stock price under different conditions.
Trades
in our common stock may be subject to Rule 15g-9 of the Exchange
Act, which imposes requirements on broker/dealers who sell
securities subject to the rule to persons other than established
customers and accredited investors. For transactions covered by the
rule, broker/dealers must make a special suitability determination
for purchasers of the securities and receive the purchaser’s
written agreement to the transaction before the sale.
Period Ended
|
|
|
Year Ending December 31, 2019
|
|
|
Through
the Current Date
|
$0.0074
|
$0.0030
|
June
30, 2019
|
$0.0084
|
$0.0055
|
March
31, 2019
|
$0.0114
|
$0.0070
|
|
|
|
Year Ending December 31, 2018
|
|
|
December
31, 2018
|
$0.0226
|
$0.0063
|
September
30, 2018
|
$0.0185
|
$0.0105
|
June
30, 2018
|
$0.0280
|
$0.0145
|
March
31, 2018
|
$0.0495
|
$0.0139
|
|
|
|
Year Ending December 31, 2017
|
|
|
December
31, 2017
|
$0.0373
|
$0.0010
|
September
30, 2017
|
$0.0116
|
$0.0020
|
June
30, 2017
|
$0.0070
|
$0.0010
|
March
31, 2017
|
$0.0200
|
$0.0050
|
As of
October 18, 2019, the closing price of the company's common stock
was $0.004 per share. As of October 18, 2019, there were
3,858,188,075 shares of common stock outstanding. We have
approximately 135 stockholders of record. This number does not
include up to approximately 101,000 beneficial owners whose shares
are held in the names of various security brokers, dealers, and
registered clearing agencies.
Dividend Policy
We have
never declared or paid any cash dividends on our common stock and
intend, for the foreseeable future, to retain any future earnings
to finance the growth and development of our business. Our future
dividend policy will be determined by our Board of Directors on the
basis of various factors, including our results of operations,
financial condition, capital requirements and investment
opportunities.
Transfer Agent
The
transfer agent for our common stock is Issuer Direct Corporation
located at 500 Perimeter Park, Suite D, Morrisville, NC
27560.
Securities Authorized for Issuance Under Equity Compensation
Plans.
On
December 6, 2018, the Company’s shareholders voted to approve
the First Amended and Restated 2017 Stock Incentive Plan to
increase the shares issuable under the plan from 100 million to 200
million. The Company has 100,000,000 shares available for issuance.
The Company has outstanding unexercised stock option grants
totaling 100,000,000 shares at an average exercise price of $0.010
per share as of December 31, 2018. The Company filed registration
statements on Form S-8 to register 200,000,000 shares of the
Company’s common stock related to the 2017 Stock Incentive
Plan and First Amended and Restated 2017 Stock Incentive
Plan.
As of June 30, 2019, there are 82,500,000 options to purchase
common stock at an average exercise price of $0.0099 per share
outstanding under the 2017 Amended and Restated Stock Incentive
Plan.
Penny Stock Regulations and Restrictions on
Marketability
The SEC has adopted rules that regulate broker-dealer practices in
connection with transactions in penny stocks. Penny stocks are
generally equity securities with a market price of less than $5.00,
other than securities registered on certain national securities
exchanges or quoted on the NASDAQ system, provided that current
price and volume information with respect to transactions in such
securities is provided by the exchange or system. The penny stock
rules require a broker-dealer, prior to a transaction in a penny
stock, to deliver a standardized risk disclosure document prepared
by the SEC, that: (a) contains a description of the nature and
level of risk in the market for penny stocks in both public
offerings and secondary trading, (b) contains a description of the
broker's or dealer's duties to the customer and of the rights and
remedies available to the customer with respect to a violation of
such duties or other requirements of the securities laws, (c)
contains a brief, clear, narrative description of a dealer market,
including bid and ask prices for penny stocks and the significance
of the spread between the bid and ask price, (d) contains a
toll-free telephone number for inquiries on disciplinary actions,
(e) defines significant terms in the disclosure document or in the
conduct of trading in penny stocks, and (f) contains such other
information and is in such form, including language, type size and
format, as the SEC shall require by rule or
regulation.
The broker-dealer also must provide, prior to effecting any
transaction in a penny stock, the customer with (a) bid and offer
quotations for the penny stock, (b) the compensation of the
broker-dealer and its salesperson in the transaction, (c) the
number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the
market for such stock, and (d) a monthly account statement showing
the market value of each penny stock held in the customer's
account.
In addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from those rules,
the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and
receive the purchaser's written acknowledgment of the receipt of a
risk disclosure statement, a written agreement as to transactions
involving penny stocks, and a signed and dated copy of a written
suitability statement.
These disclosure requirements may have the effect of reducing the
trading activity for our common stock. Therefore, stockholders may
have difficulty selling their shares of our common
stock.
Identification of
Directors and Executive Officers.
Directors and Executive Officers
The
following table sets forth certain information about our current
directors and executive officers as of October 18,
2019:
Name
|
Age
|
Positions and Offices Held
|
Since
|
Management
Directors
|
|
|
|
Marco
Hegyi
|
61
|
Director
|
December
9, 2013
|
|
|
Chairman
of the Board
|
April
1, 2016- October 23, 2017 and December 6, 2018
|
|
|
Chief
Executive Officer
|
April
1, 2016
|
|
|
President
|
December
4, 2013
|
|
|
Nominations
and Governance Committee Chairman
|
June 3,
2014- October 23, 2017
|
|
|
Interim
Audit Committee Chairman
|
December
6, 2018
|
Mark E.
Scott
|
66
|
Chief
Financial Officer
|
July
31, 2014
|
|
|
Secretary
|
February
14, 2017
|
|
|
Director
|
February
14, 2017
|
Independent
Directors
|
|
|
|
Katherine
McLain
|
53
|
Director
|
February
14, 2017
|
|
|
Nominations
and Governance Committee Chairman
|
October
23, 2017
|
|
|
Compensation
Committee Chairman
|
December
6, 2018
|
Thom
Kozik
|
59
|
Director
|
October
5, 2017
|
Other
Named Executives
|
|
|
|
Joseph
Barnes
|
46
|
Executive
Vice President of GrowLife Hydroponics, Inc.
|
August
16, 2017
|
|
|
Senior
Vice President of Business Development
|
October
10, 2014
|
|
|
|
|
Term of Office
Each of our officers is elected by the Company's Board of Directors
to serve until the next annual meeting of Directors or until their
successors are duly elected and qualified. Each of our directors is
elected by the Company's Board of Directors and shall hold office
until the next annual meeting of stockholders and until his/her
successor shall have been duly elected and qualified.
Marco Hegyi – Mr. Hegyi joined GrowLife as its President and a
Member of its Board of Directors on December 9, 2013 and was
appointed as Chairman of the Nominations and Governance Committee
and a member of the Compensation Committee on June 3, 2014.
Mr. Hegyi was appointed as CEO and Chairman of GrowLife
effective on April 1, 2016. On October 23, 2017, Mr. Hegyi was not
appointed as Chairman of GrowLife, Chairman of the Nominations and
Governance Committee or a member of the Compensation Committee.
Effective December 6, 2018, Mr. Hegyi serves as Chairman of the
Board, a Member of the Board of Directors, Chief Executive Officer,
President, Interim Audit Committee Chairman and as a Member of the
Compensation and Nominations and Governance
Committees.
Mr. Hegyi served as an independent director of Know Labs, Inc., fka
Visualant, Inc. from February 14, 2008 and as Chairman of the Board
from May 2011, and served at the Chairman of the Audit and
Compensation committees until his departure on February 2015.
Previously, Mr. Hegyi was a principal with the Chasm Group from
2006 to January 2014, where he has provided business consulting
services. As a management consultant, Mr. Hegyi applied his
extensive technology industry experience to help early-stage
companies and has been issued 10 US patents.
Prior to working as a consultant in 2006, Mr. Hegyi served as
Senior Director of Global Product Management at Yahoo! Prior to
Yahoo!, Mr. Hegyi was at Microsoft leading program management for
Microsoft Windows and Office beta releases aimed at software
developers from 2001 to 2006. While at Microsoft, he formed
new software-as-a-service concepts and created operating programs
to extend the depth and breadth of the company’s unparalleled
developer eco-system, including managing offshore, outsource teams
in China and India, and being the named inventor of a filed
Microsoft patent for a business process in service
delivery.
During Mr. Hegyi’s career, he has served as President and CEO
of private and public companies, Chairman and director of boards,
finance, compensation and audit committee chair, chief operating
officer, vice-president of sales and marketing, senior director of
product management, and he began his career as a systems software
engineer.
Mr. Hegyi earned a Bachelor of Science degree in Information and
Computer Sciences from the University of California, Irvine, and
has completed advanced studies in innovation marketing, advanced
management, and strategy at Harvard Business School, Stanford
University, UCLA Anderson Graduate School of Management, and MIT
Sloan School of Management.
Mr. Hegyi’s prior experience as Chairman and Chief Executive
Officer of public companies, combined with his advanced studies in
business management and strategy, were the primary factors in the
decision to add Mr. Hegyi to the Company’s Board of
Directors.
Mark E. Scott – Mr. Mark
E. Scott was re-appointed to the Board of Directors and Secretary
of GrowLife, Inc. on February 14, 2017. Mr. Scott was previously a
member of the Board of Directors and Secretary of GrowLife, Inc.
from May 2014 until his resignation on October 18, 2015. Mr. Scott
was appointed our Consulting Chief Financial Officer on August 31,
2014 and Chief Financial Officer on November 1,
2017.
Mr. Scott served as Chief Financial Officer, Secretary and
Treasurer of Know Labs, Inc., from May 2010 to August 31, 2016. Mr.
Scott was Chief Financial Officer of U.S. Rare Earths, Inc., a
consulting position he held December 19, 2011 to April 30, 2014 and
Chief Financial Officer of Sonora Resources Corporation, a
consulting position he held from June 15, 2011 to August 31, 2014.
Also, Mr. Scott was Chief Financial Officer, Secretary and
Treasurer of WestMountain Gold from February 28, 2011 to December
31, 2013 and was a consultant from December 2010 to February 27,
2011. Mr. Scott provides consulting services to other entities from
time to time. Mr. Scott has significant financial, capital market
and relations experience in public and private microcap
companies. Mr. Scott is a certified public accountant
and received a Bachelor of Arts in Accounting from the University
of Washington.
Mr. Scott was appointed to the Board of Directors based on his
financial, SEC and governance skills.
Katherine McLain- Katherine McLain, Esq. joined GrowLife as a Member of its Board of
Directors on February 14, 2017 and was appointed Chairman of the
Nominations & Governance and Compensation Committees and serves
on the Audit Committee as of December 6, 2018. Ms. McLain has served as Assistant General Counsel
for Intuit, Inc. (known for TurboTax & QuickBooks) since
November 2017. Previously, Ms. McLain was legal counsel for Stripe,
Inc., a financial payments company from 2015-2017. From 2010 to
2015, Ms. McLain was Senior Counsel of Silicon Valley Bank. Ms.
McLain has held legal and compliance roles ranging in both public
and private companies including Silicon Valley Bank, Wells Fargo
Bank, and Obopay. Ms. McLain has over 30 years of experience
as a revenue focused attorney and regulatory professional helping
grow new business lines as well as ground up start-up
ventures. She is a graduate of the University of California,
Berkeley and the Santa Clara University School of Law and lives in
Castro Valley, CA.
Ms. McLain was appointed to the Board of Directors based on her
legal and regulatory skills.
Thom Kozik- Thom
Kozik joined GrowLife as a Member of its Board of Directors on
October 5, 2017 and was appointed a member of the Audit Committee
on October 23, 2017. Mr. Kozik was appointed to the Nominations
& Governance and Compensation Committees and serves on the
Audit Committee as of December 6, 2018. From 2013 through 2014, Mr.
Kozik served as Chief Operating Office of Omnia Media in Los
Angeles, a leading YouTube Multichannel Network delivering over 1
billion monthly video views, and almost 70 million global
Millennial subscribers. Thom assisted the company’s
CEO/founder in building the team, refining product strategy, and
securing additional funding. In December 2014, Mr. Kozik took on
the role of VP, Global Marketing/Loyalty for Marriott
International, having been recruited to fundamentally transform the
hospitality industry’s longest-running loyalty program. Thom
also led the merging of two of the industry’s most powerful
programs with Marriott’s acquisition of Starwood Hotels &
Resorts in 2016. Since March 1, 2018, Mr. Kozik serves as Chief
Commercial Officer of Loyyal Corporation, a technology firm
providing services to enterprise clients in the Travel &
Hospitality sector. In his decades of experience with corporations
such as Marriott International, Microsoft, Yahoo, and Atari, along
with several startups, he has held executive roles in marketing,
business development, and product development. Over the past decade
Kozik’s core focus has been the behavioral economics of
online consumers and communities, and methods to maximize their
lifetime value, and leveraging technology to reduce acquisition
costs while increasing retention.
Mr. Kozik was appointed to the Board of Directors based on his
marketing and product brand skills.
Joseph Barnes- Mr. Barnes was
appointed President of GrowLife Hydroponics, Inc. on August 16,
2017 and was appointed Senior Vice President of Business
Development for GrowLife, Inc. on October 10, 2014. Mr. Barnes
works, Colorado. Mr. Barnes joined GrowLife in 2010 and is
responsible for all GrowLife Hydroponics operations. He led the
sales team that recorded sales in 2014 of more than $8 million, a
100% increase from the previous year.
Mr. Barnes made the progressive and entrepreneurial decision to
work with GrowLife after seeing the agricultural benefits of indoor
growing. He is deeply passionate about clean and sustainable grows,
and has deep relationships with many trusted cultivators. He holds
extensive knowledge of indoor growing methods with
concentrating on maximizing the yields for clean and
healthy crops.
Barnes was a highly regarded snowboard instructor in Vail, Colorado
prior to joining GrowLife. He worked with many top snowboard
professionals, and received a Level 1 certification from American
Association Snowboard Instructors (AASI). Before his days on the
slopes, Barnes was also a recruiting manager focusing on placing
senior executives with international pharmaceutical/biotech
companies. He also owned and operated Chrome Night Life Arena, a
20,000 square foot indoor/outdoor venue based in Philadelphia with
more than 65 employees.
Certain Significant Employees
There are no significant employees required to be disclosed under
Item 401(c) of Regulation S-K.
Family Relationships
There are no family relationships among our directors and executive
officers.
Board Composition and Appointment of Directors
Our
business is managed under the direction of our board of directors.
Our board of directors currently consists of four members. Our
board of directors conducts its business through meetings of our
board of directors and our committees. During 2018, our current
board of directors held five meetings and acted by unanimous
written consent seven times. All members of our current board of
directors attended 75% of the meetings of our board during
2015.
There
are no family relationships among any of our directors or executive
officers.
Communication with our Board of Directors
Our
stockholders and other interested parties may communicate with our
board of directors by sending written communication in an envelope
addressed to "Board of Directors" in care of the Secretary, 5400
Carillon Point, Kirkland, WA 98033.
Director Independence
The Board has affirmatively determined that Katherine McLain, and
Thom Kozik are independent as of December 31, 2018. For
purposes of making that determination, the Board used
NASDAQ’s Listing Rules even though the Company is not
currently listed on NASDAQ.
Board Committees
The Board has three standing committees to facilitate and assist
the Board in the execution of its responsibilities. The committees
are currently the Audit Committee, the Nominations and Governance
Committee, and the Compensation Committee. The Committees were
formed on June 3, 2014 by the current board of directors. The Audit
Committee, Compensation and Nominations and Governance Committees
each have one management directors and two independent directors.
The table below shows current membership for each of the
standing Board committees.
Audit
|
|
Compensation
|
|
Nominations and Governance
|
Marco
Hegyi (Interim Chairman)
|
Katherine
McLain (Chairman)
|
Katherine
McLain (Chairman)
|
Thom
Kozik
|
|
Marco
Hegyi
|
|
Marco
Hegyi
|
Katherine
McLain
|
|
Thom
Kozik
|
|
Thom
Kozik
|
Audit Committee
The
Audit Committee has three members and met four times during the
fiscal year that ended December 31, 2018. The Audit Committee is
currently comprised of Ms. Katherine McLain and Mr. Thom Kozik,
each a non-employee Director and Marco Hegyi, a management
director. The Board has determined that Ms. McLain, Mr. Kozik and
Mr. Hegyi are financially literate. The Board also has determined
that Mr. Hegyi, Interim Chairman of the Audit Committee, is an
“audit committee financial expert” as defined by the
Securities and Exchange Commission (“SEC”) and as
adopted under the Sarbanes-Oxley Act of 2002. The Amended and
Restated Audit Committee charter can be found on the
Company’s website at www.growlifeinc.com
and was filed as Exhibit 99.2 to our Form 8-K filed with the SEC on
October 25, 2015.
The
Audit Committee’s responsibilities, discussed in detail in
the charter include, among other duties, the responsibility
to:
-
appoint the independent registered accounting firm;
-
review the arrangements for and scope of the audit by independent
registered accounting firm;
-
review the independence of the independent registered accounting
firm;
-
consider the adequacy and effectiveness of the system of internal
accounting and financial controls and review any
proposed corrective actions;
-
review and monitor our policies regarding business ethics and
conflicts of interest, audit function and internal audit
review;
-
discuss with management and the independent auditors our draft
quarterly interim and annual financial statements and key
accounting and reporting matters, including earnings releases and
review of financial statements; and
-
review the activities and recommendations of our accounting
department
Nominations and Governance Committee
The
Nominations and Governance Committee currently has three members
and did not meet during the fiscal year that ended on December 31,
2018. Nominations and Governance Committee is comprised Ms.
Katherine McLain and Mr. Thom Kozik, each a non-employee Director
and Marco Hegyi, a management director. The Committee was
formed on June 3, 2014. The Amended and Restated Nominations and
Governance Committee charter can be found on the Company’s
website at www.growlifeinc.com
and was filed as Exhibit 99.2 to our Form 8-K filed with the SEC on
October 25, 2015.
The
Nominations and Governance Committee’s responsibilities,
discussed in detail in the charter include, among other duties, the
responsibility to:
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●
|
assist
the Board in identifying individuals qualified to become Board
members, and recommend to the Board the nominees for election as
directors at the next annual meeting of stockholders;
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●
|
Assist
the Board in determining the size and composition of the Board
committees;
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●
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develop
and recommend to the Board the corporate governance principles
applicable to the Company; and
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●
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serve
in an advisory capacity to the Board and Chairman of the Board on
matters of organization, management succession plans, major changes
in the organizational structure of the Company and the conduct of
board activities.
|
Compensation Committee
The
Compensation Committee currently has three members and met two
times during the fiscal year ended December 31, 2018. The Committee
was formed on June 3, 2014. The Compensation Committee is comprised
of Ms. Katherine McLain and Mr. Thom Kozik, each a non-employee
Director and Marco Hegyi, a management director The Compensation
committee charter can be found on the Company’s website at
www.growlifeinc.com
and was filed as Exhibit 99.2 to our Form 8-K filed with the SEC on
June 9, 2014.
The
Compensation Committee’s responsibilities, which are
discussed in detail in its charter, include, among other duties,
the responsibility to:
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●
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Review
and approve corporate goals and objectives relevant to compensation
and benefits for the CEO and all other executive officers,
evaluating the CEO’s and all other executive officer’s
performances in light of those goals and objectives, and
recommending to the Board the level of compensation of the CEO
and all other executive officers based on such
evaluations;
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●
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Administering
the Company’s stock incentive plans, including the review and
approval of all stock option, restricted stock or other award
grants to executive officers, non-employee directors and
consultants/advisors, and the aggregate number of stock options or
other awards to be granted to employees;
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●
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Reviewing,
commenting on and recommending to the Board executive compensation
plans, programs and policies of the Company or that the
Company proposes to adopt;
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●
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Reviewing
and recommended the annual compensation for the Company’s
non-employee directors; and
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●
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Administering
the Company’s Stock Incentive Plan, including the review of
all stock option, restricted stock, or other award grants pursuant
to the plan.
|
Compensation Committee Interlocks and Insider
Participation
None of
our executive officers serves as a member of the board of directors
or compensation committee, or other committee serving an equivalent
function, of any other entity that has one or more of its executive
officers serving as a member of our board of directors or our
compensation committee.
Code of Conduct and Ethics
We have
adopted conduct and ethics standards titled the code of ethics,
which is available at www.growlifeinc.com. These standards were
adopted by our board of directors to promote transparency and
integrity. The standards apply to our board of directors,
executives and employees. Waivers of the requirements of our code
of ethics or associated polices with respect to members of our
board of directors or executive officers are subject to approval of
the full board.
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, 2018, that our disclosure controls and procedures were not
effective at the reasonable assurance level due to the material
weaknesses in our internal controls over financial reporting
discussed immediately below.
Identified Material Weakness
A
material weakness in our internal control over financial reporting
is a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or
detected.
Management
identified the following material weakness during its assessment of
internal controls over financial reporting:
Audit Committee :
The current Audit Committee has two independent directors, but the
Chairman is an interim Named Executive Officer. We expect to expand
this committee during 2019.
b) Changes in Internal Control over Financial
Reporting
During
the year ended December 31,
2018, there were no changes in our internal controls over
financial reporting during this fiscal quarter, which were
identified in connection with our management’s evaluation
required by paragraph (d) of rules 13a-15 and 15d-15 under the
Exchange Act, that materially affected, or is reasonably likely to
have a materially affect, on our internal control over financial
reporting.
Involvement in Certain Legal Proceedings
None of
our current directors or executive officers has, to the best of our
knowledge, during the past ten years:
●
Had any petition under the federal bankruptcy laws or any state
insolvency law filed by or against, or had a receiver, fiscal
agent, or similar officer appointed by a court for the business or
property of such person, or any partnership in which he was a
general partner at or within two years before the time hereof, or
any corporation or business association of which he was an
executive officer at or within two years before the time
hereof;
●
Been convicted in a criminal proceeding or a named subject of a
pending criminal proceeding (excluding traffic violations and other
minor offenses);
●
Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining him
from, or otherwise limiting, the following activities:
●
Acting as a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker,
leverage transaction merchant, any other person regulated by the
Commodity Futures Trading Commission, or an associated person of
any of the foregoing, or as an investment adviser, underwriter,
broker or dealer in securities, or as an affiliated person,
director or employee of any investment company, bank, savings and
loan association or insurance company, or engaging in or continuing
any conduct or practice in connection with such
activity;
●
Engaging in any type of business practice; or
●
Engaging in any activity in connection with the purchase or sale of
any security or commodity or in connection with any violation of
federal or state securities laws or federal commodities
laws;
●
Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated, of any federal or
state authority barring, suspending, or otherwise limiting for more
than 60 days the right of such person to engage in any
activity described in (i) above, or to be associated with
persons engaged in any such activity;
●
Been found by a court of competent jurisdiction in a civil action
or by the SEC to have violated any federal or state securities law,
where the judgment in such civil action or finding by the SEC has
not been subsequently reversed, suspended, or vacated;
or
●
Been found by a court of competent jurisdiction in a civil action
or by the Commodity Futures Trading Commission to have violated any
federal commodities law, where the judgment in such civil action or
finding by the Commodity Futures Trading Commission has not been
subsequently reversed, suspended, or vacated.
Section 16(a) Beneficial Ownership Reporting
Compliance
Our executive officers, directors and 10% stockholders are required
under Section 16(a) of the Exchange Act to file reports of
ownership and changes in ownership with the SEC. Copies of these
reports must also be furnished to us.
Based solely on a review of copies of reports furnished to us, as
of December 31, 2018 our executive officers, directors and 10%
holders complied with all filing requirements.
Executive and Director
Compensation
Summary Compensation Table
The following table provides information concerning remuneration of
the chief executive officer, the chief financial officer and
another named executive officer for the years ended December 31,
2018 and 2017:
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Principal
Position
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Marco Hegyi, Chief
Excutive Officer, Chairman of the Board and Director
(2)
|
12/31/2018
|
$255,234
|
$20,000
|
$-
|
$-
|
$-
|
$285,023
|
$560,257
|
|
12/31/2017
|
$250,000
|
$-
|
$-
|
$-
|
$-
|
$205,273
|
$455,273
|
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|
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Mark E. Scott,
Chief Financial Officer and Director (3)
|
12/31/2018
|
$147,140
|
$20,000
|
$-
|
$-
|
$40,000
|
$27,018
|
$234,158
|
|
12/31/2017
|
$138,250
|
$-
|
$-
|
$-
|
$18,000
|
$28,047
|
$184,297
|
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|
Joseph
Barnes,President of GrowLife Hydroponics, Inc. (4)
|
12/31/2018
|
$152,515
|
$20,000
|
$-
|
$-
|
$36,000
|
$-
|
$208,515
|
|
12/31/2017
|
$138,670
|
$-
|
$-
|
$-
|
$24,000
|
$-
|
$162,670
|
(1) For 2013, reflects
the aggregate grant date fair value of stock awards granted during
the relevant fiscal year calculated in accordance with FASB ASC
Topic 718 as reflected in the terms of the August 12, 2012
Compensation Plan. For 2014, these
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC
Topic 718.
(2) Mr. Hegyi was
paid a salary of $275,000 during the period October 15, 2018 to
December 31, 2018 and a salary of $250,000 during the period
January 1, 2018 to October 14, 2018 and the year ended December 31,
2017. Mr. Hegyi received a discretionary bonus of $20,000 during
the year ended December 31, 2018. We
paid life insurance of $10,273 for Mr. Hegyi during the years ended
December 31, 2018 and 2017, respectively. On October 21,
2018 and 2017, a Mr. Hegyi a 5 year Warrant to purchase up to
10,000,000 shares of our common stock at an exercise price of $0.01
per share vested. The warrants were valued at $390,000 and $192,000
we recorded $178,750 and $195,000 as compensation expense for the
years ended December 31, 2018 and 2017, respectively.. On October
15, 2018, Mr. Hegyi received Warrants to purchase up to 48,000,000
shares of our common stock at an exercise price of $0.012 per share
and which vest on October 15, 2018, 2019 and 2020. The Warrants are
exercisable for 5 years. The warrant that vested on October 15,
2018 was valued at $96,000 and we recorded this amount compensation
expense for the year ended December 31, 2018.
(3) Mr. Scott was paid a salary of $165,000 during the
period October 15, 2018 to December 31, 2018 and a salary of
$150,000 during the period January 1, 2018 to October 14, 2018 and
the year ended December 31, 2017. Mr. Scott received a
discretionary bonus of $20,000 during the year ended December 31,
2018. Mr. Scott was reimbursed $27,018
and $28,047 for insurance expenses during the years ended December
31, 2018 and 2017, respectively. On October 15, 2018, an entity controlled by Mr.
Scott was granted an option to purchase 20,000,000 shares of common
stock at an exercise price of $0.012 per share. On October 15, 2017, an entity controlled by Mr.
Scott was granted an option to purchase 12,000,000 shares of common
stock at an exercise price of $0.006 per share. The stock
option grants vest quarterly over three years and are exercisable
for 5 years. The stock option grants were valued at $40,000 and
$18,000. The Company recorded $8,833 and $1,500 as compensation
expense for the years ended December 31, 2018 and 2017,
respectively.
(4) Mr. Barnes was paid a salary of $165,000 during the
period October 15, 2018 to December 31, 2018 and a salary of
$150,000 during the period January 1, 2018 to October 14, 2018 and
the year ended December 31, 2017. Mr. Barnes received a
discretionary bonus of $20,000 during the year ended December 31,
2018. On October 15, 2018, Mr. Barnes
was granted an option to purchase 18,000,000 shares of common
stock at an exercise price of $0.012 per share. On October 25, 2017, Mr. Barnes was granted an
option to purchase 10,000,000 shares of common stock at an
exercise price of $0.007 per share. The stock option grants vest
quarterly over three years and are exercisable for 5 years. The
stock option grants were valued at $36,000 and $24,000. The Company
recorded $8,550 and $2,000 as compensation expense for the years
ended December 31, 2018 and 2017, respectively.
Grants of Stock Based Awards during the year ended December 31,
2018
The Compensation Committee approved the following performance-based
incentive compensation to the Named Executive Officers for the year
ended December 31, 2018:
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Estimated Future Payouts Under
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Estimated Future Payouts Under
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Non-Equity
Incentive Plan
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Equity Incentive Plan
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Awards
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Awards
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Name
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(#)
|
(#)
|
(#)
|
(#)
|
(#)
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Marco
Hegyi
|
-
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$-
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-
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$-
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-
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-
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-
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-
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-
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$-
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$-
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Mark E. Scott
(2)
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$-
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-
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$-
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-
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-
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-
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20,000,000
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-
|
$0.012
|
$40,000
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Joseph Barnes
(3)
|
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$-
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-
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$-
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-
|
-
|
-
|
18,000,000
|
-
|
$0.012
|
$36,000
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(1)
These
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC
Topic 718.
(2)
On October 15, 2018, an entity
controlled by Mr. Scott was granted an option to purchase
20,000,000 shares of common stock at an exercise price of
$0.012 per share. The stock option grant vests quarterly over three
years and is exercisable for 5 years. The stock option grant was
valued at $40,000
(3)
On October 15, 2018, Mr. Barnes was
granted an option to purchase 18,000,000 shares of common
stock at an exercise price of $0.012 per share. The stock
option grant vests quarterly over three years and is exercisable
for 5 years. The stock option grant was valued at
$36,000.
Outstanding Equity Awards as of December 31, 2018
The Named Executive Officers had the following outstanding equity
awards as of December 31, 2018:
|
Option
Awards
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Stock
Awards
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Option
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Expiration
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(#)
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(#)
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(#)
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Date
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(#)
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|
(#)
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|
Marco Hegyi
(2)
|
-
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-
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-
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$-
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-
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$-
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-
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$-
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Mark E. Scott
(3)
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4,000,000
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-
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-
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$0.010
|
7/30/2019
|
-
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$-
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-
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$-
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5,000,000
|
7,000,000
|
-
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$0.006
|
10/15/2022
|
-
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$-
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-
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$-
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1,666,667
|
18,333,333
|
-
|
$0.012
|
10/23/2023
|
-
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$-
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-
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$-
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Joseph Barnes
(4)
|
8,000,000
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-
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-
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$0.010
|
10/9/2019
|
-
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$-
|
-
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$-
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|
4,166,667
|
5,833,333
|
-
|
$0.007
|
10/25/2022
|
-
|
$-
|
-
|
$-
|
|
1,500,000
|
16,500,000
|
|
$0.012
|
10/23/2023
|
-
|
$-
|
-
|
$-
|
(1)
These
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC
Topic 718.
(2)
On October 15, 2018, an entity
controlled by Mr. Scott was granted an option to purchase
20,000,000 shares of common stock at an exercise price of
$0.012 per share. On October 15, 2017,
an entity controlled by Mr. Scott was granted an option to purchase
12,000,000 shares of common stock at an exercise price of
$0.006 per share. The stock option grants vest quarterly over three
years and are exercisable for 5 years. The stock option grants were
valued at $40,000 and $18,000 The Company recorded $8,833 and
$1,500 as compensation expense for the years ended December 31,
2018 and 2017, respectively. An entity controlled by Mr. Scott has
an additional 4,000,000 share stock option grant that is fully
vested.
(3)
On October 15, 2018, Mr. Barnes was
granted an option to purchase 18,000,000 shares of common
stock at an exercise price of $0.012 per share. On October 25, 2017, Mr. Barnes was granted an
option to purchase 10,000,000 shares of common stock at an
exercise price of $0.007 per share. The stock option grants vest
quarterly over three years and are exercisable for 5 years. The
stock option grants were valued at $36,000 and $24,000. The Company
recorded $8,550 and $2,000 as compensation expense for the years
ended December 31, 2018 and 2017, respectively. Mr. Barnes stock
option grant consists of 8,000,000 shares of our common stock that
vested quarterly over three years beginning October 1, 2014 and
2,000,000 shares of our common stock that vested October 10, 2014.
On October 12, 2016, we amended the exercise price of the stock
option grants for Mr. Barnes to $0.010 per share.
Option Exercises and Stock Vested for the year ended December 31,
2018
Mr.
Hegyi, Scott and Barnes did not have any option exercised or stock
that vested during the year ended December 31, 2018.
Pension Benefits
We do not provide any pension benefits.
Nonqualified Deferred Compensation
We do not have a nonqualified deferral program.
Employment and Consulting Agreements
Employment Agreement with Marco Hegyi
On
October 15, 2018, the Board of Directors approved an Employment
Agreement with Marco Hegyi pursuant to which we engaged Mr. Hegyi
as its Chief Executive Officer through October 15, 2021. Mr.
Hegyi’s previous Employment Agreement was set to expire on
October 21, 2018.
Mr.
Hegyi’s annual compensation is $275,000. Mr. Hegyi is also
entitled to receive an annual bonus equal to four percent (4%) of
the Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
Mr.
Hegyi received a Warrant to purchase up to 16,000,000 shares of our
common stock at an exercise price of $0.012 per share which vest
immediately. In addition, Mr. Hegyi received two Warrants to
purchase up to 16,000,000 shares of common stock of the Company at
an exercise price of $0.012 per share which vest on October 15,
2019 and 2020, respectively. The Warrants are exercisable for 5
years.
Mr.
Hegyi will be entitled to participate in all group employment
benefits that are offered by us to our senior executives and
management employees from time to time, subject to the terms and
conditions of such benefit plans, including any eligibility
requirements. In addition, the Company will purchase and maintain
during the Term an insurance policy on Mr. Hegyi’s life in
the amount of $2,000,000 payable to Mr. Hegyi’s named heirs
or estate as the beneficiary.
If we terminate Mr. Hegyi’s employment at any time prior to
the expiration of the Term without Cause, as defined in the
Employment Agreement, or if Mr. Hegyi terminates his employment at
any time for “Good Reason” or due to a
“Disability”, Mr. Hegyi will be entitled to receive (i)
his Base Salary amount through the end of the Term; and (ii) his
Annual Bonus amount for each year during the remainder of the
Term.
Employment Agreement with Mark E. Scott
On
October 15, 2018, the Compensation Committee approved an Employment
Agreement with Mark E. Scott pursuant to which the Company engaged
Mr. Scott as its Chief Financial Officer through October 15, 2021.
Mr. Scott’s previous Agreement was cancelled.
Mr.
Scott’s annual compensation is $165,000. Mr. Scott is also
entitled to receive an annual bonus equal to two percent (2%) of
the Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
Our
Board of Directors granted Mr. Scott an option to purchase twenty
million shares of our Common Stock under our 2017 Amended and
Restated Stock Incentive Plan at an exercise price of $0.012 per
share. The Shares vest quarterly over three years. All options will
have a five-year life and allow for a cashless exercise. The stock
option grant is subject to the terms and conditions of our Amended
and Restated Stock Incentive Plan, including vesting requirements.
In the event that Mr. Scott’s continuous status as employee
to us is terminated by us without Cause or Mr. Scott terminates his
employment with us for Good Reason as defined in the Scott
Agreement, in either case upon or within twelve months after a
Change in Control as defined in our amended and Restated Stock
Incentive Plan, then 100% of the total number of Shares shall
immediately become vested.
Mr.
Scott is entitled to participate in all group employment benefits
that are offered by us to our senior executives and management
employees from time to time, subject to the terms and conditions of
such benefit plans, including any eligibility requirements. In
addition, we are required purchase and maintain an insurance policy
on Mr. Scott’s life in the amount of $2,000,000 payable to
Mr. Scott’s named heirs or estate as the beneficiary.
Finally, Mr. Scott is entitled to twenty days of vacation annually
and also has certain insurance and travel employment
benefits.
If we terminate Mr. Scott’s employment at any time prior to
the expiration of the Term without Cause, as defined in the
Employment Agreement, or if Mr. Scott terminates his employment at
any time for “Good Reason” or due to a
“Disability”, Mr. Scott will be entitled to receive (i)
his Base Salary amount for ninety days; and (ii) his Annual Bonus
amount for each year during the remainder of the
Term.
Employment Agreement with Joseph Barnes
On
October 15, 2018, our Compensation Committee approved an Employment
Agreement with Joseph Barnes pursuant to which we engaged Mr.
Barnes as President of the GrowLife Hydroponics Company through
October 15, 2021. Mr. Barnes’s previous Agreement was
cancelled.
Mr.
Barnes’s annual compensation is $165,000. Mr. Barnes is also
entitled to receive an annual bonus equal to two percent (2%) of
the Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
Our
Board of Directors granted Mr. Barnes an option to purchase
eighteen million shares of the Company’s Common Stock under
the Company’s 2017 Amended and Restated Stock Incentive Plan
at an exercise price of $0.012 per share. The Shares vest quarterly
over three years. All options will have a five-year life and allow
for a cashless exercise. The stock option grant is subject to the
terms and conditions of our Amended and Restated Stock Incentive
Plan, including vesting requirements. In the event that Mr.
Barnes’s continuous status as employee to us is terminated by
us without Cause or Mr. Barnes terminates his employment with us
for Good Reason as defined in the Barnes Agreement, in either case
upon or within twelve months after a Change in Control as defined
in our Amended and Restated Stock Incentive, then 100% of the total
number of Shares shall immediately become vested.
Mr.
Barnes is entitled to participate in all group employment benefits
that are offered by us to our senior executives and management
employees from time to time, subject to the terms and conditions of
such benefit plans, including any eligibility requirements. In
addition, the Company is required purchase and maintain an
insurance policy on Mr. Barnes’s life in the amount of
$2,000,000 payable to Mr. Barnes’s named heirs or estate as
the beneficiary. Finally, Mr. Barnes is entitled to twenty days of
vacation annually and also has certain insurance and travel
employment benefits.
If we terminate Mr. Barnes’s employment at any time prior to
the expiration of the Term without Cause, as defined in the
Employment Agreement, or if Mr. Barnes terminates his employment at
any time for “Good Reason” or due to a
“Disability”, Mr. Barnes will be entitled to receive
(i) his Base Salary amount for ninety days; and (ii) his Annual
Bonus amount for each year during the remainder of the
Term.
Potential Payments upon Termination or Change in
Control
The Company’s Employment Agreement with Marco Hegyi has
provisions providing for severance payments as detailed
below.
|
|
|
|
|
|
Executive
|
|
|
|
|
|
Payments
Upon
|
|
|
|
|
|
|
|
|
|
|
|
Compensation:
|
|
|
|
|
|
Base salary
(1)
|
$-
|
$-
|
$575,000
|
$575,000
|
$-
|
Performance-based
incentive
|
|
|
|
|
|
compensation
|
$-
|
$-
|
$-
|
$-
|
$-
|
Stock
options
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Benefits and
Perquisites:
|
|
|
|
|
|
Health and welfare
benefits
|
$-
|
$-
|
$-
|
$-
|
$-
|
Accrued vacation
pay
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$575,000
|
$575,000
|
$-
|
(1)
Reflects
amounts to be paid upon termination without cause and upon
termination in a change of control, less any months worked. All
outstanding warrants fully vest under certain
conditions.
The Company’s Employment Agreement with Mark E. Scott has
provisions providing for severance payments as detailed
below.
|
|
|
|
|
|
Executive
|
|
|
|
|
|
Payments
Upon
|
|
|
|
|
|
|
|
|
|
|
|
Compensation:
|
|
|
|
|
|
Base salary
(1)
|
$-
|
$-
|
$41,250
|
$41,250
|
$-
|
Performance-based
incentive
|
|
|
|
|
|
compensation
|
$-
|
$-
|
$-
|
$-
|
$-
|
Stock
options
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Benefits and
Perquisites:
|
|
|
|
|
|
Health and welfare
benefits
|
$-
|
$-
|
$-
|
$-
|
$-
|
Accrued vacation
pay
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$41,250
|
$41,250
|
$-
|
(2)
Reflects
amounts to be paid upon termination without cause and upon
termination in a change of control. All outstanding stock options
vests fully vest under certain conditions.
The Company’s Employment Agreement with Joe Barnes has
provisions providing for severance payments as detailed
below.
|
|
|
|
|
|
Executive
|
|
|
|
|
|
Payments
Upon
|
|
|
|
|
|
|
|
|
|
|
|
Compensation:
|
|
|
|
|
|
Base salary
(1)
|
$-
|
$-
|
$41,250
|
$41,250
|
$-
|
Performance-based
incentive
|
|
|
|
|
|
compensation
|
$-
|
$-
|
$-
|
$-
|
$-
|
Stock
options
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Benefits and
Perquisites:
|
|
|
|
|
|
Health and welfare
benefits
|
$-
|
$-
|
$-
|
$-
|
$-
|
Accrued vacation
pay
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$41,250
|
$41,250
|
$-
|
(1)
Reflects
amounts to be paid upon termination without cause and upon
termination in a change of control. There outstanding stock options
vests fully vest under certain conditions.
Director Compensation
We primarily use stock options grants to incentive compensation to
attract and retain qualified candidates to serve on the Board. This
compensation reflected the financial condition of the Company. In
setting director compensation, we consider the significant amount
of time that Directors expend in fulfilling their duties to the
Company as well as the skill-level required by our members of the
Board. During year ended December 31, 2018, Marco Hegyi and Mark E.
Scott did not receive any compensation for their service as
directors. The compensation disclosed in the Summary
Compensation Table on page 37 represents the total
compensation.
Director Summary Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Michael E. Fasci
(2)
|
$-
|
$125,781
|
$-
|
$-
|
$-
|
$-
|
$125,781
|
|
|
|
|
|
|
|
|
Katherine McLean
(3)
|
-
|
57,863
|
-
|
-
|
-
|
-
|
57,863
|
|
|
|
|
|
|
|
|
Thom Kozik
(4)
|
-
|
19,562
|
-
|
-
|
-
|
-
|
19,562
|
|
|
|
|
|
|
|
|
|
$-
|
$203,205
|
$-
|
$-
|
$-
|
$-
|
$77,425
|
(1) These amounts reflect the grant date market value as
required by Regulation S-K Item 402(n)(2), computed in accordance
with FASB ASC Topic 718.
(2) On
February 1, 2018, we issued 3,789,041 shares of our common stock to
Mr. Fasci that was valued at $0.02 per share or $75,781. On
December 6, 2018, we issued Mr. Fasci 5,000,000 shares of our
common stock that was valued at $0.01 per share or $50,000. On
December 6, 2018, Michael E. Fasci resigned as a Member of the
Board of Directors.
(3) On
February 1, 2018, we issued 2,893,151 shares of our common stock to
Katherine McLain that was valued at $0.02 per share or
$57,863.
(4) On
February 1, 2018, we issued 978,082 shares of our common stock to
Thom Kozik that was valued at $0.02 per share or
$19,562.
Compensation Paid to Board Members
Our independent non-employee directors are not compensated in
cash. The only compensation has been in the form of
stock awards. There is no stock compensation plan for independent
non-employee directors.
Security Ownership of Certain
Beneficial Owners and Management
The following table sets forth certain information regarding the
ownership of our common stock as of September 30, 2019
by:
●
|
each director and nominee for director;
|
|
|
●
|
each person known by us to own beneficially 5% or more of our
common stock;
|
|
|
●
|
each officer named in the summary compensation table elsewhere in
this report; and
|
|
|
●
|
all directors and executive officers as a group.
|
The amounts and percentages of common stock beneficially owned are
reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities. Under the
rules of the SEC, a person is deemed to be a “beneficial
owner” of a security if that person has or shares voting
power,” which includes the power to vote or to direct the
voting of such security, or “investment power,” which
includes the power to dispose of or to direct the disposition of
such security. A person is also deemed to be a beneficial owner of
any securities of which that person has the right to acquire
beneficial ownership within 60 days. Under these rules more than
one person may be deemed a beneficial owner of the same securities
and a person may be deemed to be a beneficial owner of securities
as to which such person has no economic interest.
Unless otherwise indicated below, each beneficial owner named in
the table has sole voting and sole investment power with respect to
all shares beneficially owned, subject to community property laws
where applicable. The address of each beneficial owner is 5400
Carillon Point, Kirkland, WA 98033 and the address of more than 5%
of common stock is detailed below.
|
Shares
Beneficially Owned
|
Name of
Beneficial Owner
|
|
|
Directors and Named
Executive Officers-
|
|
Marco Hegyi
(2)
|
62,000,000
|
1.6%
|
Mark E. Scott
(3)
|
31,666,667
|
*
|
Katherine McLain
(4)
|
13,001,259
|
*
|
Thom Kozik
(5)
|
11,086,190
|
*
|
Joseph Barnes
(6)
|
20,966,667
|
*
|
Total Directors and
Officers (5 in total)
|
138,720,783
|
3.6%
|
* Less than 1%.
(1) Based on
3,858,188,075 shares of common stock outstanding as of September
30, 2019.
(2) Reflects the shares beneficially owned by Marco Hegyi,
including warrants to purchase 59,500.000 shares of our
common stock.
(3) Reflects the shares beneficially owned by Mark E. Scott,
including stock option grants totaling 18,666,667 shares that Mr.
Scott has the right to acquire in sixty days.
(4)
Reflects the shares beneficially owned
by Katherine McLain.
(5)
Reflects the shares beneficially owned
by Thom Kozik.
(6)
Reflects the shares beneficially owned
by Joseph Barnes, including stock option grants totaling 20,666,667
shares that Mr. Barnes has the right to acquire in sixty
days.
There are no 5% holders as of September 30, 2019.
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
financial condition and results of operations together with our
financial statements and related notes appearing at the end of this
prospectus. Some of the information contained in this discussion
and analysis or set forth elsewhere in this prospectus, including
information with respect to our plans and strategy for our business
and related financing, includes forward-looking statements that
involve risks and uncertainties. You should read the "Risk Factors"
section of this prospectus for a discussion of important factors
that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements
contained in the following discussion and analysis.
THE COMPANY AND OUR BUSINESS
GrowLife,
Inc. (“GrowLife” or the “Company”) is
incorporated under the laws of the State of Delaware and is
headquartered in Kirkland, Washington. We were founded in 2012 with
the Closing of the Agreement and Plan of Merger with SGT Merger
Corporation.
FINANCIAL PERFORMANCE
Fundamentals,
or “are we growing throughout our business,” review how
the business itself is performing. First, our revenue in the last
quarter was $2.2 million and our first half of the year totaled
$4.4 million. In comparison we generated $4.6 million ALL of last
year. If you add the uncounted over $500,000 of unshipped orders we
received last quarter, that brings us to about $5 million for just
the first half of this year, well outpacing all of last
year.
Next,
gross profits, or revenue after our cost of sales, was reported at
$1.4 million for the first half of 2019 in comparison to last
year’s $188,000; a 670% year-over-year increase. This is
attributed to the EZ-CLONE business contribution, which brought in
significantly higher margins along with our continuing GrowLife
business revenue, which is still split evenly, resulting in blended
margins in the 30-32.5% range, up from GrowLife’s 10%. The
EZ-CLONE business represents a greater percentage of our sales, we
expect to see these gross margins increase
further.
Finally,
the Company continues to generate growth by investing in its
EZ-CLONE acquisition, sales and marketing efforts and thus reports
a loss for the first half of the year. We believe that
expansion spending is necessary in a high-growth market such as the
cannabis, hemp and CBD-related businesses.
SO WHERE ARE WE INVESTING? CLONING AND CBD
We see
the greatest opportunity for our Company in further positioning
ourselves as the industry leaders in plant cloning, and more
specifically, as the leader in cloning of hemp plants that are
being grown for CBD extraction. Hemp production was recently
legalized in the US, creating a completely new market opportunity
where countless farmers are switching their operations to hemp.
Some conservative reports estimate that more than 500 million hemp
plants will be planted in 2019, with most farmers looking to grow
hemp to provide raw materials to the exploding CBD market.
Unfortunately, a lot of hemp growers do not understand the
intricacies of growing hemp, especially for CBD extraction. Not all
hemp plants can be used to create CBD products. Plants need to be
rich in CBD, not THC, be the correct gender, and be healthy and
large enough to process. In order to achieve this, the only way to
start plants is by using genetically modified and feminized seeds
or through cloning.
As an
industry leader, we knew that we would need the foresight to
project the cannabis growing industry of the future and to stay
ahead of trends, and to strategically position our company
accordingly. This includes the booming need for CBD-rich
hemp.
Toward
the end of 2018, we announced the majority acquisition of a company
called EZ-CLONE Enterprises. EZ-CLONE was and is known as the
industry-leading supplier of commercial-grade cloning and
propagation equipment. This was a part of this strategic
positioning plan.
Cannabis
cultivators have been cloning their favorite strains from mother
plants for years now, using various methods like tabletop growing.
These methods are extremely labor and space intensive. As the
demand for cannabis and CBD-rich hemp increases through further
legalization, as will the demand for more and more starters,
whether CLONEs or seeds. And while cloning is the most preferred
method of production for many growers, cloning can be time and
labor intensive, and takes a lot of space in most grow
facilities.
In late
2017, EZ-CLONE developed its Pro unit, which is one of the largest
and the most efficient cloning systems on the market. It is
commercially scalable and allows cultivators to CLONE high volumes
of plants, in a short timeframe, as short as 14 days, with the
least amount of human and environmental resources consumed than
ever previously seen. These systems decrease the need for resources
such as labor and planting area, and we estimate that cultivators
reduce their costs by over 20% per plant using CLONEs vs. seed
while simultaneously producing the highest-quality plants possible.
This system is so unique, we
recently announced a patent issuance on this system and hope
to secure further intellectual property protection on EZ-CLONE
products in the coming months and years.
We
believe this illustrates how GrowLife is positioned as an innovator
of this industry-leading cloning solution, to capitalize not only
on the emerging cannabis industry but now the exploding hemp CBD
industry. In just the few months since taking over operations at
EZ-CLONE, we have seen an increase in revenue of over
130%.
In
addition to the Pro unit, the EZ-CLONE product line has systems of
all sizes designed for any size grow room or facility, consumable
products such as rooting compound, and everything needed to operate
these systems. Since our acquisition, we have added a
subscription-based service to provide monthly shipments to
cultivators with everything necessary to CLONE in our systems, as
well as struck a deal with technology company Emerald Metrics to
add spectral imaging add-ons to our Pro systems that allow growers
to see the health of their CLONEs through any computer or mobile
device.
We have
all heard statistics such as the CBD industry will reach $20
billion by 2024. We believe these forecasts could be understated.
Analysts continue to be shocked at the rise of consumer acceptance
of CBD products, and more and more large companies will begin to
debut CBD products, and demand for raw hemp-based CBD will grow
accordingly. Additionally, we are seeing many hemp growers losing
crop viability due to the way they are starting plants, some losing
crops to cross-pollination and some even being burned down by the
DEA when they have too high of levels of THC. We believe this is a
testament as to how much demand for hemp crops will continue to
grow, and growers will continue to search for the best way to grow
hemp to avoid these issues. And I reiterate that cloning is really
the best way to ensure a healthy crop with the proper CBD content.
We plan to be the hemp CBD heroes with our, for lack of a better
word, revolutionary cloning products. We have made strides to reach
hemp farmers and educate them on the benefits of cloning, launching
our resource and sales channel at EZCLONEHemp.com, attending
hemp-focused tradeshows, and ramping up our sales force in
hemp-heavy states where traditional agricultural is making the
switch to hemp.
IN SUMMARY
Moving
forward, we believe there will continue to be innovation in
plant-growing equipment after the planting stage, we’re not
going to get lost in that. We are not going to create the best LED
light, or trimming machine. We are going to stick with focusing on
our core competencies; which is helping cultivators with
jump-starting their crops, reduce their costs and grow better
plants. We’re going to help them with the equipment needed to
grow their own clones, address innovation in the cloning process
and educate cultivators on the necessity of cloning in order to
maximize yield and grow high CBD strains, and even potentially
provide the clones themselves.
We
believe that through our strategic investment in EZ-CLONE, we have
positioned ourselves very well to capitalize on this expanding
market opportunity. Where EZ-CLONE was able to create a quality
product with steady growth, GrowLife has propelled it into an
international brand being utilized by some of the largest grow
operations in the world.
Recently
we have been investing capital into building out our manufacturing
capacity for the EZ-CLONE product line to prepare for this
continued growth. We currently have a sizable backlog of orders and
need to have the manufacturing capacity to not only fulfill these
orders but keep up with demand. Growth on this scale requires
capital. As such, we are seeking additional financing tools and are
happy to share that our existing funding partners continue to
support our vision by giving us a $1 million bridge as we finalize
potential other investments. We believe this illustrates the
confidence large investors have in our refreshed business
model.
Please
follow our shareholder updates for more to come on our financing.
With it we will be able to dedicate funds toward increasing our
manufacturing capacity, hiring additional sales and support staff
and actualize on our vision of being the leading source of plant
starters and equipment for the hemp and cannabis market and meet
the demand as it continues to rise.
We
believe with the revenue growth and increased margins described,
our fundamentals are strong, our positioning is focused and
trajectory is encouraging. To put it is simply, we are ready and
prepared to make our place in one of the largest shifts in
mainstream wellness and agriculture in history.
Results of Operations
The following table presents certain consolidated statement of
operations information and presentation of that data as a
percentage of change from year-to-year.
SIX MONTHS ENDED JUNE 30, 2019
AS COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 2018
(dollars
in thousands)
|
Six Months Ended June 30,
|
|
|
|
|
|
Net
revenue
|
$4,445
|
$1,917
|
$2,528
|
131.9%
|
Cost
of goods sold
|
2,998
|
1,729
|
1,269
|
-73.4%
|
Gross
profit
|
1,447
|
188
|
1,259
|
669.7%
|
General
and administrative expenses
|
4,183
|
2,104
|
2,079
|
-98.8%
|
Operating
loss
|
(2,736)
|
(1,916)
|
(820)
|
-42.8%
|
Other
income (expense):
|
|
|
|
|
Change
in fair value of derivative
|
509
|
1,655
|
(1,146)
|
-69.2%
|
Interest
expense, net
|
(227)
|
(709)
|
482
|
68.0%
|
Loss
on debt conversions
|
(1,575)
|
(5,354)
|
3,779
|
70.6%
|
Total
other (expense) income
|
(1,293)
|
(4,408)
|
3,115
|
70.7%
|
(Loss)
before income taxes
|
(4,029)
|
(6,324)
|
2,295
|
36.3%
|
Income
taxes - current benefit
|
-
|
-
|
-
|
0.0%
|
Net
(loss)
|
$(4,029)
|
$(6,324)
|
$2,295
|
36.3%
|
|
|
|
|
|
Revenue
Net
revenue for the six months ended June 30, 2019 increased by
$2,528,000 to $4,445,000 from $1,917,000 for the six months ended
June 30, 2018. The increase resulted from increased sales personnel
and the acquisition of EZ-CLONE on
October 15, 2018.
Cost of Goods Sold
Cost of
sales for the six months ended June 30, 2019 increased by
$1,269,000 to $2,998,000 from $1,729,000 for the six months ended
June 30, 2018. The increase resulted from the acquisition of EZ-CLONE on October 15,
2018.
Gross profit was $1,447,000 for the six months ended June 30, 2019
as compared to a gross profit of $188,000 for the six months ended
June 30, 2018. The gross profit percentage was 32.5% for the six
months ended June 30, 2019 as compared to 9.8% for the six months
ended June 30, 2018. The increase was due increased sales,
offset by lower cost of sales related to favorable product mix
related to the acquisition of EZ-CLONE
on October 15, 2018. EZ-CLONE reported a gross profit percentage of
51.6%.
General and Administrative Expenses
General
and administrative expenses for the six months ended June 30, 2019
were $4,183,000 as compared to $2,104,000 for the six months ended
June 30, 2018. The variances were as follows: (i) an increase in
non-cash other expenses of $910,000; (ii) an increase in EZ-CLONE
expenses (primarily payroll and rent) of $940,000; and (iii) an
increase in other expenses of $229,000 (primary payroll and sales
and marketing expenses). As part of the general and administrative
expenses for the six months ended June 30, 2019, we recorded public
relation, investor relation or business development expenses of
$60,000 and $0 respectively. The increase resulted from increased
sales personnel and channels of distribution, the development of
the reflective tiles and flooring
product line which was acquired on October 3, 2017, the development
of the Encino business and the acquisition of EZ-CLONE on October
15, 2018.
Non-cash
general and administrative expenses for the six months ended June
30, 2019 were $910,000 including (i) depreciation and amortization
of $85,000; (ii) amortization of intangible assets of $571,000;
(iii) stock based compensation of $80,000 related to stock option
grants and warrants; and (iv) common stock issued for services of
$174,000.
Non-cash
general and administrative expenses for the six months ended June
30, 2018 were $300,000 including (i) depreciation and amortization
of $31,000; (ii) stock based compensation of $114,000 related to
stock option grants and warrants; (iii) common stock issued for
services of $155,000.
Other Expense
Other
expense for the six months ended June 30, 2019 was $1,293,000 as
compared to other expense of $4,408,000 for the six months ended
June 30, 2018. The other expense for the three months ended June
30, 2019 included (i) change in derivative liability of $509,000;
offset by (ii) interest expense of $227,000; and (iii) loss on debt
conversions of $1,575,000. The change in derivative liability is
the non-cash change in the fair value and relates to our derivative
instruments. The non-cash interest related to accrued interest
expense on our notes payable. The loss on debt conversions related
to the conversion of our notes payable at prices below the market
price.
The
other expense for the six months ended June 30, 2018 included (i)
interest expense of $709,000; (ii) loss on debt conversions of
$5,354,000; and (iii) change in fair value of derivative of
$1,655,000 The non-cash interest related to the amortization of the
debt discount associated with our convertible notes and accrued
interest expense related to our notes payable. The loss on debt
conversions related to the conversion of our notes payable at
prices below the market price.
Net (Loss)
Net
loss for the six months ended June 30, 2019 was $4,023,000 as
compared to $6,324,000 for the six months ended June 30, 2018 for
the reasons discussed above.
Net
loss for the six months ended June 30, 2019 included non-cash
expenses of $2,109,000 including (i) depreciation and amortization
of $84,000; (ii) amortization of intangible assets of $571,000;
(iii) stock based compensation of $80,000 related to stock option
grants and warrants; (iv) common stock issued for services of
$174,000; (v) accrued interest on convertible notes payable of
$127,000; (vi) loss on debt conversions of $1,575,000; and (vii)
noncontrolling interest in EZ-CLONE Enterprises, Inc. of $7,000;
offset by (viii) change in derivative liability of
$509,000.
Net
loss for the six months ended June 30, 2018 included non-cash
expenses of $4,765,000 including (i) depreciation and amortization
of $31,000; (ii) stock based compensation of $114,000 related to
stock option grants and warrants; (iii) common stock issued for
services of $154,000; (iv) accrued interest and amortization of
debt discount on convertible notes payable of $601,000; and (v)
loss on debt conversions of $5,529,000; offset by (vi) change in
derivative liability of $1,662,000.
We
expect losses to continue as we implement our business
plan.
YEAR ENDED DECEMBER 31, 2018 COMPARED TO THE YEAR ENDED DECEMBER
31, 2017
(dollars in thousands)
|
|
|
|
|
|
|
Net
revenue
|
$4,573
|
$2,452
|
$2,121
|
86.5%
|
Cost
of goods sold
|
4,105
|
2,181
|
1,924
|
-88.2%
|
Gross
profit
|
468
|
271
|
197
|
72.7%
|
General
and administrative expenses
|
5,017
|
2,320
|
2,697
|
-116.3%
|
Operating
loss
|
(4,549)
|
(2,049)
|
(2,500)
|
-122.0%
|
Other
income (expense):
|
|
|
|
|
Change
in fair value of derivative
|
978
|
496
|
482
|
97.2%
|
Interest
expense, net
|
(1,321)
|
(1,281)
|
(40)
|
-3.1%
|
Other
income
|
-
|
16
|
(16)
|
-100.0%
|
Impairment
of acquired assets
|
(62)
|
-
|
(62)
|
-100.0%
|
Loss
on debt conversions
|
(6,519)
|
(2,503)
|
(4,016)
|
-160.4%
|
Total
other (expense)
|
(6,924)
|
(3,272)
|
(3,652)
|
-111.6%
|
(Loss)
before income taxes
|
(11,473)
|
(5,321)
|
(6,152)
|
-115.6%
|
Income
taxes - current benefit
|
-
|
-
|
-
|
0.0%
|
Net
(loss)
|
$(11,473)
|
$(5,321)
|
$(6,152)
|
-115.6%
|
Revenue
Net
revenue for the year ended December 31, 2018 increased $2,121,000
to $4,573,000 as compared to $2,452,000 for the year ended December
31, 2017. The increase resulted from increased sales personnel and
channels of distribution, the development of the reflective tiles and flooring product line which
was acquired on October 3, 2017, the development of the Encino
business and the acquisition of EZ-Clone on October 15,
2018.
Cost of Goods Sold
Cost of
sales for the year ended December 31, 2018 increased $1,924,000 to
$4,105,000 as compared to $2,181,000 for the year ended December
31, 2017. The increase resulted from increased sales personnel and
channels of distribution, the development of the reflective tiles and flooring product line which
was acquired on October 3, 2017, the development of the Encino
business and the acquisition of EZ-Clone on October 15,
2018.
Gross profit was $468,000 for the year ended December 31, 2018 as
compared to a gross profit of $271,000 for the year ended December
31, 2017. The gross profit percentage was 10.2% for the year ended
December 31, 2018 as compared to 11.1% for the year ended December
31, 2017. The increase was due increased sales, offset by
lower cost of sales related to favorable product mix at the
reflective tiles and flooring product
line and the acquisition of EZ-Clone on October 15, 2018.
The gross margin % decrease related to an additional $100,000
reserve for obsolete inventory that was recorded during the year
ended December 31, 2018.
General and Administrative Expenses
General
and administrative expenses for the year ended December 31, 2018
were $5,017,000 as compared to $2,320,000 for the year ended
December 31, 2017. The variances were as follows: (i) an increase
in insurance of $106,000 (ii) an increase in legal expense of
$62,000; (iii) an increase in payroll of $518,000; (iv) an increase
in sales and marketing of $ 131,000; (v) an increase in consulting
of $142,000; (vi) an increase in non-cash other expenses of
$388,000; (vii) an increase in rent of $189,000; (viii) an increase
in EZ-Clone expenses of $269,000; and (ix) an increase in other
expenses of $892,000. As part of the general and administrative
expenses for the year ended December 31, 2018, we recorded public
relation, investor relation or business development expenses of
$41,000 and $0 respectively. The increase resulted from increased
sales personnel and channels of distribution, the development of
the reflective tiles and flooring
product line which was acquired on October 3, 2017, the development
of the Encino business and the acquisition of EZ-Clone on October
15, 2018.
Non-cash
general and administrative expenses for the year ended December 31,
2018 were $682,000 including (i) depreciation and amortization of
$223,000; (ii) stock based compensation of $241,000 related to
stock option grants and warrants; (iii) common stock issued for
services of $218,000.
Non-cash
general and administrative expenses for the year ended December 31,
2017 were $294,000 including (i) depreciation and amortization of
$2,000; (ii) stock based compensation of $216,000 related to stock
option grants and warrants; and (iii) common stock issued for
services of $76,000.
Other Expense
Other
expense for the year ended December 31, 2018 was $6,924,000 as
compared to other expense of $3,272,000 for the year ended December
31, 2017. The other expense for the year ended December 31, 2018
included (i) change in derivative liability of $978,000; offset by
(ii) interest expense of $1,321,000; (iii) loss on debt conversions
of $6,519,000; (iv) and impairment of acquired assets of $62,000.
The change in derivative liability is the non-cash change in the
fair value and relates to our derivative instruments. The non-cash
interest related to the amortization of the debt discount
associated with our convertible notes and accrued interest expense
related to our notes payable. The loss on debt conversions related
to the conversion of our notes payable at prices below the market
price. The impairment of acquired assets related to the Encino
operation.
The
other expense for the year ended December 31, 2017 included (i)
change in derivative liability of $496,000 and (ii) other income of
$16,000; offset by (iii) interest expense of $1,281,000 and (iv)
loss on debt conversions of $2,503,000. The change in derivative
liability is the non-cash change in the fair value and relates to
our derivative instruments. The non-cash interest related to the
amortization of the debt discount associated with our convertible
notes and accrued interest expense related to our notes payable.
The loss on debt conversions related to the conversion of our notes
payable at prices below the market price.
Net (Loss)
Net
loss for the year ended December 31, 2018 was $11,473,000 as
compared to $5,321,000 for the year ended December 31, 2017 for the
reasons discussed above.
Net
loss for the year ended December 31, 2018 included non-cash
expenses of $7,477,000 including (i) depreciation and amortization
of $223,000; (ii) stock based compensation of $241,000 related to
stock option grants and warrants; (iii) common stock issued for
services of $218,000. (iv) accrued interest and amortization of
debt discount on convertible notes payable of $1,191,000; (v) loss
on debt conversions of $6,519,000; (vi) impairment of acquired
assets of $62,000; offset by (vii) change in derivative liability
of $978,000.
Net
loss for the year ended December 31, 2017 included non-cash
expenses of $3,462,000, (i) depreciation and amortization of
$2,000; (ii) stock based compensation of $216,000 related to stock
option grants and warrants; (iii) common stock issued for services
of $76,000. (iv) accrued interest and amortization of debt discount
on convertible notes payable of $623,000; (v) write-off of
derivative liability to additional paid in capital to of $538,000;
and (vi) loss on debt conversions of 2,503,000, offset by (vii)
change in derivative liability of $496,000.
We
expect losses to continue as we implement our business
plan.
LIQUIDITY AND CAPITAL RESOURCES
We had
cash of $126,000 and a working capital deficit of approximately
$379,000 (less derivative liability, convertible debt, right of use
liability and deferred revenue) as of June 30, 2019. We
expect losses to continue as we grow our business. Our cash used in
operations for the six months ended June 30, 2019 and for the years
ended December 31, 2018 and 2017 was $2,097,000, $3,855,000 and
$2,082,000, respectively. We expect the cash used in operations to
decline with increased sales, gross margin and reduced
expenses.
We will
need to obtain additional financing in the future. There can be no
assurance that we will be able to secure funding, or that if such
funding is available, the terms or conditions would be acceptable
to us. If we are unable to obtain additional financing, we may need
to restructure our operations, divest all or a portion of our
business or file for bankruptcy. We have financed our operations
through the issuance of convertible debentures and the sale of
common stock.
Funding Agreements with Chicago Venture Partners, L.P., and Iliad
Research and Trading, L.P and Odyssey Research and Trading,
LLC
On July
23, 2019, we closed the transactions described below with Odyssey
Research and Trading, LLC, a Utah limited liability company
(“Odyssey”).
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement
On July
23, 2019, we executed the following agreements with Odyssey: (i)
Securities Purchase Agreement; (ii) Secured Promissory Notes; and
(iii) Security Agreement (collectively the “Odyssey
Agreements”). The Company entered into the Odyssey Agreements
with the intent to acquire working capital to grow the
Company’s businesses.
The
total amount of funding under the Odyssey Agreements is $1,105,000.
The Convertible Promissory Note carries an original issue discount
of $100,000 and a transaction expense amount of $5,000, for total
debt of $1,105,000. We agreed to reserve three times the number of
shares based on the redemption value with a minimum of 500 million
shares of its common stock for issuance upon conversion of the
Debt, if that occurs in the future. If not converted sooner, the
Debt is due on or before July 22, 2020. The Debt carries an
interest rate of ten percent (10%). The Debt is convertible, at
Odyssey’s option, into the Company’s common stock at
$0.010 per share subject to adjustment as provided for in the
Secured Promissory Notes.
Our
obligation to pay the Debt, or any portion thereof, is secured by
all of our assets.
Operating Activities
Net
cash used in operating activities for the six months ended June 30,
2019 was $2,097,000. This amount was primarily related to a net
loss of $4,023,000 and (i) net working capital of $183,000; offset
by (ii) non-cash expenses of $2,109,000 including (i) depreciation
and amortization of $84,000; (ii) amortization of intangible assets
of $571,000; (iii) stock based compensation of $80,000 related to
stock option grants and warrants; (iv) common stock issued for
services of $174,000; (v) accrued interest on convertible notes
payable of $127,000; (vi) loss on debt conversions of $1,575,000;
and (vii) noncontrolling interest in EZ-CLONE Enterprises, Inc. of
$7,000; offset by (viii) change in derivative liability of
$509,000.
Investment Activities
Net cash used in investing activities for the six months
ended June 30, 2019 was $5,000. The amount related to the
investment in purchased assets.
Financing Activities
Net
cash used in financing activities for the six months ended June 30,
2019 was $106,000. The amount related to proceeds from note payable
of $490,000, offset by repayment of convertible notes payable of
$591,000 and repayment of capital lease of $5,000.
Our contractual cash obligations as of June 30, 2019 are summarized
in the table below:
|
|
|
|
|
|
Contractual Cash
Obligations
|
|
|
|
|
|
Operating
leases
|
$2,013,196
|
$537,910
|
$925,511
|
$549,776
|
$-
|
Convertible notes
payable
|
2,685,122
|
2,685,122
|
-
|
-
|
-
|
Notes payable and
capital leases
|
106,610
|
106,610
|
-
|
-
|
-
|
Capital
expenditures
|
300,000
|
100,000
|
100,000
|
100,000
|
-
|
|
$5,104,928
|
$3,429,642
|
$1,025,511
|
$649,776
|
$-
|
Critical Accounting Policies and Estimates
Accounts Receivable and Revenue - Revenue is recognized at
the time the Company sells merchandise to the customer in store.
eCommerce sales include shipping revenue and are recorded upon
shipment to the customer. This is when the risk of loss transfers
to our customers, the fee is fixed and determinable, and collection
of the sale is reasonably assured. A product is not shipped without
an order from the customer and the completion of credit acceptance
procedures. The majority of our sales are cash or credit card;
however, we occasionally extend terms to our customers. Accounts
receivable are reviewed periodically for
collectability.
Inventories - Inventories are recorded on a first in first
out basis. Inventory consists of raw materials, purchased finished
goods and components held for resale. Inventory is valued at the
lower of cost or market. The reserve for inventory was $50,000 and
$120,000 as of June 30, 2019 and
December 31, 2018, respectively.
Long Lived Assets – The
Company reviews its long-lived assets for impairment annually or
when changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Long-lived assets under certain
circumstances are reported at the lower of carrying amount or fair
value. Assets to be disposed of and assets not expected to provide
any future service potential to the Company are recorded at the
lower of carrying amount or fair value (less the projected cost
associated with selling the asset). To the extent carrying values
exceed fair values, an impairment loss is recognized in operating
results.
Intangible Assets – Intangible assets are capitalized
and amortized on a straight-line basis over their estimated useful
life, if the life is determinable. If the life is not determinable,
amortization is not recorded. We regularly perform reviews to
determine if facts and circumstances exist which indicate that the
useful lives of our intangible assets are shorter than originally
estimated or the carrying amount of these assets may not be
recoverable. When an indication exists that the carrying amount of
intangible assets may not be recoverable, we assess the
recoverability of our assets by comparing the projected
undiscounted net cash flows associated with the related asset or
group of assets over their remaining lives against their respective
carrying amounts. Such impairment test is based on the lowest level
for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. Impairment,
if any, is based on the excess of the carrying amount over the
estimated fair value of those assets.
Fair Value Measurements and Financial Instruments - ASC
Topic 820 defines fair value, establishes a framework for measuring
fair value, establishes a three-level valuation hierarchy for
disclosure of fair value measurement and enhances disclosure
requirements for fair value measurements. The valuation hierarchy
is based upon the transparency of inputs to the valuation of an
asset or liability as of the measurement date. The three levels are
defined as follows:
Level 1
- Inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active
markets.
Level 2
- Inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial
instrument.
Level 3
- Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
The
carrying value of cash, accounts receivable, investment in a
related party, accounts payables, accrued expenses, due to related
party, notes payable, and convertible notes approximates their fair
values due to their short-term maturities.
Derivative financial instruments -The Company evaluates all
of its financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are
accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the
consolidated statements of operations. For stock-based derivative
financial instruments, the Company uses a weighted average
Black-Scholes-Merton option pricing model to value the derivative
instruments at inception and on subsequent valuation dates. The
classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as
current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within twelve months
of the balance sheet date.
Stock Based Compensation - The
Company has share-based compensation plans under which employees,
consultants, suppliers and directors may be granted restricted
stock, as well as options and warrants to purchase shares of
Company common stock at the fair market value at the time of grant.
Stock-based compensation cost to employees is measured by the
Company at the grant date, based on the fair value of the award,
over the requisite service period under ASC 718. For options issued
to employees, the Company recognizes stock compensation costs
utilizing the fair value methodology over the related period of
benefit. Grants of stock to non-employees and other
parties are accounted for in accordance with the ASC
505.
Convertible Securities – Based upon ASC 815-15, we have
adopted a sequencing approach regarding the application of ASC
815-40 to convertible securities issued subsequent to December 31,
2015. We will evaluate our contracts based upon the earliest
issuance date. In the event partial reclassification of contracts
subject to ASC 815-40-25 is necessary, due to our inability to
demonstrate we have sufficient shares authorized and unissued,
shares will be allocated on the basis of issuance date, with the
earliest issuance date receiving first allocation of shares. If a
reclassification of an instrument were required, it would result in
the instrument issued latest being reclassified first.
Quantitative and Qualitative Disclosure about Market
Risk
Registrant
is a smaller reporting company and is not required to provide this
information
Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
Dismissal of SD Mayer and Associates, LLP
On
October 3, 2019, the Company dismissed SD Mayer and Associates, LLP
as the Company’s independent registered public accounting
firm. The decision to change accountants was approved by the
Company’s Audit Committee.
The SD
Mayer 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 SD Mayer on the Company’s
financial statements for fiscal years 2017 and 2018 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, 2017 and 2018
and through October 3, 2019, (i) there were no disagreements with
SD Mayer on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to SD Mayer’s
satisfaction, would have caused SD Mayer 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.
Engagement of BPM LLP
On
October 3, 2019 the Company, upon the Audit Committee’s
approval, engaged the services of BPM LLP and as the
Company’s new independent registered public accounting firm
to audit the Company’s consolidated financial statements as
of December 31, 2019 and for the year then ended. BPM 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
BPM 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 BPM 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.
Not Applicable.
INCORPORATION OF
CERTAIN INFORMATION BY REFERENCE.
We are not incorporating certain information by
reference.
COMMISSION POSITION OF
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our directors and officers are indemnified as provided by Section
145 of the General Corporation Law of Delaware and our Bylaws. We
have agreed to indemnify each of our directors and certain officers
against certain liabilities, including liabilities under the
Securities Act of 1933. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to our
directors, officers and controlling persons pursuant to the
provisions described above, or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than our payment of expenses incurred or paid by our
director, officer or controlling person in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of
such issue.
We have been advised that in the opinion of the Securities and
Exchange Commission indemnification for liabilities arising under
the Securities Act is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities is asserted by
one of our directors, officers, or controlling persons in
connection with the securities being registered, we will, unless
in the opinion of our legal counsel the matter has been
settled by controlling precedent, submit the question of whether
such indemnification is against public policy to a court of
appropriate jurisdiction. We will then be governed by the court's
decision.
WHERE YOU CAN FIND MORE
INFORMATION
We have
filed with the SEC a Registration Statement on Form S-1 under
the Securities Act of 1933 with respect to the shares of common
stock we are offering to sell. This prospectus, which constitutes
part of the Registration Statement, does not include all of the
information contained in the Registration Statement and the
exhibits, schedules and amendments to the Registration Statement.
For further information with respect to us and our common stock, we
refer you to the Registration Statement and to the exhibits and
schedules to the Registration Statement. Statements contained in
this prospectus about the contents of any contract, agreement or
other document are not necessarily complete, and, in each instance,
we refer you to the copy of the contract, agreement or other
document filed as an exhibit to the Registration Statement. Each of
these statements is qualified in all respects by this
reference.
You may
read and copy the Registration Statement of which this prospectus
is a part at the SEC's public reference room, which is located at
100 F Street, N.E., Room 1580, Washington, DC 20549. You
can request copies of the Registration Statement by writing to the
Securities and Exchange Commission and paying a fee for the copying
cost. Please call the SEC at 1-800-SEC-0330 for more information
about the operation of the SEC's public reference room. In
addition, the SEC maintains a website, which is located at
www.sec.gov,
that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the
SEC. You may access the Registration Statement of which this
prospectus is a part at the SEC's website.
We are
subject to the information reporting requirements of the Securities
Exchange Act of 1934 and are required to file reports, proxy
statements and other information with the SEC. All documents filed
with the SEC are available for inspection and copying at the public
reference room and website of the SEC referred to above. We
maintain a website at www.growlifeinc.com. You may access our
reports, proxy statements and other information free of charge at
this website as soon as reasonably practicable after such material
is electronically filed with, or furnished to, the SEC. The
information on such website is not incorporated by reference and is
not a part of this prospectus.
INDEX TO FINANCIAL
STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Consolidated
Balance Sheets as of December 31, 2018 and December 31, 2017
(audited)
|
F-2
|
Consolidated
Statements of Operations for the years ended December 31, 2018 and
2017
|
F-3
|
Consolidated
Statements of Stockholders’ Deficit
|
F-4
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2018 and
2017
|
F-5
|
Notes
to the Consolidated Financial Statements
|
F-6
|
|
|
Consolidated
Balance Sheets as of June 30, 2019 and December 31, 2018
(audited)
|
F-26
|
Consolidated
Statements of Operations for the three and six months ended June
30, 2019 and 2018
|
F-27
|
Consolidated
Statements of Cash Flows for the six months ended June 30, 2019 and
2018
|
F-28
|
Notes
to the Consolidated Financial Statements
|
F-29
|
Report of Independent Registered Public Accounting
Firm
The Board of Directors and Shareholders
GrowLife, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of
GrowLife, Inc. as of December 31, 2018 and 2017, and the related
consolidated statements of operations, stockholders’ deficit,
and cash flows for each of the two years in the period ended
December 31, 2018 and the related notes (collectively referred to
as the ‘financial statements’). In our opinion, the
financial statements referred to above present fairly, in all
material respects, the consolidated financial position of GrowLife,
Inc. at December 31, 2018 and 2017, and the consolidated results of
its operations and its cash flows for each of the two years in the
period ended December 31, 2018, in conformity with U.S. generally
accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits. We are a
public accounting firm registered with the PCAOB and required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. Our audit included performing procedures to assess the
risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial
statements, the Company has sustained a net loss from operations
and has an accumulated deficit since inception. These factors
raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in this
regard are also described in Note 2.
The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
/s/ SD Mayer & Associates, LLP
SD Mayer & Associates, LLP
We have served as the Company’s auditor since
2016
Seattle, Washington
March 8, 2019
GROWLIFE, INC. AND
SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
Cash and cash
equivalents
|
$2,334,377
|
$69,191
|
Accounts receivable
- trade
|
42,254
|
-
|
Inventory,
net
|
792,664
|
465,678
|
Prepaid
costs
|
3,418
|
-
|
Deposits
|
51,916
|
24,308
|
Total current
assets
|
3,224,629
|
559,177
|
|
|
|
EQUIPMENT,
NET
|
712,866
|
302,689
|
INTANGIBLE
ASSETS
|
3,280,453
|
-
|
TOTAL
ASSETS
|
$7,217,948
|
$861,866
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT)
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
Accounts payable -
trade
|
$1,054,371
|
$821,398
|
Accrued
expenses
|
261,954
|
133,988
|
Accrued expenses -
related parties
|
73,585
|
37,776
|
Derivative
liability
|
1,795,473
|
2,660,167
|
Current portion of
convertible notes payable
|
3,404,133
|
3,015,021
|
Current portion of
notes payable- related parties
|
100,020
|
-
|
Current portion of
capital lease
|
8,534
|
-
|
Deferred
revenue
|
89,504
|
10,000
|
Total current
liabilities
|
6,787,574
|
6,678,350
|
|
|
|
COMMITMENTS AND
CONTINGENCIES
|
-
|
-
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
Preferred stock -
$0.0001 par value, 10,000,000 shares authorized, no
shares
|
|
|
issued and
outstanding
|
-
|
-
|
Common stock -
$0.0001 par value, 6,000,000,000 shares authorized,
3,437,599,095
|
|
|
and 2,367,634,022
shares issued and outstanding at 12/31/2018 and 12/31/2017,
respectively
|
343,749
|
236,752
|
Additional paid in
capital
|
139,331,067
|
123,678,069
|
Accumulated
deficit
|
(141,176,087)
|
(129,731,305)
|
Total stockholders'
deficit
|
(1,501,271)
|
(5,816,484)
|
|
|
|
NON CONTROLLING
INTEREST IN EZ-CLONE ENTERPRISES, INC.
|
1,931,645
|
-
|
|
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
$7,217,948
|
$861,866
|
The
accompanying notes are an integral part of these consolidated
financial statements.
GROWLIFE, INC. AND
SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
NET
REVENUE
|
$4,573,461
|
$2,452,104
|
COST OF GOODS
SOLD
|
4,105,172
|
2,180,603
|
GROSS
PROFIT
|
468,289
|
271,501
|
GENERAL AND
ADMINISTRATIVE EXPENSES
|
5,016,977
|
2,320,455
|
OPERATING
LOSS
|
(4,548,689)
|
(2,048,954)
|
|
|
|
OTHER INCOME
(EXPENSE):
|
|
|
Change in fair
value of derivative
|
977,732
|
496,306
|
Interest expense,
net
|
(1,320,811)
|
(1,281,083)
|
Impairment of
acquired assets
|
(61,902)
|
-
|
Other (expense)
income
|
-
|
15,577
|
Loss on debt
conversions
|
(6,519,467)
|
(2,502,819)
|
Total other
(expense)
|
(6,924,448)
|
(3,272,019)
|
|
|
|
(LOSS) BEFORE
INCOME TAXES
|
(11,473,137)
|
(5,320,974)
|
|
|
|
Income taxes -
current benefit
|
-
|
-
|
|
|
|
NET
(LOSS)
|
(11,473,137)
|
(5,320,974)
|
|
|
|
Noncontrolling
interest in EZ-Clone Enterprises, Inc.
|
28,355
|
-
|
|
|
|
NET LOSS
ATTRIBUTABLE TO GROWLIFE, INC. AND SUBSIDIARIES
|
$(11,444,782)
|
$(5,320,974)
|
COMMON
SHAREHOLDERS
|
|
|
|
|
|
Basic and diluted
(loss) per share
|
$(0.00)
|
$(0.00)
|
|
|
|
Weighted average
shares of common stock outstanding- basic and diluted
|
2,978,812,920
|
2,044,521,389
|
The
accompanying notes are an integral part of these consolidated
financial statements.
GROWLIFE, INC. AND
SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2016
|
51
|
$-
|
1,656,120,083
|
$165,600
|
$117,537,822
|
$(124,410,332)
|
$(6,706,910)
|
|
|
|
|
|
|
|
|
Stock based compensation for stock
options
|
-
|
-
|
-
|
-
|
29,251
|
-
|
29,251
|
Stock based compensation for
warrants
|
-
|
-
|
-
|
-
|
187,292
|
-
|
187,292
|
Shares issued for debt
conversion
|
-
|
-
|
64,869,517
|
6,487
|
542,052
|
-
|
548,539
|
Shares issued for services
rendered
|
-
|
-
|
10,000,000
|
1,000
|
75,000
|
-
|
76,000
|
Shares issued for convertible note
and interest conversion
|
-
|
-
|
636,644,422
|
63,665
|
4,768,954
|
-
|
4,832,619
|
Cancellation of Series C Convertible
Preferred Stock
|
(51)
|
-
|
-
|
-
|
-
|
-
|
-
|
Write-off of derivative liability to
additional paid in capital
|
-
|
-
|
-
|
-
|
537,698
|
-
|
537,698
|
Net loss for the year ended December
31, 2017
|
-
|
-
|
-
|
-
|
-
|
(5,320,973)
|
(5,320,973)
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2017
|
-
|
-
|
2,367,634,022
|
236,752
|
123,678,069
|
(129,731,305)
|
(5,816,484)
|
Stock based compensation for stock
options
|
-
|
-
|
-
|
-
|
44,682
|
-
|
44,682
|
Stock based compensation for
warrants
|
-
|
-
|
-
|
-
|
196,750
|
-
|
196,750
|
Shares issued for debt
conversion
|
-
|
-
|
2,400,000
|
240
|
32,760
|
-
|
33,000
|
Shares issued for services
rendered
|
-
|
-
|
13,910,274
|
1,391
|
216,815
|
-
|
218,206
|
Shares issued for convertible note
and interest conversion
|
-
|
-
|
669,032,996
|
66,904
|
9,966,328
|
-
|
10,033,232
|
Shares issued for common
stock
|
-
|
-
|
65,176,818
|
6,518
|
1,293,482
|
-
|
1,300,000
|
Rigths offering
|
-
|
-
|
211,137,293
|
21,114
|
2,512,011
|
-
|
2,533,125
|
Stock option
exercise
|
-
|
-
|
1,000,000
|
100
|
5,900
|
-
|
6,000
|
Shares issued for acquisition of
EZ-Clone Enterprises, Inc.
|
-
|
-
|
107,307,692
|
10,731
|
1,384,270
|
-
|
1,395,001
|
Noncontrolling interest in EZ-Clone
Enterprises, Inc.
|
-
|
-
|
-
|
-
|
-
|
28,355
|
28,355
|
Net loss for the year ended December
31, 2018
|
-
|
-
|
-
|
-
|
-
|
(11,473,137)
|
(11,473,137)
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2018
|
-
|
$-
|
3,437,599,095
|
$343,749
|
$139,331,067
|
$(141,176,087)
|
$(1,501,271)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
GROWLIFE, INC. AND
SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$(11,444,782)
|
$(5,320,974)
|
Adjustments to
reconcile net loss to net cash (used in)
|
|
|
operating
activities
|
|
|
Depreciation
|
80,125
|
1,890
|
Amortization
of intangible assets
|
142,628
|
-
|
Stock
based compensation
|
241,433
|
216,543
|
Common
stock issued for services
|
218,206
|
76,000
|
Amortization
of debt discount
|
769,237
|
419,666
|
Change
in fair value of derivative liability
|
(977,732)
|
(496,306)
|
Accrued
interest on convertible notes payable
|
421,666
|
203,697
|
Loss on debt
conversions
|
6,519,467
|
2,502,799
|
Impairment of
acquired assets
|
61,902
|
-
|
Write-off of
derivaive liability to additional paid in capital
|
-
|
537,698
|
Changes in
operating assets and liabilities:
|
|
|
Accounts
receivable
|
42,254
|
-
|
Inventory
|
(326,986)
|
(47,225)
|
Prepaids and other
assets
|
(3,418)
|
-
|
Deposits
|
(27,608)
|
13,145
|
Accounts
payable
|
232,973
|
(170,934)
|
Accrued
expenses
|
116,625
|
19,503
|
Deferred
revenue
|
79,504
|
(37,995)
|
CASH (USED
IN) OPERATING ACTIVITIES
|
(3,854,506)
|
(2,082,493)
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
Investment in
purchased assets
|
(544,432)
|
(302,689)
|
NET CASH (USED IN)
INVESTING ACTIVITIES:
|
(544,432)
|
(302,689)
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
Proceeds from the
issuance of common stock rights
|
2,533,125
|
-
|
Common stock option
exercise
|
6,000
|
-
|
Proceeds from notes
payable, net
|
2,825,000
|
3,860,344
|
Proceeds from the
issuance of common stock
|
1,300,000
|
-
|
Cash payoff to TCA
Global Credit Master Fund, LP
|
-
|
(1,509,041)
|
NET CASH PROVIDED
BY FINANCING ACTIVITIES
|
6,664,125
|
2,351,303
|
|
|
|
NET INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
2,265,187
|
(33,879)
|
|
|
|
CASH AND CASH
EQUIVALENTS, beginning of period
|
69,191
|
103,070
|
|
|
|
CASH AND CASH
EQUIVALENTS, end of period
|
$2,334,377
|
$69,191
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Interest
paid
|
$-
|
$-
|
Taxes
paid
|
$-
|
$-
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
Shares issued for
convertible note and interest conversion
|
$3,338,082
|
$2,329,800
|
Common shares
issued for accounts payable
|
$33,000
|
$548,539
|
Acquisition of
EZ-Clone Erterprises, Inc.- intangible assets
|
$3,423,081
|
$-
|
Acquisition of
EZ-Clone Erterprises, Inc.
|
$1,395,000
|
$-
|
Noncontrolling
interest in EZ-Clone Enterprises, Inc.
|
$1,931,645
|
$-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
GROWLIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
GrowLife, Inc.
(“GrowLife” or the “Company”) is
incorporated under the laws of the State of Delaware and is
headquartered in Kirkland, Washington. The Company was founded in
2012 with the Closing of the Agreement and Plan of Merger with SGT
Merger Corporation.
The Company’s
goal of becoming the nation’s largest cultivation facility
service provider for the production of organics, herbs and greens
and plant-based medicines has not changed. The Company’s
mission is to best serve more cultivators in the design, build-out,
expansion and maintenance of their facilities with products of high
quality, exceptional value and competitive price. Through a
nationwide network of knowledgeable representatives, regional
centers and its e-commerce website, GrowLife provides essential and
hard-to-find goods including media (i.e., farming soil),
industry-leading hydroponics equipment, organic plant nutrients,
and thousands more products to specialty grow operations across the
United States.
The Company
primarily sells through its wholly owned subsidiary, GrowLife
Hydroponics, Inc. GrowLife companies distribute and sell over
15,000 products through its e-commerce distribution channel,
GrowLifeEco.com, and through our regional retail storefronts.
GrowLife and its business units are organized and directed to
operate strictly in accordance with all applicable state and
federal laws.
On June 7, 2013,
GrowLife Hydroponics completed the purchase of Rocky Mountain
Hydroponics, LLC, a Colorado limited liability company
(“RMC”), and Evergreen Garden Center, LLC, a Maine
limited liability company (“EGC”). The effective date
of the purchase was June 7, 2013.
On
October 3, 2017, the Company closed the acquisition of 51% of the
Purchased Assets from David Reichwein, a Pennsylvania resident, GIP
International Ltd, a Hong Kong corporation and DPR International
LLC, a Pennsylvania limited liability corporation. The Purchased
Assets include intellectual property, copy rights and trademarks
related to reflective tiles and flooring.
The
Company did not acquire business, customer list or
employees.
The Company acquired its 51% interest in
the Purchased Assets for $400,000. The Company funded equipment and rent of an office
lease. On February 16,
2018, the Company purchased the remaining 49% of the Purchased
Assets in exchange for a one-time payment of $250,000. As December 31, 2018, the Company had recorded
investment in purchased assets of $552,689.
On August 17, 2018,
the Company entered into an Asset Purchase Agreement with Go Green
Hydroponics, Inc., a California corporation and TCA – Go
Green SPV, LLC, a Florida limited liability pursuant to which the
Company acquired the intellectual property and assumed the lease
for the property located at 15721 Ventura Blvd., Encino, CA 91436.
The Company intends to operate a retail store, sale over the
internet and sell on a direct basis at this location.
Concurrently, the
Company and Seller entered into a Security Agreement for securing
the assets of Company as collateral for the obligations of Company
as set forth in the Security Agreement. In consideration for the
sale and assignment of the Purchased Assets, the Company agreed to
pay the Seller: (i) the proceeds generated from the sale of the
closing inventory until all closing inventory has been sold, and
(ii) to pay the Seller 5% of all gross revenue of Company earned or
in any way related to the Purchased Assets generated between
October 1, 2018 and December 31, 2019, up to a maximum of
$200,000.
On October 15,
2018, the Company closed the Purchase and Sale Agreement with
EZ-Clone Enterprises, Inc., a California corporation. EZ-Clone is
the manufacturer of
multiple award-winning products specifically designed for the
commercial cloning and propagation stage of indoor plant
cultivation including cannabis, food, and other hydroponic farming.
The Company acquired 51% of EZ-Clone for $2,040,000, payable
as follows: (i) a cash payment of $645,000; and (ii) the issuance
of 107,307,692 restricted shares of the Company’s common
stock at a price of $0.013 per share or $1,395,000.
The Company has the
obligation to acquire the remaining 49% of EZ-Clone within one year
for $1,960,000, payable as follows:
(i) a cash payment of $855,000; and (ii) the issuance of 85,000,000
shares of the Company’s common stock at a price of $0.013 per
share or $1,105,000.
On October 17,
2017, the Company were informed by Alpine Securities Corporation
(“Alpine”) that Alpine has demonstrated compliance with
the Financial Industry Regulatory Authority (“FINRA”)
Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of
1934. We filed an amended application with the OTC Markets to list
the Company’s common stock on the OTCQB and begin to trade on
this market as of March 20, 2018. As
of March 4, 2019, the Company began to trade on the
Pink
Sheet stocks system.
The Company’s bid price had closed below
$0.01 for more than 30 consecutive calendar
days.
NOTE 2 –
GOING CONCERN
The
accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company incurred net losses of $11,444,782 and
$5,320,974 for the years ended December 31, 2018 and 2017,
respectively. Our net cash used in operating activities was
$3,854,506 and $2,082,493 for the years ended December 31, 2018 and
2017, respectively.
The Company anticipates that it will record losses
from operations for the foreseeable future. As of December 31,
2018, the accumulated deficit was
$141,176,087. The Company has experienced
recurring operating losses and negative operating cash flows since
inception and has financed its working capital requirements during
this period primarily through the recurring issuance of convertible
notes payable and advances from a related party. The audit opinion prepared by our independent
registered public accounting firm relating to our financial
statements for the year ended December 31, 2018 and 2017 filed with
the SEC on March 8, 2019 includes an explanatory paragraph
expressing the substantial doubt about our ability to continue as a
going concern.
Continuation
of the Company as a going concern is dependent upon obtaining
additional working capital. The financial statements do
not include any adjustments that might be necessary if we are
unable to continue as a going concern.
NOTE
3 – SIGNIFICANT ACCOUNTING
POLICIES: ADOPTION OF ACCOUNTING STANDARDS
Basis of Presentation - The accompanying
consolidated financial statements include the accounts of the
Company. Intercompany accounts and transactions have been
eliminated. The preparation of these consolidated financial
statements in conformity with U.S. generally accepted accounting
principles (“GAAP”).
Principles of
Consolidation - The
consolidated financial statements include the accounts of the
Company and its wholly owned and majority-owned subsidiaries.
Inter-Company items and transactions have been eliminated in
consolidation.
Cash and Cash
Equivalents - The Company
classifies highly liquid temporary investments with an original
maturity of nine months or less when purchased as cash equivalents.
The Company maintains cash balances at various financial
institutions. Balances at US banks are insured by the Federal
Deposit Insurance Corporation up to $250,000. The Company has not
experienced any losses in such accounts and believes it is not
exposed to any significant risk for cash on deposit. At
December 31, 2018, the Company had uninsured deposits in the amount
of $1,923,046.
Accounts Receivable and Revenue -
Revenue is recognized at the time the Company sells merchandise to
the customer in store. eCommerce sales include shipping revenue and
are recorded upon shipment to the customer. This is when the risk
of loss transfers to our customers, the fee is fixed and
determinable, and collection of the sale is reasonably assured. A
product is not shipped without an order from the customer and the
completion of credit acceptance procedures. The majority of our
sales are cash or credit card; however, we occasionally extend
terms to our customers. Accounts receivable are reviewed
periodically for collectability.
Inventories - Inventories are recorded
on a first in first out basis. Inventory consists of raw materials,
purchased finished goods and components held for resale. Inventory
is valued at the lower of cost or market. The reserve for inventory
was $120,000 and $20,000 as of December 31, 2018 and 2017,
respectively.
Equipment – Equipment consists of machinery,
equipment, tooling, computer equipment and leasehold improvements,
which are stated at cost less accumulated depreciation and
amortization. Depreciation is computed by the straight-line method
over the estimated useful lives or lease period of the relevant
asset, generally 3-10 years, except for leasehold improvements
which are depreciated over the lesser of the life of the lease or
10 years.
Long Lived Assets
– The Company reviews its
long-lived assets for impairment annually or when changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Long-lived assets under certain circumstances are
reported at the lower of carrying amount or fair value. Assets to
be disposed of and assets not expected to provide any future
service potential to the Company are recorded at the lower of
carrying amount or fair value (less the projected cost associated
with selling the asset). To the extent carrying values exceed fair
values, an impairment loss is recognized in operating
results.
Intangible Assets – Intangible
assets are capitalized and amortized on a straight-line basis over
their estimated useful life, if the life is determinable. If the
life is not determinable, amortization is not recorded. We
regularly perform reviews to determine if facts and circumstances
exist which indicate that the useful lives of our intangible assets
are shorter than originally estimated or the carrying amount of
these assets may not be recoverable. When an indication exists that
the carrying amount of intangible assets may not be recoverable, we
assess the recoverability of our assets by comparing the projected
undiscounted net cash flows associated with the related asset or
group of assets over their remaining lives against their respective
carrying amounts. Such impairment test is based on the lowest level
for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. Impairment,
if any, is based on the excess of the carrying amount over the
estimated fair value of those assets.
Fair Value Measurements and Financial
Instruments - ASC Topic 820 defines fair value, establishes
a framework for measuring fair value, establishes a three-level
valuation hierarchy for disclosure of fair value measurement and
enhances disclosure requirements for fair value measurements. The
valuation hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date. The
three levels are defined as follows:
Level 1 -
Inputs to the valuation methodology are quoted prices (unadjusted)
for identical assets or liabilities in active markets.
Level 2 -
Inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial
instrument.
Level 3 -
Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
The carrying value
of cash, accounts receivable, investment in a related party,
accounts payables, accrued expenses, due to related party, notes
payable, and convertible notes approximates their fair values due
to their short-term maturities.
Derivative financial instruments -The
Company evaluates all of its financial instruments to determine if
such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the
consolidated statements of operations. For stock-based derivative
financial instruments, the Company uses a weighted average
Black-Scholes-Merton option pricing model to value the derivative
instruments at inception and on subsequent valuation dates. The
classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as
current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within twelve months
of the balance sheet date.
Sales Returns - We allow customers to
return defective products when they meet certain established
criteria as outlined in our sales terms and conditions. It is our
practice to regularly review and revise, when deemed necessary, our
estimates of sales returns, which are based primarily on actual
historical return rates. We record estimated sales returns as
reductions to sales, cost of goods sold, and accounts receivable
and an increase to inventory. Returned products which are recorded
as inventory are valued based upon the amount we expect to realize
upon its subsequent disposition. As of December 31, 2018 and 2017,
there was a reserve for sales returns of $40,000 and $10,000,
respectively, which is minimal based upon our historical
experience.
Stock Based Compensation - The Company has share-based compensation plans
under which employees, consultants, suppliers and directors may be
granted restricted stock, as well as options and warrants to
purchase shares of Company common stock at the fair market value at
the time of grant. Stock-based compensation cost to employees is
measured by the Company at the grant date, based on the fair value
of the award, over the requisite service period under ASC 718. For
options issued to employees, the Company recognizes stock
compensation costs utilizing the fair value methodology over the
related period of benefit. Grants of stock to
non-employees and other parties are accounted for in accordance
with the ASC 505.
Net (Loss) Per Share - Under the provisions of ASC 260, “Earnings
per Share,” basic loss per common share is computed by
dividing net loss available to common shareholders by the weighted
average number of shares of common stock outstanding for the
periods presented. Diluted net loss per share reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that would
then share in the income of the Company, subject to anti-dilution
limitations. The common stock equivalents have not been included as
they are anti-dilutive.
As of December 31,
2018, there are also (i) stock option grants outstanding for the
purchase of 100 million common
shares at a $0.010 average exercise price; (ii) warrants for the
purchase of 902.8 million
common shares at a $0.029 average exercise price; and (iii)
112.8 million shares related to convertible debt that can be
converted at $0.002535 per share. In addition, the Company has an
unknown number of common shares to be issued under the Chicago
Venture, Iliad and St. George financing agreements. As of
December 31, 2017, there are
also (i) stock option grants outstanding for the purchase of
56,000,000 common shares at a $0.007 average exercise price; (ii)
warrants for the purchase of 595 million common shares at a $0.031
average exercise price; and (iii) 241,766,075 million shares related to convertible debt that can be
converted at $0.002535 per share. In addition, we have an unknown
number of common shares to be issued under the Chicago
Venture Partners, L.P. financing
agreements.
Dividend Policy
- The Company has never paid any cash
dividends and intends, for the foreseeable future, to retain any
future earnings for the development of our business. Our future
dividend policy will be determined by the board of directors on the
basis of various factors, including our results of operations,
financial condition, capital requirements and investment
opportunities.
Use of Estimates - In preparing these
unaudited interim consolidated financial statements in conformity
with GAAP, management is required to make estimates and assumptions
that may affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of
the consolidated financial statements and the reported amount of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates. Significant estimates and
assumptions included in our consolidated financial statements
relate to the valuation of long-lived assets, estimates of sales
returns, inventory reserves and accruals for potential liabilities,
and valuation assumptions related to derivative liability, equity
instruments and share based compensation.
Recent Accounting Pronouncements
In July 2015, the
Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2015-11, “Simplifying the Measurement
of Inventory,” Topic 330, “Inventory” (ASU
2015-11). The amendments in ASU 2015-11, which apply to inventory
that is measured using any method other than the last-in, first-out
(LIFO) or retail inventory method, require that entities measure
inventory at the lower of cost and net realizable value. The
amendments in ASU 2015-11 should be applied on a prospective basis.
ASU 2015-11 is effective for fiscal years beginning after December
15, 2016 and interim periods within those years. The Company
adopted the amendments of ASU 2015-11 effective January 1, 2018.
The adoption of this standard did not have a material impact on the
Company’s consolidated financial statements for the year
ended December 31, 2018.
In March 2016, the
FASB issued ASU 2016-09, “Improvements to Employee
Share-Based Payment Accounting,” Topic 718,
“Compensation-Stock Compensation” (ASU 2016-09). ASU
2016-09 includes provisions intended to simplify various aspects
related to how share-based payments are accounted for and presented
in the Company’s financial statements, including income tax
consequences, forfeitures and classification on the statement of
cash flows. Under previous guidance, excess tax benefits and
deficiencies from share-based compensation arrangements were
recorded in equity when the awards vested or were settled. ASU
2016-09 requires prospective recognition of excess tax benefits and
deficiencies in income tax expense, rather than paid-in-capital.
The Company adopted the amendments of ASU 2016-09 effective January
1, 2018.The adoption of this standard did not have a material
impact on the Company’s consolidated statements of income for
the year ended December 31, 2018.
In addition, under
ASU 2016-09, excess tax income tax benefits from share-based
compensation arrangements are classified as cash flow from
operations, rather than as cash flow from financing activities. For
the year ended December 31, 2018, there were no excess income tax
benefits.
The Company has
elected to continue to estimate the number of share-based awards
expected to vest, as permitted by ASU 2016-09, rather than electing
to account for forfeitures as they occur.
ASU 2016-09
requires excess tax benefits and deficiencies to be prospectively
excluded from assumed future proceeds in the calculation of diluted
shares, resulting in an immaterial decrease in diluted weighted
average shares outstanding for the year ended December 31,
2018.
In January 2017,
the FASB issued ASU 2017-04, “Simplifying the Test for
Goodwill Impairment,” Topic 350, “Intangibles –
Goodwill and Other” (ASU 2017-04). The amendments in ASU
2017-04 simplify the accounting for goodwill impairment for all
entities by requiring impairment charges to be based on the first
step in the current two-step impairment test. An impairment charge
for the amount by which the carrying amount exceeds the reporting
unit’s fair value should be recognized; however, the loss
recognized should not exceed the total amount of goodwill allocated
to that reporting unit. The amendments should be applied on a
prospective basis. Early adoption is permitted for annual and
interim goodwill impairment testing dates after January 1, 2017,
and the ASU is effective for the Company’s first quarter of
the fiscal year ending December 31, 2020. The Company is currently
evaluating the impact that the adoption of these provisions will
have on its consolidated financial statements.
In February 2016,
the FASB issued ASU 2016-02, “Leases,” Topic 842,
“Leases” (ASU 2016-02). ASU No. 2016-02 requires
lessees to recognize a right-of-use asset and corresponding lease
liability for all leases with terms of more than 12 months.
Recognition, measurement and presentation of expenses will depend
on classification as a finance or operating lease. ASU 2016-02 also
requires certain quantitative and qualitative disclosures. The
provisions of ASU 2016-02 are effective for the Company’s
first quarter of the fiscal year ending December 31, 2020, with
early adoption permitted. The Company will apply the transition
provisions of ASU 2016-02 at its adoption date, rather than the
earliest comparative period presented in the financial statements,
as permitted by ASU 2018-11, “Leases,” Topic 842,
“Targeted Improvements,” released in July
2018.
The adoption of ASU
2016-02 may result in a material increase to the Company’s
consolidated balance sheets for lease liabilities and right-of-use
assets. The Company is also performing a comprehensive review of
its current processes to determine and implement changes required
to support the adoption of this standard. The Company is currently
evaluating the other effects the adoption of ASU 2016-02 will have
on its consolidated financial statements.
In January 2018,
the FASB issued ASU 2018-01, “Leases,” Topic 842,
“Land Easement Practical Expedient for Transition to Topic
842” (ASU 2018-01). ASU 2018-01 permits an entity to elect a
transition practical expedient to not assess, under Accounting
Standards Codification (ASC) 842, land easements that exist or
expired before the standard’s effective date that were not
previously accounted for as leases under ASC 840. The Company plans
to elect this practical expedient in implementing ASU
2016-02.
In May 2014, the
FASB issued ASU 2014-09, “Revenue from Contracts with
Customers,” Topic 606, “Revenue from Contracts with
Customers” (ASU 2014-09). ASU 2014-09 provides guidance for
revenue recognition and will replace most existing revenue
recognition guidance in GAAP when it becomes effective. ASU
2014-09’s core principle is that a company will recognize
revenue when it transfers promised goods or services to customers
in an amount that reflects the consideration to which the company
expects to be entitled for the transfer of those goods or services.
ASU 2014-09 permits the use of either the retrospective or
cumulative effect transition method. Additionally, the amendments
in this ASU provide a practical expedient for entities to recognize
the incremental costs of obtaining a contract as an expense when
incurred if the amortization period of the asset that the entity
otherwise would have recognized is one year or less, The Company
plans to elect this practical expedient upon adoption.
In July 2015, the
FASB issued ASU 2015-14, “Revenue from Contracts with
Customers – Deferral of the Effective Date.” The FASB
approved the deferral of ASU 2014-09, by extending the new revenue
recognition standard’s mandatory effective date by one year
and permitting public companies to apply the new revenue standard
to annual reporting periods beginning after December 15, 2017. The
guidance in ASU 2014-09 will be effective for the Company in the
first quarter of the fiscal year ending December 31,
2019.
Further to ASU
2014-09 and ASU 2015-14, the FASB issued ASU 2016-08,
“Revenue from Contracts with Customers,” Topic 606,
“Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)” (ASU 2016-08) in March 2016, ASU 2016-12,
“Revenue from Contracts with Customers,” Topic 606,
“Narrow-Scope Improvements and Practical Expedients”
(ASU 2016-12) in May 2016 and ASU 2016-20, “Revenue from
Contracts with Customers,” Topic 606, “Technical
Corrections and Improvements” (ASU 2016-20) in December 2016.
The amendments in ASU 2016-08 clarify the implementation guidance
on principal versus agent considerations, including indicators to
assist an entity in determining whether it controls a specified
good or service before it is transferred to the customers. ASU
2016-12 addresses narrow-scope improvements to the guidance on
collectability, non-cash consideration, and completed contracts at
transition. Additionally, the amendments in this ASU provide a
practical expedient for contract modifications at transition and an
accounting policy election related to the presentation of sales
taxes and other similar taxes collected from customers. The Company
plans to make such election. The Company also plans to elect the
practical expedient in ASU 2016-20 that provides entities do not
need to disclose the transaction price allocated to performance
obligations when the related contracts have a duration of one year
or less. This includes loyalty rewards, which can be redeemed in
the month subsequent to the quarter earned, and marketing
promotions that cross accounting periods. Both of these classes of
transactions are currently immaterial to the Company. The effective
date and transition requirements for ASU 2016-08, ASU 2016-12 and
ASU 2016-20 are the same as for ASU 2014-09.
The Company does
not plan to early adopt the new revenue recognition guidance;
adoption will be on the modified retrospective basis beginning in
fiscal year 2019. The Company has substantially concluded its
assessment of the impact of the adoption of this standard on its
consolidated financial statements. Most of the Company’s
revenue is expected to continue to be generated from point-of-sale
transactions, which ASU 2014-09 treats generally consistent with
current accounting standards. The Company does not expect this
standard will have a material impact on the accounting for
point-of-sale transactions or related areas including the right of
return and customer incentives. Although the impact on the
consolidated financial statements is not expected to be material,
additional disclosures will be required.
In June 2018, the
FASB issued ASU 2018-07, “Compensation-Stock
Compensation,” Topic 718, “Improvements to Nonemployee
Share-Based Payment Accounting” (ASU 2018-07) as part of its
Simplification Initiative to reduce complexity when accounting for
share-based payments to non-employees. ASU 2018-07 expands the
scope of Topic 718 to more closely align share-based payment
transactions for acquiring goods and services from non-employees
with the accounting for share-based payments to employees, with
certain exceptions. The provisions of ASU 2018-07 are effective for
the Company’s first quarter of the fiscal year ending
December 31, 2020, with early adoption permitted.
NOTE
4 – TRANSACTIONS
Acquisition
of 51% of EZ-Clone Enterprises, Inc.
On October 15,
2018, the Company closed the Purchase and Sale Agreement with
EZ-Clone Enterprises, Inc., a California corporation that was
founded in January 2000. EZ-Clone is the manufacturer of multiple
award-winning products specifically designed for the commercial
cloning and propagation stage of indoor plant cultivation including
cannabis, food, and other hydroponic farming. The Company
has proprietary products and services such as the Commercial Pro
System, Hobbyist Cloning Systems, Cloning Tents, Coco Collars, Coco
Seed Starters, Rooting Gel, and Clear Rez. Technical Support,
know-how and overall knowledge is also considered proprietary. The
Company trademarks are EZ CLONE and EZ CLONE CRIB.
This acquisition is expected to accelerate the Company’s
revenue growth, increase the Company gross margins and add
additional manufacturing and research and development
personnel.
The Company acquired 51% of
EZ-Clone for $2,040,000, payable as follows: (i) a cash payment of
$645,000; and (ii) the issuance of 107,307,692 restricted shares of
the Company’s common stock at a price of $0.013 per share or
$1,395,000. The Company has the obligation to acquire the remaining
49% of EZ-Clone within one year for $1,960,000, payable as follows: (i) a cash payment
of $855,000; and (ii) the issuance of 85,000,000 shares of the
Company’s common stock at a price of $0.013 per share or
$1,105,000.
The cost to acquire these assets has been preliminarily allocated
to the assets acquired according to estimated fair values and is
subject to adjustment when additional information concerning asset
valuations is finalized, but no later than October 15, 2019. The
preliminary allocation is as follows:
Purchase
Price Allocation
|
|
Common
Stock
|
$1,395,000
|
Cash
|
645,000
|
Assets
acquired
|
(911,294)
|
Liabilities
acquired
|
939,375
|
Non-controlling
interest
|
1,960,000
|
EZ-Clone
equity
|
(605,000)
|
Total
purchase price
|
$3,423,081
|
The
results of operations of EZ-Clone were included in the Consolidated
Statements of Operations for the period October 15, 2018 to
December 31, 2018.
The
unaudited pro-forma financial data for the acquisition for the year
ended December 31, 2018, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
$4,573,461
|
$1,551,503
|
$6,124,964
|
Net
loss
|
(11,473,137)
|
(111,671)
|
(11,584,808)
|
Net
loss per share
|
$(0.00)
|
|
$(0.00)
|
The
unaudited pro-forma financial data for the acquisition for the year
ended December 31, 2017, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
$2,452,104
|
$2,648,873
|
$5,100,977
|
Net
loss
|
(5,320,974)
|
(126,962)
|
(5,447,936)
|
Net
loss per share
|
$(0.00)
|
|
$(0.00)
|
There were no material, nonrecurring items included in the reported
the pro-forma results.
Termination
of Agreements with CANX, LLC
On February 15,
2019, the Company entered into a Termination of Existing Agreements
and Release with CANX USA, LLC, a Nevada limited liability company.
Pursuant to the Agreement, the Parties agreed to terminate, release and discharge all existing and
further rights and obligations between the Parties under, arising
out of, or in any way related to that certain Waiver and Modification Agreement and Amended and
Restated Joint Venture Agreement made as of July 10, 2014, and any
ancillary agreements or instruments thereto, including, but not
limited to, the Warrants issued to CANX entitling CANX to purchase
540,000,000 shares of the Company’s common stock at an
exercise price of $0.033.
In
exchange for the Agreement and cancellation of the CANX Agreements
and Warrants, the Company agreed to issue $1,000,000 of restricted
common stock priced at the February 7, 2019 closing price of
$0.008, or 125,000,000 restricted common stock shares.
NOTE
5 – INVENTORY
Inventory as of
December 31, 2018 and 2017 consisted of the following:
|
|
|
|
|
|
|
|
|
Raw
materials
|
$417,570
|
$110,000
|
Work
in process
|
35,280
|
-
|
Finished
goods
|
459,814
|
375,678
|
Inventory
reserve
|
(120,000)
|
(20,000)
|
Total
|
$792,664
|
$465,678
|
Raw materials
consist of supplies for the flooring product line and
EZ-Clone.
Finished goods
inventory relates to product at the Company’s retail stores,
which is product purchased from distributors, and in some cases
directly from the manufacturer, and resold at our stores and EZ-
Clone.
The Company reviews
its inventory on a periodic basis to identify products that are
slow moving and/or obsolete, and if such products are identified,
the Company records the appropriate inventory impairment charge at
such time.
NOTE
6 – PROPERTY AND EQUIPMENT
Property and
equipment as of December 31, 2018 and 2017 consists of the
following:
|
|
|
|
|
|
|
|
|
Machinery,
equipment and tooling
|
$943,326
|
$365,861
|
Furniture
and fixtures
|
-
|
49,787
|
Computer
equipment
|
16,675
|
52,304
|
Leasehold
improvements
|
14,703
|
56,965
|
Total
property and equipment
|
974,704
|
524,917
|
Less
accumulated depreciation and amortization
|
(261,839)
|
(222,228)
|
Net
property and equipment
|
$712,866
|
$302,689
|
Fixed
assets, net of accumulated depreciation, were $712,866 and $302,689
as of December 31, 2018 and 2017, respectively. Accumulated
depreciation was $261,839 and $222,228 as of December 31, 2018 and
2017, respectively. Total depreciation expense was $80,125 and
$1,890 for the years ended December 31, 2018 and 2017,
respectively. All equipment is used for manufacturing, selling,
general and administrative purposes and accordingly all
depreciation is classified in cost of goods sold, selling, general
and administrative expenses. The Company began depreciation on the
purchased machine January 1, 2018 when significant operations
began.
On
October 3, 2017, the Company closed the acquisition of 51% of the
Purchased Assets from David Reichwein, a Pennsylvania resident, GIP
International Ltd, a Hong Kong corporation and DPR International
LLC, a Pennsylvania limited liability corporation. The Purchased
Assets include intellectual property, copy rights and trademarks
related to reflective tiles and flooring.
The
Company did not acquire business, customer list or
employees.
The Company acquired its 51% interest in
the Purchased Assets for $400,000. The Company funded equipment and rent of an office
lease. On February 16,
2018, the Company purchased the remaining 49% of the Purchased
Assets in exchange for a one-time payment of $250,000. As of December 31, 2018, the Company had recorded
investment in purchased assets of $552,689.
On October 15, 2018, the Company acquired 51%
of EZ-Clone Enterprises, Inc. and acquired $244,203 of net
property and equipment.
During the year
ended December 31, 2018, the Company retired fully depreciated
assets of $358,156.
NOTE
7 – INTANGIBLE
ASSETS
Intangible
assets as of December 31, 2018 and 2017 consisted of the
following:
|
Estimated
|
|
|
|
Useful
Lives
|
|
|
|
|
|
|
Customer
lists
|
3
years
|
$1,604,341
|
$-
|
Patents
|
3
years
|
1,818,740
|
|
Less:
accumulated amortization
|
|
(142,628)
|
-
|
Intangible
assets, net
|
|
$3,280,453
|
$-
|
Total
amortization expense was $142,628 and $0 for the years ended
December 31, 2018 and 2017, respectively.
On October 15,
2018, the Company closed the Purchase and Sale Agreement with
EZ-Clone Enterprises, Inc., a California corporation that was
founded in January 2000. The Company acquired 51% of
EZ-Clone for $2,040,000, payable as follows: (i) a cash payment of
$645,000; and (ii) the issuance of 107,307,692 restricted shares of
the Company’s common stock at a price of $0.013 per share or
$1,395,000. The Company has the obligation to acquire the remaining
49% of EZ-Clone within one year for $1,960,000, payable as follows: (i) a cash payment
of $855,000; and (ii) the issuance of 85,000,000 shares of the
Company’s common stock at a price of $0.013 per share or
$1,105,000.
The
fair value of the intellectual property associated with the assets
acquired was $3,423,081 estimated by using a discounted cash flow
approach based on future economic benefits. In summary, the
estimate was based on a projected income approach and related
discounted cash flows over five years, with applicable risk factors
assigned to assumptions in the forecasted results.
NOTE 8- ACCOUNTS PAYABLE
Accounts
payable were $1,054,371 and $821,398 as of December 31, 2018
and December 31, 2017, respectively. Such liabilities consisted of
amounts due to vendors for inventory purchases, audit, legal and
other expenses incurred by the Company.
NOTE 9- ACCRUED EXPENSES
Accrued expenses were $261,954 and $133,988 as
of December 31, 2018 and, 2017, respectively. Such liabilities
consisted of amounts due to Go Green Hydroponics, Inc. and
TCA – Go Green SPV, LLC and sales tax and payroll
liabilities.
On August 17, 2018,
the Company entered into an Asset Purchase Agreement with Go Green
Hydroponics, Inc. and TCA – Go Green SPV, LLC. The Company
acquired the inventory of Go Green but agreed to pay the Seller
100% of the proceeds generated from the sale of the closing
inventory until all closing inventory has been sold. The Company
recorded accrued expenses $98,150 as of December 31, 2018 related
to the sale of inventory. Also, the Company agreed to pay 5% of all
gross revenue of Company earned or in any way related to the
Purchased Assets generated between October 1, 2018 and December 31,
2019, up to a maximum of $200,000. The Company estimated gross
revenue for that period to be approximately $1,200,000 and recorded
a $60,000 liability. The Company recorded an impairment of acquired
assets in the amount of $60,000 as of December 31, 2018. In
addition, the Company recorded an additional accrued liability of
$1,986 as of December 31, 2018.
NOTE
10 – CONVERTIBLE NOTES PAYABLE, NET
Convertible notes
payable as of December 31, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% OID Convertible
Promissory Notes
|
$2,982,299
|
$135,780
|
$-
|
$3,118,079
|
7%
Convertible note ($850,000)
|
270,787
|
15,267
|
-
|
286,054
|
|
$3,253,086
|
$151,047
|
$-
|
$3,404,133
|
Convertible notes
payable as of December 31, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6%
Secured convertible note (2014)
|
$39,251
|
$1,974
|
$-
|
$41,225
|
7%
Convertible note ($850,000)
|
250,000
|
321,652
|
-
|
571,652
|
10% OID Convertible
Promissory Notes
|
2,980,199
|
120,492
|
(698,547)
|
2,402,144
|
|
$3,269,450
|
$444,118
|
$(698,547)
|
$3,015,021
|
6%
Secured Convertible Note and Secured Credit Facility (2014)
On March 13, 2018,
the Company, received a Notice of Conversion from Logic Works LLC
converting principal and interest of $41,690 owed under that a 6%
Convertible Note into 16,445,609 shares of our common stock with a
fair value of $248,329. As of March 13, 2018, the outstanding
balance on the Convertible Note was $0.
7%
Convertible Notes Payable
As of December 31, 2017, the outstanding
principal on the 7% convertible note was $250,000 and accrued
interest was $321,652, which results in a total liability of
$571,652.
On February 12,
2018, the Company received a Notice of Conversion from Forglen LLC
converting principal and interest of $321,945 owed under that 7%
Convertible Note as amended June 19, 2014 into 127,000,000 shares
of the Company’s common stock with a fair value of
$2,235,200. On March 12, 2018, the Company entered into a Second
Amendment to the Note. Pursuant to the Amendment, the Note’s
maturity date has been extended to December 31, 2019, and interest
accrues at 7% per annum, compounding on the maturity date.
Additionally, after review of the Note and accrued interest, the
Parties agreed that as of March 12, 2018, the outstanding balance
on the Note was $270,787.
As of December 31, 2018, the outstanding
principal on this 7% convertible note was $270,787 and accrued
interest was $15,267, which results in a total liability of
$286,054.
10% Convertible Promissory Notes
Funding from Chicago Venture Partners, L.P. (“Chicago
Venture”)
As of December 31, 2017, the outstanding
principal balance due to Chicago Venture was $2,980,199, accrued
interest was $120,492, net of the discount of $698,547, which
results in a total amount of $2,402,144.
As of December 31, 2018, the outstanding
principal balance due to Chicago Venture is $1,112,200 and accrued
interest was $90,931, which results in a total amount of
$1,203,230.
During the year
ended December 31, 2018, Chicago Venture converted principal and
interest of $3,104,181 into 525,587,387 shares of our common stock
at a per share conversion price of $0.0059 with a fair value of
$7,756,330. The Company recognized $6,565,415 loss on debt
conversions during the year ended December 31, 2018.
During the year
ended December 31, 2018, the Company recorded an OID debt discount
expense of $660,472 to interest expense related to the Chicago
Venture financing.
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement with Iliad Research and Trading, L.P.
(“Iliad”)
On August 10, 2018,
the Company closed the transactions described below with
Iliad.
On August 7, 2018,
the Company executed the following agreements with Iliad: (i)
Securities Purchase Agreement; (ii) Secured Promissory Notes; and
(iii) Security Agreement (collectively the “Iliad
Agreements”). The Company entered into the Iliad Agreements
with the intent to acquire working capital to grow our
businesses.
The total amount of
funding under the Iliad Agreements is $1,500,000. The Convertible
Promissory Note carries an original issue discount of $150,000 and
a transaction expense amount of $5,000, for total debt of
$1,655,000. The Company agreed to reserve three times the number of
shares based on the redemption value with a minimum of 150 million
shares of its common stock for issuance upon conversion of the
Debt, if that occurs in the future. If not converted sooner, the
Debt is due on or before August 7, 2019. The Debt carries an
interest rate of ten percent (10%). The Debt is convertible, at
Iliad’s option, into our common stock at $0.015 per share
subject to adjustment as provided for in the Secured Promissory
Notes. The Company’s obligation to pay the Debt, or any
portion thereof, is secured by all of our assets. The Company has
$504,098 available under this debt financing.
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement with Iliad
On October 15,
2018, we executed the following agreements with Iliad: (i)
Securities Purchase Agreement; (ii) Secured Promissory Notes; (iii)
Security Agreement; and (iv) Warrant to Purchase Shares of Common
Shares (collectively the “Iliad Agreements”). The
Company entered into the Iliad Agreements with the intent to
acquire EZ-Clone Enterprises, Inc.
The total amount of
funding under the Iliad Agreements is $700,000. The Convertible
Promissory Note carries an original issue discount of $70,000 and a
transaction expense amount of $5,000, for total debt of $775,000.
The Company agreed to reserve 350 million shares of its common
stock for issuance upon conversion of the Debt, if that occurs in
the future. If not converted sooner, the Debt is due on or before
July 15, 2018. The Debt carries an interest rate of ten percent
(10%). The Debt is convertible, at Iliad’s option, into the
Company’s common stock at 65% of the lowest trading prices in
the twenty trading days before conversion.
The Warrant is
exercisable for a period of five (5) years from the Closing, for
the purchase of up to $387,500 shares of our Common Stock at the
market price as of the date of exercise as defined in the
agreements. The Warrant is subject to a cashless exercise option at
the election of Iliad and other adjustments as detailed in the
Warrant. The fair value of the warrant is $118,615 at December 31,
2018.
Our obligation to
pay the Debt, or any portion thereof, is secured by all of the
Company’s assets.
At December 31,
2018 the outstanding principal balance due to Iliad Research and
Trading, L.P. is $1,870,000, accrued interest of $44,849 resulting
in a total of $1,914,849. On January 17, 2019, the Company repaid
$650,000 to Iliad.
NOTE
11 – DERIVATIVE LIABILITY
In April 2008, the
FASB issued a pronouncement that provides guidance on determining
what types of instruments or embedded features in an instrument
held by a reporting entity can be considered indexed to its own
stock for the purpose of evaluating the first criteria of the scope
exception in the pronouncement on accounting for derivatives. This
pronouncement was effective for financial statements issued for
fiscal years beginning after December 15, 2008.
If the conversion
features of conventional convertible debt provide for a rate of
conversion that is below market value, this feature is
characterized as a beneficial conversion feature (BCF). A BCF is
recorded by the Company as a debt discount pursuant to ASC Topic
470-20. Debt with Conversion and Other Options. In those
circumstances, the convertible debt is recorded net of the discount
related to the BCF and the Company amortizes the discount to
interest expense over the life of the debt using the effective
interest method. The debt is convertible at the lesser of 65% of
the fair value of the Company’s common stock or $0.009
requiring the conversion feature to be bifurcated from the host
debt contract and accounting for separately as a derivative,
resulting in periodic revaluations.
There was a
derivative liability of $1,795,473 as of December 31,
2018. For the year ended
December 31, 2018, the Company recorded non-cash income of $977,732
related to the “change in fair value of derivative”
expense related to the Chicago Venture and Iliad financing. The
income related to a decline in the share price and Chicago Venture
converted principal and interest of $3,104,181 into 525,587,387
shares of our common stock at a per share conversion price of
$0.0059.
Derivative
liability as of December 31,
2018 was as follows:
|
|
|
|
|
|
Fair
Value Measurements Using Imputs
|
|
Financial
Instruments
|
|
|
|
|
Liabilities:
|
|
|
|
|
Derivative
Instruments
|
$-
|
$1,795,473
|
$-
|
$1,795,473
|
|
|
|
|
|
Total
|
$-
|
$1,795,473
|
$-
|
$1,795,473
|
NOTE
12 – RELATED PARTY TRANSACTIONS
AND CERTAIN RELATIONSHIPS
Since January 1,
2017, the Company engaged in the following reportable transactions
with our directors, executive officers, holders of more than 5% of
our voting securities, and affiliates or immediately family members
of our directors, executive officers and holders of more than 5% of
our voting securities.
Certain
Relationships
Please see the
transactions with Chicago Venture Partners, L.P. discussed in Notes
10, 11, 13 and 17.
Transactions
with Marco Hegyi
On October 21, 2018
and 2017, a Mr. Hegyi Warrant to purchase up to 10,000,000 shares
of our common stock at an exercise price of $0.01 per share vested.
The Warrant is exercisable for 5 years. The warrants were valued at
$390,000 and $192,000 we recorded $178,750 and $195,000 as
compensation expense for the years ended December 31, 2018 and
2017, respectively. On October 15, 2018, Mr. Hegyi received
Warrants to purchase up to 48,000,000 shares of our common stock at
an exercise price of $0.012 per share and which vest on October 15,
2018, 2019 and 2020. The Warrants are exercisable for 5 years. The
warrant that vested on October 15, 2018 was valued at $96,000 and
we recorded this amount compensation expense for the year ended
December 31, 2018.
On October 15,
2018, the Board of Directors approved an Employment Agreement with
Marco Hegyi pursuant to which the Company engaged Mr. Hegyi as its
Chief Executive Officer through October 15, 2021. See Note 15 for
additional details.
Transactions
with an Entity Controlled by Mark E. Scott
On October 15, 2018, an entity controlled by Mr.
Scott was granted an option to purchase 20,000,000 shares of common
stock at an exercise price of $0.012 per share. On October 15, 2017, an entity controlled by Mr.
Scott was granted an option to purchase 12,000,000 shares of common
stock at an exercise price of $0.006 per share. The stock
option grants vest quarterly over three years and are exercisable
for 5 years. The stock option grants were valued at $40,000 and
$18,000. The Company recorded $8,833 and $1,500 as compensation
expense for the years ended December 31, 2018 and 2017,
respectively.
On October 15,
2018, the Compensation Committee of the Company approved an
Employment Agreement with Mark E. Scott pursuant to which the
Company engaged Mr. Scott as its Chief Financial Officer through
October 15, 2021. Mr. Scott’s previous Agreement was
cancelled. See Note 15 for additional details.
Transaction
with Joseph Barnes
On October 15, 2018, Mr. Barnes was granted an
option to purchase 18,000,000 shares of common stock at an
exercise price of $0.012 per share. On
October 25, 2017, Mr. Barnes was granted an option to purchase
10,000,000 shares of common stock at an exercise price of
$0.007 per share. The stock option grants vest quarterly over three
years and are exercisable for 5 years. The stock option grants were
valued at $36,000 and $24,000. The Company recorded $8,550 and
$2,000 as compensation expense for the years ended December 31,
2018 and 2017, respectively
On October 15,
2018, the Compensation Committee of the Company approved an
Employment Agreement with Joseph Barnes pursuant to which the
Company engaged Mr. Barnes as President of the GrowLife Hydroponics
Company through October 15, 2021. Mr. Barnes’s previous
Agreement was cancelled. See Note 15 for additional
details.
Transactions
with Michael E. Fasci
On February 4,
2017, the Company issued 1,000,000 shares of our common stock to
Michael E. Fasci pursuant to a service award for $15,000. The
shares were valued at the fair market price of $0.015 per share. On
April 27, 2017, the Company issued 1,000,000 shares of our common
stock to Michael E. Fasci pursuant to a service award for $9,000.
The shares were valued at the fair market price of $0.009 per
share. On April 27, 2017, the Company issued 2,000,000 shares of
our common stock to Michael E. Fasci pursuant to a consulting
agreement for $18,000. The shares were valued at the fair market
price of $0.009 per share. On November 2, 2017, the Company issued
2,000,000 shares of our common stock to Michael E. Fasci pursuant
to a consulting agreement for $10,000. The shares were valued at
the fair market price of $0.005 per share.
On February 1,
2018, the Company issued 3,789,041 shares of our common stock to
Mr. Fasci that was valued at $0.02 per share or $75,781. On
December 6, 2018, the Company issued Mr. Fasci 5,000,000 shares of
our common stock that was valued at $0.01 per share or $50,000. On
December 6, 2018, Michael E. Fasci resigned as a Member of the
Board of Directors.
Transactions
with Katherine McLain
Ms. Katherine
McLain was appointed as a director on February 14, 2017. On June
28, 2017, the Company issued 1,000,000 shares of our common stock
to Ms. McLain pursuant to a service award for $9,000. The shares
were valued at the fair market price of $0.009 per share. On
October 23, 2017, the Company issued 1,000,000 shares of our common
stock to Ms. McLain pursuant to a service award for $5,000. The
shares were valued at the fair market price of $0.005 per share. On
February 1, 2018, the Company issued 2,893,151 shares of our common
stock to Katherine McLain that was valued at $0.02 per share or
$57,863.
Transaction
with Thom Kozik
Mr. Kozik was
appointed as a director on October 5, 2017. On October 23, 2017,
the Company issued 2,000,000 shares of our common stock to Mr.
Kozik pursuant to a service award for $10,000. The shares were
valued at the fair market price of $0.005 per share. On February 1,
2018, the Company issued 978,082 shares of our common stock to Thom
Kozik that was valued at $0.02 per share or $19,562.
NOTE
13 – EQUITY
Authorized
Capital Stock
The Company has
authorized 6,010,000,000 shares of capital stock, of which
6,000,000,000 are shares of voting common stock, par value $0.0001
per share, and 10,000,000 are shares of preferred stock, par value
$0.0001 per share. On October 24, 2017
the Company filed a Certificate of Amendment of Certificate of
Incorporation with the Secretary of State of the State of Delaware
to increase the authorized shares of common stock from
3,000,000,000 to 6,000,000,000 shares.
Non-Voting
Preferred Stock
Under the terms of
our articles of incorporation, the Company’s board of
directors is authorized to issue shares of non-voting preferred
stock in one or more series without stockholder approval. The
Company’s board of directors has the discretion to determine
the rights, preferences, privileges and restrictions, dividend
rights, conversion rights, redemption privileges and liquidation
preferences, of each series of non-voting preferred
stock.
The purpose of
authorizing the Company’s board of directors to issue
non-voting preferred stock and determine the Company’s rights
and preferences is to eliminate delays associated with a
stockholder vote on specific issuances. The issuance of non-voting
preferred stock, while providing flexibility in connection with
possible acquisitions, future financings and other corporate
purposes, could have the effect of making it more difficult for a
third party to acquire, or could discourage a third party from
seeking to acquire, a majority of our outstanding voting stock.
Other than the Series B and C Preferred Stock discussed below,
there are no shares of non-voting preferred stock presently
outstanding and we have no present plans to issue any shares of
preferred stock.
Common
Stock
Unless
otherwise indicated, all of the following sales or issuances of
Company securities were conducted under the exemption from
registration as provided under Section 4(2) of the Securities Act
of 1933 (and also qualified for exemption under 4(5), formerly 4(6)
of the Securities Act of 1933, except as noted below). All of the
shares issued were issued in transactions not involving a public
offering, are considered to be restricted stock as defined in Rule
144 promulgated under the Securities Act of 1933 and stock
certificates issued with respect thereto bear legends to that
effect.
The
Company has compensated consultants and service providers with
restricted common stock during the development of our business and
when our capital resources were not adequate to provide payment in
cash.
During
the year ended December 31, 2018, the Company had had the following
sales of unregistered of equity securities to accredited investors
unless otherwise indicated:
On February 7,
2018, the Company issued 7,660,274 shares to three directors. The
shares were valued at the fair market price of $0.020 per share or
$153,205. The shares were issued for annual director service to the
Company.
On February 12,
2018, the Company received a Notice of Conversion from Forglen LLC
converting principal and interest of $321,945 owed under that
certain 7% Convertible Note as amended June 19, 2014 into
127,000,000 shares of the Company’s common stock with a fair
value of $2,235,200.
On March 13, 2018,
the Company, received a Notice of Conversion from Logic Works LLC
converting principal and interest of $41,690 owed under that a 6%
Convertible Note into 16,445,609 shares of our common stock with a
fair value of $248,329. As of March 13, 2018, the outstanding
balance on the Convertible Note was $0.
During the year
ended December 31, 2018, the Company issued 2,400,000 shares of its
common stock to a service provider pursuant to conversions of debt
totaling $33,000. The shares were valued at the fair market price
of $0.0138 per share.
During the year
ended December 31, 2018, the Company issued 6,250,000 shares of its
common stock to a service provider and a former director related to
services. The shares were valued at the fair market price of
$0.0104 per share or $65,000.
During the year
ended December 31, 2018, Chicago Venture converted principal and
interest of $3,104,181 into 525,587,387 shares of our common stock
at a per share conversion price of $0.0059 with a fair value of
$7,756,330. The Company recognized $6,565,415 loss on debt
conversions during the year ended December 31, 2018.
During the year
ended December 31, 2018, an employee exercised a stock option grant
for 1,000,000 shares at $0.006 or $6,000.
Securities Purchase Agreements with St. George Investments,
LLC
On
February 9, 2018, the Company executed the following agreements
with St. George Investments LLC, a Utah limited liability company:
(i) Securities Purchase Agreement; and (ii) Warrant to Purchase
Shares of Common Stock. The Company entered into the St. George
Agreements with the intent to acquire working capital to grow the
Company’s businesses.
Pursuant
to the St. George Agreements, the Company agreed to sell and to
issue to St. George for an aggregate purchase price of $1,000,000:
(a) 48,687,862 Shares of newly issued restricted Common Stock of
the Company; and (b) the Warrant. St. George has paid the entire
Purchase Price for the Securities.
The
Warrant is exercisable for a period of five (5) years from the
Closing, for the purchase of up to 48,687,862 shares of the
Company’s Common Stock at an exercise price of $0.05 per
share of Common Stock. The Warrant is subject to a cashless
exercise option at the election of St. George and other adjustments
as detailed in the Warrant.
On March 20, 2018,
the Company entered into and closed on a Common Stock Purchase
Agreement with St. George Investments, LLC, a Utah limited
liability company. The Company issued St. George 6,410,256 shares
of newly issued restricted Common Stock of the Company at a
purchase price of $0.0156 per share.
On April 26, 2018,
the Company entered into and closed on a Common Stock Purchase
Agreement with St. George Investments, LLC, Pursuant to the St.
George Agreements, the Company sold and agreed to issue to St.
George 4,950,495 shares of newly issued restricted Common Stock of
the Company at a purchase price of $0.0202 per share.
On May 25, 2018,
the Company entered into and closed on a Common Stock Purchase
Agreement with St. George Investments, LLC, Pursuant to the St.
George Agreements, the Company sold and agreed to issue to St.
George 5,128,205 shares of newly issued restricted Common Stock of
the Company at a purchase price of $0.0195 per share.
On October 15,
2018, the Company closed the Purchase and Sale Agreement with
EZ-Clone and issued 107,307,692 restricted shares of our common
stock at a price of $0.013 per share or $1,395,000.
On November 30,
2018, the Company closed its Rights Offering. We received $2,533,648
under the Rights Offering and issued 211,137,293 shares of common
stock at $0.012 per share.
During the year
ended December 31, 2017, the Company had had the following sales of
unregistered of equity securities to accredited investors unless
otherwise indicated:
On February 28,
2017, Logic Works converted principal and interest of $291,044 into
82,640,392 shares of the Company’s common stock at a per
share conversion price of $0.004.
During the year ended December 31, 2017,
five vendors converted debt of $559,408 into 64,869,517 shares of
the Company’s common stock at the fair market price of
$0.0086 per share.
During the year ended December 31, 2017,
four directors were issued 10,000,000 shares of the Company’s
common stock at the fair market price of $0.0076 per share for 2017
director services.
During the year
ended December 31, 2017, Chicago Venture converted principal and
accrued interest of $2,688,000 into 554,044,030 shares of the
Company’s common stock at a per share conversion price of
$0.0049.
Warrants
The Company issued
the following warrants during the year ended December 31,
2018:
On February 9,
2018, the Company executed the following agreements with St. George
Investments LLC and issued a warrant to purchase of up to
48,687,862 shares of the Company’s Common Stock at an
exercise price of $0.05 per share. The Warrant is subject to a
cashless exercise option at the election of St. George and other
adjustments as repricing as detailed in the Warrant.
On October 15,
2018, Mr. Hegyi received Warrants to purchase up to 48,000,000
shares of our common stock at an exercise price of $0.012 per share
and which vest on October 15, 2018, 2019 and 2020. The Warrants are
exercisable for 5 years. The warrant that vested on October 15,
2018 was valued at $96,000 and we recorded this amount compensation
expense for the year ended December 31, 2018.
The Warrant is
exercisable for a period of five (5) years from the Closing, for
the purchase of up to $387,500 shares of our Common Stock at the
market price as of the date of exercise as defined in the
agreements. The Warrant is subject to a cashless exercise option at
the election of Iliad and other adjustments as detailed in the
Warrant. The fair value of the warrant is $118,615 at December 31,
2018.
On November 30,
2018, the Company closed its Rights Offering. The Company received
$2,533,648 under the Rights Offering and issued 211,137,293 shares
of common stock at $0.012 per share. The Company also issued five
year warrants to acquire 105,568,642 shares of common stock
exercisable at $.018 and five year warrants to acquire 105,568,642
shares of common stock exercisable $.024 per
share.
On
February 15, 2019, the Company entered into a Termination of
Existing Agreements and Release with CANX USA, LLC, a Nevada
limited liability company. Pursuant to the Agreement, the Parties
agreed to On February 15, 2019, the Company entered into a
Termination of Existing Agreements and Release with CANX USA, LLC,
a Nevada limited liability company. Pursuant to the Agreement, the
Parties agreed to terminate, release and discharge all existing and
further rights and obligations between the Parties under, arising
out of, or in any way related to that certain Waiver and
Modification Agreement and Amended and Restated Joint Venture
Agreement made as of July 10, 2014, and any ancillary agreements or
instruments thereto, including, but not limited to, the Warrants
issued to CANX entitling CANX to purchase 540,000,000 shares of the
Company’s common stock at an exercise price of
$0.033.
In
exchange for the Agreement and cancellation of the CANX Agreements
and Warrants, the Company agreed to issue $1,000,000 of restricted
common stock priced at the February 7, 2019 closing price of
$0.008, or 125,000,000 restricted common stock shares.
A summary of the
warrants issued as of December 31, 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
595,000,000
|
$0.029
|
Issued
|
307,825,146
|
0.025
|
Exercised
|
-
|
-
|
Forfeited
|
-
|
-
|
Expired
|
-
|
-
|
Outstanding
at end of period
|
902,825,146
|
$0.029
|
Exerciseable
at end of period
|
902,825,146
|
|
A summary of the
status of the warrants outstanding as of December 31, 2018 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
540,000,000
|
0.33
|
$0.033
|
540,000,000
|
$0.033
|
55,000,000
|
7.67
|
0.010
|
55,000,000
|
0.010
|
48,000,000
|
5.75
|
0.012
|
16,000,000
|
0.012
|
48,687,862
|
4.08
|
0.050
|
48,687,862
|
0.050
|
211,137,284
|
2.92
|
0.021
|
211,137,284
|
0.021
|
902,825,146
|
1.44
|
$0.029
|
870,825,146
|
0.029
|
Warrants
had no intrinsic value as of December 31, 2018.
The warrants were
valued using the following assumptions:
Assumptions
|
|
Dividend
yield
|
0%
|
Expected
life
|
|
Expected
volatility
|
200%
|
Risk
free interest rate
|
0.78%
|
NOTE
14– STOCK OPTIONS
Description of Stock Option Plan
On December 6,
2018, the Company’s shareholders voted to approve the First
Amended and Restated 2017 Stock Incentive Plan to increase the
shares issuable under the plan from 100 million to 200 million. The
Company has 100,000,000 shares available for issuance. The Company
has outstanding unexercised stock option grants totaling
100,000,000 shares at an average exercise price of $0.010 per share
as of December 31, 2018. The Company filed registration statements
on Form S-8 to register 200,000,000 shares of the Company’s
common stock related to the 2017 Stock Incentive Plan and First
Amended and Restated 2017 Stock Incentive Plan.
Determining
Fair Value under ASC 505
The
Company records compensation expense associated with stock options
and other equity-based compensation using the Black-Scholes-Merton
option valuation model for estimating fair value of stock options
granted under our plan. The Company amortizes the fair value of
stock options on a ratable basis over the requisite service
periods, which are generally the vesting periods. The expected life
of awards granted represents the period of time that they are
expected to be outstanding. The Company estimates the
volatility of our common stock based on the historical volatility
of its own common stock over the most recent period corresponding
with the estimated expected life of the award. The Company bases
the risk-free interest rate used in the Black Scholes-Merton option
valuation model on the implied yield currently available on U.S.
Treasury zero-coupon issues with an equivalent remaining term equal
to the expected life of the award. The Company has not paid any
cash dividends on our common stock and does not anticipate paying
any cash dividends in the foreseeable future. Consequently, the
Company uses an expected dividend yield of zero in the
Black-Scholes-Merton option valuation model and adjusts share-based
compensation for changes to the estimate of expected equity award
forfeitures based on actual forfeiture experience. The effect of
adjusting the forfeiture rate is recognized in the period the
forfeiture estimate is changed.
Stock Option Activity
During
the year ended December 31, 2018, the Company had the following
stock option activity:
On February 23, 2018, an employee was granted an
option to purchase 2,000,000 shares of common stock at an
exercise price of $0.020 per share. The stock option grant vests
quarterly over two years and is exercisable for 5 years. The stock
option grant was valued at $13,000.
On February 23, 2018, an employee was granted an
option to purchase 1,000,000 shares of common stock at an
exercise price of $0.020 per share. The stock option grant vests
quarterly over one year and is exercisable for 5 years. The stock
option grant was valued at $6,500.
On May 1, 2018, an employee was granted an option
to purchase 2,000,000 shares of common stock at an exercise
price of $0.020 per share. The stock option grant vests quarterly
over one year and is exercisable for 5 years. The stock option
grant was valued at $13,000.
On June 1, 2018, an employee was granted an option
to purchase 2,000,000 shares of common stock at an exercise
price of $0.020 per share. The stock option grant vests quarterly
over one year and is exercisable for 5 years. The stock option
grant was valued at $13,000.
On October 15, 2018, an entity controlled by Mr.
Scott was granted an option to purchase 20,000,000 shares of common
stock at an exercise price of $0.012 per share. The stock
option grant vests quarterly over three years and are exercisable
for 5 years. The stock option grants were valued at $40,000 and the
Company recorded this amount as compensation expense for the year
ended December 31, 2018.
On October 15, 2018, Mr. Barnes was granted an
option to purchase 18,000,000 shares of common stock at an
exercise price of $0.012 per share. The stock option grant vests
quarterly over three years and are exercisable for 5 years. The
stock option grants were valued at $36,000 and the Company recorded
this amount as compensation expense for the year ended December 31,
2018.
As
of December 31, 2018, there are 100,000,000 options to purchase
common stock at an average exercise price of $0.010 per share
outstanding under the 2017 Amended and Restated Stock Incentive
Plan. The Company recorded $44,682 and $29,250 of compensation
expense, net of related tax effects, relative to stock options for
the years ended December 31, 2018 and 2017 in accordance with ASC
505. Net loss per share (basic and diluted) associated with this
expense was approximately ($0.00). As of December 31, 2018, there
is $140,970 of total unrecognized costs related to employee granted
stock options that are not vested. These costs are expected to be
recognized over a period of approximately 3.79 years.
During
the year ended December 31, 2017, the Company had the following
stock option activity:
On June 28, 2017,
the Company’s Compensation Committee granted four advisory
committee members each an option to purchase 500,000 shares of the
Company’s common stock under the Company’s 2011 Stock
Incentive Plan at an exercise price of $0.009 per share, the fair
market price on June 28, 2017.
On October 1, 2017,
Mr. Reichwein was granted an option to purchase 20,000,000 shares
of our common stock under our 2011 Stock Incentive Plan at $0.006
per share. The shares vest as follows:
|
|
|
|
i
|
Ten million shares
vested immediately;
|
|
|
|
|
ii
|
Ten million shares
vest on a quarterly basis over two years beginning on the date of
grant.
|
The
stock option grants are exercisable for 5 years and were valued at
$20,000.
On October 15, 2017, an entity controlled by Mr.
Scott was granted an option to purchase 12,000,000 shares of common
stock at an exercise price of $0.006 per share. The stock
option grant vests quarterly over three years and is exercisable
for 5 years. The stock option grant was valued at
$18,000.
On October 25, 2017, Mr. Barnes was granted an
option to purchase 10,000,000 shares of common stock at an
exercise price of $0.007 per share. The stock option grant vests
quarterly over three years and is exercisable for 5 years. The
stock option grant was valued at $24,000.
Stock
option activity for the years ended December 31, 2018 and 2017 is
as follows:
|
|
|
|
|
|
|
|
Outstanding as of
December 31, 2016
|
12,010,000
|
$0.010
|
$120,500
|
Granted
|
44,000,000
|
0.006
|
280,000
|
Exercised
|
-
|
-
|
-
|
Forfeitures
|
(10,000)
|
(0.050)
|
(500)
|
Outstanding as of
December 31, 2017
|
56,000,000
|
0.007
|
400,000
|
Granted
|
45,000,000
|
0.013
|
596,000
|
Exercised
|
(1,000,000)
|
0.006
|
(6,000)
|
Forfeitures
|
-
|
-
|
-
|
Outstanding as of
December 31, 2018
|
100,000,000
|
$0.010
|
$990,000
|
The following table summarizes information about
stock options outstanding and exercisable at December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.006
|
31,000,000
|
3.75
|
$0.006
|
18,333,333
|
$0.006
|
0.007
|
10,000,000
|
3.75
|
0.007
|
4,166,667
|
0.007
|
0.009
|
2,000,000
|
1.50
|
0.009
|
1,000,000
|
0.009
|
0.010
|
12,000,000
|
0.88
|
0.010
|
12,000,000
|
0.010
|
0.012
|
38,000,000
|
4.75
|
0.012
|
3,166,667
|
0.012
|
0.020
|
7,000,000
|
4.39
|
0.020
|
1,416,667
|
0.020
|
|
100,000,000
|
3.79
|
$0.010
|
40,083,333
|
$0.008
|
Stock option grants
totaling 31,000,000 shares of common stock have an intrinsic value
of $18,333 as of December 31, 2018.
The stock option
grants were valued using the following assumptions:
Assumptions
|
|
Dividend
yield
|
0%
|
Expected
life
|
|
Expected
volatility
|
140%
|
Risk
free interest rate
|
0.02%
|
NOTE
15 – COMMITMENTS, CONTINGENCIES
AND LEGAL PROCEEDINGS
Legal
Proceedings
From
time to time, the Company may become subject to various legal
proceedings that are incidental to the ordinary conduct of its
business. Although we cannot accurately predict the amount of any
liability that may ultimately arise with respect to any of these
matters, it makes provision for potential liabilities when it deems
them probable and reasonably estimable. These provisions are based
on current information and may be adjusted from time to time
according to developments.
Other
than those certain legal proceedings as reported in the
Company’s annual report on Form 10-K filed with the SEC on
March 8, 2019, the Company’s know of no material, existing or
pending legal proceedings against our Company, nor is the Company
involved as a plaintiff in any material proceeding or pending
litigation. There are no proceedings in which any director, officer
or any affiliates, or any registered or beneficial shareholder, is
an adverse party or has a material interest adverse to the
Company’s interest.
Operating
Leases
On May 31, 2018,
the Company rented space at 5400
Carillon Point, Kirkland, Washington 98033 for $623 per
month for the Company’s corporate office and use of
space in the Regus network, including California. The
Company’s agreement expires May 31, 2019.
On
October 1, 2017, GrowLife Hydroponics, Inc. entered into a lease in
Calgary, Canada. The monthly lease is approximately $3,246. The
lease expires September 30, 2022.
On December 19, 2017, GrowLife Innovations, Inc.
entered into a lease in Grand Prairie, Texas dated
October 9, 2017, for 5,000 square
feet for the manufacturing and distribution of its flooring
products. The monthly lease payment is
$15,000. The lease expires December 1, 2022 and can be
renewed.
On
July 2, 2018, GrowLife Hydroponics, Inc. entered into a store lease
for 1,950 square feet in Portland, Maine. The monthly lease is
approximately $2,113, with 3% increases in year two and three. The
lease expires July 2, 2021 and can be extended.
On
August 31, 2018, GrowLife, Inc. entered into the Fourth Amendment
to the Lease Agreement for the store in Encino, California. The
monthly lease is approximately $6,720, with a 3% increase on March
1, 2019. The lease expires September 1, 2019 and the Company is
required to provide six months’ notice to terminate the
lease.
On
December 14, 2018, GrowLife, Inc. entered into a lease agreement
with Pensco Trust Company for a 28,000 square feet industrial space
at 10170 Croydon Way, Sacramento, California 95827 used for the
assembly and sales of plastic parts by EZ-Clone. The monthly lease
payment is $17,000 and increased approximately 3% per year. The
lease expires on December 31, 2023.
The
aggregate future minimum lease payments under operating leases, to
the extent the leases have early cancellation options and excluding
escalation charges, are as follows:
Years Ended
December 31,
|
|
2019
|
$534,795
|
2020
|
925,511
|
2021
|
549,776
|
2022
|
-
|
2023
|
-
|
Beyond
|
-
|
Total
|
$2,010,082
|
Employment
Agreements
Employment Agreement with Marco Hegyi
On October 15,
2018, the Board of Directors of GrowLife, Inc. (the
“Company”) approved an Employment Agreement with Marco
Hegyi pursuant to which the Company engaged Mr. Hegyi as its Chief
Executive Officer through October 15, 2021. Mr. Hegyi’s
previous Employment Agreement was set to expire on October 21,
2018.
Mr. Hegyi’s
annual compensation is $275,000. Mr. Hegyi is also entitled to
receive an annual bonus equal to four percent (4%) of the
Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
Mr. Hegyi received
a Warrant to purchase up to 16,000,000 shares of common stock of
the Company at an exercise price of $0.012 per share which vest
immediately. In addition, Mr. Hegyi received two Warrants to
purchase up to 16,000,000 shares of common stock of the Company at
an exercise price of $0.012 per share which vest on October 15,
2019 and 2020, respectively. The Warrants are exercisable for 5
years.
Mr. Hegyi will be
entitled to participate in all group employment benefits that are
offered by the Company to the Company’s senior executives and
management employees from time to time, subject to the terms and
conditions of such benefit plans, including any eligibility
requirements. In addition, the Company will purchase and maintain
during the Term an insurance policy on Mr. Hegyi’s life in
the amount of $2,000,000 payable to Mr. Hegyi’s named heirs
or estate as the beneficiary.
If the Company terminates Mr. Hegyi’s
employment at any time prior to the expiration of the Term without
Cause, as defined in the Employment Agreement, or if Mr. Hegyi
terminates his employment at any time for “Good Reason”
or due to a “Disability”, Mr. Hegyi will be entitled to
receive (i) his Base Salary amount through the end of the Term; and
(ii) his Annual Bonus amount for each year during the remainder of
the Term.
Employment Agreement with Mark E. Scott
On October 15,
2018, the Compensation Committee of the Company approved an
Employment Agreement with Mark E. Scott pursuant to which the
Company engaged Mr. Scott as its Chief Financial Officer through
October 15, 2021. Mr. Scott’s previous Agreement was
cancelled.
Mr. Scott’s
annual compensation is $165,000. Mr. Scott is also entitled to
receive an annual bonus equal to two percent (2%) of the
Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
The Company’s
Board of Directors granted Mr. Scott an option to purchase twenty
million shares of the Company’s Common Stock under the
Company’s 2018 Amended and Restated Stock Incentive Plan at
an exercise price of $0.012 per share. The Shares vest quarterly
over three years. All options will have a five-year life and allow
for a cashless exercise. The stock option grant is subject to the
terms and conditions of the Company’s Amended and Restated
Stock Incentive Plan, including vesting requirements. In the event
that Mr. Scott’s continuous status as employee to the Company
is terminated by the Company without Cause or Mr. Scott terminates
his employment with the Company for Good Reason as defined in the
Scott Agreement, in either case upon or within twelve months after
a Change in Control as defined in the Company’s Amended and
Restated Stock Incentive, then 100% of the total number of Shares
shall immediately become vested.
Mr. Scott is
entitled to participate in all group employment benefits that are
offered by the Company to the Company’s senior executives and
management employees from time to time, subject to the terms and
conditions of such benefit plans, including any eligibility
requirements. In addition, the Company is required purchase and
maintain an insurance policy on Mr. Scott’s life in the
amount of $2,000,000 payable to Mr. Scott’s named heirs or
estate as the beneficiary. Finally, Mr. Scott is entitled to twenty
days of vacation annually and also has certain insurance and travel
employment benefits.
If the Company terminates Mr. Scott’s
employment at any time prior to the expiration of the Term without
Cause, as defined in the Employment Agreement, or if Mr. Scott
terminates his employment at any time for “Good Reason”
or due to a “Disability”, Mr. Scott will be entitled to
receive (i) his Base Salary amount for ninety days; and (ii) his
Annual Bonus amount for each year during the remainder of the
Term.
Employment Agreement with Joseph Barnes
On October 15,
2018, the Compensation Committee of the Company approved an
Employment Agreement with Joseph Barnes pursuant to which the
Company engaged Mr. Barnes as President of the GrowLife Hydroponics
Company through October 15, 2021. Mr. Barnes’s previous
Agreement was cancelled.
Mr. Barnes’s
annual compensation is $165,000. Mr. Barnes is also entitled to
receive an annual bonus equal to two percent (2%) of the
Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
The Company’s
Board of Directors granted Mr. Barnes an option to purchase
eighteen million shares of the Company’s Common Stock under
the Company’s 2017 Amended and Restated Stock Incentive Plan
at an exercise price of $0.012 per share. The Shares vest quarterly
over three years. All options will have a five-year life and allow
for a cashless exercise. The stock option grant is subject to the
terms and conditions of the Company’s and Amended and
Restated Stock Incentive Plan, including vesting requirements.
In the event that Mr. Barnes’s continuous status as
employee to the Company is terminated by the Company without Cause
or Mr. Barnes terminates his employment with the Company for Good
Reason as defined in the Barnes Agreement, in either case upon or
within twelve months after a Change in Control as defined in the
Company’s Amended and Restated Stock Incentive Plan, then
100% of the total number of Shares shall immediately become
vested.
Mr. Barnes is
entitled to participate in all group employment benefits that are
offered by the Company to the Company’s senior executives and
management employees from time to time, subject to the terms and
conditions of such benefit plans, including any eligibility
requirements. In addition, the Company is required purchase and
maintain an insurance policy on Mr. Barnes’s life in the
amount of $2,000,000 payable to Mr. Barnes’s named heirs or
estate as the beneficiary. Finally, Mr. Barnes is entitled to
twenty days of vacation annually and also has certain insurance and
travel employment benefits.
If the Company terminates Mr. Barnes’s
employment at any time prior to the expiration of the Term without
Cause, as defined in the Employment Agreement, or if Mr. Barnes
terminates his employment at any time for “Good Reason”
or due to a “Disability”, Mr. Barnes will be entitled
to receive (i) his Base Salary amount for ninety days; and (ii) his
Annual Bonus amount for each year during the remainder of the
Term.
NOTE 16
– INCOME TAXES
The Company has
incurred losses since inception, which have generated net operating
loss carryforwards. The net operating loss carryforwards
arise from United States sources.
Pretax losses
arising from United States operations were $11,473,137 for the year
ended December 31, 2018.
Pretax losses
arising from United States operations were approximately $5,320,974
for the year ended December 31, 2018.
The Company has net
operating loss carryforwards of approximately $19,101,728, which
expire in 2022-2036. Because it is not more likely than not that
sufficient tax earnings will be generated to utilize the net
operating loss carryforwards, a corresponding valuation allowance
of approximately $4,011,363 was established as of December 31,
2018. Additionally, under the Tax Reform Act of 1986, the amounts
of, and benefits from, net operating losses may be limited in
certain circumstances, including a change in control.
Section 382 of
the Internal Revenue Code generally imposes an annual limitation on
the amount of net operating loss carryforwards that may be used to
offset taxable income when a corporation has undergone significant
changes in its stock ownership. There can be no assurance that the
Company will be able to utilize any net operating loss
carryforwards in the future. The Company is subject to possible tax
examination for the years 2012 through 2018
For
the year ended December 31, 2018, the Company’s effective tax
rate differs from the federal statutory rate principally due to net
operating losses and equity issued for services.
U.S. Tax Reform
On December 22,
2017, the U.S. government enacted comprehensive tax legislation
commonly referred to as the Tax Cuts and Jobs Act (the Tax Reform
Act). The Tax Reform Act significantly revises the future ongoing
federal income tax by, among other things, lowering U.S. corporate
income tax rates effective January 1, 2018. The Company has
calculated a blended U.S. federal income tax rate of approximately
21% for the fiscal year ending December 31, 2018 and 21.0% for
subsequent fiscal years. Remeasurement of the Company’s
deferred tax balance under the Tax Reform Act resulted in a
non-cash tax benefit reduction of approximately $2.5 million for
the year ended December 31, 2018.
The changes
included in the Tax Reform Act are broad and complex. The final
transition impacts of the Tax Reform Act may differ from the above
estimate due to, among other things, changes in interpretations of
the Tax Reform Act, any legislative action to address questions
that arise because of the Tax Reform Act and any changes in
accounting standards for income taxes or related interpretations in
response to the Tax Reform Act.
The
principal components of the Company’s deferred tax assets at
December 31, 2018 and 2017 are as follows:
|
|
|
U.S. operations
loss carry forward and state at statutory rate of 40%
|
$4,011,363
|
$3,068,992
|
Less valuation
allowance
|
4,011,363
|
3,068,992
|
Net deferred tax
assets
|
-
|
-
|
Change in valuation
allowance
|
$4,011,363
|
$3,068,992
|
A
reconciliation of the United States Federal Statutory rate to the
Company’s effective tax rate for the years ended December 31,
2018 and 2017 is as follows:
|
|
|
Federal statutory
rate
|
-21.0%
|
-21.0%
|
State income tax
rate
|
-6.0%
|
-6.0%
|
Change
in valuation allowance
|
27.0%
|
27.0%
|
Effective tax
rate
|
0.0%
|
0.0%
|
The Company’s
tax returns for 2012 to 2018 are open to review by the Internal
Revenue Service.
NOTE
17– SUBSEQUENT EVENTS
The
Company evaluates subsequent events, for the purpose of adjustment
or disclosure, up through the date the financial statements are
available.
There were the material events subsequent
to December 31, 2018:
Transactions
with CANX, LLC
On February 15,
2019, the Company entered into a Termination of Existing Agreements
and Release with CANX USA, LLC, a Nevada limited liability company.
Pursuant to the Agreement, the Parties agreed to terminate, release and discharge all existing and
further rights and obligations between the Parties under, arising
out of, or in any way related to that certain Waiver and Modification Agreement and Amended and
Restated Joint Venture Agreement made as of July 10, 2014, and any
ancillary agreements or instruments thereto, including, but not
limited to, the Warrants issued to CANX entitling CANX to purchase
540,000,000 shares of the Company’s common stock at an
exercise price of $0.033.
In
exchange for the Agreement and cancellation of the CANX Agreements
and Warrants, the Company agreed to issue $1,000,000 of restricted
common stock priced at the February 7, 2019 closing price of
$0.008, or 125,000,000 restricted common stock shares.
Repayment
of Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement with Iliad
On January 17,
2019, the Company repaid $650,000 to Iliad due under the October
15, 2018 funding transaction with Iliad.
Trading on Pink Sheet Stock Systems
As of March 4, 2019, the Company began to trade
on the Pink Sheet stocks
system. The Company’s bid
price had closed below $0.01 for more than 30 consecutive calendar
days.
GROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
Cash and cash
equivalents
|
$126,302
|
$2,334,377
|
Accounts receivable
- trade, net of allowance for doubtful accounts of $5,690 as of
6/30/2019 and 12/31/2018
|
323,425
|
42,254
|
Inventory,
net
|
942,694
|
792,664
|
Prepaid
costs
|
17,983
|
3,418
|
Deposits
|
58,416
|
51,916
|
Current portion of
right of use asset
|
336,681
|
-
|
Total current
assets
|
1,805,501
|
3,224,629
|
|
|
|
EQUIPMENT,
NET
|
633,507
|
712,866
|
INTANGIBLE
ASSETS
|
2,709,939
|
3,280,453
|
NON-CURRENT PORTION
OF RIGHT OF USE ASSET
|
748,729
|
-
|
TOTAL
ASSETS
|
$5,897,676
|
$7,217,948
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT)
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
Accounts payable -
trade
|
$1,430,201
|
$1,054,371
|
Accrued
expenses
|
285,884
|
261,954
|
Accrued expenses -
related parties
|
24,793
|
73,585
|
Derivative
liability
|
1,286,743
|
1,795,473
|
Current portion of
convertible notes payable
|
2,685,122
|
3,404,133
|
Current portion of
notes payable- related parties
|
102,830
|
100,020
|
Current portion of
capital lease
|
3,780
|
8,534
|
Deferred
revenue
|
-
|
89,504
|
Current portion of
right of use liability
|
328,923
|
-
|
Total current
liabilities
|
6,148,276
|
6,787,574
|
|
|
|
NON-CURRENT PORTION
OF RIGHT OF USE LIABILITY
|
760,366
|
-
|
|
|
|
COMMITMENTS AND
CONTINGENCIES
|
-
|
-
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
Preferred stock -
$0.0001 par value, 10,000,000 shares authorized, no
shares
|
|
|
issued and
outstanding
|
-
|
-
|
Common stock -
$0.0001 par value, 6,000,000,000 shares authorized,
3,759,717,098
|
|
|
and 3,437,599,095
shares issued and outstanding at 6/30/2019 and 12/31/2018,
respectively
|
375,960
|
343,749
|
Additional paid in
capital
|
141,886,782
|
139,331,067
|
Accumulated
deficit
|
(145,198,634)
|
(141,176,087)
|
Total stockholders'
deficit
|
(2,935,892)
|
(1,501,271)
|
|
|
|
NON CONTROLLING
INTEREST IN EZ-CLONE ENTERPRISES, INC.
|
1,924,926
|
1,931,645
|
|
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
$5,897,676
|
$7,217,948
|
The
accompanying notes are an integral part of these consolidated
financial statements.
GROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
REVENUE
|
$2,200,733
|
$1,208,415
|
$4,445,012
|
$1,917,351
|
COST OF GOODS
SOLD
|
1,524,960
|
1,096,934
|
2,998,331
|
1,729,451
|
GROSS
PROFIT
|
675,773
|
111,481
|
1,446,681
|
187,900
|
GENERAL AND
ADMINISTRATIVE EXPENSES
|
2,052,769
|
924,813
|
4,182,725
|
2,104,270
|
OPERATING
LOSS
|
(1,376,996)
|
(813,332)
|
(2,736,044)
|
(1,916,370)
|
|
|
|
|
|
OTHER INCOME
(EXPENSE):
|
|
|
|
|
Change in fair
value of derivative
|
21,457
|
(703,346)
|
508,730
|
1,655,098
|
Interest expense,
net
|
(107,303)
|
(320,929)
|
(227,343)
|
(709,233)
|
Loss on debt
conversions
|
(228,099)
|
(244,549)
|
(1,574,609)
|
(5,353,526)
|
Total other
(expense)
|
(313,945)
|
(1,268,824)
|
(1,293,222)
|
(4,407,661)
|
|
|
|
|
|
(LOSS) BEFORE
INCOME TAXES
|
(1,690,941)
|
(2,082,156)
|
(4,029,266)
|
(6,324,031)
|
|
|
|
|
|
Income taxes -
current benefit
|
-
|
-
|
-
|
-
|
|
|
|
|
|
NET
(LOSS)
|
(1,690,941)
|
(2,082,156)
|
(4,029,266)
|
(6,324,031)
|
|
|
|
|
|
Noncontrolling
interest in EZ-Clone Enterprises, Inc.
|
(18,809)
|
-
|
6,719
|
-
|
|
|
|
|
|
NET LOSS
ATTRIBUTABLE TO GROWLIFE, INC. AND SUBSIDIARIES
|
$(1,709,750)
|
$(2,082,156)
|
$(4,022,547)
|
$(6,324,031)
|
COMMON
SHAREHOLDERS
|
|
|
|
|
|
|
|
|
|
Basic and diluted
(loss) per share
|
$(0.00)
|
$(0.00)
|
$(0.00)
|
$(0.00)
|
|
|
|
|
|
Weighted average
shares of common stock outstanding- basic and diluted
|
3,639,091,893
|
2,938,882,290
|
3,716,729,634
|
2,824,194,733
|
The
accompanying notes are an integral part of these consolidated
financial statements.
GROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$(4,022,547)
|
$(6,324,031)
|
Adjustments to
reconcile net loss to net cash (used in)
|
|
|
operating
activities
|
|
|
Depreciation
|
84,678
|
30,553
|
Amortization
of intangible assets
|
570,514
|
-
|
Stock
based compensation
|
80,247
|
113,629
|
Common
stock issued for services
|
174,362
|
153,206
|
Amortization
of debt discount
|
-
|
498,658
|
Change
in fair value of derivative liability
|
(508,730)
|
(1,662,346)
|
Accrued
interest on convertible notes payable
|
126,898
|
101,674
|
Loss on debt
conversions
|
1,574,609
|
5,529,319
|
Noncontrolling
interest in EZ-Clone Enterprises, Inc.
|
6,719
|
-
|
Changes in
operating assets and liabilities:
|
|
|
Accounts
receivable
|
(281,171)
|
-
|
Inventory
|
(150,030)
|
30,010
|
Prepaids and other
assets
|
(14,565)
|
-
|
Deposits
|
(6,500)
|
-
|
Right of use,
net
|
3,879
|
-
|
Accounts
payable
|
375,830
|
(14,951)
|
Accrued
expenses
|
(22,052)
|
(123,964)
|
Deferred
revenue
|
(89,504)
|
-
|
CASH (USED
IN) OPERATING ACTIVITIES
|
(2,097,363)
|
(1,668,243)
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
Investment in
purchased assets
|
(5,319)
|
(250,000)
|
NET CASH (USED IN)
INVESTING ACTIVITIES:
|
(5,319)
|
(250,000)
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
Repayment of
convertible notes payable
|
(590,909)
|
-
|
Proceeds from notes
payable
|
490,000
|
-
|
Repayment on
capital lease
|
(4,754)
|
-
|
Cash provided from
Convertible Promissory Note with Chicago Venture Partners,
L.P.
|
-
|
685,000
|
Share issuances to
St. George Investments LLC
|
-
|
1,300,000
|
NET CASH (USED IN)
PROVIDED BY FINANCING ACTIVITIES
|
(105,663)
|
1,985,000
|
|
|
|
NET (DECREASE)
INCREASE IN CASH AND CASH EQUIVALENTS
|
(2,208,345)
|
66,757
|
|
|
|
CASH AND CASH
EQUIVALENTS, beginning of period
|
2,334,377
|
69,191
|
|
|
|
CASH AND CASH
EQUIVALENTS, end of period
|
$126,032
|
$135,947
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Interest
paid
|
$-
|
$-
|
Taxes
paid
|
$-
|
$-
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
Shares issued for
convertible note and interest conversion
|
$368,000
|
$2,673,590
|
Common shares
issued for accounts payable
|
$-
|
$18,000
|
Shares issued for
purchase of warrant
|
$1,000,000
|
$-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
GROWLIFE, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
The accompanying
unaudited consolidated condensed financial statements have been
prepared by GrowLife, Inc. (“us,” “we,” or
“our”) in accordance with U.S. generally accepted
accounting principles (“GAAP”) for interim financial
reporting and rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with GAAP have been condensed or omitted. In the opinion
of our management, all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of the
financial position, results of operations, and cash flows for the
fiscal periods presented have been included.
These financial
statements should be read in conjunction with the audited financial
statements and related notes included in our Annual Report filed on
Form 10-K for the year ended December 31, 2018. The results of
operations for the six months ended June 30, 2019 are not
necessarily indicative of the results expected for the full fiscal
year, or for any other fiscal period.
GrowLife, Inc.
(“GrowLife” or the “Company”) is
incorporated under the laws of the State of Delaware and is
headquartered in Kirkland, Washington. The Company was founded in
2012 with the Closing of the Agreement and Plan of Merger with SGT
Merger Corporation.
The Company’s
goal of becoming the nation’s largest cultivation facility
service provider for the production of organics, herbs and greens
and plant-based medicines has not changed. The Company’s
mission is to best serve more cultivators in the design, build-out,
expansion and maintenance of their facilities with products of high
quality, exceptional value and competitive price. Through a
nationwide network of knowledgeable representatives, regional
centers and its e-commerce website, GrowLife provides essential and
hard-to-find goods including media (i.e., farming soil),
industry-leading hydroponics equipment, organic plant nutrients,
and thousands more products to specialty grow operations across the
United States.
The Company
primarily sells through its wholly owned subsidiary, GrowLife
Hydroponics, Inc. GrowLife companies distribute and sell over
15,000 products through its e-commerce distribution channel,
GrowLifeEco.com, and through our regional retail storefronts.
GrowLife and its business units are organized and directed to
operate strictly in accordance with all applicable state and
federal laws.
On June 7, 2013,
GrowLife Hydroponics completed the purchase of Rocky Mountain
Hydroponics, LLC, a Colorado limited liability company
(“RMC”), and Evergreen Garden Center, LLC, a Maine
limited liability company (“EGC”). The effective date
of the purchase was June 7, 2013.
On
October 3, 2017, the Company closed the acquisition of 51% of the
Purchased Assets from David Reichwein, a Pennsylvania resident, GIP
International Ltd, a Hong Kong corporation and DPR International
LLC, a Pennsylvania limited liability corporation. The Purchased
Assets include intellectual property, copy rights and trademarks
related to reflective tiles and flooring.
The
Company did not acquire business, customer lists or
employees.
The Company acquired its 51% interest in
the Purchased Assets for $400,000. The Company funded equipment and rent of an office
lease. On February 16,
2018, the Company purchased the remaining 49% of the Purchased
Assets in exchange for a one-time payment of $250,000. As of December 31, 2018, the Company had recorded
investment in purchased assets of $552,689.
On August 17, 2018,
the Company entered into an Asset Purchase Agreement with Go Green
Hydroponics, Inc., a California corporation and TCA – Go
Green SPV, LLC, a Florida limited liability pursuant to which the
Company acquired the intellectual property and assumed the lease
for the property located at 15721 Ventura Blvd., Encino, CA 91436.
The Company intends to operate a retail store, sale over the
internet and sell on a direct basis at this location.
Concurrently, the
Company and Seller entered into a Security Agreement for securing
the assets of Company as collateral for the obligations of Company
as set forth in the Security Agreement. In consideration for the
sale and assignment of the Purchased Assets, the Company agreed to
pay the Seller: (i) the proceeds generated from the sale of the
closing inventory until all closing inventory has been sold, and
(ii) to pay the Seller 5% of all gross revenue of Company earned or
in any way related to the Purchased Assets generated between
October 1, 2018 and December 31, 2019, up to a maximum of
$200,000.
On October 15,
2018, the Company closed the Purchase and Sale Agreement with
EZ-CLONE Enterprises, Inc., a California corporation. EZ-CLONE is
the manufacturer of
multiple award-winning products specifically designed for the
commercial cloning and propagation stage of indoor plant
cultivation including cannabis, food, and other hydroponic farming.
The Company acquired 51% of EZ-CLONE for $2,040,000, payable
as follows: (i) a cash payment of $645,000; and (ii) the issuance
of 107,307,692 restricted shares of the Company’s common
stock at a price of $0.013 per share or $1,395,000.
The Company has the
obligation to acquire the remaining 49% of EZ-CLONE within one year
for $1,960,000, payable as follows:
(i) a cash payment of $855,000; and (ii) the issuance of 85,000,000
shares of the Company’s common stock at a price of $0.013 per
share or $1,105,000.
On October 17, 2017, the
Company was informed by Alpine Securities Corporation
(“Alpine”) that Alpine has demonstrated compliance with
the Financial Industry Regulatory Authority (“FINRA”)
Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of
1934. We filed an amended application with the OTC Markets to list
the Company’s common stock on the OTCQB and begin to trade on
this market as of March 20, 2018. As
of March 4, 2019, the Company began to trade on the
Pink
Sheet stocks system. The
Company’s bid price had closed below $0.01 for more than 30
consecutive calendar days.
NOTE 2 – GOING CONCERN
The
accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company incurred net losses of $4,029,266,
$11,444,782, and $5,320,974 for the six months ended June 30, 2019
and the years ended December 31, 2018 and 2017 respectively. Our
net cash used in operating activities was $2,097,363, $3,854,506,
and $2,082,493 for the six months ended June 30, 2019 and the years
ended December 31, 2018 and 2017 respectively.
The Company anticipates that it will record losses
from operations for the foreseeable future. As of June 30, 2019,
the accumulated deficit was $145,198,634. The
Company has experienced recurring operating losses and negative
operating cash flows since inception and has financed its working
capital requirements during this period primarily through the
recurring issuance of convertible notes payable and advances from a
related party. The audit opinion
prepared by our independent registered public accounting firm
relating to our financial statements for the year ended December
31, 2018 and 2017 filed with the SEC on March 8, 2019 includes an
explanatory paragraph expressing the substantial doubt about our
ability to continue as a going concern.
Continuation
of the Company as a going concern is dependent upon obtaining
additional working capital. The financial statements do
not include any adjustments that might be necessary if we are
unable to continue as a going concern.
NOTE
3 – SIGNIFICANT ACCOUNTING
POLICIES: ADOPTION OF ACCOUNTING STANDARDS
Basis of Presentation - The accompanying
consolidated financial statements include the accounts of the
Company. Intercompany accounts and transactions have been
eliminated. The preparation of these consolidated financial
statements in conformity with U.S. generally accepted accounting
principles (“GAAP”).
Principles of
Consolidation - The
consolidated financial statements include the accounts of the
Company and its wholly owned and majority-owned subsidiaries.
Inter-Company items and transactions have been eliminated in
consolidation.
Cash and Cash
Equivalents - The Company
classifies highly liquid temporary investments with an original
maturity of nine months or less when purchased as cash equivalents.
The Company maintains cash balances at various financial
institutions. Balances at US banks are insured by the Federal
Deposit Insurance Corporation up to $250,000. The Company has not
experienced any losses in such accounts and believes it is not
exposed to any significant risk for cash on deposit. At
June 30, 2019, the Company had uninsured deposits in the amount of
$0.
Accounts Receivable and Revenue -
Revenue is recognized at the time the Company sells merchandise to
the customer in store. eCommerce sales include shipping revenue and
are recorded upon shipment to the customer. This is when the risk
of loss transfers to our customers, the fee is fixed and
determinable, and collection of the sale is reasonably assured. A
product is not shipped without an order from the customer and the
completion of credit acceptance procedures. The majority of our
sales are cash or credit card; however, we occasionally extend
terms to our customers. Accounts receivable are reviewed
periodically for collectability.
Inventories - Inventories are recorded
on a first in first out basis. Inventory consists of raw materials,
purchased finished goods and components held for resale. Inventory
is valued at the lower of cost or market. The reserve for inventory
was $30,000 and $120,000 as of June 30, 2019 and December 31, 2018,
respectively.
Equipment – Equipment consists of machinery,
equipment, tooling, computer equipment and leasehold improvements,
which are stated at cost less accumulated depreciation and
amortization. Depreciation is computed by the straight-line method
over the estimated useful lives or lease period of the relevant
asset, generally 3-10 years, except for leasehold improvements
which are depreciated over the lesser of the life of the lease or
10 years.
Long Lived Assets
– The Company reviews its
long-lived assets for impairment annually or when changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Long-lived assets under certain circumstances are
reported at the lower of carrying amount or fair value. Assets to
be disposed of and assets not expected to provide any future
service potential to the Company are recorded at the lower of
carrying amount or fair value (less the projected cost associated
with selling the asset). To the extent carrying values exceed fair
values, an impairment loss is recognized in operating
results.
Intangible Assets – Intangible
assets are capitalized and amortized on a straight-line basis over
their estimated useful life, if the life is determinable. If the
life is not determinable, amortization is not recorded. We
regularly perform reviews to determine if facts and circumstances
exist which indicate that the useful lives of our intangible assets
are shorter than originally estimated or the carrying amount of
these assets may not be recoverable. When an indication exists that
the carrying amount of intangible assets may not be recoverable, we
assess the recoverability of our assets by comparing the projected
undiscounted net cash flows associated with the related asset or
group of assets over their remaining lives against their respective
carrying amounts. Such impairment test is based on the lowest level
for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. Impairment,
if any, is based on the excess of the carrying amount over the
estimated fair value of those assets.
Fair Value Measurements and Financial
Instruments - ASC Topic 820 defines fair value, establishes
a framework for measuring fair value, establishes a three-level
valuation hierarchy for disclosure of fair value measurement and
enhances disclosure requirements for fair value measurements. The
valuation hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date. The
three levels are defined as follows:
Level 1 -
Inputs to the valuation methodology are quoted prices (unadjusted)
for identical assets or liabilities in active markets.
Level 2 -
Inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial
instrument.
Level 3 -
Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
The carrying value
of cash, accounts receivable, investment in a related party,
accounts payables, accrued expenses, due to related party, notes
payable, and convertible notes approximates their fair values due
to their short-term maturities.
Derivative financial instruments -The
Company evaluates all of its financial instruments to determine if
such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the
consolidated statements of operations. For stock-based derivative
financial instruments, the Company uses a weighted average
Black-Scholes-Merton option pricing model to value the derivative
instruments at inception and on subsequent valuation dates. The
classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as
current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within twelve months
of the balance sheet date.
Sales Returns - We allow
customers to return defective products when they meet certain
established criteria as outlined in our sales terms and conditions.
It is our practice to regularly review and revise, when deemed
necessary, our estimates of sales returns, which are based
primarilyon actual historical return rates. We record estimated
sales returns as reductions to sales, cost of goods sold, and
accounts receivable and an increase to inventory. Returned products
which are recorded as inventory are valued based upon the amount we
expect to realize upon its subsequent disposition. As of June 30,
2019, and December 31, 2018, there was a reserve for sales returns
of $0, respectively, which is minimal based upon our historical
experience.
Stock Based Compensation - The Company has share-based compensation plans
under which employees, consultants, suppliers and directors may be
granted restricted stock, as well as options and warrants to
purchase shares of Company common stock at the fair market value at
the time of grant. Stock-based compensation cost to employees is
measured by the Company at the grant date, based on the fair value
of the award, over the requisite service period under ASC 718. For
options issued to employees, the Company recognizes stock
compensation costs utilizing the fair value methodology over the
related period of benefit. Grants of stock to
non-employees and other parties are accounted for in accordance
with the ASC 505.
Net (Loss) Per Share - Under the provisions of ASC 260, “Earnings
per Share,” basic loss per common share is computed by
dividing net loss available to common shareholders by the weighted
average number of shares of common stock outstanding for the
periods presented. Diluted net loss per share reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that would
then share in the income of the Company, subject to anti-dilution
limitations. The common stock equivalents have not been included as
they are anti-dilutive.
As of June 30,
2019, there are also (i) stock option grants outstanding for the
purchase of 82.5 million common
shares at a $0.010 average exercise price; (ii) warrants for the
purchase of 362.8 million
common shares at a $0.023 average exercise price; and (iii)
116.5 million shares related to convertible debt that can be
converted at $0.0025 per share. In addition, we have an unknown
number of common shares to be issued under the Chicago Venture,
Iliad and St. George financing agreements because the number of
shares ultimately issued to Chicago Venture depends on the price at
which Chicago Venture converts its debt to shares and exercises its
warrants. The lower the conversion or exercise prices, the more
shares that will be issued to Chicago Venture upon the conversion
of debt to shares. We won’t know the exact number of shares
of stock issued to Chicago Venture until the debt is actually
converted to equity.
As of June 30, 2018, there are also (i) stock
option grants outstanding for the purchase of 63 million common
shares at a $0.009 average exercise price; (ii) warrants for the
purchase of 595 million common shares at a $0.031 average exercise
price; and (iii) 109 million shares
related to convertible debt that can be converted at $0.0025 per
share. In addition, we have an unknown number of common shares to
be issued under the Chicago Venture Partners, L.P.
financing
agreements.
Dividend Policy
- The Company has never paid any cash
dividends and intends, for the foreseeable future, to retain any
future earnings for the development of our business. Our future
dividend policy will be determined by the board of directors on the
basis of various factors, including our results of operations,
financial condition, capital requirements and investment
opportunities.
Use of Estimates - In preparing these
unaudited interim consolidated financial statements in conformity
with GAAP, management is required to make estimates and assumptions
that may affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of
the consolidated financial statements and the reported amount of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates. Significant estimates and
assumptions included in our consolidated financial statements
relate to the valuation of long-lived assets, estimates of sales
returns, inventory reserves and accruals for potential liabilities,
and valuation assumptions related to derivative liability, equity
instruments and share based compensation.
Recent Accounting Pronouncements
A
variety of proposed or otherwise potential accounting standards are
currently under study by standard setting organizations and various
regulatory agencies. Due to the tentative and preliminary nature of
those proposed standards, management has not determined whether
implementation of such proposed standards would be material to the
Company’s consolidated financial statements.
In February 2016,
the FASB issued Accounting Standards Update No.
2016-02, Leases (Topic 842) (ASU 2016-02), as amended,
which generally requires lessees to recognize operating and
financing lease liabilities and corresponding right-of-use assets
on the balance sheet and to provide enhanced disclosures
surrounding the amount, timing and uncertainty of cash flows
arising from leasing arrangements. The Company adopted the new
standard effective January 1, 2019 on a modified retrospective
basis and did not restate comparative periods. The Company elected
the package of practical expedients permitted under the transition
guidance, which allows the Company to carryforward our historical
lease classification, our assessment on whether a contract is or
contains a lease, and the Company’s initial direct costs for
any leases that exist prior to adoption of the new standard. The
Company also elected to combine lease and non-lease components and
to keep leases with an initial term of twelve months or less off
the balance sheet and recognize the associated lease payments in
the consolidated statements of operations on a straight-line basis
over the lease term.
The Company
determines if an arrangement is a lease at inception. Operating and
finance leases are included in Right of Use ("ROU") assets, and
lease liability obligations in the Company’s consolidated
balance sheets. ROU assets represent our right to use an underlying
asset for the lease term and lease liability obligations represent
the Company’s obligation to make lease payments arising from
the lease. ROU assets and liabilities are recognized at
commencement date based on the present value of lease payments over
the lease term. The Company accounts for lease agreements with
lease and non-lease components and account for such components as a
single lease component. As most of the Company’s leases do
not provide an implicit rate, we estimated our incremental
borrowing rate based on the information available at commencement
date in determining the present value of lease payments. The
Company uses the implicit rate when readily determinable. The ROU
asset also includes any lease payments made and excludes lease
incentives and lease direct costs. The Company’s lease terms
may include options to extend or terminate the lease when it is
reasonably certain that we will exercise that option. Lease expense
is recognized on a straight-line basis over the lease term. Please
refer to Note 8 for additional information.
NOTE
4 – TRANSACTIONS
Acquisition
of 51% of EZ-CLONE Enterprises, Inc.
On October 15,
2018, the Company closed the Purchase and Sale Agreement with
EZ-CLONE Enterprises, Inc., a California corporation that was
founded in January 2000. EZ-CLONE is the manufacturer of multiple
award-winning products specifically designed for the commercial
cloning and propagation stage of indoor plant cultivation including
cannabis, food, and other hydroponic farming. The Company
has proprietary products and services such as the Commercial Pro
System, Hobbyist Cloning Systems, Cloning Tents, Coco Collars, Coco
Seed Starters, Rooting Gel, and Clear Rez. Technical Support,
know-how and overall knowledge is also considered proprietary. The
Company trademarks are EZ-CLONE and EZ-CLONE CRIB.
This acquisition is expected to accelerate the Company’s
revenue growth, increase the Company gross margins and add
additional manufacturing and research and development
personnel.
The Company acquired 51% of
EZ-CLONE for $2,040,000, payable as follows: (i) a cash payment of
$645,000; and (ii) the issuance of 107,307,692 restricted shares of
the Company’s common stock at a price of $0.013 per share or
$1,395,000. The Company has the obligation to acquire the remaining
49% of EZ-CLONE within one year for $1,960,000, payable as follows: (i) a cash payment
of $855,000; and (ii) the issuance of 85,000,000 shares of the
Company’s common stock at a price of $0.013 per share or
$1,105,000.
The cost to acquire these assets has been preliminarily allocated
to the assets acquired according to estimated fair values and is
subject to adjustment when additional information concerning asset
valuations is finalized, but no later than October 15, 2019. The
preliminary allocation is as follows:
Purchase
Price Allocation
|
$
|
Common
Stock
|
$1,395,000
|
Cash
|
645,000
|
Assets
acquired
|
(911,294)
|
Liabilities
acquired
|
939,375
|
Non-controlling
interest
|
1,960,000
|
EZ-CLONE
equity
|
(605,000)
|
|
|
|
|
|
|
|
|
Total
purchase price
|
$3,423,081
|
The
results of operations of EZ-CLONE were included in the Consolidated
Statements of Operations for the period October 15, 2018 to
December 31, 2018.
The
unaudited pro-forma financial data for the acquisition for the year
ended December 31, 2018, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
$4,573,461
|
$1,551,503
|
$6,124,964
|
Net
loss
|
(11,473,137)
|
(111,671)
|
(11,584,808)
|
Net
loss per share
|
$(0.00)
|
|
$(0.00)
|
The
unaudited pro-forma financial data for the acquisition for the year
ended December 31, 2017, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
$2,452,104
|
$2,648,873
|
$5,100,977
|
Net
loss
|
(5,320,974)
|
(126,962)
|
(5,447,936)
|
Net
loss per share
|
$(0.00)
|
|
$(0.00)
|
There was no material, nonrecurring items included in the reported
the pro-forma results.
Termination
of Agreements with CANX, LLC
On February 15,
2019, the Company entered into a Termination of Existing Agreements
and Release with CANX USA, LLC, a Nevada limited liability company.
Pursuant to the Agreement, the Parties agreed to terminate, release and discharge all existing and
further rights and obligations between the Parties under, arising
out of, or in any way related to that certain Waiver and Modification Agreement and Amended and
Restated Joint Venture Agreement made as of July 10, 2014, and any
ancillary agreements or instruments thereto, including, but not
limited to, the Warrants issued to CANX entitling CANX to purchase
540,000,000 shares of the Company’s common stock at an
exercise price of $0.033.
In
exchange for the Agreement and cancellation of the CANX Agreements
and Warrants, the Company agreed to issue $1,000,000 of restricted
common stock priced at the February 7, 2019 closing price of
$0.008, or 125,000,000 restricted common stock shares.
NOTE
5 – INVENTORY
Inventory as of
June 30, 2019 and December 31, 2018 consisted of the
following:
|
|
|
|
|
|
|
|
|
Raw
materials
|
$479,305
|
$417,570
|
Work
in process
|
88,475
|
35,280
|
Finished
goods
|
404,914
|
459,814
|
Inventory
reserve
|
(30,000)
|
(120,000)
|
Total
|
$942,694
|
$792,664
|
Raw materials
consist of supplies for the flooring product line and
EZ-CLONE.
Finished goods
inventory relates to product at the Company’s retail stores,
which is product purchased from distributors, and in some cases
directly from the manufacturer, and resold at our stores and
EZ-CLONE.
The Company reviews
its inventory on a periodic basis to identify products that are
slow moving and/or obsolete, and if such products are identified,
the Company records the appropriate inventory impairment charge at
such time.
NOTE
6 – PROPERTY AND EQUIPMENT
Property and
equipment as of June 30, 2019 and December 31, 2018 consists of the
following:
|
|
|
|
|
|
|
|
|
Machinery,
equipment and tooling
|
$909,556
|
$943,326
|
Computer
equipment
|
16,675
|
16,675
|
Leasehold
improvements
|
19,971
|
14,703
|
Total
property and equipment
|
946,203
|
974,704
|
Less
accumulated depreciation and amortization
|
(312,696)
|
(261,839)
|
Net
property and equipment
|
$633,507
|
$712,866
|
Fixed
assets, net of accumulated depreciation, were $633,507 and $712,866
as of June 30, 2019 and December 31, 2018, respectively.
Accumulated depreciation was $312,696 and $261,839 as of June 30,
2019 and December 31, 2018, respectively. Total depreciation
expense was $50,857 and $30,553 for the six months ended June 30,
2019 and December 31, 2018, respectively. All equipment is used for
manufacturing, selling, general and administrative purposes and
accordingly all depreciation is classified in cost of goods sold,
selling, general and administrative expenses.
On
October 3, 2017, the Company closed the acquisition of 51% of the
Purchased Assets from David Reichwein, a Pennsylvania resident, GIP
International Ltd, a Hong Kong corporation and DPR International
LLC, a Pennsylvania limited liability corporation. The Purchased
Assets include intellectual property, copy rights and trademarks
related to reflective tiles and flooring.
The
Company did not acquire business, customer list or
employees.
The Company acquired its 51% interest in
the Purchased Assets for $400,000. The Company funded equipment and rent of an office
lease. On February 16,
2018, the Company purchased the remaining 49% of the Purchased
Assets in exchange for a one-time payment of $250,000. As of December 31, 2018, the Company had recorded
investment in purchased assets of $552,689.
On October 15, 2018, the Company acquired 51%
of EZ-CLONE Enterprises, Inc. and acquired $244,203 of net
property and equipment.
During the year
ended December 31, 2018, the Company retired fully depreciated
assets of $358,156.
NOTE
7 – INTANGIBLE
ASSETS
Intangible
assets as of June 30, 2019 and December 31, 2018 consisted of the
following:
|
Estimated
|
|
|
|
Useful
Lives
|
|
|
|
|
|
|
Customer
lists
|
3
years
|
$1,604,341
|
$1,604,341
|
Patents
|
3
years
|
1,818,740
|
1,818,740
|
Less:
accumulated amortization
|
|
(713,142)
|
(142,628)
|
Intangible
assets, net
|
|
$2,709,939
|
$3,280,453
|
Total
amortization expense was $570,513 and $0 for the six months ended
June 30, 2019 and 2018, respectively.
On October 15,
2018, the Company closed the Purchase and Sale Agreement with
EZ-CLONE Enterprises, Inc., a California corporation that was
founded in January 2000. The Company acquired 51% of
EZ-CLONE for $2,040,000, payable as follows: (i) a cash payment of
$645,000; and (ii) the issuance of 107,307,692 restricted shares of
the Company’s common stock at a price of $0.013 per share or
$1,395,000. The Company has the obligation to acquire the remaining
49% of EZ-CLONE within one year for $1,960,000, payable as follows: (i) a cash payment
of $855,000; and (ii) the issuance of 85,000,000 shares of the
Company’s common stock at a price of $0.013 per share or
$1,105,000.
The
fair value of the intellectual property associated with the assets
acquired was $3,423,081 estimated by using a discounted cash flow
approach based on future economic benefits. In summary, the
estimate was based on a projected income approach and related
discounted cash flows over five years, with applicable risk factors
assigned to assumptions in the forecasted results.
NOTE 8- LEASES
The Company has
entered into operating leases for retail and corporate facilities.
These leases have terms which range from two to five years, and
often include options to renew. These operating leases are listed
as separate line items on the Company's June 30, 2019 Consolidated
Balance Sheet, and represent the Company’s right to use the
underlying asset for the lease term. The Company’s obligation
to make lease payments are also listed as separate line items on
the Company's June 30, 2019 Consolidated Balance Sheet. Based on
the present value of the lease payments for the remaining lease
term of the Company's existing leases, the Company recognized
right-of-use assets and lease liabilities for operating leases of
approximately $1,253,000 on January 1, 2019. Operating lease
right-of-use assets and liabilities commencing after January 1,
2019 are recognized at commencement date based on the present value
of lease payments over the lease term. As of June 30, 2019, total
right-of-use assets and operating lease liabilities were
approximately $1,085,000 and $1,089,000, respectively. In the six
months ended June 30, 2019, the Company recognized approximately
$399,000 in total lease costs.
Because the rate
implicit in each lease is not readily determinable, the Company
uses its incremental borrowing rate to determine the present value
of the lease payments.
Information related
to the Company's operating right-of-use assets and related lease
liabilities as of and for the six months ended June 30, 2019 were
as follows:
Cash paid for
operating lease liabilities
|
$
227,000
|
Weighted-average
remaining lease term
|
3.2
years
|
Weighted-average
discount rate
|
10 %
|
Minimum future
lease payments
|
-
|
Minimum future
lease payments as of June 30, 2019 are as
follows:
Year
|
$
|
2019
|
$227,149
|
2020
|
461,360
|
2021
|
464,150
|
2022
|
303,687
|
2023
|
236,352
|
Total
lease liability
|
1,692,699
|
Less
imputed interest
|
(603,410)
|
Net
lease liability
|
$1,089,289
|
NOTE 9- ACCOUNTS PAYABLE
Accounts
payable were $1,430,201 and $1,054,371 as of June 30, 2019 and
December 31, 2018, respectively. Such liabilities consisted of
amounts due to vendors for inventory purchases, audit, legal and
other expenses incurred by the Company. The increase relates to
inventory purchased at EZ-CLONE for production for sales during the
three months ended September 30, 2019.
NOTE 10- ACCRUED EXPENSES
Accrued expenses were $285,884 and $261,954 as
of June 30, 2019 and December 31, 2018, respectively. Such
liabilities consisted of amounts due to Go Green
Hydroponics, Inc. and TCA – Go Green SPV, LLC and
sales tax and payroll
liabilities.
On August 17, 2018,
the Company entered into an Asset Purchase Agreement with Go Green
Hydroponics, Inc. and TCA – Go Green SPV, LLC. The Company
acquired the inventory of Go Green but agreed to pay the Seller
100% of the proceeds generated from the sale of the closing
inventory until all closing inventory has been sold. The Company
recorded accrued expenses $134,497 as of September 30, 2018 related
to the sale of inventory. Also, the Company agreed to pay 5% of all
gross revenue of Company earned or in any way related to the
Purchased Assets generated between October 1, 2018 and December 31,
2019, up to a maximum of $200,000. The Company estimated gross
revenue for that period to be approximately $1,200,000 and recorded
a $60,000 liability. The Company recorded an impairment of acquired
assets in the amount of $60,000 as of December 31,
2018.
NOTE
11– CONVERTIBLE NOTES PAYABLE, NET
Convertible notes
payable as of June 30, 2019
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% OID Convertible
Promissory Notes
|
$2,156,669
|
$232,997
|
$-
|
$2,389,666
|
7%
Convertible note ($850,000)
|
270,787
|
24,669
|
-
|
295,456
|
|
$2,427,456
|
$257,666
|
$-
|
$2,685,122
|
Convertible notes
payable as of December 31, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% OID Convertible
Promissory Notes
|
$2,982,299
|
$135,780
|
$-
|
$3,118,079
|
7%
Convertible note ($850,000)
|
270,787
|
15,267
|
-
|
286,054
|
|
$3,253,086
|
$151,047
|
$-
|
$3,404,133
|
7%
Convertible Notes Payable
On March 12, 2018,
the Company entered into a Second Amendment to the Note. Pursuant
to the Amendment, the Note’s maturity date has been extended
to December 31, 2019, and interest accrues at 7% per annum,
compounding on the maturity date. Additionally, after review of the
Note and accrued interest, the Parties agreed that as of March 12,
2018, the outstanding balance on the Note was
$270,787.
As of June 30, 2019, the outstanding principal on
this 7% convertible note was $270,787 and accrued interest was
$24,669, which results in a total liability of
$295,456.
10% Convertible Promissory Notes
Funding from Chicago
Venture Partners, L.P. (“Chicago Venture”) and
Iliad Research and
Trading, L.P. (“Iliad”)
As of December 31, 2018, the outstanding
principal balance due to Chicago Venture and Iliad was $2,982,299
and accrued interest was $135,780, which results in a total amount
of $3,118,079.
During the year
ended December 31, 2018, Chicago Venture and Iliad converted
principal and interest of $3,104,181 into 525,587,387 shares of our
common stock at a per share conversion price of $0.0059 with a fair
value of $7,756,330. The Company recognized $6,565,415 loss on debt
conversions during the year ended December 31, 2018.
During the year
ended December 31, 2018, the Company recorded an OID debt discount
expense of $660,472 to interest expense related to the Chicago
Venture and Iliad financing.
As of June 30, 2019, the outstanding principal
balance due to Chicago Venture and Iliad was $2,156,669 and accrued
interest was $232,997, which results in a total amount of
$2,389,666.
During the six
months ended June 30, 2019, Chicago Venture and Iliad converted
principal and accrued interest of $745,000 into 171,017,865 shares
of our common stock at a per share conversion price of $.0044 with
a fair value of $1,293,341. The Company recognized $1,574,609 loss
on debt conversions during the six months ended June 30,
2019.
NOTE
12 – DERIVATIVE LIABILITY
In April 2008, the
FASB issued a pronouncement that provides guidance on determining
what types of instruments or embedded features in an instrument
held by a reporting entity can be considered indexed to its own
stock for the purpose of evaluating the first criteria of the scope
exception in the pronouncement on accounting for derivatives. This
pronouncement was effective for financial statements issued for
fiscal years beginning after December 15, 2008.
If the conversion
features of conventional convertible debt provide for a rate of
conversion that is below market value, this feature is
characterized as a beneficial conversion feature (BCF). A BCF is
recorded by the Company as a debt discount pursuant to ASC Topic
470-20. Debt with Conversion and Other Options. In those
circumstances, the convertible debt is recorded net of the discount
related to the BCF and the Company amortizes the discount to
interest expense over the life of the debt using the effective
interest method. The debt is convertible at the lesser of 65% of
the fair value of the Company’s common stock or $0.009
requiring the conversion feature to be bifurcated from the host
debt contract and accounting for separately as a derivative,
resulting in periodic revaluations.
There was a
derivative liability of $1,286,743 as of June 30, 2019. For the six months ended June 30, 2019,
the Company recorded non-cash income of $508,730 related to the
“change in fair value of derivative” expense related to
the Chicago Venture and Iliad financing. During the six months
ended June 30, 2019, Chicago Venture and Iliad converted principal
and accrued interest of $745,000 into 171,017,865 shares of our
common stock at a per share conversion price of $.0044 with a fair
value of $1,293,341. The Company recognized $1,574,609 loss on debt
conversions during the six months ended June 30, 2019.
Derivative
liability as of June 30, 2019
was as follows:
|
|
|
|
|
|
Fair
Value Measurements Using Inputs
|
|
Financial Instruments
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Derivative
Instruments
|
$-
|
$1,286,743
|
$-
|
$1,286,743
|
|
|
|
|
|
Total
|
$-
|
$1,286,743
|
$-
|
$1,286,743
|
NOTE
13 – RELATED PARTY TRANSACTIONS
AND CERTAIN RELATIONSHIPS
Related
Party Transactions
Transactions
with Katherine McLain
Ms. Katherine
McLain was appointed as a director on February 14, 2017. On
February 22, 2019, the Company issued 8,108,108 shares of our
common stock to Katherine McLain valued at $0.0074 per share or
$60,000.
Transaction
with Thom Kozik
Mr. Kozik was
appointed as a director on October 5, 2017. On February 22, 2019,
the Company issued 8,108,108 shares of our common stock to Mr.
Kozik valued at $0.0074 per share or $60,000.
NOTE
14 – EQUITY
Authorized
Capital Stock
The Company has
authorized 6,010,000,000 shares of capital stock, of which
6,000,000,000 are shares of voting common stock, par value $0.0001
per share, and 10,000,000 are shares of preferred stock, par value
$0.0001 per share. On October 24, 2017
the Company filed a Certificate of Amendment of Certificate of
Incorporation with the Secretary of State of the State of Delaware
to increase the authorized shares of common stock from
3,000,000,000 to 6,000,000,000 shares.
Non-Voting
Preferred Stock
Under the terms of
our articles of incorporation, the Company’s board of
directors is authorized to issue shares of non-voting preferred
stock in one or more series without stockholder approval. The
Company’s board of directors has the discretion to determine
the rights, preferences, privileges and restrictions, dividend
rights, conversion rights, redemption privileges and liquidation
preferences, of each series of non-voting preferred
stock.
The purpose of
authorizing the Company’s board of directors to issue
non-voting preferred stock and determine the Company’s rights
and preferences is to eliminate delays associated with a
stockholder vote on specific issuances. The issuance of non-voting
preferred stock, while providing flexibility in connection with
possible acquisitions, future financings and other corporate
purposes, could have the effect of making it more difficult for a
third party to acquire, or could discourage a third party from
seeking to acquire, a majority of our outstanding voting stock.
Other than the Series B and C Preferred Stock discussed below,
there are no shares of non-voting preferred stock presently
outstanding and we have no present plans to issue any shares of
preferred stock.
Common
Stock
Unless
otherwise indicated, all of the following sales or issuances of
Company securities were conducted under the exemption from
registration as provided under Section 4(2) of the Securities Act
of 1933 (and also qualified for exemption under 4(5), formerly 4(6)
of the Securities Act of 1933, except as noted below). All of the
shares issued were issued in transactions not involving a public
offering, are considered to be restricted stock as defined in Rule
144 promulgated under the Securities Act of 1933 and stock
certificates issued with respect thereto bear legends to that
effect.
The
Company has compensated consultants and service providers with
restricted common stock during the development of our business and
when our capital resources were not adequate to provide payment in
cash.
During
the six months ended June 30, 2019, the Company had the following
sales of unregistered equity securities to accredited investors
unless otherwise indicated:
During the six
months ended June 30, 2019, the Company issued 22,183,471 shares to
suppliers for services provided. The Company valued the shares at
$174,435 per share or $0.0079.
During the six
months ended June 30, 2019, Chicago Venture and Iliad converted
principal and accrued interest of $745,000 into 171,017,865 shares
of our common stock at a per share conversion price of $.0044 with
a fair value of $1,293,341. The Company recognized $582,246 loss on
debt conversions during the six months ended June 30,
2019.
On February 15,
2019, the Company entered into a Termination of Existing Agreements
and Release with CANX USA, LLC, a Nevada limited liability company.
Pursuant to the Agreement, the Parties agreed to terminate, release
and discharge all existing and further rights and obligations
between the Parties under, arising out of, or in any way related to
that certain Waiver and Modification Agreement and Amended and
Restated Joint Venture Agreement made as of July 10, 2014, and any
ancillary agreements or instruments thereto, including, but not
limited to, the Warrants issued to CANX entitling CANX to purchase
540,000,000 shares of the Company’s common stock at an
exercise price of $0.033.
In exchange for the
Agreement and cancellation of the CANX Agreements and Warrants, the
Company agreed to issue $1,000,000 of restricted common stock
priced at the February 7, 2019 closing price of $0.008, or
125,000,000 restricted common stock shares The Company recorded a
loss on settlement of $986,363.
On May 2, 2019, the
Company issued 3,916,667 shares valued at $0.006 to a former
employee related to a cashless stock option exercise. We cancelled
a stock option grant for 15,083,333 shares issued at
$0.006.
Warrants
The Company had the
following warrant activity during the six months ended June 30,
2019:
On February 15,
2019, the Company entered into a Termination of Existing Agreements
and Release with CANX USA, LLC, a Nevada limited liability company.
Pursuant to the Agreement, the Parties agreed to terminate, release and discharge all existing and
further rights and obligations between the Parties under, arising
out of, or in any way related to that certain Waiver and Modification Agreement and Amended and
Restated Joint Venture Agreement made as of July 10, 2014, and any
ancillary agreements or instruments thereto, including, but not
limited to, the Warrants issued to CANX entitling CANX to purchase
540,000,000 shares of the Company’s common stock at an
exercise price of $0.033.
In
exchange for the Agreement and cancellation of the CANX Agreements
and Warrants, the Company agreed to issue $1,000,000 of restricted
common stock priced at the February 7, 2019 closing price of
$0.008, or 125,000,000 restricted common stock shares.
A summary of the
warrants issued as of June 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
902,825,146
|
$0.029
|
Issued
|
-
|
-
|
Exercised
|
-
|
-
|
Forfeited
|
(540,000,000)
|
(0.033)
|
Expired
|
-
|
-
|
Outstanding
at end of period
|
362,825,146
|
$0.023
|
Exerciseable
at end of period
|
362,825,146
|
|
A summary of the
status of the warrants outstanding as of June 30, 2019 is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
-
|
$-
|
-
|
$-
|
55,000,000
|
7.16
|
0.010
|
55,000,000
|
0.010
|
48,000,000
|
5.25
|
0.012
|
16,000,000
|
0.012
|
48,687,862
|
3.58
|
0.050
|
48,687,862
|
0.050
|
211,137,284
|
2.32
|
0.021
|
211,137,284
|
0.021
|
362,825,146
|
3.30
|
$0.023
|
330,825,146
|
$0.023
|
Warrants had no
intrinsic value as of June 30, 2019.
The warrants were
valued using the following assumptions:
0%
|
1-5
Years
|
70-200%
|
0.78-2.6%
|
NOTE
15– STOCK OPTIONS
Description of Stock Option Plan
On December 6,
2018, the Company’s shareholders voted to approve the First
Amended and Restated 2017 Stock Incentive Plan to increase the
shares issuable under the plan from 100 million to 200 million. The
Company has 100,000,000 shares available for issuance. The Company
has outstanding unexercised stock option grants totaling
100,000,000 shares at an average exercise price of $0.010 per share
as of December 31, 2018. The Company filed registration statements
on Form S-8 to register 200,000,000 shares of the Company’s
common stock related to the 2017 Stock Incentive Plan and First
Amended and Restated 2017 Stock Incentive Plan.
Determining Fair Value under ASC 505
The
Company records compensation expense associated with stock options
and other equity-based compensation using the Black-Scholes-Merton
option valuation model for estimating fair value of stock options
granted under our plan. The Company amortizes the fair value of
stock options on a ratable basis over the requisite service
periods, which are generally the vesting periods. The expected life
of awards granted represents the period of time that they are
expected to be outstanding. The Company estimates the
volatility of our common stock based on the historical volatility
of its own common stock over the most recent period corresponding
with the estimated expected life of the award. The Company bases
the risk-free interest rate used in the Black Scholes-Merton option
valuation model on the implied yield currently available on U.S.
Treasury zero-coupon issues with an equivalent remaining term equal
to the expected life of the award. The Company has not paid any
cash dividends on our common stock and does not anticipate paying
any cash dividends in the foreseeable future. Consequently, the
Company uses an expected dividend yield of zero in the
Black-Scholes-Merton option valuation model and adjusts share-based
compensation for changes to the estimate of expected equity award
forfeitures based on actual forfeiture experience. The effect of
adjusting the forfeiture rate is recognized in the period the
forfeiture estimate is changed.
Stock Option Activity
During
the six months ended June 30, 2019, the Company had the following
stock option activity:
On February 6, 2019, the Company issued a stock
option grant to an advisory board member for 500,000 shares of
common stock at an exercise price of $0.008 per share. The
stock option grant vests quarterly over three years and is
exercisable for 3 years. The stock option grant was valued at
$1,000.
On April 26, 2019, the Company issued stock option
grants to two employees for 3,000,000 shares of common stock
at an exercise price of $0.010 per share. The stock option grant
vests quarterly over three years and is exercisable for 3 years.
The stock option grants were valued at $3,000.
On April 2, 2019,
the Company amended the exercise price on stock option grants for
five million shares and changed the exercise price from $0.020 to
$0.010 per share.
On May 2, 2019, the
Company issued 3,916,667 shares valued at $0.006 to a former
employee related to a cashless stock option exercise. We cancelled
a stock option grant for 15,083,333 shares issued at
$0.006.
During the three months ended June 30, 2019, a
stock option grant for 2,000,000 shares of common stock at
an exercise price of $0.02 per share expired.
As
of June 30, 2019, there are 82,500,000 options to purchase common
stock at an average exercise price of $0.0099 per share outstanding
under the 2017 Amended and Restated Stock Incentive Plan. The
Company recorded $32,247 and $16,129 of compensation expense, net
of related tax effects, relative to stock options for the six
months ended June 30, 2019 and 2018 in accordance with ASC 505. Net
loss per share (basic and diluted) associated with this expense was
approximately ($0.00). As of June 30, 2019, there is $112,624 of
total unrecognized costs related to employee granted stock options
that are not vested. These costs are expected to be recognized over
a period of approximately 3.87 years.
Stock
option activity for the period ended June 30, 2019 is as
follows:
|
|
|
|
|
|
|
|
Outstanding as of
December 31, 2018
|
100,000,000
|
$0.0094
|
$940,000
|
Granted
|
3,500,000
|
0.0080
|
34,000
|
Exercised
|
(3,916,667)
|
(0.0060)
|
(23,500)
|
Forfeitures
|
(17,083,333)
|
(0.0076)
|
(130,500)
|
Outstanding as of
June 30, 2019
|
82,500,000
|
$0.0099
|
$820,000
|
The following table summarizes information about
stock options outstanding and exercisable at June 30,
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.006
|
12,000,000
|
3.36
|
$0.006
|
6,000,000
|
$0.006
|
0.007
|
10,000,000
|
3.50
|
0.007
|
5,000,000
|
0.007
|
.008-.009
|
2,500,000
|
1.55
|
.008-.009
|
1,375,000
|
0.008
|
|
20,000,000
|
3.36
|
0.010
|
14,916,667
|
0.010
|
|
38,000,000
|
4.00
|
0.012
|
9,500,000
|
0.012
|
|
82,500,000
|
3.87
|
$0.010
|
36,791,667
|
$0.009
|
Stock option grants
totaling 82,500,000 shares of common stock no intrinsic value as of
June 30, 2019.
The stock option
grants were valued using the following assumptions:
0%
|
1-5
Years
|
70-200%
|
0.78-2.6%
|
NOTE
16 – COMMITMENTS, CONTINGENCIES
AND LEGAL PROCEEDINGS
Legal
Proceedings
From
time to time, the Company may become subject to various legal
proceedings that are incidental to the ordinary conduct of its
business. Although we cannot accurately predict the amount of any
liability that may ultimately arise with respect to any of these
matters, it makes provision for potential liabilities when it deems
them probable and reasonably estimable. These provisions are based
on current information and may be adjusted from time to time
according to developments.
Other
than those certain legal proceedings as reported in the
Company’s annual report on Form 10-K filed with the SEC on
March 8, 2019, the Company’s know of no material, existing or
pending legal proceedings against our Company, nor is the Company
involved as a plaintiff in any material proceeding or pending
litigation. There are no proceedings in which any director, officer
or any affiliates, or any registered or beneficial shareholder, is
an adverse party or has a material interest adverse to the
Company’s interest.
Operating
Leases
On May 31, 2019,
the Company rented space at 5400
Carillon Point, Kirkland, Washington 98033 for $623 per
month for the Company’s corporate office and use of
space in the Regus network, including California. The
Company’s agreement expires May 31, 2020.
On
October 1, 2017, GrowLife Hydroponics, Inc. entered into a lease in
Calgary, Canada. The monthly lease is approximately $3,246. The
lease expires September 30, 2022.
On December 19, 2017, GrowLife Innovations, Inc.
entered into a lease in Grand Prairie, Texas dated
October 9, 2017, for 5,000 square
feet for the manufacturing and distribution of its flooring
products. The monthly lease payment is
$15,000. The lease expires December 1, 2022 and can be
renewed.
On
July 2, 2018, GrowLife Hydroponics, Inc. entered into a store lease
for 1,950 square feet in Portland, Maine. The monthly lease is
approximately $2,113, with 3% increases in year two and three. The
lease expires July 2, 2021 and can be extended.
On
August 31, 2018, GrowLife, Inc. entered into the Fourth Amendment
to the Lease Agreement for the store in Encino, California. The
monthly lease is approximately $6,720, with a 3% increase on March
1, 2019. The lease expires September 1, 2019 and the Company is
required to provide six months’ notice to terminate the
lease.
On
December 14, 2018, GrowLife, Inc. entered into a lease agreement
with Pensco Trust Company for a 28,000 square feet industrial space
at 10170 Croydon Way, Sacramento, California 95827 used for the
assembly and sales of plastic parts by EZ-CLONE. The monthly lease
payment is $17,000 and increased approximately 3% per year. The
lease expires on December 31, 2023.
The
aggregate future minimum lease payments under operating leases, to
the extent the leases have early cancellation options and excluding
escalation charges, are as follows:
Years Ended June
30,
|
|
2020
|
$537,910
|
2021
|
925,511
|
2022
|
549,776
|
2023
|
-
|
2024
|
-
|
Beyond
|
-
|
Total
|
$2,013,196
|
NOTE
17 – SUBSEQUENT EVENTS
The
Company evaluates subsequent events, for the purpose of adjustment
or disclosure, up through the date the financial statements are
available.
The Company had the following material events
subsequent to June 30, 2019:
On July 23, 2019,
the Company closed the transactions described below with Odyssey
Research and Trading, LLC, a Utah limited liability company
(“Odyssey”).
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement
On July 23, 2019,
the Company executed the following agreements with Odyssey: (i)
Securities Purchase Agreement; (ii) Secured Promissory Notes; and
(iii) Security Agreement (collectively the “Odyssey
Agreements”). The Company entered into the Odyssey Agreements
with the intent to acquire working capital to grow the
Company’s businesses.
The total amount of
funding under the Odyssey Agreements is $1,105,000. The Convertible
Promissory Note carries an original issue discount of $100,000 and
a transaction expense amount of $5,000, for total debt of
$1,105,000. The Company agreed to reserve three times the number of
shares based on the redemption value with a minimum of 500 million
shares of its common stock for issuance upon conversion of the
Debt, if that occurs in the future. If not converted sooner, the
Debt is due on or before July 22, 2020. The Debt carries an
interest rate of ten percent (10%). The Debt is convertible, at
Odyssey’s option, into the Company’s common stock at
$0.010 per share subject to adjustment as provided for in the
Secured Promissory Notes.
The Company’s
obligation to pay the Debt, or any portion thereof, is secured by
all of the Company’s assets.
PROSPECTUS
GROWLIFE, INC.
5400 Carillon Point
Kirkland, WA 98033
DEALER PROSPECTUS DELIVERY OBLIGATION
Until _______________, 2019, all dealers that effect transactions
in these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
____________________, 2019
PART II—INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND
DISTRIBUTION.
The expenses payable by us in connection with the issuance and
distribution of the securities being registered are set forth
below. Each item listed is estimated as follows:
Securities
and Exchange Commission registration fee
|
$303
|
Accounting
fees and expenses
|
5,000
|
Legal
fees and expenses
|
15,000
|
Registrar
and transfer agent fees and expenses
|
2,000
|
Miscellaneous
|
7,697
|
|
|
Total
expenses
|
$30,000
|
ITEM 14. INDEMNIFICATION OF DIRECTORS AND
OFFICERS.
Under Delaware law, a corporation may include in its certificate of
incorporation (“Certificate”) a provision that
eliminates or limits the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of
fiduciary duties as a director, but no such provision may eliminate
or limit the liability of a director (a) for any breach of duty of
loyalty, (b) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (c)
under Section 174 of the Delaware General Corporation Law (the
“DGCL”) (dealing with illegal redemptions and stock
repurchases), or (d) for any transaction from which the director
derived an improper personal benefit. Our Certificate limits
personal liability of directors to the fullest extent permitted by
Delaware law.
The Certificate also provides that we shall, to the fullest extent
permitted by Section 145 of the DGCL, as amended, indemnify all
persons whom it may indemnify thereto, provided that if such
indemnified person initiates a proceeding, he or she shall be
indemnified only if our board of directors approved such action.
Section 145 of the DGCL permits indemnification against expenses,
fines, judgments and settlements incurred by any director, officer
or employee of a Company in the event of pending or threatened
civil, criminal, administrative or investigative proceedings, if
such person was, or was threatened to be made, a party by reason of
the fact that he or she is or was a director, officer or employee
of the Company. Section 145 and our Certificate also provide that
the indemnification provided for therein shall not be deemed
exclusive of any other rights to which those seeking
indemnification may otherwise be entitled.
We have a directors’ and officers’ liability insurance
policy in place pursuant to which its directors and officers are
insured against certain liabilities, including certain liabilities
under the Securities Act of 1933, as amended and the Securities and
Exchange Act of 1934, as amended.
ITEM
15.
RECENT
SALES OF UNREGISTERED SECURITIES
In the two years preceding the filing of this Registration
Statement, we have issued the following securities that were not
registered under the Securities Act.
All of the offerings and sales described below were deemed to be
exempt under Rule 506 of Regulation D and/or Section 4(a)(2) of the
Securities Act. No advertising or general solicitation was employed
in offering the securities, the offerings and sales were made to a
limited number of persons, all of whom were accredited investors
and transfer was restricted by the company in accordance with the
requirements of Regulation D and the Securities Act. All issuances
to accredited and non-accredited investors were structured to
comply with the requirements of the safe harbor afforded by Rule
506 of Regulation D, including limiting the number of
non-accredited investors to no more than 35 investors who have
sufficient knowledge and experience in financial and business
matters to make them capable of evaluating the merits and risks of
an investment in our securities. We have not employed any
underwriters in connection with any of the below transactions, and
the individuals and entities to whom we issued securities are not
affiliated with us. Except as noted below, none of the holders of
the securities have any contractual rights to have such securities
registered with the Securities and Exchange
Commission.
Year Ended December 31, 2017
During
the year ended December 31, 2017, the Company had had the following
sales of unregistered of equity securities to accredited investors
unless otherwise indicated:
On
February 28, 2017, Logic Works converted principal and interest of
$291,044 into 82,640,392 shares of the Company’s common stock
at a per share conversion price of $0.004.
During the year ended December 31, 2017, five vendors
converted debt of $559,408 into 64,869,517 shares of the
Company’s common stock at the fair market price of $0.0086
per share.
During the year ended December 31, 2017, four directors were
issued 10,000,000 shares of the Company’s common stock at the
fair market price of $0.0076 per share for 2017 director
services.
During
the year ended December 31, 2017, Chicago Venture converted
principal and accrued interest of $2,688,000 into 554,044,030
shares of the Company’s common stock at a per share
conversion price of $0.0049.
Year Ended December 31, 2018
During the year ended December 31, 2018, the Company had had the
following sales of unregistered of equity securities to accredited
investors unless otherwise indicated:
On
February 7, 2018, the Company issued 7,660,274 shares to three
directors. The shares were valued at the fair market price of
$0.020 per share or $153,205. The shares were issued for annual
director service to the Company.
On
February 12, 2018, the Company received a Notice of Conversion from
Forglen LLC converting principal and interest of $321,945 owed
under that certain 7% Convertible Note as amended June 19, 2014
into 127,000,000 shares of the Company’s common stock with a
fair value of $2,235,200.
On
March 13, 2018, the Company, received a Notice of Conversion from
Logic Works LLC converting principal and interest of $41,690 owed
under that a 6% Convertible Note into 16,445,609 shares of our
common stock with a fair value of $248,329. As of March 13, 2018,
the outstanding balance on the Convertible Note was
$0.
During
the year ended December 31, 2018, the Company issued 2,400,000
shares of its common stock to a service provider pursuant to
conversions of debt totaling $33,000. The shares were valued at the
fair market price of $0.0138 per share.
During
the year ended December 31, 2018, the Company issued 6,250,000
shares of its common stock to a service provider and a former
director related to services. The shares were valued at the fair
market price of $0.0104 per share or $65,000.
During
the year ended December 31, 2018, Chicago Venture converted
principal and interest of $3,104,181 into 525,587,387 shares of our
common stock at a per share conversion price of $0.0059 with a fair
value of $7,756,330. The Company recognized $6,565,415 loss on debt
conversions during the year ended December 31, 2018.
During
the year ended December 31, 2018, an employee exercised a stock
option grant for 1,000,000 shares at $0.006 or $6,000.
Securities Purchase Agreements with St. George Investments,
LLC
On February 9, 2018, the Company executed the following agreements
with St. George Investments LLC, a Utah limited liability company:
(i) Securities Purchase Agreement; and (ii) Warrant to Purchase
Shares of Common Stock. The Company entered into the St. George
Agreements with the intent to acquire working capital to grow the
Company’s businesses.
Pursuant to the St. George Agreements, the Company agreed to sell
and to issue to St. George for an aggregate purchase price of
$1,000,000: (a) 48,687,862 Shares of newly issued restricted Common
Stock of the Company; and (b) the Warrant. St. George has paid the
entire Purchase Price for the Securities.
The Warrant is exercisable for a period of five (5) years from the
Closing, for the purchase of up to 48,687,862 shares of the
Company’s Common Stock at an exercise price of $0.05 per
share of Common Stock. The Warrant is subject to a cashless
exercise option at the election of St. George and other adjustments
as detailed in the Warrant.
On
March 20, 2018, the Company entered into and closed on a Common
Stock Purchase Agreement with St. George Investments, LLC, a Utah
limited liability company. The Company issued St. George 6,410,256
shares of newly issued restricted Common Stock of the Company at a
purchase price of $0.0156 per share.
On
April 26, 2018, the Company entered into and closed on a Common
Stock Purchase Agreement with St. George Investments, LLC, Pursuant
to the St. George Agreements, the Company sold and agreed to issue
to St. George 4,950,495 shares of newly issued restricted Common
Stock of the Company at a purchase price of $0.0202 per
share.
On May
25, 2018, the Company entered into and closed on a Common Stock
Purchase Agreement with St. George Investments, LLC, Pursuant to
the St. George Agreements, the Company sold and agreed to issue to
St. George 5,128,205 shares of newly issued restricted Common Stock
of the Company at a purchase price of $0.0195 per
share.
On
October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-Clone and issued 107,307,692 restricted shares of
our common stock at a price of $0.013 per share or
$1,395,000.
On
November 30, 2018, the Company closed its Rights Offering. We received $2,533,648
under the Rights Offering and issued 211,137,293 shares of common
stock at $0.012 per share.
Subsequent to the Year Ended December 31, 2018
During the six months ended June 30, 2019, the Company had the
following sales of unregistered equity securities to accredited
investors unless otherwise indicated:
During
the six months ended June 30, 2019, the Company issued 22,183,471
shares to suppliers for services provided. The Company valued the
shares at $174,435 per share or $0.0079.
During
the six months ended June 30, 2019, Chicago Venture and Iliad
converted principal and accrued interest of $745,000 into
171,017,865 shares of our common stock at a per share conversion
price of $.0044 with a fair value of $1,293,341. The Company
recognized $582,246 loss on debt conversions during the six months
ended June 30, 2019.
On
February 15, 2019, the Company entered into a Termination of
Existing Agreements and Release with CANX USA, LLC, a Nevada
limited liability company. Pursuant to the Agreement, the Parties
agreed to terminate, release and discharge all existing and further
rights and obligations between the Parties under, arising out of,
or in any way related to that certain Waiver and Modification
Agreement and Amended and Restated Joint Venture Agreement made as
of July 10, 2014, and any ancillary agreements or instruments
thereto, including, but not limited to, the Warrants issued to CANX
entitling CANX to purchase 540,000,000 shares of the
Company’s common stock at an exercise price of
$0.033.
In
exchange for the Agreement and cancellation of the CANX Agreements
and Warrants, the Company agreed to issue $1,000,000 of restricted
common stock priced at the February 7, 2019 closing price of
$0.008, or 125,000,000 restricted common stock shares The Company
recorded a loss on settlement of $986,363.
On May
2, 2019, the Company issued 3,916,667 shares valued at $0.006 to a
former employee related to a cashless stock option exercise. We
cancelled a stock option grant for 15,083,333 shares issued at
$0.006.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES.
The
exhibits to the Registration Statement are listed in the Exhibit
Index attached hereto and incorporated by reference
herein.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during
any period in which offers or sales are being made, a
post-effective amendment to this Registration
Statement:
(i) To
include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To
reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than 20% change in the maximum aggregate offering price set forth
in the “Calculation of Registration Fee” table in the
effective registration statement;
(iii) To
include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the
purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from
registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination
of the offering.
(4) That, for the
purpose of determining liability of the registrant under the
Securities Act of 1933 to any purchaser in the initial distribution
of the securities: The undersigned registrant undertakes that in a
primary offering of securities of the undersigned registrant
pursuant to this registration statement, regardless of the
underwriting method used to sell the securities to the purchaser,
if the securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned registrant
will be a seller to the purchaser and will be considered to offer
or sell such securities to such purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
(ii) Any
free writing prospectus relating to the offering prepared by or on
behalf of the undersigned registrant or used or referred to by the
undersigned registrant;
(iii)
The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and
(iv)
Any other communication that is an offer in the offering made by
the undersigned registrant to the purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that, in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such
issue.
(5)
For
purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this registration statement as of the time
it was declared effective.
(6)
For
the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form
S-1 and has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the
City of Kirkland, State of Washington, on November 12,
2019.
|
|
|
|
|
|
|
|
By:
|
/s/
Marco
Hegyi
|
|
|
|
Marco
Hegyi
|
|
|
|
Chief Executive
Officer
|
|
|
|
|
|
|
By:
|
/s/
Mark E.
Scott
|
|
|
|
Mark E.
Scott
|
|
|
|
Chief Financial
Officer
|
|
Pursuant
to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in
the capacities held on the dates indicated.
SIGNATURES
|
TITLE
|
DATE
|
|
|
|
/s/ Marco Hegyi
|
Chief Executive Officer and Director
|
November
12, 2019
|
Marco Hegyi
|
(Principal Executive Officer)
|
|
|
|
|
/s/ Mark E. Scott
|
Chief Financial Officer, Director and Secretary
|
November
12, 2019
|
Mark E. Scott
|
(Principal Financial/Accounting Officer)
|
|
|
|
|
/s/ Katherine McLain
|
Director
|
November
12, 2019
|
Katherine
McLain
|
|
|
/s/ Thom Kozik
|
Director
|
November
12, 2019
|
Thom
Kozik
|
|
|
Exhibit Index
Exhibit
Index
Exhibt No.
|
|
Description
|
|
|
Certificate
of Incorporation. Filed as an exhibit to the Company’s Form
10-SB General Form for Registration of Securities of Small Business
Issuers filed with the SEC on December 7, 2007, and hereby
incorporated by reference.
|
|
|
Second Amended and
Restated Bylaws of GrowLife, Inc. dated October 16, 2015. Filed as
an exhibit to the Company’s Form 8-K and filed with the SEC
on October 26, 2015, and hereby incorporated by
reference.
|
|
|
Certificate
of Amendment of Certificate of Incorporation of GrowLife, Inc.
dated October 23, 2017 to increase the authorized shares of Common
Stock from 3,000,000,000 to 6,000,000,000 shares. Filed as an
exhibit to the Company’s Form 8-K and filed with the SEC on
October 24, 2017, and hereby incorporated by reference.
|
|
|
GrowLife,
Inc. 2017 Stock Incentive Plan filed as an Annex 1 to the
Company’s Preliminary Schedule 14A filed with the SEC on
September 11, 2018, and hereby incorporated by reference.
|
5.1
|
|
Opinion
of Horwitz + Armstrong, A Prof. Law Corp. regarding the legality of
the securities being registered (filed
herewith)
|
|
|
Lease
Amending Agreement dated October 1, 2017 by and between GrowLife,
Inc. and Berezan Management (Alta) Ltd. Filed as an exhibit to the
Company’s Form 10-K and filed with the SEC on March 28, 2018,
and hereby incorporated by reference.
|
|
|
Compilation of
Securities Purchase Agreement, Secured
Promissory Notes, and Security Agreement dated December 22,
2017, entered into by and between GrowLife, Inc. and Chicago
Venture Partners, L.P. Filed as an exhibit to the Company’s
Form 10-K and filed with the SEC on March 28, 2018, and hereby
incorporated by reference
|
10.3
|
|
Asset Purchase
Agreement dated as of October 2, 2017 amongst GrowLife, Inc. and
David Reichwein, GIP International Ltd and DPR International
LLC.
|
10.4
|
|
Texas commercial
Lease Agreement dated October 9, 2017 by and between GrowLife
Innovations, Inc. and All Commercial Flooring Inc.
|
|
|
Compilation of
Securities Purchase Agreement and Warrant to Purchase Common Stock
dated February 9, 2018, entered into by and between GrowLife, Inc.
and St. George Investments LLC. Filed as an exhibit to the
Company’s Form 8-K and filed with the SEC on February 15,
2018, and hereby incorporated by reference.
|
10.6
|
|
First Addendum to
Asset Purchase Agreement and Employment Agreement dated February
18, 2018 amongst Growlife, Inc. and David Reichwein, GIP
International Ltd and DPR International LLC. (filed
herewith).
|
|
|
Second Amendment to
Forglen LLC 7% Convertible Promissory Note. Filed as an exhibit to
the Company’s Form 8-K and filed with the SEC on March 16,
2018, and hereby incorporated by reference.
|
|
|
Common Stock
Purchase Agreement dated March 20, 2018 entered into by and between
GrowLife, Inc. and St. George Investments LLC. Filed as an exhibit
to the Company’s Form 8-K and filed with the SEC on March 23,
2018, and hereby incorporated by reference.
|
|
|
Compilation of
Securities Purchase Agreement, Secured Promissory Notes, and
Security Agreement. Filed as an exhibit to the Company’s Form
8-K and filed with the SEC on August 16, 2018, and hereby
incorporated by reference.
|
|
|
Asset Purchase
Agreement dated August 17, 2018 entered into by and between
GrowLife, Inc. and Go Green Hydroponics, Inc. Filed as an exhibit
to the Company’s Form 8-K and filed with the SEC on August
23, 2018, and hereby incorporated by reference.
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Security Agreement
dated August 17, 2018 by and between GrowLife, Inc. and Go Green
Hydroponics, Inc. Filed as an exhibit to the Company’s Form
8-K and filed with the SEC on August 23, 2018, and hereby
incorporated by reference.
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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.
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Four Amendment to
Lease Agreement dated August 31, 2018 entered into by and between
GrowLife, Inc., The GST Non-Exempt Marital Trust under the Samuel
and Elaine Rosenthal Revocable Trust and Ackerman-Rosenthal
Property, LLC. Filed as an exhibit to the Company’s Annual
Report on Form 10-K and filed with the SEC on March 8, 2019, and
hereby incorporated by reference.
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Assignment and
Assumption of Lease dated August 31, 2018 entered into by and
between GrowLife, Inc., Go Green Hydroponics, Inc., GST Non-Exempt
Marital Trust Under the Samuel and Elaine Rosenthal Revocable Trust
and Ackerman-Rosenthal Property, LLC. Filed as an exhibit to the
Company’s Annual Report on Form 10-K and filed with the SEC
on March 8, 2019, and hereby incorporated by
reference.
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Lease Agreement
dated July 2, 2018 entered into by and between GrowLife
Hydroponics, Inc. Inc. and Brixmor SPE 4 LP. Filed as an exhibit to
the Company’s Annual Report on Form 10-K and filed with the
SEC on March 8, 2019, and hereby incorporated by
reference.
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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.
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Mark Scott
Employment Agreement dated October 15, 2018. Filed as an exhibit to
the Company’s Form 8-K and filed with the SEC on October 17,
2018, and hereby incorporated by reference.
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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.
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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.
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Compilation of
Securities Purchase Agreement, Warrant, Secured Promissory Notes,
and Security Agreement. Filed as an exhibit to the Company’s
Form 8-K and filed with the SEC on October 17, 2018, and hereby
incorporated by reference.
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Prospectus
Supplement dated November 8, 2018 to Rights Offering to Shareholders
filed in 424(b)(4) Prospectus filed with the SEC on October 18,
2018, and hereby incorporated by reference. Filed as an
exhibit to the Company’s Form 8-K and filed with the SEC on
November 16, 2018, and hereby incorporated by
reference.
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Prospectus
Supplement dated November 16, 2018 to Rights Offering to Shareholders filed in 424(b)(4)
Prospectus filed with the SEC on October 18, 2018, and hereby
incorporated by reference. Filed as an exhibit to the
Company’s Form 8-K and filed with the SEC on November 16,
2018, and hereby incorporated by reference.
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Standard and
Industrial Multi-Tenant Lease dated December 18, 2018 by and
between Pensco Trust Company and GrowLife, Inc. Filed as an exhibit
to the Company’s Form 10-K and filed with the SEC on October
17, 2018, and hereby incorporated by reference.
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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.
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Compilation of Securities Purchase Agreement,
Secured Promissory Notes, and Security Agreement with
Odyssey Research and Trading, LLC. Filed as an exhibit to the
Company’s Form 8-K and filed with the SEC on July 30, 2019,
and hereby incorporated by reference.
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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.
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21.1
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Subsidiaries of the
Registrant (filed herewith)
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23.1
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Consent of SD Mayer
& Associates, LLP, independent registered public accounting
firm (filed herewith)
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23.3
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Consent of Horwitz
+ Armstrong, A Professional Law Corporation (included in Exhibit
5.1) (filed herewith)
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24.1
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Power of Attorney
(included on the signature page of this registration
statement).
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Audited Financial
Statements of EZ-Clone Enterprises, Inc. Filed as an exhibit to the
Company’s Form 8-KA and filed with the SEC on January 24,
2019, and hereby incorporated by reference.
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Unaudited Pro Forma Financial Information
of GrowLife, Inc. and EZ-Clone Enterprises, Inc. Filed
as an
exhibit to the Company’s Form 8-KA and filed with the SEC on
January 24, 2019, and hereby incorporated
by reference.
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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.
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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.
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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.
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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.
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Form
of Notice of Guaranteed Delivery
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II-8
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