Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(FEE REQUIRED)
For the fiscal year ended December 31, 2019
☐ TRANSACTION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the transaction period from ________ to ________
Commission file number 000-50385
GrowLife, Inc.
(Exact
name of registrant as specified in its charter)
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Delaware
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90-0821083
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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5400 Carillon Point
Kirkland, WA 98033
(Address
of principal executive offices and zip code)
(866) 781-5559
(Registrant’s
telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer”, “smaller reporting
company”, and “emerging growth company” in Rule
12b-2
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer (Do not check if a smaller reporting company)
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Smaller
reporting company
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Emerging
growth company
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☒
As of June 30, 2019 (the last business day of our most recently
completed second fiscal quarter), based upon the last reported
trade on that date, the aggregate market value of the voting and
non-voting common equity held by non-affiliates (for this purpose,
all outstanding and issued common stock minus stock held by the
officers, directors and known holders of 10% or more of the
Company’s common stock) was $23,254,528.
As of
April 1, 2020, there were
29,282,602 shares of the issuer’s common stock, $0.0001 par
value per share, outstanding.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion, in addition to the other information
contained in this report, should be considered carefully in
evaluating us and our prospects. This report (including without
limitation the following factors that may affect operating results)
contains forward-looking statements (within the meaning of Section
27A of the Securities Act of 1933, as amended ("Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended
("Exchange Act") regarding us and our business, financial
condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions or variations of such words are
intended to identify forward-looking statements, but are not the
exclusive means of identifying forward-looking statements in this
report. Additionally, statements concerning future matters such as
revenue projections, projected profitability, growth strategies,
development of new products, enhancements or technologies, possible
changes in legislation and other statements regarding matters that
are not historical are forward-looking statements.
Forward-looking statements in this report reflect the good faith
judgment of our management and the statements are based on facts
and factors as we currently know them. Forward-looking statements
are subject to risks and uncertainties and actual results and
outcomes may differ materially from the results and outcomes
discussed in the forward-looking statements. Factors that could
cause or contribute to such differences in results and outcomes
include, but are not limited to, those discussed below and in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" as well as those discussed elsewhere in this
report. Readers are urged not to place undue reliance on these
forward-looking statements which speak only as of the date of this
report. We undertake no obligation to revise or update any
forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this
report.
TABLE OF CONTENTS
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PART 1
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PART
II
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PART
III
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PART
IV
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY AND OUR BUSINESS
Forward-looking
statements in this report reflect the good-faith judgment of our
management, and the statements are based on facts and factors as we
currently know them. Forward-looking statements are subject to
risks, uncertainties and actual results, and outcomes may differ
materially from the results and outcomes discussed in the
forward-looking statements. Factors that could cause or contribute
to such differences in results and outcomes include, but are not
limited to, those discussed below as well as those discussed
elsewhere in this report (including in Part II, Item 1A (Risk
Factors)). Readers are urged not to place undue reliance on these
forward-looking statements because they speak only as of the date
of this report. We undertake no obligation to revise or update any
forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this
report.
On
October 9, 2019, we approved the reduction of authorized capital
stock, whereby the total number of our authorized common stock
decreased from 6,000,000,000 by a ratio of 1 for 50, to 120,000,000
shares. On November 20, 2019, we filed
a Certificate of Amendment of Certificate of Incorporation with the
Secretary of State of the State of Delaware. As a result of
the reduction, we have an aggregate 130,000,000 authorized shares
consisting of : (i) 120,000,000 shares of common stock, par value
$0.0001 per share, and (ii) 10,000,000 shares of preferred stock,
par value $0.0001 per share.
The reverse stock split of 1 for 150 was effective at the open of
business on November 27, 2019 whereupon the shares of common stock
began trading on a split-adjusted basis. Our CUSIP number for our
common stock changed to 39985X203. All warrant, option, share and per
share information in this Form 10-K gives retroactive effect to the
1-for-150 reverse split with all numbers rounded up to the nearest
whole share.
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
First,
our 2019 revenue of $8.2 million as compared to $4.6 million for
last year ending December 31, 2018, overall grew about 80% over the
prior year.
Second,
gross profits, or revenue after our cost of sales, was reported at
$2.5 million for the year ending December 31, 2019 as compared to
last year’s $468,000, a 432% year-over-year increase. This is
attributed to the acquisition of the EZ-CLONE Enterprises Inc.
(“EZ-CLONE”) line of products, which brought in
significantly higher margins along with our continuing GrowLife
business revenue, resulting in blended gross margin of 30.2%, up
from 10.2%.
Finally,
the Company continues to generate growth by investing in its
EZ-CLONE acquisition, sales and marketing efforts and a result
reported a loss for the year ending December 31, 2019. We
believe that expansion spending is necessary in a high-growth
market such as the cannabis, hemp and CBD-related
businesses.
As of
December 31, 2019, we had closed all of our retail stores which we
had previously operated in Portland, Maine, Encino, California and
Calgary, and Canada online sales. During 2019 we also divested from
the flooring division located in Grand Prairie, Texas. As a result
of these changes, we expect to reduce losses and cash outflows by
up to $100,000 per month starting October 1, 2019. During the
quarter ended September 30, 2019, we recorded a restructuring
expense of $306,000 for the closure of the flooring division
related to the equipment write down and $250,000 for the closure of
the retail stores, related leases and online sales.
1
GROWLIFE’S EVOLUTION
GrowLife
is the customer’s champion, always focused on where we can
add value to their success. When we asked cultivators over the
years how we can best help them, at first it was with access to the
best products. So the Company grew, through acquisitions, to seven
retail stores and an e-commerce site with 12,000 products to reach
areas where our stores could not. Then, large-scale cultivation
operations required consultative engagements, and a direct sales
team with professional growing expertise was added. As a result,
less retail traffic led us to close many stores and turn a few into
distribution hubs. Then, the industry saw consolidation and major
price drops where cost of operations became the biggest
demand.
GrowLife
set the goal of increasing margins and revenue through an
acquisition needed to offset the low margins and reduce high debt
financing. We also began researching Cube, an initiative to lower
production costs of dry weight Cannabis Flower to $0.50 per gram
for our customers. We went from a reseller company to a technology
company, which required more capital and more acquisitions. In
2018, our gross margins were cut in half and losses grew to about
the same as our revenue.
In
2019, with the EZ-CLONE acquisition, we achieved our goals by
raising gross margins to over 30% and revenue to over $8 million.
We also reached our Cube goal of producing $0.50 per gram.
Cube’s greatest cost savings came from space management,
which led to labor, energy and waste efficiencies. We have posted
our operating manual online and are providing the materials in an
open source manner. We will sell the higher margin materials and
avoid carrying expensive Cube inventory in order to focus on our
clone business.
GROWLIFE’S FUTURE
GrowLife’s Goal
Be the nation’s leading supplier of plant clones
that grow plant-based medicines through systems, services and
partnerships.
In
2019, billions of plants were grown to serve the demand of the
plant-based medicines, more commonly referred to as the Cannabis
and CBD markets. The source of propagation, or initial planting, is
seeding or cloning (starters). The leader in cloning systems is
EZ-CLONE. The economics have favored seeds until recently where
controlling genetics, gender and yield to control the crop output,
focus on certain geographic locations equipped with tobacco
infrastructure are becoming a strategic investment.
GrowLife Mission
Measure its success by its customer’s success;
serving cultivators of all sizes as a reliable business partner and
its shareholders with value and trust.
Our
EZ-CLONE systems come in many sizes for different size customers.
We seek and partner with the best genetics and propagators in the
country. And, we make the best long-term decisions for our
shareholders to deliver value,
including maintaining management continuity to best serve them.
Promptly and diligently taking action to qualify the Company for
re-uplist back to the OTCQB from the Pink Sheets is an example of
the Company’s commitment to its shareholders.
GrowLife’s Vision
Our clones are the essential factor for our customers
now
and in the long-term in today’s Hemp CBD and tomorrow’s
Cannabinoid Industry.
In
2019, we grew greatly by supplying EZ-CLONE, our leading cloning
systems, to our cultivators across the country as we prepared to
supply Hemp CBD clones. In 2020 we plan to supply millions of
EZ-CLONEZ clones to CBD farmers. We seek to continue to deliver on
our mission with our shareholders as the CBD clone
industry grows and our
role in it.
2
WHY CLONES ARE THE GAME CHANGER
Toward
the end of 2018, we announced the majority acquisition of EZ-CLONE
Enterprises Inc. EZ-CLONE is the industry-leading supplier of
commercial-grade cloning and propagation equipment. This was a part
of this strategic positioning plank to shift from reselling other
products and control our own destiny, with locking in on an
essential component in the cultivator’s supply
chain.
Cannabis
cultivators have been cloning their favorite strains from mother
plants for decades, using various outdated conventional 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, so will the demand for more and more
starters, whether clones or seeds. And while cloning is the
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 Commercial Pro System, which is one of
the largest and most efficient aeroponic cloning systems on the
market. It is commercially scalable and allows cultivators to clone
high volumes of plants in a timeframe as short as 10 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.
In
addition to the Commercial Pro System, the EZ-CLONE product line
has systems of all sizes designed for any size grow room or
facility, consumable products such as EZ-CLONE’s Rooting
Compound, Cloning Collars, Clear Rez and other items 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 multi-spectral imaging add-ons to
our Commercial Pro Systems that allow growers to see the health of
their clones through any computer or mobile device.
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. Cloning in the Cannabis industry where genetics is
important can still be managed with seeds, but when it comes to CBD where genetic
and gender control dictates yield of revenue and crop regulatory
compliance is determined by exact genetic make-up, cloning becomes
essential.
WHY CLONES
To
position GrowLife as the industry leader in clones, we believe that
we need to deliver both systems and the highest quality clones in
the growing hemp and CBD industry. This puts us ahead of trends,
and to be the primary source of clones as well as propagation
machinery and consumables for the booming CBD-rich hemp
industry.
3
CBD VALUE CHAIN OPPORTUNITY
We see
the greatest opportunity for our Company in further positioning
ourselves as the industry leader in plant cloning, and more
specifically, as the leader in cloning of hemp plants grown for CBD
extraction. Hemp production was legalized in December 2018 in the
United States, subject to certain federal and state restrictions,
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 were
planted in 2019, with 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.
While
there are many forecasts where the CBD industry will be billions of
dollars, there is a distinction between CBD and industrial hemp,
retail and planting, etc. We believe these forecasts can be
influenced by many factors such as the quality and availability of
certain genetics and distribution, which provides access to markets
normally not available such as the growing eco-system at this
market’s stage. We believe analysts will continue to raise
their CBD forecasts for the upcoming years, and more large
companies from the personal care and beverage industries will 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 are losing crops to
cross-pollination and some are 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 we see that cloning is the best way
to ensure a healthy crop with the proper CBD/THC content. We plan
to be the hemp CBD champion with our standard operating procedures
(SOP), superior genetics and large-scaled propagated clones. 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 trade shows and ramping up
our sales force in hemp-heavy states, where traditional agricultural is
making the switch to hemp. We hand pick the best seeds with the
best genetics to produce the best clones.
4
EZ-CLONEZ ECONOMICS
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To make
a compelling case to farmers the cost of clone versus seeds must
work. The table shows an example of how an EZ-CLONEZ clone, if
priced at $5.00, would compare to a seed priced at $0.50, when
fully factored.
The
case shows a clone is 30% less than seeds. When purchased in
greater quantities, the pricing is lower and therefore savings may
be greater. Additional factors of the clones, which are not
included, that farmers can look into are greater yields and
consistency from genetics and acre density in certain climate areas
that may increase revenue for greater return.
Overall,
our EZ-CLONEZ business development consultants have over 100 years
of combined cultivation experience to assure the right clone,
genetics and SOP are provided.
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SUMMARY
With
our strategic investment in EZ-CLONE, we have positioned ourselves
to capitalize on expanding market opportunity. Where EZ-CLONE was
able to create a quality product with steady growth, GrowLife has
grown it and continues to expand it with clones into the Hemp CBD
market. Whether it be system or plants, GrowLife will provide the
best clones in the market to our customers.
We
believe with the revenue growth and increased margins described,
our fundamentals are strong, our positioning is focused and our
strategy is true. 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
December 31, 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. We have approximately 12
full and part time employees located throughout the United States
who operate our businesses. In addition, 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
In
2019, we saw thousands of customers purchase through hundreds of
retailers who purchased our EZ-CLONE products from our
distributors, Hawthorne and Hydrofarm, as well as directly from us
across varying states. In 2020, we see this retail walk-in
purchasing sales strategy to serving cultivation facilities, online
selling and direct sales to continue to serve our customers across
the nation.
Our key
suppliers include manufacturers for the production of our EZ-CLONE
products. All the products purchased and resold are applicable to
indoor growing for organics, greens, and plant-based medicines. In
2020 we have a new team of genetics and propagation partners who
are facilitating the production of our EZ-CLONEZ clones in select
states.
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.
In the
EZ-CLONEZ business, we expect
the seed and many small clone providers in the Hemp CBD market to
provide alternative to our products and compete with our products.
Our propagation partners have been selected to have the capacity to
serve large-scale farmers seeking to fulfill the demand for
millions of clones.
5
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,
and www.greners.com.
We have
applied for two patents related to the vertical room Cube 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.
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.
The total purchase price was $4 million of which $1,500,000 is
payable in cash and $2.5 million payable in stock. At closing, we
paid 51% of this amount totaling $2,040,000 via a (i) a cash
payment of $645,000; and (ii) the issuance of 715,385 restricted
shares of our common stock valued $1,395,000.
The
October 15, 2018 agreement called for the Company, upon delivery of
the remaining 49% of EZ Clone stock, to acquire such stock within
one year for $1,960,000, payable as follows: (i) a cash payment of
$855,000; and (ii) the issuance of Company’s common stock at
a value of $1,105,000. On November 5, 2019, we amended the purchase
agreement with one 24.5% owner obligating the Company to purchase
the remaining 49% of stock by agreeing to a 20% extension fee
($171,000) of the $855,000 cash payable at the earlier of the
closing of $2,000,000 in funding or nine months (July 2020). As of
December 31, 2019, the $171,000 extension fee has not been paid and
we continue in discussion with the shareholders about paying of the
remaining purchase price payable.
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 December 31, 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.
6
OUR COMMON STOCK
On
October 17, 2017, we were informed by Alpine Securities Corporation
(“Alpine”) that Alpine has demonstrated compliance with
the Financial Industry Regulatory Authority (“FINRA”)
Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of
1934. We filed an amended application with the OTC Markets to list
the Company’s common stock on the OTCQB and begin to trade on
this market as of March 20, 2018. As
of March 4, 2019, we began to trade on the Pink Sheet stocks
system. Our bid price had
closed below $0.01 for more than 30 consecutive calendar
days. As of March 17, 2020, we commenced trading on the
OTCQB Market ("OTCQB") after successfully up-listing from the OTC
Pink Market.
PRIMARY RISKS AND UNCERTAINTIES
We are
exposed to various risks related to legal proceedings, our need for
additional financing, the sale of significant numbers of our
shares, the potential adjustment in the exercise price of our
convertible debentures and a volatile market price for our common
stock. These risks and uncertainties are discussed in more detail
below in Part I, Item 1A.
WEBSITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION
REPORTS
We file annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC").
You may read and copy any document we file at the SEC's Public
Reference Room at 100 F Street, N.E., Washington D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the
public reference room. The SEC maintains a website at
http://www.sec.gov that contains reports, proxy and information
statements and other information concerning filers. We also
maintain a web site at http://www.growlifeinc.com that provides
additional information about our Company and links to documents we
file with the SEC. The Company's charters for the Audit Committee,
the Compensation Committee, and the Nominating Committee; and the
Code of Conduct & Ethics are also available on our website. The
information on our website is not part of this Form
10-K.
ITEM 1A. RISK FACTORS
There are certain inherent risks which will have an effect on our
development in the future and the most significant risks and
uncertainties known and identified by our management are described
below.
Risks
Related to Pandemics
The effects of the recent COVID-19 coronavirus pandemic are not
immediately known, but may adversely affect our business, results
of operations, financial condition, liquidity, and cash
flow.
Presently,
the impact of COVID-19 has not shown any imminent adverse effects
on our business, especially since states across the United
States—including California—has deemed cannabis
businesses as “essential,” allowing our business to
continue its operations. This notwithstanding, it is still unknown
and difficult to predict what adverse effects, if any, COVID-19 can
have on our business, or against the various aspects of
same.
As of
the date of this Annual Report, COVID-19 coronavirus has been
declared a pandemic by the World Health Organization, has been
declared a National Emergency by the United States Government and
has resulted in several states being designated disaster zones.
COVID-19 coronavirus caused significant volatility in global
markets. The spread of COVID-19 coronavirus has caused public
health officials to recommend precautions to mitigate the spread of
the virus, especially as to travel and congregating in large
numbers. In addition, certain states and municipalities have
enacted, and additional cities are considering, quarantining and
“shelter-in-place” regulations which severely limit the
ability of people to move and travel and require non-essential
businesses and organizations to close.
It is
unclear how such restrictions, which will contribute to a general
slowdown in the global economy, will affect our business, results
of operations, financial condition and our future strategic
plans.
Recent
shelter-in-place and essential-only travel regulations could
negatively impact our customers. In addition, while our products
are manufactured in the United States, we still could experience
significant supply chain disruptions due to interruptions in
operations at any or all of our suppliers’ facilities or
downline suppliers. If we experience significant delays in
receiving our products we will experience delays in fulfilling
orders and ultimately receiving payment, which could result in loss
of sales and a loss of customers, and adversely impact our
financial condition and results of operations. The current status
of COVID-19 coronavirus closures and restrictions could also
negatively impact our ability to receive funding from our existing
capital sources as each business is and has been affected
uniquely.
In
addition, our headquarters are located in Kirkland, Washington
which was also recently subject of large COVID-19 outbreak. In
response, Washington State governor, Jay Inslee, mandated a minimum
2 week stay at home order with exceptions only for essential
businesses. While these restrictions are relatively recent as of
the date of this Annual Report, it is unclear at this time how
these restrictions will be amended as the pandemic evolves. We
believe that since we are an essential business, we are hopeful
that COVID-19 closures will have only a limited effect on our
operations and revenues.
7
Risks Related to Securities Markets and Investments in Our
Securities
General securities market uncertainties resulting from the COVID-19
pandemic.
Since
the outset of the pandemic the United States and worldwide national
securities markets have undergone unprecedented stress due to the
uncertainties of the pandemic and the resulting reactions and
outcomes of government, business and the general population. These
uncertainties have resulted in declines in all market sectors,
increases in volumes due to flight to safety and governmental
actions to support the markets. As a result, until the pandemic has
stabilized, the markets may not be available to the Company for
purposes of raising required capital. Should we not be able
to obtain financing when required, in the amounts necessary to
execute on our plans in full, or on terms which are economically
feasible we may be unable to sustain the necessary capital to
pursue our strategic plan and may have to reduce the planned future
growth and/or scope of our operations.
Risks Related to Our Business
Risks Associated with Securities Purchase Agreements with
Chicago Venture Partners, L.P.
(“Chicago Venture”), Iliad Research and Trading,
L.P. (“Iliad”) and Odyssey Research and Trading, LLC,
(“Odyssey”).
The
Securities Purchase Agreements with Chicago Venture, Illiad and
Odyssey 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 Notes.
Our
ability to require Chicago Venture, Illiad and Odyssey to fund the
Notes is at mutual discretion, subject to certain limitations.
Chicago Venture, Illiad and Odyssey are 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
Agreements and/or Notes or that we will be able to draw down any
portion of the amounts available under the Securities Purchase
Agreements and/or Notes.
If we
not able to draw down all amounts possible under the Securities
Purchase Agreements or if the Securities Purchase Agreements are
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.
Risks Associated with EZ-CLONE Enterprises, Inc.
On
October 15, 2018, we closed the Purchase and Sale Agreement with
EZ-CLONE. 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 total purchase price was $4 million of which
$1,500,000 is payable in cash and $2.5 million payable in stock. At
closing, we paid 51% of this amount totaling $2,040,000 via
a (i) a cash payment of $645,000; and (ii) the issuance of 715,385
restricted shares of our common stock valued
$1,395,000.
The
October 15, 2018 agreement called for the Company, upon delivery of
the remaining 49% of EZ Clone stock, to acquire such stock within
one year for $1,960,000, payable as follows: (i) a cash payment of
$855,000; and (ii) the issuance of Company’s common stock at
a value of $1,105,000. On November 5, 2019, we amended the purchase
agreement with one 24.5% owner obligating the Company to purchase
the remaining 49% of stock by agreeing to a 20% extension fee
($171,000) of the $855,000 cash payable at the earlier of the
closing of $2,000,000 in funding or nine months (July 2020). As of
December 31, 2019, the $171,000 extension fee has not been paid and
we continue in discussion with the shareholders about paying of the
remaining purchase price payable.
Our acquisition of EZ-Clone thus far has been positive for our
overall results of operations. Additionally, we have spent a
significant amount of time and effort modifying our business plans
and focuses toward the clone industry. If we fail to close on the
remaining 49% of EZ-Clone we may experience direct consequences
including, but not limited to, claims for breach of contract for
failure to close on a contractual obligation.
8
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 Pink Sheet stocks
system because our bid price
had closed below $0.01 for more than 30 consecutive calendar
days. As of March 17, 2020, we commenced trading on the
OTCQB Market ("OTCQB") after successfully up-listing from the OTC
Pink Market.
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”. 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.
9
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, 2019 and 2018 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 December 31, 2019, we
had an accumulated deficit of $148.5 million. There can be no assurance
that we will achieve or maintain profitability.
10
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.
11
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.
12
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
no directors’ and officers’ liability insurance and
limited commercial liability insurance policies. Any significant
claims would have a material adverse effect on our business,
financial condition and results of
operations.
Risks Related to our Common Stock
Chicago Venture, Illiad and Odyssey could have significant
influence over matters submitted to stockholders for
approval.
As a
result of funding from Chicago Venture, Iliad and Odyssey as
previously detailed, they exercise significant control over
us.
While
there are limits on the ownership by each party, ff these companies
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 companies, 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.
13
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,
|
|
●
|
Competitive
activities, and
|
|
●
|
Additions
or departures of key personnel.
|
These
broad market and industry factors may have a material adverse
effect on the market price of our common stock, regardless of our
actual operating performance. These factors could have a material
adverse effect on our business, financial condition, and/or results
of operations.
The sale of a significant number of our shares of common stock
could depress the price of our common stock.
Sales
or issuances of a large number of shares of common stock in the
public market or the perception that sales may occur could cause
the market price of our common stock to decline. As of December 31,
2019, there were approximately (i) 28,677,147 shares of common
stock outstanding; (ii) stock option grants for the purchase of
550,000 shares of common stock at average exercise price of $1.491
per share; (iii) warrants to purchase an aggregate of we had
warrants to purchase an aggregate of 2,418,834 shares of common
stock with expiration dates between November 2021
and October 2028 at an exercise price of $3.465 per
share; (iv) and unknown number of
common shares to be issued under the Chicago Venture, Iliad and St.
George financing agreements.
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 $0.221 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.
14
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Operating Leases
On May
31, 2019, we rented space at 5400
Carillon Point, Kirkland, Washington 98033 for $623 per
month for our corporate office and use of space in the Regus
network, including California. The agreement expires May 31,
2020.
On December 14, 2018, we entered into a lease agreement with Pensco
Trust Company for a 28,000 square feet industrial space at 10170
Croydon Way, Sacramento, California 95827 used for the assembly and
sales of plastic parts by EZ-CLONE. The monthly lease payment is
$17,500 and increased approximately 3% per year. The lease expires
on December 31, 2023.
15
Terminated Leases
On October 1, 2017, GrowLife Hydroponics, Inc. entered into a lease
in Calgary, Canada. The monthly lease is approximately $3,246. The
lease originally expired September 30, 2022. This lease was terminated effective September 30,
2019.
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 originally expired December 1, 2022. This lease was
terminated effective September 30, 2019 with the expected sale of
the flooring division.
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 originally expired July 2, 2021. This lease was
terminated effective September 30, 2019.
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 originally expired September
1, 2019 and the Company is required to provide six months’
notice to terminate the lease. This lease was terminated effective
September 30, 2019.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become subject to various legal
proceedings that are incidental to the ordinary conduct of its
business. Although we cannot accurately predict the amount of any
liability that may ultimately arise with respect to any of these
matters, it makes provision for potential liabilities when it deems
them probable and reasonably estimable. These provisions are based
on current information and may be adjusted from time to time
according to developments.
We know of no material, existing or pending legal proceedings
against our Company, nor is the Company involved as a plaintiff in
any material proceeding or pending litigation. There are no
proceedings in which any director, officer or any affiliates, or
any registered or beneficial shareholder, is an adverse party or
has a material interest adverse to the Company’s
interest.
As of
September 30, 2019, the Company closed retail stores in Portland,
Maine, Encino, California and Calgary, Canada. The Company is
negotiating with the landlords and the Company has recorded
restructuring reserves.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
16
PART II
ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
General
The
following description of our capital stock and provisions of our
articles of incorporation and bylaws are summaries and are
qualified by reference to our articles of incorporation and the
bylaws. We have filed copies of these documents with the SEC as
exhibits to our Form 10-K.
Authorized Capital Stock
On
October 9, 2019, we approved the reduction of authorized capital
stock, whereby the total number of our authorized common stock
decreased from 6,000,000,000 by a ratio of 1 for 50, to 120,000,000
shares. On November 20, 2019, we filed
a Certificate of Amendment of Certificate of Incorporation with the
Secretary of State of the State of Delaware. As a result of
the reduction, we have an aggregate 130,000,000 authorized shares
consisting of: (i) 120,000,000 shares of common stock, par value
$0.0001 per share, and (ii) 10,000,000 shares of preferred stock,
par value $0.0001 per share.
The 1 for 150 reverse stock split was effective at the
open of business on November 27, 2019 whereupon the shares of
common stock began trading on a split-adjusted basis under the new
CUSIP, 39985X203.
Capital Stock Issued and Outstanding
As
of December 31, 2019, we have issued and outstanding
securities on a fully diluted basis, consisting of:
●
28,677,147 shares of common stock;
●
Stock option grants for the purchase of 550,000 shares of common
stock at average exercise price of $1.491 per share;
●
Warrants to purchase an aggregate of 2,418,834 shares of common
stock with expiration dates between November 2021
and October 2028 at an exercise price of $3.465 per
share; and
●
An unknown number of common shares to
be issued under the Chicago Venture, Iliad and St. George
financing agreements.
Voting Common Stock
Holders
of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have
cumulative voting rights. An election of directors by our
stockholders shall be determined by a plurality of the votes cast
by the stockholders entitled to vote on the election. On all other
matters, the affirmative vote of the holders of a majority of the
stock present in person or represented by proxy and entitled to
vote is required for approval, unless otherwise provided in our
articles of incorporation, bylaws or applicable law. Holders of
common stock are entitled to receive proportionately any dividends
as may be declared by our board of directors, subject to any
preferential dividend rights of outstanding preferred
stock.
In the
event of our liquidation or dissolution, the holders of common
stock are entitled to receive proportionately all assets available
for distribution to stockholders after the payment of all debts and
other liabilities and subject to the prior rights of any
outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The
rights, preferences and privileges of holders of common stock are
subject to and may be adversely affected by the rights of the
holders of shares of any series of preferred stock that we may
designate and issue in the future.
17
Non-Voting Preferred Stock
Under
the terms of our articles of incorporation, our board of directors
is authorized to issue shares of non-voting preferred stock in one
or more series without stockholder approval. Our board of directors
has the discretion to determine the rights, preferences, privileges
and restrictions, dividend rights, conversion rights, redemption
privileges and liquidation preferences, of each series of
non-voting preferred stock.
The
purpose of authorizing our board of directors to issue non-voting
preferred stock and determine our rights and preferences is to
eliminate delays associated with a stockholder vote on specific
issuances. The issuance of non-voting preferred stock, while
providing flexibility in connection with possible acquisitions,
future financings and other corporate purposes, could have the
effect of making it more difficult for a third party to acquire or
could discourage a third party from seeking to acquire, a majority
of our outstanding voting stock. Other than the Series B and C
Preferred Stock discussed below, there are no shares of non-voting
preferred stock presently outstanding and we have no present plans
to issue any shares of preferred stock.
Warrants to Purchase Common Stock
As of
December 31, 2019, we had warrants to purchase an aggregate of
2,418,834 shares of common stock with expiration dates
between November 2021 and October 2028 at an
exercise price of $3.465 per share, subject to
adjustment..
Options to Purchase Common Stock
We have
1,333,333 shares available for issuance under the First Amended and
Restated 2017 Stock Incentive Plan. We have outstanding unexercised
stock option grants totaling 550,000 shares at an average exercise
price of $1.491 per share as of December 31, 2019. The Company
filed registration statements on Form S-8 to register 1,333,333
shares of our common stock related to the 2017 Stock Incentive Plan
and First Amended and Restated 2017 Stock Incentive
Plan.
Dividend Policy
We have
not previously paid any cash dividends on our common stock and do
not anticipate or contemplate paying dividends on our common stock
in the foreseeable future. We currently intend to use all of our
available funds to develop our business. We can give no assurances
that we will ever have excess funds available to pay
dividends.
Change in Control Provisions
Our articles of incorporation and by-laws provide for a maximum of
nine directors, and the size of the Board cannot be increased by
more than three directors in any calendar year. There is
no provision for classification or staggered terms for the members
of the Board of Directors.
Our articles of incorporation also provide that except to the
extent the provisions of Delaware General Corporation Law require a
greater voting requirement, any action, including the amendment of
the Company’s articles or bylaws, the approval of a plan of
merger or share exchange, the sale, lease, exchange or other
disposition of all or substantially all of the Company’s
property other than in the usual and regular course of business,
shall be authorized if approved by a simple majority of
stockholders, and if a separate voting group is required or
entitled to vote thereon, by a simple majority of all the votes
entitled to be cast by that voting group.
Our bylaws provide that only the Chief Executive Officer or a
majority of the Board of Directors may call a special
meeting. The bylaws do not permit the stockholders of the
Company to call a special meeting of the stockholders for any
purpose.
18
Articles of Incorporation and Bylaws Provisions
Our
articles of incorporation, as amended, and bylaws contain
provisions that could have the effect of discouraging potential
acquisition proposals or tender offers or delaying or preventing a
change in control, including changes a stockholder might consider
favorable. In particular, our articles of incorporation and bylaws
among other things:
●
permit our board of directors to alter our bylaws without
stockholder approval; and
●
provide that vacancies on our board of directors may be filled by a
majority of directors in office, although less than a
quorum.
Such
provisions may have the effect of discouraging a third party from
acquiring us, even if doing so would be beneficial to our
stockholders. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of our
board of directors and in the policies formulated by them, and to
discourage some types of transactions that may involve an actual or
threatened change in control of our company. These provisions are
designed to reduce our vulnerability to an unsolicited acquisition
proposal and to discourage some tactics that may be used in proxy
fights. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly
or unsolicited proposal to acquire or restructure our company
outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals could result in
an improvement of their terms.
However,
these provisions could have the effect of discouraging others from
making tender offers for our shares that could result from actual
or rumored takeover attempts. These provisions also may have the
effect of preventing changes in our management.
Market Price of and Dividends on Common Equity and Related
Stockholder Matters
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 Pink Sheet stocks
system because our bid price
had closed below $0.01 for more than 30 consecutive calendar
days. As of March 17, 2020, we commenced trading on the
OTCQB Market ("OTCQB") after successfully up-listing from the OTC
Pink Market.
The
quotations reflect inter-dealer prices, without retail markup,
markdown or commission, and may not represent actual transactions.
Consequently, the information provided below was not be indicative
of our common stock price under different conditions.
|
Period Ended
|
High
|
Low
|
|
Year Ending December 31, 2020
|
|
|
|
Through
the Current Date
|
$0.490
|
$0.140
|
|
|
|
|
|
Year Ending December 31, 2019
|
|
|
|
December
31, 2019
|
$1.229
|
$0.315
|
|
September
30, 2019
|
$1.110
|
$0.495
|
|
June
30, 2019
|
$1.260
|
$0.825
|
|
March
31, 2019
|
$1.710
|
$1.050
|
|
|
|
|
|
Year Ending December 31, 2018
|
|
|
|
December
31, 2018
|
$3.390
|
$0.945
|
|
September
30, 2018
|
$2.775
|
$1.575
|
|
June
30, 2018
|
$4.200
|
$2.175
|
|
March
31, 2018
|
$7.425
|
$2.085
|
As of
March 27, 2020, the closing price of the company's common stock was
$.257 per share. As of April 1, 2020, there were 29,282,602 shares
of common stock issued and outstanding. We have
137 stockholders of record. This number does not include over
101,000 beneficial owners whose shares are held in the names of
various security brokers, dealers, and registered clearing
agencies.
19
Transfer Agent
The
transfer agent for our common stock is Issuer Direct Corporation
located 500 Perimeter Park, Suite D, Morrisville NC
27560, and their telephone number is
(919) 481-4000.
Recent Sales of Unregistered Securities
Unless otherwise indicated, all of the following sales or issuances
of Company securities were conducted under the exemption from
registration as provided under Section 4(a)(2) of the Securities
Act of 1933. All of the shares issued were issued in transactions
not involving a public offering, are considered to be restricted
stock as defined in Rule 144 promulgated under the Securities Act
of 1933 and stock certificates issued with respect thereto bear
legends to that effect.
We have compensated consultants and service providers with
restricted common stock during the development of our business and
when our capital resources were not adequate to provide payment in
cash.
During the three months ended December 31, 2019, we had the
following sales of unregistered sales of equity
securities.
Chicago
Venture converted principal and accrued interest of $312,872 into
1,357,262 shares of our common stock at a per share conversion
price of $0.231.
Forglen
LLC converted principal and accrued interest of $305,075 into
1,375,285 shares of our common stock at a per share conversion
price of $0.222.
We
issued 188,335 shares in conjunction with resolving a business
matter. We valued the shares at $0.60 per share of $113,000 and
such amount was expensed as loss on debt conversions during the
twelve months ended December 31, 2019.
We issued 35,011 fractional shares as a result of the reverse stock
split that was effective at the
open of business on November 27, 2019.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2019
related to the equity compensation plan in effect at that
time.
|
|
(a)
|
(b)
|
(c)
|
|
|
|
|
Number of securities
|
|
|
|
|
remaining available
|
|
|
Number of securities
|
Weighted-average
|
for future issuance
|
|
|
to be issued upon
|
exercise price of
|
under equity compensation
|
|
|
exercise of outstanding
|
outstanding options,
|
plan (excluding securities
|
|
Plan Category
|
options, warrants and rights
|
warrants and rights
|
reflected in column (a))
|
|
Equity
compensation plan
|
|
|
|
|
approved
by shareholders
|
550,000
|
$1.491
|
745,441
|
|
Equity
compensation plans
|
|
|
|
|
not
approved by shareholders
|
|
|
|
|
Total
|
550,000
|
$1.491
|
745,441
|
20
ITEM 6. SELECTED FINANCIAL DATA
In the following table, we provide you with our selected
consolidated historical financial and other data. We have prepared
the consolidated selected financial information using our
consolidated financial statements for the years ended December 31,
2019 and 2018. When you read this selected consolidated historical
financial and other data, it is important that you read along with
it the historical financial statements and related notes in our
consolidated financial statements included in this report, as well
as Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
|
|
Years Ended December 31,
|
||||
|
|
2019
|
2018
|
2017
|
2016
|
2015
|
|
|
|
|
|
|
|
|
STATEMENT
OF OPERATIONS DATA:
|
|
|
|
|
|
|
Net
revenue
|
$8,218
|
$4,573
|
$2,452
|
$1,231
|
$3,500
|
|
Cost
of goods sold
|
5,669
|
4,105
|
2,181
|
1,276
|
2,981
|
|
Gross
profit
|
2,549
|
468
|
271
|
(45)
|
519
|
|
General
and administrative expenses
|
7,566
|
5,017
|
2,320
|
2,764
|
2,684
|
|
Operating
(loss)
|
(5,017)
|
(4,549)
|
(2,049)
|
(2,809)
|
(2,165)
|
|
Other
expense
|
(2,475)
|
(6,924)
|
(3,272)
|
(4,886)
|
(3,524)
|
|
Net
loss before taxes
|
$(7,492)
|
$(11,473)
|
$(5,321)
|
$(7,695)
|
$(5,689)
|
|
Net
loss
|
$(7,374)
|
$(11,473)
|
$(5,321)
|
$(7,695)
|
$(5,689)
|
|
Net
loss per share
|
$(0.29)
|
$(0.58)
|
$(0.39)
|
$(0.96)
|
$(0.96)
|
|
Weighted
average number of shares
|
25,145,036
|
19,858,753
|
13,630,143
|
7,983,773
|
5,895,658
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
We sell
through our 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
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.
The total purchase price was $4 million of which $1,500,000 is
payable in cash and $2.5 million payable in stock. At closing, we
paid 51% of this amount totaling $2,040,000 via a (i) a cash
payment of $645,000; and (ii) the issuance of 715,385 restricted
shares of our common stock valued $1,395,000.
The
October 15, 2018 agreement called for the Company, upon delivery of
the remaining 49% of EZ Clone stock, to acquire such stock within
one year for $1,960,000, payable as follows: (i) a cash payment of
$855,000; and (ii) the issuance of Company’s common stock at
a value of $1,105,000. On November 5, 2019, we amended the purchase
agreement with one 24.5% owner obligating the Company to purchase
the remaining 49% of stock by agreeing to a 20% extension fee
($171,000) of the $855,000 cash payable at the earlier of the
closing of $2,000,000 in funding or nine months (July 2020). As of
December 31, 2019, the $171,000 extension fee has not been paid and
we continue in discussion with the shareholders about paying of the
remaining purchase price payable.
21
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.
(dollars in thousands)
|
|
Years Ended
December 31,
|
|||
|
|
2019
|
2018
|
$
Variance
|
%
Variance
|
|
Net
revenue
|
$8,218
|
$4,573
|
$3,645
|
79.7%
|
|
Cost of goods
sold
|
5,669
|
4,105
|
1,564
|
-38.1%
|
|
Gross
profit
|
2,549
|
468
|
2,081
|
444.7%
|
|
General and
administrative expenses
|
7,010
|
5,017
|
1,993
|
-39.7%
|
|
Restructuring
expense- flooring division
|
306
|
-
|
306
|
-100.0%
|
|
Restructuring
expense- retail stores and online sales
|
250
|
-
|
250
|
-100.0%
|
|
Operating
loss
|
(5,017)
|
(4,549)
|
(468)
|
-10.3%
|
|
Other income
(expense):
|
|
|
|
|
|
Change
in fair value of derivative
|
496
|
978
|
(482)
|
-49.3%
|
|
Interest
expense, net
|
(1,204)
|
(1,321)
|
117
|
8.9%
|
|
Impairment
of acquired assets
|
-
|
(62)
|
62
|
100.0%
|
|
Loss on debt
conversions
|
(1,767)
|
(6,519)
|
4,752
|
72.9%
|
|
Total other
expense, net
|
(2,475)
|
(6,924)
|
4,449
|
64.3%
|
|
Loss before income
taxes
|
(7,492)
|
(11,473)
|
3,981
|
34.7%
|
|
Income taxes -
current benefit
|
(118)
|
-
|
(118)
|
-100.0%
|
|
Net
loss
|
$(7,374)
|
$(11,473)
|
$4,099
|
35.7%
|
YEAR ENDED DECEMBER 31, 2019 COMPARED TO THE YEAR ENDED DECEMBER
31, 2018
Net
revenue for the year ended December 31, 2019 increased by
$3,645,000 to $8,218,000 from $4,573,000 for the year ended
December 31, 2018. The increase resulted from increased sales
personnel and the acquisition of
EZ-CLONE on October 15, 2018. The hydroponics revenue for
the year ended December 31, 2019 was $4,487,000 as compared to
$3,706,000 for the year ended December 31, 2018. The EZ-CLONE
revenue from its line of products for the year ended December 31,
2019 was $3,731,000 as compared to $454,000 for the year ended
December 31, 2018.
Cost of Goods Sold
Cost of
sales for the year ended December 31, 2019 increased by $1,564,000
to $5,669,000 from $4,105,000 for the year ended December 31, 2018.
The increase resulted from increased sales and from the
from the acquisition of EZ-CLONE on
October 15, 2018.
Gross profit was $2,549,000 for the year ended December 31, 2019
as compared to a gross profit of
$468,000 for the year ended December 31, 2018. The gross profit percentage was 31.0% for
the year ended December 31, 2019 as compared to 10.2% for the year ended
December 31, 2018. The increase
was due increased sales, offset by lower cost of sales related to
favorable product mix related to the
acquisition of the EZ-CLONE line of products on October 15,
2018. EZ-CLONE reported a gross
profit percentage of 50.5%.
22
General and Administrative Expenses
General
and administrative expenses for the year ended December 31, 2019 were
$7,010,000 as compared to $5,017,000 for the year ended December
31, 2018. The variances were as follows: (i) an increase in
EZ-CLONE expenses (primarily payroll and rent) of $1,476,000;(iii)
an increase in salaries and taxes of $202,000; (iv) an increase in
sales and marketing expenses of $176,000; and (v) an increase in
other expenses of $139,000. As part of the general and
administrative expenses for the years ended December 31, 2019 and
2018, we recorded public relation, investor relation or business
development expenses of $30,000 and $41,000 respectively. The
overall increase in general and administrative expenses resulted
from increased sales personnel, trade show and travel expenses and
resulting from the acquisition of
EZ-CLONE on October 15, 2018.
Non-cash
general and administrative expenses for the year ended December 31,
2019 were $1,398,000 including (i) depreciation of $89,000; (ii)
amortization of intangible assets of $838,000; (iii) stock based
compensation of $158,000 related to stock option grants and
warrants; and (iv) common stock issued for services of
$312,000.
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.
Restructuring Expense
We
closed retail stores in Portland, Maine, Encino, California and
Calgary, Canada and online sales as of September 30, 2019. Also, we
closed the sale of the flooring division located in Grand Prairie,
Texas. We reduced our losses and cash costs by up to $100,000 per
month starting October 1, 2019. During the year ended December 31,
2019, we recorded restructuring expense of $306,000 for the sale of
the flooring division and $250,000 for the closure of the retail
stores and online sales.
Other Expense
Other
expense for the year ended December 31, 2019 was $2,475,000 as
compared to $6,924,000 for the year ended December 31, 2018. The
other expense for the year ended December 31, 2019 included (i)
benefit from the reduction in derivative liability of $496,000;
offset by (ii) interest expense of $1,204,000; and (iii) loss on
debt conversions of $1,776,000. 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 year ended December 31, 2018 included (i)
benefit from the reduction 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.
Net Loss
Net
loss for the year ended December 31, 2019 was $7,374,000 as
compared to $11,473,000 for the for the year ended December 31,
2018 for the reasons discussed above. The Company’s shares of
the 2019 and 2018 net loss was $7,285,445 and $11,444,781 after
allocating a portion to non-controlling interest.
Net
loss for the year ended December 31, 2019 included non-cash
expenses of $4,160,000 including (iii) depreciation of $89,000;
(iv) restructuring reserve- retail stores, on line sales and
flooring division of $556,000; (v) amortization of intangible
assets of $838,000; (vi) stock based compensation of $158,000
related to stock option grants and warrants; (vii) common stock
issued for services of $313,000; (viii) non cash interest and
amortization of debt discount of $,933,000; (ix) loss on debt
conversions of $1,767,000; and offset by (xi) benefit from the
reduction in derivative liability of $(494,000).
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) benefit from the reduction in
derivative liability of $978,000.
We
expect losses to continue as we implement our business
plan.
23
LIQUIDITY AND CAPITAL RESOURCES
We
adopted the Financial Accounting Standards Board’s
(“FASB”) Accounting Standard Codification
(“ASC”) Topic 205-40, Presentation of Financial
Statements – Going Concern, which requires that management
evaluate whether there are relevant conditions and events that, in
the aggregate, raise substantial doubt about the entity’s
ability to continue as a going concern and to meet its obligations
as they become due within one year after the date that the
financial statements are issued.
The
accompanying financial statements have been prepared assuming that
we will continue as a going concern. However, since inception, we
have sustained significant operating losses and such losses are
expected to continue for the foreseeable future. As of December 31,
2019, we had an accumulated deficit of $148,461,532, cash and cash equivalents of $40,834
and a working capital deficit of $1,815,503, (less derivative
liability, convertible debt and right of use liability).
Additionally, we used in operating activities $2,910,000, $3,855,000, and
$2,082,000
for the years ended December 31, 2019,
2018 and 2017 respectively. We will require additional cash
funding to fund operations through June 30, 2020. Accordingly,
management has concluded that we do not have sufficient funds to
support operations within one year after the date the financial
statements are issued and, therefore, we concluded there was
substantial doubt about the Company’s ability to continue as
a going concern.
To fund
further operations, we will need to raise additional capital. We
may obtain additional financing in the future through the issuance
of its common stock, or through other equity or debt financings.
Our ability to continue as a going concern or meet the minimum
liquidity requirements in the future is dependent on its ability to
raise significant additional capital, of which there can be no
assurance. If the necessary financing is not obtained or achieved,
we will likely be required to reduce its planned expenditures,
which could have an adverse impact on the results of operations,
financial condition and our ability to achieve its strategic
objective. There can be no assurance that financing will be
available on acceptable terms, or at all. The financial statements
contain no adjustments for the outcome of these uncertainties.
These factors raise substantial doubt about our ability to continue
as a going concern and have a material adverse effect on our future
financial results, financial position and cash flows.
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement with Chicago Venture Partners, L.P
On January 30, 2020, we executed the following agreements with CVP:
(i) Securities Purchase Agreement; (ii) Secured Convertible
Promissory Notes (“Notes”); and (iii) Security
Agreement (collectively the “CVP Agreements”). We
entered into the CVP Agreements with the intent to acquire working
capital to grow our businesses.
The total amount of funding under the CVP Agreements is $500,000 in
various tranches. The Notes carry an original issue discount of
$50,000 and a transaction expense amount of $5,000, for total debt
of $555,000. We agreed to reserve 53,333 shares of its common stock
for issuance upon conversion of the Debt, if that occurs in the
future. If not converted sooner, the Debt is due on or before
January 29, 2021. The Debt carries an interest rate of ten percent
(10%). The Debt is convertible, at CVP’s option, into our
common stock at $0.30 per share subject to adjustment as provided
for in the Notes As of April 1, 2020, we have received $500,000
under CVP Agreements. 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 year ended December 31,
2019 was $2,910,000. This amount was primarily related to a net
loss of $7,285,000 and (i) net working capital increase of
$215,000; and offset by (ii) non-cash expenses of $4,160,000
including (iii) depreciation of $89,000; (iv) restructuring
reserve- retail stores, on line sales and flooring division of
$556,000; (v) amortization of intangible assets of $838,000; (vi)
stock based compensation of $158,000 related to stock option grants
and warrants; (vii) common stock issued for services of $313,000;
(viii) non cash interest and amortization of debt discount of
$933,000; (ix) loss on debt conversions of $1,767,000; and offset
by (xi) benefit from reduction in derivative liability of
$(494,000).
Net
cash used in operating activities for the year ended December 31,
2018 was $3,855,000. This amount was primarily related to a net
loss of $11,445,000, (i) an increase in inventory of $327,000; (ii)
an increase in prepaid expenses and deposits of $31,000; offset by
(iii) an increase in accounts payable, accrued expenses and
deferred revenue of $429,000; (iv) an increase in accounts
receivable of $42,000 and (v) non-cash expenses of $7,477,000
including (vi) depreciation and amortization of $223,000; (vii)
stock based compensation of $241,000 related to stock option grants
and warrants; (viii) common stock issued for services of $218,000.
(ix) accrued interest and amortization of debt discount on
convertible notes payable of $1,191,000; (x) loss on debt
conversions of $6,519,000; (xi) impairment of acquired assets of
$62,000; offset by (xii) change in derivative liability of
$978,000.
Investment Activities
Net cash used in investing activities for the years ended
December 31, 2019 and 2018 was $12,000 and $544,000, respectively.
The 2019 amount related to the investment in property and
equipment. The 2018 amount related to the $250,000 purchase of the
remaining 49% of the flooring business on February 16, 2018 and the
acquisition of $294,000 of fixed assets related to the 51%
acquisition of EZ-Clone on October 15, 2018.
24
Financing Activities
Net
cash provided by financing activities for the year ended December
31, 2019 and 2018 was $629,000 and $6,444,000, respectively. The
2019 amount related to proceeds from note payable of $1,416,000,
offset by repayment of convertible notes payable of $779,000 and
repayment of capital lease of $8,000. The 2018 amount related to
(i) we received $2,533,000
under the Rights Offering; (ii) proceeds from notes payable
of $2,825,000 by Chicago Venture and Iliad; (iii) $1,300,000 in the
issuance of common stock by St. George; and (iv) a stock option
exercise of $6,000.
Our contractual cash obligations as of December 31, 2019 are
summarized in the table below:
|
|
|
Less
Than
|
|
|
Greater
Than
|
|
Contractual Cash
Obligations
|
Total
|
1
Year
|
1-3
Years
|
3-5
Years
|
5
Years
|
|
Operating lease
cash payments
|
$881,683
|
$213,115
|
$439,092
|
$229,476
|
$-
|
|
Convertible notes
payable and accrued interest
|
2,905,870
|
2,905,870
|
-
|
-
|
-
|
|
Notes payable and
capital leases
|
104,144
|
104,144
|
-
|
-
|
-
|
|
Acquisition of 49%
of EZ-CLONE Enterprises, Inc.
|
1,026,000
|
1,026,000
|
0
|
-
|
-
|
|
Capital
expenditures
|
-
|
-
|
-
|
-
|
-
|
|
|
$4,917,696
|
$4,249,128
|
$439,092
|
$229,476
|
$-
|
OFF-BALANCE SHEET ARRANGEMENTS
We do
not have any off-balance sheet arrangements (as that term is
defined in Item 303 of Regulation S-K) that are reasonably likely
to have a current or future material effect on our financial
condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The
application of GAAP involves the exercise of varying degrees of
judgment. On an ongoing basis, we evaluate our estimates and
judgments based on historical experience and various other factors
that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions
or conditions. We believe that of our significant accounting
policies (see summary of significant accounting policies more fully
described in Note 3 to Form 10-K for the year ended December
31, 2019), the following policies involve a higher degree of
judgment and/or complexity:
Cash and Cash Equivalents - We
classify highly liquid temporary investments with an original
maturity of three months or less when purchased as cash
equivalents. The Company maintains cash balances at various
financial institutions. Balances at US banks are insured by the
Federal Deposit Insurance Corporation up to $250,000. The Company
has not experienced any losses in such accounts and believes it is
not exposed to any significant risk for cash on
deposit. At December 31, 2019, the Company had uninsured
deposits in the amount of $0.
Accounts Receivable and Revenue – The company
recognizes revenue in accordance with ASC Topic 606, Revenue from
Contracts with Customers, which requires the application of the
five-step-principles-based-accounting-model for revenue
recognition. These steps include (1) a legally enforceable
contract, written or unwritten is identified; (2) performance
obligations in the contracts are identified; (3) the transaction
price reflecting variable consideration, if any, is identified; (4)
the transaction price is allocated to the performance obligations;
and (5) revenue is recognized when the control of goods is
transferred to the customer at a particular time or over time. Our
hydroponic sales are cash or credit card. Our EZ-CLONE sales
include credit cash, payments in advance, 3% discount upon receipt
and, we extend thirty day terms to select customers. Accounts
receivable are reviewed periodically for
collectability.
Inventories - Inventories are recorded on a first in first
out basis Inventory consists of raw materials, work in process and
finished goods and components sold by EZ-CLONE to it distribution
customers. In addition, finished goods includes products
hydroponics, which is product purchased from distributors, and in
some cases directly from the manufacturer, and resold to its
hydroponics customers. Inventory is valued at the lower of cost or
market. The reserve for inventory was $0 and $120,000 as of
December 31, 2019 and 2018, respectively.
Fair Value Measurements and Financial Instruments
– ASC Topic 820, Fair Value Measurement and Disclosures,
defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. This topic also establishes a fair
value hierarchy, which requires classification based on observable
and unobservable inputs when measuring fair value. The
fair value hierarchy distinguishes between assumptions based on
market data (observable inputs) and an entity’s own
assumptions (unobservable inputs). The hierarchy
consists of three levels:
|
Level 1
– Quoted prices in active markets for identical assets and
liabilities;
|
|
Level 2 – Inputs other than level one inputs that are either
directly or indirectly observable; and.
|
|
Level 3
–
Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
|
25
The
recorded value of other financial assets and liabilities, which
consist primarily of cash and cash equivalents, accounts
receivable, other current assets, and accounts payable and accrued
expenses approximate the fair value of the respective assets and
liabilities as of December 31, 2019 and 2018 are based upon the
short-term nature of the assets and liabilities.
Derivative financial instruments -We evaluate all of its
financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are
accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the
consolidated statements of operations. For stock-based derivative
financial instruments, the Company uses a Black-Scholes-Merton
option pricing model to value the derivative instruments at
inception and on subsequent valuation dates. The classification of
derivative instruments, including whether such instruments should
be recorded as liabilities or as equity, is evaluated at the end of
each reporting period. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on
whether or not net-cash settlement of the derivative instrument
could be required within twelve months of the balance sheet
date.
Stock Based Compensation – We have share-based compensation plans
under which employees, consultants, suppliers and directors may be
granted restricted stock, as well as options to purchase shares of
our common stock at the fair market value at the time of grant.
Stock-based compensation cost is measured by us at the grant date,
based on the fair value of the award, over the requisite service
period using an estimated forfeiture rate. For options issued to
employees, we recognize stock compensation costs utilizing the fair
value methodology over the related period of
benefit. Grants of stock options and stock to
non-employees and other parties are accounted for in accordance
with the ASC 718.
Convertible Securities – Based upon ASC 815-15, we have
adopted a sequencing approach regarding the application of ASC
815-40 to convertible securities issued subsequent to December 31,
2015. We will evaluate our contracts based upon the earliest
issuance date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the
information required by this Item. Nevertheless, we have no
investments in any market risk sensitive instruments either held
for trading purposes or entered into for other than trading
purposes.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Reference is made to our consolidated financial statements
beginning on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Dismissal of SD Mayer and Associates, LLP
On October 3, 2019, we dismissed SD Mayer and Associates, LLP as
our independent registered public accounting firm. The decision to
change accountants was approved by the Company’s Audit
Committee.
The SD Mayer reports on our 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 we, upon the Audit Committee’s approval,
engaged the services of BPM LLP and as our new independent
registered public accounting firm to audit our 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 our quarterly
reports on Form 10-Q going forward.
During each of our two most recent fiscal years and through the
date of this report, (a) we have not engaged BPM as either the
principal accountant to audit our 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) we 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
our 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.
26
ITEM 9A. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
We
conducted an evaluation under the supervision and with the
participation of our management, of the effectiveness of the design
and operation of our disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act
of 1934, as amended (“Exchange Act”), means controls
and other procedures of a company that are designed to ensure that
information required to be disclosed by the company in the reports
it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures also include, without limitation, controls
and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the
company's management, including its principal executive and
principal financial officers, or persons performing similar
functions, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, our principal
executive and principal financial officers concluded as of December
31, 2019, that our disclosure controls and procedures were not
effective at the reasonable assurance level due to the material
weaknesses in our internal controls over financial reporting
discussed immediately below.
Identified Material Weakness
A
material weakness in our internal control over financial reporting
is a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or
detected.
Management
identified the following material weakness during its assessment of
internal controls over financial reporting:
Audit Committee:
The current Audit Committee has two independent directors, but the
audit committee Chairman is our CEO and Chairman of the Board. We
need an independent financial expert to fulfill this role as audit
committee chairman for proper governance. We expect to expand this
committee during 2020.
b) Changes in Internal Control over Financial
Reporting
During
the quarter ended December 31,
2019, there were no changes in our internal controls over
financial reporting, which were identified in connection with our
management’s evaluation required by paragraph (d) of rules
13a-15 and 15d-15 under the Exchange Act, that materially affected,
or is reasonably likely to have a materially affect, on our
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
There were no disclosures of any information required to be filed
on Form 8-K during the three months ended December 31, 2019 that
were not filed.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The
following table sets forth certain information about our current
directors and executive officers as of December 31,
2019:
|
Name
|
Age
|
Positions and
Offices Held
|
Since
|
|
Management
Directors
|
|
|
|
|
Marco
Hegyi
|
62
|
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
|
|
|
|
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
|
54
|
Director
|
February 14,
2017
|
|
|
|
Compensation
Committee Chairman
|
December 6,
2018
|
|
Thom
Kozik
|
59
|
Director
|
October 5,
2017
|
|
Other Named
Executives
|
|
|
|
|
Joseph
Barnes
|
47
|
Executive Vice
President of GrowLife Hydroponics, Inc.
|
August 16,
2017
|
|
|
|
Senior Vice
President of Business Development
|
October 10,
2014
|
All
directors hold office until their successors are duly appointed or
until their earlier resignation or removal.
Business Experience Descriptions
Set forth below is certain biographical information regarding each
of our executive officers and directors.
Marco Hegyi – Mr. Hegyi joined GrowLife as its President and a
Member of its Board of Directors on December 9, 2013 and was
appointed as Chairman of the Nominations and Governance Committee
and a member of the Compensation Committee on June 3, 2014.
Mr. Hegyi was appointed as CEO and Chairman of GrowLife
effective on April 1, 2016. On October 23, 2017, Mr. Hegyi was
appointed as Chairman of GrowLife, Chairman of the Nominations and
Governance Committee or a member of the Compensation Committee.
Effective December 6, 2018, Mr. Hegyi serves as Chairman of the
Board, a Member of the Board of Directors, Chief Executive Officer,
President, Interim Audit Committee Chairman and as a Member of the
Compensation and Nominations and Governance
Committees.
28
Mr. Hegyi served as an independent director of Know Labs, Inc., fka
Visualant, Inc. from February 14, 2008 and as Chairman of the Board
from May 2011 and served at the Chairman of the Audit and
Compensation committees until his departure on February 2015. Mr.
Hegyi was a principal with the Chasm Group from 2006 to January
2014, where he provided business consulting services. As a
management consultant, Mr. Hegyi applied his extensive technology
industry experience to help early-stage companies and has been
issued 10 US patents.
Prior to working as a consultant in 2006, Mr. Hegyi served as
Senior Director of Global Product Management at Yahoo! Prior to
Yahoo!, Mr. Hegyi was at Microsoft from 2001 to 2006 leading
program management for Microsoft Windows and Office beta releases
aimed at software developers. While at Microsoft, he formed
new software-as-a-service concepts and created operating programs
to extend the depth and breadth of the company’s unparalleled
developer eco-system, including managing offshore, outsource teams
in China and India, and being the named inventor of a filed
Microsoft patent for a business process in service
delivery.
During Mr. Hegyi’s career, he has served as President and CEO
of private and public companies, Chairman and director of boards,
finance, compensation and audit committee chair, chief operating
officer, vice-president of sales and marketing, senior director of
product management, and he began his career as a systems software
engineer.
Mr. Hegyi earned a Bachelor of Science degree in Information and
Computer Sciences from the University of California, Irvine, and
has completed advanced studies in innovation marketing, advanced
management, and strategy at Harvard Business School, Stanford
University, UCLA Anderson Graduate School of Management, and MIT
Sloan School of Management.
Mr. Hegyi’s prior experience as Chairman and Chief Executive
Officer of public companies, combined with his advanced studies in
business management and strategy, were the primary factors in the
decision to add Mr. Hegyi to the Company’s Board of
Directors.
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 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. From March 1, 2018 to January 2020, Mr. Kozik
served as Chief Commercial Officer of Loyyal Corporation, a
technology firm providing services to enterprise clients in the
Travel & Hospitality sector. In his decades of experience with
corporations such as Marriott International, Microsoft, Yahoo, and
Atari, along with several startups, he has held executive roles in
marketing, business development, and product development. Over the
past decade Kozik’s core focus has been the behavioral
economics of online consumers and communities, and methods to
maximize their lifetime value, and leveraging technology to reduce
acquisition costs while increasing retention.
Mr. Kozik was appointed to the Board of Directors based on his
marketing and product brand skills.
29
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. We employee a sales administrator and Vice President of
Administration/ corporate controller that are related to executive
officers. The two employees to not report directly to the executive
officers.
Involvement in Certain Legal Proceedings
None of
our current directors or executive officers has, to the best of our
knowledge, during the past ten years:
●
Had any petition under the federal bankruptcy laws or any state
insolvency law filed by or against, or had a receiver, fiscal
agent, or similar officer appointed by a court for the business or
property of such person, or any partnership in which he was a
general partner at or within two years before the time hereof, or
any corporation or business association of which he was an
executive officer at or within two years before the time
hereof;
●
Been convicted in a criminal proceeding or a named subject of a
pending criminal proceeding (excluding traffic violations and other
minor offenses);
●
Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining him
from, or otherwise limiting, the following activities:
●
Acting as a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker,
leverage transaction merchant, any other person regulated by the
Commodity Futures Trading Commission, or an associated person of
any of the foregoing, or as an investment adviser, underwriter,
broker or dealer in securities, or as an affiliated person,
director or employee of any investment company, bank, savings and
loan association or insurance company, or engaging in or continuing
any conduct or practice in connection with such
activity;
●
Engaging in any type of business practice; or
●
Engaging in any activity in connection with the purchase or sale of
any security or commodity or in connection with any violation of
federal or state securities laws or federal commodities
laws;
●
Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated, of any federal or
state authority barring, suspending, or otherwise limiting for more
than 60 days the right of such person to engage in any
activity described in (i) above, or to be associated with
persons engaged in any such activity;
●
Been found by a court of competent jurisdiction in a civil action
or by the SEC to have violated any federal or state securities law,
where the judgment in such civil action or finding by the SEC has
not been subsequently reversed, suspended, or vacated;
or
●
Been found by a court of competent jurisdiction in a civil action
or by the Commodity Futures Trading Commission to have violated any
federal commodities law, where the judgment in such civil action or
finding by the Commodity Futures Trading Commission has not been
subsequently reversed, suspended, or vacated.
30
Committees of the Board of Directors
The Board has three standing committees to facilitate and assist
the Board in the execution of its responsibilities. The committees
are currently the Audit Committee, the Nominations and Governance
Committee, and the Compensation Committee. The Committees were
formed on June 3, 2014 by the current board of directors. The Audit
Committee, Compensation and Nominations and Governance Committees
each have one management directors and two independent directors.
The table below shows current membership for each of the
standing Board committees.
|
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
|
Compensation Committee Interlocks and Insider
Participation
None of
our executive officers serves as a member of the board of directors
or compensation committee, or other committee serving an equivalent
function, of any other entity that has one or more of its executive
officers serving as a member of our board of directors or our
compensation committee.
Code of Conduct and Ethics
We have
adopted conduct and ethics standards titled the code of ethics,
which is available at www.growlifeinc.com. These standards were
adopted by our board of directors to promote transparency and
integrity. The standards apply to our board of directors,
executives and employees. Waivers of the requirements of our code
of ethics or associated polices with respect to members of our
board of directors or executive officers are subject to approval of
the full board.
Section 16(a) Beneficial Ownership Reporting
Compliance
Our executive officers, directors and 10% stockholders are required
under Section 16(a) of the Exchange Act to file reports of
ownership and changes in ownership with the SEC. Copies of these
reports must also be furnished to us.
Based solely on a review of copies of reports furnished to us, as
of December 31, 2019 our executive officers, directors and 10%
holders complied with all filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview of Compensation Program
This Compensation Discussion and Analysis describes the material
elements of compensation awarded to, earned by or paid to each of
our executive officers named in the Compensation Table on
page __ under “Remuneration of Executive Officers”
(the “Named Executive Officers”) who served during the
year ended December 31, 2019. This compensation discussion
primarily focuses on the information contained in the following
tables and related footnotes and narrative for the last completed
fiscal year. We also describe compensation actions taken after the
last completed fiscal year to the extent that it enhances the
understanding of our executive compensation disclosure. The
principles and guidelines discussed herein would also apply to any
additional executive officers that the Company may hire in the
future.
The Compensation Committee of the Board has responsibility for
overseeing, reviewing and approving executive compensation and
benefit programs in accordance with the Compensation
Committee’s charter. The members of the Compensation
Committee are Marco Hegyi, Thom Kozik and Katherine McLain. We
expect to appoint one independent Directors to serve on the
Compensation Committee during 2019.
31
Compensation Philosophy and Objectives
The major compensation objectives for the Company’s executive
officers are as follows:
|
|
●
|
to
attract and retain highly qualified individuals capable of making
significant contributions to our long-term success;
|
|
|
●
|
to
motivate and reward named executive officers whose knowledge,
skills, and performance are critical to our success;
|
|
|
●
|
to
closely align the interests of our named executive officers and
other key employees with those of its shareholders;
and
|
|
|
●
|
to
utilize incentive based compensation to reinforce performance
objectives and reward superior performance.
|
Role of Chief Executive Officer in Compensation
Decisions
The Board approves all compensation for the chief executive
officer. The Compensation Committee makes recommendations on the
compensation for the chief executive officer and approves all
compensation decisions, including equity awards, for our executive
officers. Our chief executive officer makes recommendations
regarding the base salary and non-equity compensation of other
executive officers that are approved by the Compensation Committee
in its discretion.
Setting Executive Compensation
The Compensation Committee believes that compensation for the
Company’s executive officers must be managed to what we can
afford and in a way that allows for us to meet our goals for
overall performance. During 2019 and 2018, the Compensation
Committee and the Board compensated its Chief Executive Officers,
President and Chief Financial Officer at the salaries indicated in
the compensation table. This compensation reflected our financial
condition. The Compensation Committee does not use a peer group of
publicly traded and privately-held companies in structuring the
compensation packages.
Executive Compensation Components for the Year Ended December 31,
2019
The Compensation Committee did not use a formula for allocating
compensation among the elements of total compensation during the
year that ended December 31, 2019. The Compensation Committee
believes that in order to attract and retain highly effective
people it must maintain a flexible compensation structure. For the
year that ended December 31, 2019, the principal components of
compensation for named executive officers were base
salary.
Base Salary
Base salary is intended to ensure that our employees are fairly and
equitably compensated. Generally, base salary is used to
appropriately recognize and reward the experience and skills that
employees bring to the Company and provides motivation for career
development and enhancement. Base salary ensures that all employees
continue to receive a basic level of compensation that reflects any
acquired skills which are competently demonstrated and are
consistently used at work.
Base salaries for the Company’s named executive officers are
initially established based on their prior experience, the scope of
their responsibilities and the applicable competitive market
compensation paid by other companies for similar positions. Mr.
Hegyi, Mr. Scott and Mr. Barnes were compensated as described above
based on the financial condition of the Company.
Performance-Based Incentive Compensation
The Compensation Committee believes incentive compensation
reinforces performance objectives, rewards superior performance and
is consistent with the enhancement of stockholder value. All of the
Company’s Named Executive Officers are eligible to receive
performance-based incentive compensation. The Compensation
Committee did not recommend or approve payment of any
performance-based incentive compensation to the Named Executive
Officers during the year ended December 31, 2018 based on our
financial condition.
32
Ownership Guidelines
The Compensation Committee does not require our executive officers
to hold a minimum number of our shares. However, to directly align
the interests of executive officers with the interests of the
stockholders, the Compensation Committee encourages each executive
officer to maintain an ownership interest in the
Company.
Stock Option Program
Stock options are an integral part of our executive compensation
program. They are intended to encourage ownership and retention of
the Company’s common stock by named executive officers and
employees, as well as non-employee members of the Board. Through
stock options, the objective of aligning employees’ long-term
interest with those of stockholders may be met by providing
employees with the opportunity to build a meaningful stake in the
Company.
The Stock Option Program assists us by:
-
enhancing the link between the creation of stockholder value and
long-term executive incentive compensation;
-
providing an opportunity for increased equity ownership by
executive officers; and
-
maintaining competitive levels of total compensation.
Stock option award levels are determined by the Compensation
Committee and vary among participants’ positions within the
Company. Newly hired executive officers or promoted executive
officers are generally awarded stock options, at the discretion of
the Compensation Committee, at the next regularly scheduled
Compensation Committee meeting on or following their hire or
promotion date. In addition, such executives are eligible to
receive additional stock options on a discretionary basis after
performance criteria are achieved.
Options are awarded at the closing price of our common stock on the
date of the grant or last trading day prior to the date of the
grant. The Compensation Committee’s policy is not to grant
options with an exercise price that is less than the closing price
of our common stock on the grant date.
Generally, the majority of the options granted by the Compensation
Committee vest quarterly over two to three years of the 5-10-year
option term. Vesting and exercise rights cease upon termination of
employment and/or service, except in the case of death (subject to
a one year limitation), disability or retirement. Stock options
vest immediately upon termination of employment without cause or an
involuntary termination following a change of control. Prior to the
exercise of an option, the holder has no rights as a stockholder
with respect to the shares subject to such option, including voting
rights and the right to receive dividends or dividend
equivalents.
The Named Executive Officers received stock option grants and
warrants during the year ended December 31, 2019 as outlined
below.
Retirement and Other Benefits
We have no other retirement, savings, long-term stock award or
other type of plans for the Named Executive Officers.
Perquisites and Other Personal Benefits
During the year ended December 31, 2019, we provided the Named
Executive Officers with medical insurance and nominal health club
benefits. The Company paid $10,273 in life insurance for Mr. Hegyi
and $27,357 in insurance for Mr. Scott. No other perquisites or
other personal benefits were provided to Named Executive Officers.
The committee expects to review the levels of perquisites and other
personal benefits provided to Named Executive Officers
annually.
Employment and consulting agreements are discussed
below.
33
Tax and Accounting Implications
Deductibility of Executive Compensation
Subject to certain exceptions, Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code") generally denies a
deduction to any publicly held corporation for compensation paid to
its chief executive officer and its three other highest paid
executive officers (other than the principal financial officer) to
the extent that any such individual's compensation exceeds $1
million. “Performance-based compensation” (as defined
for purposes of Section 162(m)) is not taken into account for
purposes of calculating the $1 million compensation limit, provided
certain disclosure, shareholder approval and other requirements are
met. We periodically review the potential consequences of Section
162(m) and may structure the performance-based portion of our
executive compensation to comply with certain exceptions to Section
162(m). However, we may authorize compensation payments that do not
comply with the exceptions to Section 162(m) when we believe that
such payments are appropriate and in the best interests of the
stockholders, after taking into consideration changing business
conditions or the officer's performance
Accounting for Stock-Based Compensation
We account for stock-based payments including its Stock Option
Program in accordance with the requirements of ASC 718,
“Compensation-Stock Compensation.”
COMPENSATION COMMITTEE REPORT
The Compensation Committee, sets and administers policies that
govern the Company's executive compensation programs, and incentive
and stock programs. The Compensation Committee of the Company has
reviewed and discussed the Compensation Discussion and Analysis
required by Item 402(b) of Regulation S-K with management and,
based on such review and discussions, the Compensation Committee
recommended to the Board that the Compensation Discussion and
Analysis be included in this Annual Report on Form 10-K for year
ended December 31, 2019.
THE COMPENSATION COMMITTEE
Katherine McLain (Chairman)
Marco Hegyi
Thom Kozik
34
EXECUTIVE COMPENSATION
REMUNERATION OF EXECUTIVE OFFICERS
The following table provides information concerning remuneration of
the chief executive officer, the chief financial officer and
another named executive officer for the years ended December 31,
2019 and 2018:
Summary Compensation Table
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
Stock
|
Plan
|
Option
|
Other
|
|
|
|
|
|
Salary
|
Bonus
|
Awards
|
Compensation
|
Awards
|
Compensation
|
Total
|
|
|
Principal
Position
|
|
($)
|
($)
|
($)
(1)
|
($)
|
($)
|
($)
|
($)
|
|
|
Marco
Hegyi, Chief Excutive Officer, Chairman of the Board and Director
(2)
|
12/31/19
|
$275,000
|
$20,227
|
$-
|
$-
|
$-
|
$106,273
|
$401,500
|
|
|
|
12/31/18
|
$255,234
|
$20,000
|
$-
|
$-
|
$-
|
$285,023
|
$560,257
|
|
|
|
|
|
|
|
|
|
|
||
|
Mark E.
Scott, Chief Financial Officer and Director (3)
12/31/19
|
12/31/19
|
$165,000
|
$20,227
|
$-
|
$-
|
$-
|
$27,357
|
$212,584
|
|
|
|
12/31/18
|
$147,140
|
$20,000
|
$-
|
$-
|
$40,000
|
$27,018
|
$234,158
|
|
|
|
|
|
|
|
|
|
|
||
|
Joseph
Barnes,President of GrowLife Hydroponics, Inc.
(4) 12/31/19
|
12/31/19
|
$165,000
|
$20,227
|
$-
|
$-
|
$-
|
$-
|
$185,227
|
|
|
|
12/31/18
|
$152,515
|
$20,000
|
$-
|
$-
|
$36,000
|
$-
|
$208,515
|
|
(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.
Mr.
Hegyi was paid a salary of $275,000 during the period October 15,
2018 to December 31, 2019 and a salary of $250,000 during the
period January 1, 2018 to October 14, 2018. Mr. Hegyi received a
discretionary bonus of $20,227 and $20,000 during the years ended
December 31, 2019 and 2018, respectively. We paid life insurance of $10,273 for Mr. Hegyi
during the years ended December 31, 2019 and 2018,
respectively. On October 21, 2018, a 5 year Warrant for Mr.
Hegyi to purchase up to 66,666 shares of our common stock at an
exercise price of $1.50 per share vested. On October 15, 2018, Mr.
Hegyi received Warrants to purchase up to 320,000 shares of our
common stock at an exercise price of $1.80 per share and which vest
on October 15, 2018, 2019 and 2020. The Warrants are exercisable
for 5 years. The warrants were valued at $192,000. The Company
recorded compensation expense of $96,000 and $18,000 respectively
for the years ended December 31, 2019 and 2018. In 2018, we also
recorded stock compensation expense of $178,750 related the vesting
of a warrant originally issued in 2016.
(3) Mr. Scott was paid a salary of $165,000 during the
period October 15, 2018 to December 31, 2019 and a salary of
$150,000 during the period January 1, 2018 to October 14, 2018. Mr.
Scott received a discretionary bonus of $20,227 and $20,000 during
the years ended December 31, 2019 and 2018, respectively.
Mr. Scott was reimbursed $20,357 and
$27,018 for insurance expenses during the years ended December 31,
2019 and 2018, respectively. On
October 15, 2018, an entity controlled by Mr. Scott was granted an
option to purchase 133,333 shares of common stock at an
exercise price of $1.80 per share. The stock option grant vests
quarterly over three years and are exercisable for 5 years. The
stock option grant was valued at $40,000. We recorded $13,333 and
$2,833 as compensation expense for the years ended December 31,
2019 and 2018, respectively.
(4) Mr. Barnes was paid a salary of $165,000 during the
period October 15, 2018 to December 31, 2019 and a salary of
$150,000 during the period January 1, 2018 to October 14, 2018. Mr.
Barnes received a discretionary bonus of $20,227 and $20,000 during
the years ended December 31, 2019 and 2018, respectively.
On October 15, 2018, Mr. Barnes was
granted an option to purchase 120,000 shares of common stock
at an exercise price of $1.80 per share. The stock option grant
vests quarterly over three years and are exercisable for 5 years.
The stock option grant was valued at $36,000. We recorded $12,000
and $2,550 as compensation expense for the years ended December 31,
2019 and 2018, respectively.
Grants of Stock Based Awards during the year ended December 31,
2019
The Compensation Committee did not grant any stock based awards or
performance-based incentive compensation to the Named Executive
Officers for the year ended December 31, 2019.
35
Outstanding Equity Awards as of December 31, 2019
The Named Executive Officers had the following outstanding equity
awards as of December 31, 2019:
|
|
Option
Awards
|
Stock
Awards
|
|||||||
|
|
Number
of
|
Number
of
|
Number
of
|
|
|
|
|
Number
of
|
Market
or
|
|
|
Securities
|
Securities
|
Securities
|
|
|
Number
of
|
Market
Value
|
Unearned
Shares,
|
Payout Value
of
|
|
|
Underlying
|
Underlying
|
Underlying
|
|
|
Shares or
Units
|
of Shares
or
|
Units or
Other
|
Unearned
Shares,
|
|
|
Unexercised
|
Unexercised
|
Unexercised
|
Option
|
|
of
Stock
|
Units
of
|
Rights
That
|
Units, or
Other
|
|
|
Options
|
Options
|
Unearned
|
Exercise
|
Option
|
That Have
Not
|
Stock
That
|
Have
Not
|
Rights That
Have
|
|
|
Exercisable
|
Unexerciseable
|
Options
|
Price
|
Expiration
|
Vested
|
Have Not
Vested
|
Vested
|
Not
Vested
|
|
Name
|
(#)
|
(#)
|
(#)
|
($)
(1)
|
Date
|
(#)
|
($)
|
(#)
|
($)
|
|
Marco Hegyi
(2)
|
-
|
-
|
-
|
$-
|
|
-
|
$-
|
-
|
$-
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark E. Scott
(3)
|
26,667
|
-
|
-
|
$1.500
|
07/01/22
|
-
|
$-
|
-
|
$-
|
|
|
60,000
|
20,000
|
-
|
$0.900
|
10/15/22
|
-
|
$-
|
-
|
$-
|
|
|
55,556
|
77,778
|
-
|
$1.800
|
10/23/23
|
-
|
$-
|
-
|
$-
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Barnes
(4)
|
53,333
|
-
|
-
|
$1.500
|
10/10/22
|
-
|
$-
|
-
|
$-
|
|
|
50,000
|
16,667
|
-
|
$1.050
|
10/25/22
|
-
|
$-
|
-
|
$-
|
|
|
50,000
|
70,000
|
-
|
$1.800
|
10/23/23
|
-
|
$-
|
-
|
$-
|
(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 133,333
shares of common stock at an exercise price of $1.80 per
share. The stock option grant vests quarterly over three years and
is exercisable for 5 years. The stock option grants were valued at
$40,000. We recorded $13,333 and $2,833 as compensation expense for
the years ended December 31, 2019 and 2018,
respectively.
(3)
On October 15, 2018, Mr. Barnes was
granted an option to purchase 120,000 shares of common stock
at an exercise price of $1.80 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. We recorded $12,000
and $2,550 as compensation expense for the years ended December 31,
2019 and 2018, respectively.
Option Exercises for the year ended December 31, 2019
Mr.
Hegyi, Scott and Barnes did not have any option
exercised during the year ended December 31,
2019.
Pension Benefits
We do not provide any pension benefits.
Nonqualified Deferred Compensation
We do not have a nonqualified deferral program.
36
Employment Agreements
Employment Agreement with Marco Hegyi
On
October 15, 2018, the Board of Directors approved an Employment
Agreement with Marco Hegyi pursuant to which we engaged Mr. Hegyi
as its Chief Executive Officer through October 15,
2021.
Mr.
Hegyi’s annual compensation is $275,000. Mr. Hegyi is also
entitled to receive an annual bonus equal to four percent (4%) of
the Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
Mr.
Hegyi received 320,000 warrants in October 2018 as follows: (i)
Warrant to purchase up to 106,667 shares of our common stock at an
exercise price of $1.80 per share which vested immediately: and
(ii) two Warrants to purchase up to 106,667 shares of our common
stock at an exercise price of $1.80 per share. One warrant for
106,667 shares of our common stock vested on October 15, 2019.
Additional warrants for 106,667 shares of our common stock vest on
October 15, 2020 and 2021, respectively. The Warrants are
exercisable for 5 years.
Mr.
Hegyi is entitled to participate in all group employment benefits
that are offered by us to its senior executives and management
employees from time to time, subject to the terms and conditions of
such benefit plans, including any eligibility requirements. In
addition, we will purchase and maintain during the Term an
insurance policy on Mr. Hegyi’s life in the amount of
$2,000,000 payable to Mr. Hegyi’s named heirs or estate as
the beneficiary.
If we terminate Mr. Hegyi’s employment at any time prior to
the expiration of the Term without Cause, as defined in the
Employment Agreement, or if Mr. Hegyi terminates his employment at
any time for “Good Reason” or due to a
“Disability”, Mr. Hegyi will be entitled to receive (i)
his Base Salary amount through the end of the Term; and (ii) his
Annual Bonus amount for each year during the remainder of the
Term.
Employment Agreement with Mark E. Scott
On
October 15, 2018, the Compensation Committee approved an Employment
Agreement with Mark E. Scott pursuant to which we 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.
Mr.
Hegyi received 320,000 warrants in October 2018 as follows: (i)
Warrant to purchase up to 106,667 shares of our common stock at an
exercise price of $1.80 per share which vested immediately: and
(ii) two Warrants to purchase up to 106,667 shares of our common
stock at an exercise price of $1.80 per share. One warrant for
106,667 shares of our common stock vested on October 15, 2019.
Additional warrants for 106,667 shares of our common stock vest on
October 15,2020 and 2021, respectively. The Warrants are
exercisable for 5 years.
Mr.
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, 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 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.
37
Employment Agreement with Joseph Barnes
On
October 15, 2018, the 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.
The
Board of Directors granted Mr. Barnes an option to purchase 120,000
shares of our Common Stock under the Company’s 2017 Amended
and Restated Stock Incentive Plan at an exercise price of $1.80 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.
|
|
|
Early
|
Not For
Good
|
Change
in
|
|
|
Executive
|
For
Cause
|
or
Normal
|
Cause
|
Control
|
Disability
|
|
Payments
Upon
|
Termination
|
Retirement
|
Termination
|
Termination
|
or
Death
|
|
Separation
|
on
12/31/19
|
on
12/31/19
|
on
12/31/19
|
on
12/31/19
|
on
12/31/19
|
|
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.
38
The Company’s Employment Agreement with Mark E. Scott has
provisions providing for severance payments as detailed
below.
|
|
|
Early
|
Not For
Good
|
Change
in
|
|
|
Executive
|
For
Cause
|
or
Normal
|
Cause
|
Control
|
Disability
|
|
Payments
Upon
|
Termination
|
Retirement
|
Termination
|
Termination
|
or
Death
|
|
Separation
|
on
12/31/19
|
on
12/31/19
|
on
12/31/19
|
on
12/31/19
|
on
12/31/19
|
|
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. 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.
|
|
|
Early
|
Not For
Good
|
Change
in
|
|
|
Executive
|
For
Cause
|
or
Normal
|
Cause
|
Control
|
Disability
|
|
Payments
Upon
|
Termination
|
Retirement
|
Termination
|
Termination
|
or
Death
|
|
Separation
|
on
12/31/19
|
on
12/31/19
|
on
12/31/19
|
on
12/31/19
|
on
12/31/19
|
|
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.
39
DIRECTOR COMPENSATION
We primarily use stock grants to incentive compensation to attract
and retain qualified candidates to serve on the Board. This
compensation reflected the financial condition of the Company. In
setting director compensation, we consider the significant amount
of time that Directors expend in fulfilling their duties to the
Company as well as the skill-level required by our members of the
Board. On February 1, 2018, a director compensation program was
implemented. The directors are compensated at $60,000 annually and
the annual share award is based on the close price on January 31 of
that year.
During year ended December 31, 2019, Marco Hegyi and Mr. Scott did
not receive any compensation for their service as directors. The
compensation disclosed in the Summary Compensation Table on
page __ represents the total compensation.
Director Summary Compensation
|
|
|
|
|
Non-Equity
|
Non-Qualified
|
|
|
|
|
Fees
Earned
|
|
|
Incentive
|
Deferred
|
|
|
|
|
or Paid
in
|
|
|
Plan
|
Compensation
|
Other
|
|
|
|
Cash
|
Stock
|
Option
|
Compensation
|
Earnings
|
Compensation
|
|
|
Name
|
$
|
Awards
(1)
|
Awards
|
($)
|
$
|
($)
|
Total
|
|
Katherine McLean
(2)
|
-
|
$60,000
|
-
|
-
|
-
|
-
|
$60,000
|
|
|
|
|
|
|
|
|
|
|
Thom Kozik
(3)
|
-
|
60,000
|
-
|
-
|
-
|
-
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
$-
|
$120,000
|
$-
|
$-
|
$-
|
$-
|
$120,000
|
(1)
These
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC
Topic 718.
(2) On
February 22, 2019, we issued 54,054 shares of our common stock to
Katherine McLain that was valued at $1.11 per share or
$60,000.
(3) On
February 22, 2019, we issued 54,054 shares of our common stock to
Thom Kozik that was valued at $1.11 per share or
$60,000.
Compensation Paid to Board Members
Our independent non-employee directors are not compensated in
cash. The only compensation has been in the form of
stock awards. There is a stock compensation plan for independent
non-employee directors.
40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the
ownership of our common stock as of December 31, 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
|
Number
|
Percentage
(1)
|
|
Directors and Named
Executive Officers-
|
|
|
|
Marco Hegyi
(2)
|
413,334
|
1.4%
|
|
Mark E. Scott
(3)
|
228,889
|
*
|
|
Katherine McLain
(4)
|
86,675
|
*
|
|
Thom Kozik
(5)
|
73,908
|
*
|
|
Joseph Barnes
(6)
|
155,333
|
*
|
|
Total Directors and
Officers (5 in total)
|
958,139
|
3.3%
|
* Less than 1%.
(1)
Based on 28,677,147
shares of common stock outstanding as of December 31,
2019.
(2)
Reflects the shares beneficially owned by Marco Hegyi, including
warrants to purchase 396,667 shares of our common
stock.
(3)
Reflects
the shares beneficially owned by Mark E. Scott, including stock
option grants totaling 142,222 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 153,333 shares that
Mr. Barnes has the right to acquire in sixty
days.
There were no person known by us who owns beneficially 5% or more
of our common stock as of December 31, 2019.
41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Review and Approval of Related Person Transactions
We have operated under a Code of Conduct for many years. Our Code
of Conduct requires all employees, officers and directors, without
exception, to avoid the engagement in activities or relationships
that conflict, or would be perceived to conflict, with the
Company’s interests or adversely affect its reputation. It is
understood, however, that certain relationships or transactions may
arise that would be deemed acceptable and appropriate upon full
disclosure of the transaction, following review and approval to
ensure there is a legitimate business reason for the transaction
and that the terms of the transaction are no less favorable to the
Company than could be obtained from an unrelated
person.
The Audit Committee is responsible for reviewing and approving all
transactions with related persons. The Company reviews all
relationships and transactions in which the Company and our
directors and executive officers or their immediate family members
are participants to determine whether such persons have a direct or
indirect material interest. As required under SEC rules,
transactions that are determined to be directly or indirectly
material to the Company or a related person are
disclosed.
Since
January 1, 2018, the Company engaged in the following reportable
transactions with our directors, executive officers, holders of
more than 5% of our voting securities, and affiliates or
immediately family members of our directors, executive officers and
holders of more than 5% of our voting securities.
Certain Relationships
Please
see the transactions with Chicago Venture Partners, L.P. discussed
in Notes 11, 13 and 14.
Related Party Transactions
Transactions with Marco Hegyi
On
October 21, 2018, a 5 year Warrant for Mr. Hegyi to purchase up to
66,666 shares of our common stock at an exercise price of $1.50 per
share vested. The warrant was valued at $390,000 and we recorded
$178,750 as compensation expense for the year ended December 31,
2018. On October 15, 2018, Mr. Hegyi received Warrants to purchase
up to 320,000 shares of our common stock at an exercise price of
$1.80 per share and which vest on October 15, 2018, 2019 and 2020.
The Warrants are exercisable for 5 years. The warrants that vested
on October 15, 2019 and 2018 were valued at $192,000 and we
recorded compensation expense of $96,000 for the years ended
December 31, 2019 and 2018.
On
October 15, 2018, the Board of Directors approved an Employment
Agreement with Marco Hegyi pursuant to which we engaged Mr. Hegyi
as its Chief Executive Officer through October 15, 2021. See Note
16 for additional details.
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 133,333 shares of common stock at an
exercise price of $1.80 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. We recorded $13,333 and
$2,833 as compensation expense for the years ended December 31,
2019 and 2018, respectively.
On
October 15, 2018, our Compensation Committee approved an Employment
Agreement with Mark E. Scott pursuant to which we engaged Mr. Scott
as its Chief Financial Officer through October 15, 2021. Mr.
Scott’s previous Agreement was cancelled. See Note 16 for
additional details.
Transaction with Joseph Barnes
On October 15, 2018, Mr. Barnes was granted an option to purchase
120,000 shares of common stock at an exercise price of $1.80
per share. The stock option grant vests quarterly over three years
and is exercisable for 5 years. We recorded $12,000 and $2,550 as
compensation expense for the years ended December 31, 2019 and
2018, respectively.
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. See Note 16 for additional details.
Transactions with Katherine McLain
Ms.
Katherine McLain was appointed as a director on February 14, 2017.
On February 1, 2018, the Company issued 19,288 shares of our common
stock to Katherine McLain that was valued at $2.00 per share or
$57,863. On February 22, 2019, we issued 54,054 shares of our
common stock to Katherine McLain valued at $1.11 per share or
$60,000. This issuance was an annual award for independent director
services.
42
Transaction with Thom Kozik
Mr.
Kozik was appointed as a director on October 5, 2017. On February
1, 2018, we issued 6,521 shares of our common stock to Thom Kozik
that was valued at $3.00 per share or $19,562. On February 22,
2019, we issued 54,054 shares of our common stock to Mr. Kozik
valued at $1.11 per share or $60,000. This issuance was an annual
award for independent director services.
Notes Payable to Related Parties
EZ-CLONE
has $104,144 and $104,020 due to relatives of the shareholders as
of December 31, 2019 and 2018, respectively.
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.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Committee Pre-Approval Policy
The Audit Committee has established a pre-approval policy and
procedures for audit, audit-related and tax services that can be
performed by the independent auditors without specific
authorization from the Audit Committee subject to certain
restrictions. The policy sets out the specific services
pre-approved by the Audit Committee and the applicable limitations,
while ensuring the independence of the independent auditors to
audit the Company's financial statements is not impaired. The
pre-approval policy does not include a delegation to management of
the Audit Committee’s responsibilities under the Exchange
Act. During the year ended December 31, 2019, the Audit Committee
pre-approved all audit and permissible non-audit services provided
by our independent auditors.
Service Fees Paid to the Independent Registered Public Accounting
Firm
The Audit Committee engaged BPM LLP to perform a review of the
Company’s financial statements for the three months ended
September 30, 2019 and an annual audit of the Company’s
financial statements for the fiscal year ended December 31, 2019.
BPM did not perform any services prior to September 30, 2019.
Previously the Audit Committee engaged SD Mayer and Associates, LLP
to perform an annual audit of the Company’s financial
statements for the fiscal year ended December 31, 2018 and the
three months ended June 30, 2019 and March 31, 2019. The following
is the breakdown of aggregate fees for the last two fiscal years.
The following is the breakdown of aggregate fees paid for the last
two fiscal years:
|
|
Year
Ended
|
Year
Ended
|
|
|
December 31,
2019
|
December 31,
2018
|
|
Audit
fees
|
$87,450
|
$63,401
|
|
Audit related
fees
|
39,795
|
28,554
|
|
Tax
fees
|
13,150
|
12,050
|
|
All other
fees
|
35,971
|
22,500
|
|
|
|
|
|
|
$176,366
|
$126,505
|
●
“Audit
Fees” are fees paid for professional services for the audit
of our financial statements.
●
“Audit-Related
fees” are fees paid for professional services not included in
the first two categories, specifically, SAS 100 reviews, SEC
filings and consents, and accounting consultations on matters
addressed during the audit or interim reviews, and review work
related to quarterly filings.
●
“Tax
Fees” are fees primarily for tax compliance in connection
with filing US income tax returns.
●
“All
other fees” related to the reviews of Registration Statements
on Form S-1.
43
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) FINANCIAL STATEMENTS:
The Company’s financial statements, as indicated by the Index
to Consolidated Financial Statements set forth below, begin on page
F-1 of this Form 10-K, and are hereby incorporated by reference.
Financial statement schedules have been omitted because they are
not applicable or the required information is included in the
financial statements or notes thereto.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Title of Document
|
|
Page
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
(b)
|
Exhibits
|
|||
|
Exhibit
No.
|
|
Description
|
||
|
101.INS*
|
|
XBRL Instance
Document
|
||
|
101.SCH*
|
|
XBRL Taxonomy
Extension Schema Document
|
||
|
101.CAL*
|
|
XBRL Taxonomy
Extension Calculation Linkbase
Document
|
||
|
101.LAB*
|
|
XBRL Taxonomy
Extension Labels Linkbase Document
|
||
|
101.PRE*
|
|
XBRL Taxonomy
Extension Presentation Linkbase
Document
|
||
|
101.DEF*
|
|
XBRL Taxonomy
Extension Definition Linkbase
Document
|
||
*Filed Herewith. Pursuant to Regulation S-T, this interactive data
file is deemed not filed or part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities
Act of 1933, is deemed not filed for purposes of Section 18 of
the Securities Exchange Act of 1934, and otherwise is not subject
to liability under these sections.
45
Report of Independent Registered
Public Accounting Firm
To the
Board of Directors and Stockholders of GrowLife, Inc. and
Subsidiaries
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheet of GrowLife,
Inc. and Subsidiaries (the Company) as of December 31, 2019, and
the related consolidated statements of operations,
stockholders’ deficit, and cash flows for the year ended
December 31, 2019 and the related notes (collectively referred to
as the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2019, and the results of
its operations and its cash flows for the year ended December 31,
2019, in conformity with accounting principles generally accepted
in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial
statements, the Company has sustained a net loss from operations
and has an accumulated deficit since inception. These factors
raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in this
regard are also described in Note 2. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audit. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audit, we are required to obtain an understanding of
internal control over financial reporting, but not for the purpose
of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis
for our opinion.
/s/ BPM
LLP
BPM LLP
We served as the Company’s auditor since October
2019
Walnut Creek, California
April 1, 2020
F-1
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 the related consolidated statements of operations,
stockholders’ deficit, and cash flows for the year 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 the consolidated results of its
operations and its cash flows for each of the year in the period
ended December 31, 2018, in conformity with U.S. generally accepted
accounting principles.
Going Concern Uncertainty
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial
statements, the Company has sustained a net loss from operations
and has an accumulated deficit since inception. These factors
raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in this
regard are also described in Note 2. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
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 audit. 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 audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. Our audit included performing procedures to assess the
risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis
for our opinion..
/s/ SD
Mayer & Associates, LLP
SD Mayer & Associates, LLP
We served as the Company’s auditor from 2016 to October
2019
San Francisco, California
March 8, 2019
F-2
GROWLIFE, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS|
|
December
31,
2019
|
December
31,
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
Cash and cash
equivalents
|
$40,834
|
$2,334,377
|
|
Accounts receivable
- trade, net of allowance for doubtful accounts of $5,690 as of
12/31/2019 and 12/31/2018
|
101,806
|
42,254
|
|
Inventory,
net
|
600,674
|
792,664
|
|
Prepaid
costs
|
-
|
3,418
|
|
Deposits
|
18,995
|
51,916
|
|
Total current
assets
|
762,309
|
3,224,629
|
|
|
|
|
|
PROPERTY AND
EQUIPMENT, NET
|
166,482
|
712,866
|
|
INTANGIBLE ASSETS,
NET
|
1,802,434
|
2,498,704
|
|
GOODWILL
|
781,749
|
781,749
|
|
OPERATING LEASE
RIGHT OF USE ASSET
|
537,522
|
-
|
|
TOTAL
ASSETS
|
$4,050,496
|
$7,217,948
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT)
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
Accounts payable -
trade
|
$1,157,090
|
$1,054,371
|
|
Accrued
expenses
|
259,093
|
261,954
|
|
Accrued expenses -
related parties
|
31,485
|
73,585
|
|
Derivative
liability
|
1,300,915
|
1,795,473
|
|
Convertible notes
payable
|
2,884,279
|
3,404,133
|
|
Notes payable-
related parties
|
104,144
|
100,020
|
|
Capital lease
payable
|
-
|
8,534
|
|
Deferred
revenue
|
-
|
89,504
|
|
Acquisition
of EZ-CLONE Enterprises, Inc. payable in cash
|
1,026,000
|
-
|
|
Current portion of
operating lease right of use liability
|
140,772
|
-
|
|
Total current
liabilities
|
6,903,778
|
6,787,574
|
|
|
|
|
|
LONG TERM
LIABILITIES:
|
|
|
|
Deferred tax
liability
|
470,200
|
587,750
|
|
Long
term acquisition of EZ-CLONE Enterprises, Inc. payable in common
stock
|
900,000
|
-
|
|
Non-current portion
of operating lease right of use liability
|
410,734
|
-
|
|
Total long term
liabilities
|
1,780,934
|
587,750
|
|
|
|
|
|
COMMITMENTS AND
CONTINGENCIES (Note 16)
|
-
|
-
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
Preferred stock -
$0.0001 par value, 10,000,000 shares authorized, no
shares
|
|
|
|
issued and
outstanding
|
-
|
-
|
|
Common stock -
$0.0001 par value, 120,000,000 shares authorized,
28,677,147
|
|
|
|
and 22,917,327
shares issued and outstanding at 12/31/2019 and 12/31/2018,
respectively
|
386,269
|
343,749
|
|
Additional paid in
capital
|
143,441,047
|
139,331,067
|
|
Accumulated
deficit
|
(148,461,532)
|
(141,176,087)
|
|
Total stockholders'
deficit
|
(4,634,216)
|
(1,501,271)
|
|
|
|
|
|
NON CONTROLLING
INTEREST IN EZ-CLONE ENTERPRISES, INC.
|
-
|
1,343,895
|
|
|
|
|
|
TOTAL LIABILITIES,
NON CONTROLLING INTEREST AND STOCKHOLDERS' DEFICIT
|
$4,050,496
|
$7,217,948
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
GROWLIFE, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
Years
Ended,
|
|
|
|
December 31,
2019
|
December 31,
2018
|
|
|
|
|
|
NET
REVENUE
|
$8,217,562
|
$4,573,461
|
|
COST OF GOODS
SOLD
|
5,668,435
|
4,105,172
|
|
GROSS
PROFIT
|
2,549,127
|
468,289
|
|
GENERAL AND
ADMINISTRATIVE EXPENSES
|
7,010,059
|
5,016,977
|
|
RESTRUCTURING
EXPENSE- FLOORING DIVISION
|
305,895
|
-
|
|
RESTRUCTURING
EXPENSE- RETAIL STORES AND ONLINE SALES
|
250,000
|
-
|
|
OPERATING
LOSS
|
(5,016,827)
|
(4,548,688)
|
|
|
|
|
|
OTHER INCOME
(EXPENSE):
|
|
|
|
Change in fair
value of derivative
|
496,338
|
977,732
|
|
Interest expense,
net
|
(1,204,119)
|
(1,320,811)
|
|
Impairment of
acquired assets
|
-
|
(61,902)
|
|
Loss on debt
conversions
|
(1,767,325)
|
(6,519,467)
|
|
Total other expense,
net
|
(2,475,106)
|
(6,924,448)
|
|
|
|
|
|
LOSS BEFORE INCOME
TAXES
|
(7,491,933)
|
(11,473,136)
|
|
|
|
|
|
Income taxes -
current benefit
|
(117,550)
|
-
|
|
|
|
|
|
NET
LOSS
|
(7,374,383)
|
(11,473,136)
|
|
|
|
|
|
Net loss
attrituable to noncontrolling interest in EZ-Clone Enterprises,
Inc.
|
88,938
|
28,355
|
|
|
|
|
|
NET LOSS
ATTRIBUTABLE TO GROWLIFE, INC. AND SUBSIDIARIES
|
$(7,285,445)
|
$(11,444,781)
|
|
COMMON
SHAREHOLDERS
|
|
|
|
|
|
|
|
Basic and diluted
loss per share
|
$(0.29)
|
$(0.58)
|
|
|
|
|
|
Weighted average
shares of common stock outstanding- basic and diluted
|
25,145,036
|
19,858,753
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
GROWLIFE, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' DEFICIT
|
|
Common Stock
|
Additional Paid
|
Accumulated
|
Total
Stockholders'
|
|
|
|
Shares
|
Amount
|
in
Capital
|
Deficit
|
(Deficit)
|
|
Balance as of
December 31, 2017
|
15,784,227
|
$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
|
16,000
|
240
|
32,760
|
-
|
33,000
|
|
Shares issued for
services rendered
|
92,735
|
1,391
|
216,815
|
-
|
218,206
|
|
Shares issued for
convertible note and interest conversion
|
4,460,220
|
66,904
|
9,966,328
|
-
|
10,033,232
|
|
Shares issued for
common stock
|
434,512
|
6,518
|
1,293,482
|
-
|
1,300,000
|
|
Rigths
offering
|
1,407,582
|
21,114
|
2,512,010
|
-
|
2,533,124
|
|
Stock option
exercise
|
6,667
|
100
|
5,900
|
-
|
6,000
|
|
Shares issued for
acquisition of EZ-Clone Enterprises, Inc.
|
715,385
|
10,730
|
1,384,271
|
-
|
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
|
22,917,327
|
343,749
|
139,331,067
|
(141,176,087)
|
(1,501,271)
|
|
Stock based
compensation for stock options
|
-
|
-
|
62,042
|
-
|
62,042
|
|
Stock based
compensation for warrants
|
-
|
-
|
96,000
|
-
|
96,000
|
|
Shares issued for
services rendered
|
147,890
|
2,219
|
172,216
|
-
|
174,435
|
|
Shares issued for
convertible note and interest conversion
|
4,495,806
|
26,721
|
2,655,302
|
-
|
2,682,023
|
|
Shares issued for
settlement of warrant
|
833,333
|
12,500
|
987,500
|
-
|
1,000,000
|
|
Shares issued for
convertible note commitment fee
|
33,333
|
500
|
24,500
|
-
|
25,000
|
|
Warrant
exercise-cashless
|
26,111
|
392
|
(392)
|
-
|
-
|
|
Share issuance for
correction related to funding services
|
188,335
|
188
|
112,812
|
-
|
113,000
|
|
Fractional shares
issued related to reverse stock split
|
35,011
|
-
|
-
|
-
|
-
|
|
Net Loss
attributable to noncontrolling interest in EZ-Clone
|
-
|
-
|
-
|
88,938
|
88,938
|
|
Net loss for the
year ended December 31, 2019
|
-
|
-
|
-
|
(7,374,383)
|
(7,374,383)
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2019
|
28,677,147
|
$386,269
|
$143,441,047
|
$(148,461,532)
|
$(4,634,216)
|
For the year ended December 31, 2019 and 2018, the Company’s
share of the net loss totaled $7,285,445 and
$11,444,781.
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
GROWLIFE, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
Years Ended,
|
|
|
|
December 31, 2019
|
December 31, 2018
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net
loss
|
$(7,285,445)
|
$(11,444,781)
|
|
Adjustments
to reconcile net loss to net cash (used in)
|
|
|
|
operating
activities
|
|
|
|
Depreciation
|
89,322
|
80,125
|
|
Restructuring
expense - stores & flooring
|
555,895
|
-
|
|
Amortization
of intangible assets
|
838,262
|
142,628
|
|
Stock
based compensation
|
158,042
|
241,433
|
|
Common
stock issued for services
|
312,435
|
218,206
|
|
Non
cash interest and amortization of debt discount
|
933,265
|
1,190,903
|
|
Change
in fair value of derivative liability
|
(494,558)
|
(977,732)
|
|
Loss
on debt conversions
|
1,767,325
|
6,519,467
|
|
Impairment
of acquired assets
|
-
|
61,902
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(59,552)
|
42,254
|
|
Inventory
|
191,990
|
(326,986)
|
|
Prepaids
costs
|
3,418
|
(3,418)
|
|
Deposits
|
32,921
|
(27,608)
|
|
Right
of use, net
|
13,984
|
-
|
|
Accounts
payable
|
371,270
|
232,973
|
|
Accrued
expenses
|
(131,331)
|
116,625
|
|
Deferred
tax liability
|
(117,550)
|
|
|
Deferred
revenue
|
(89,504)
|
79,504
|
|
CASH
(USED IN) OPERATING ACTIVITIES
|
(2,909,811)
|
(3,854,505)
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Investment
in purchased assets
|
(12,463)
|
(544,432)
|
|
NET
CASH (USED IN) INVESTING ACTIVITIES:
|
(12,463)
|
(544,432)
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Repayment
of convertible notes payable
|
(778,872)
|
-
|
|
Proceeds
from the issuance of common stock rights
|
|
2,533,125
|
|
Common
stock option exercise
|
|
6,000
|
|
Proceeds
from notes payable
|
1,416,137
|
2,825,000
|
|
Repayment
on capital lease
|
(8,534)
|
-
|
|
Proceeds
from the issuance of common stock
|
|
1,300,000
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
628,731
|
6,664,125
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
(2,293,543)
|
2,265,188
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
2,334,377
|
69,191
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
$40,834
|
$2,334,379
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
Shares
issued for convertible note and interest conversion
|
$1,834,246
|
$3,338,082
|
|
Common
shares issued for accounts payable
|
$-
|
$33,000
|
|
Loss
of debt conversions- issuance of stock
|
$2,035,876
|
$6,519,467
|
|
Gain
on debt conversions- reduction of accounts payable
|
$268,551
|
$-
|
|
Acquisition
of EZ-Clone Enterprises, Inc.- intangible assets
|
$-
|
$3,423,081
|
|
Stock
issued for Acquisition of EZ-Clone Enterprises, Inc.
|
$-
|
$1,395,000
|
|
Issuance
of Noncontrolling interest for EZ Clone Acquistion
|
$-
|
$1,343,895
|
|
Conversion
of Noncontrolling interest to acquisition payable
|
$1,343,895
|
$-
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
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 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 total purchase
price was $4 million of which $1,500,000 is payable in cash and
$2.5 million payable in stock. At closing, we paid 51% of
this amount totaling $2,040,000 via a (i) a cash payment of
$645,000; and (ii) the issuance of 715,385 restricted shares of our
common stock valued $1,395,000.
The
October 15, 2018 agreement called for the Company, upon delivery of
the remaining 49% of EZ-CLONE stock, to acquire such stock within
one year for $1,960,000, payable as follows: (i) a cash payment of
$855,000; and (ii) the issuance of Company’s common stock at
a value of $1,105,000. On November 5, 2019, the Company amended the
purchase agreement with one 24.5% shareholder obligating the
Company to purchase the remaining 49% of stock by agreeing to a 20%
extension fee ($171,000) of the $855,000 cash payable at the
earlier of the closing of $2,000,000 in funding or nine months
(July 2020). As of December 31, 2019, the $171,000 extension fee
has not been paid and we continue in discussion with the
shareholders about paying the remaining purchase price
payable.
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. The Company 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. Our bid price had
closed below $0.01 for more than 30 consecutive calendar
days. As of March 17, 2020, the Company commenced trading on the
OTCQB Market ("OTCQB") after successfully up-listing from the OTC
Pink Market.
On
October 9, 2019, the Company approved the reduction of authorized
capital stock, whereby the total number of the Company’s
authorized common stock decreased from 6,000,000,000 by a ratio of
1 for 50, to 120,000,000 shares. On
November 20, 2019, the Company filed a Certificate of Amendment of
Certificate of Incorporation with the Secretary of State of the
State of Delaware. As a result of the reduction, the Company
an aggregate 130,000,000 authorized shares consisting of:
(i)120,000,000 shares of common stock, par value $0.0001 per share,
and (ii) 10,000,000 shares of preferred stock, par value $0.0001
per share.
The reverse stock split of 1 for 150 was effective at the open of
business on November 27, 2019 whereupon the shares of common stock
began trading on a split-adjusted basis. The Company’s CUSIP
number for the Company’s common stock changed to
39985X203. All
warrant, option, share and per share information in this Form 10-K
gives retroactive effect to the 1-for-150 reverse split with all
numbers rounded up to the nearest whole share.
F-7
NOTE 2 –
GOING CONCERN
The
accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company incurred net losses of $7,374,383 and $11,473,136 for the
years ended December 31, 2019 and 2018, respectively. Net cash used
in operating activities was $2,909,811 and $3,854,505 for the years
ended December 31, 2019 and 2018, respectively.
The
Company anticipates that it will record losses from operations for
the foreseeable future. As of December 31, 2019, the
Company’s accumulated deficit was
$148,461,532. The Company has limited capital resources,
and operations to date have been funded with the proceeds from
private equity and debt financings. These conditions raise
substantial doubt about our ability to continue as a going concern.
The audit report prepared by the Company’s independent
registered public accounting firm relating to our consolidated
financial statements for the year ended December 31, 2019 includes
an explanatory paragraph expressing the substantial doubt about the
Company’s ability to continue as a going
concern.
The
Company believes that its cash on hand will be sufficient to fund
our operations only until June 30, 2020. The Company needs additional financing to
implement our business plan and to service our ongoing operations
and pay our current debts. There can be no assurance that we will
be able to secure any needed funding, or that if such funding is
available, the terms or conditions would be acceptable to us. If we
are unable to obtain additional financing when it is needed, we
will need to restructure our operations, and divest all or a
portion of our business. We may seek additional
capital through a combination of private and public equity
offerings, debt financings and strategic collaborations. Debt
financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to the
Company’s then-existing stockholders and/or require such
stockholders to waive certain rights and preferences. If such
financing is not available on satisfactory terms, or is not
available at all, the Company may be required to delay, scale back,
eliminate the development of business opportunities or file for
bankruptcy and our operations and financial condition may be
materially adversely affected. See Note 18 for additional debt
proceeds received in 2020.
NOTE 3 – SIGNIFICANT ACCOUNTING
POLICIES: ADOPTION OF ACCOUNTING STANDARDS
Basis of Presentation - The accompanying consolidated
financial statements include the accounts of the Company.
Intercompany accounts and transactions have been eliminated. The
preparation of these consolidated financial statements in
conformity with U.S. generally accepted accounting principles
(“GAAP”).
Principles of Consolidation -
The consolidated financial statements include the accounts of the
Company and its wholly owned and majority-owned subsidiaries.
Inter-Company items and transactions have been eliminated in
consolidation. Non-controlling interest represents the portion of
ownership which the Company does not own.
Cash and Cash Equivalents - We
classify highly liquid temporary investments with an original
maturity of threemonths 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, 2019, the Company had uninsured deposits in the amount
of $0.
Accounts Receivable and Revenue – The company
recognizes revenue in accordance with ASC Topic 606, Revenue from
Contracts with Customers, which requires the application of the
five-step-principles-based-accounting-model for revenue
recognition. These steps include (1) a legally enforceable
contract, written or unwritten is identified; (2) performance
obligations in the contracts are identified; (3) the transaction
price reflecting variable consideration, if any, is identified; (4)
the transaction price is allocated to the performance obligations;
and (5) revenue is recognized when the control of goods is
transferred to the customer at a particular time or over time. Our
hydroponic sales are cash or credit card. Our EZ-CLONE sales
include credit cash, payments in advance, 3% discount upon receipt
and, we extend thirty day terms to select customers. Accounts
receivable are reviewed periodically for
collectability.
Sales Returns - We allow customers to return defective
products when they meet certain established criteria as outlined in
our sales terms and conditions. It is our practice to regularly
review and revise, when deemed necessary, our estimates of sales
returns, which are based primarily on actual historical return
rates. We record estimated sales returns as reductions to sales,
cost of goods sold, and accounts receivable and an increase to
inventory. Returned products which are recorded as inventory are
valued based upon the amount we expect to realize upon its
subsequent disposition. As of December 31, 2019 and 2018, there was
a reserve for sales returns of $20,000, respectively, which is
minimal based upon our historical experience.
Inventories - Inventories are recorded on a first in first
out basis Inventory consists of raw materials, work in process and
finished goods and components sold by EZ-CLONE to it distribution
customers. In addition, finished goods includes products
hydroponics, which is product purchased from distributors, and in
some cases directly from the manufacturer, and resold to its
hydroponics customers. Inventory is valued at the lower of cost or
market. The reserve for inventory was $0 and $120,000 as of
December 31, 2019 and 2018, respectively.
Property and Equipment –
Equipment consists of machinery, equipment, tooling, computer
equipment and leasehold improvements, which are stated at cost less
accumulated depreciation and amortization. Depreciation is computed
by the straight-line method over the estimated useful lives or
lease period of the relevant asset, generally 3-10 years, except
for leasehold improvements which are depreciated over the lesser of
the life of the lease or 10 years.
Long Lived Assets – The
Company reviews its long-lived assets for impairment annually or
when changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Long-lived assets under certain
circumstances are reported at the lower of carrying amount or fair
value. Assets to be disposed of and assets not expected to provide
any future service potential to the Company are recorded at the
lower of carrying amount or fair value (less the projected cost
associated with selling the asset). To the extent carrying values
exceed fair values, an impairment loss is recognized in operating
results.
F-8
Intangible Assets – Intangible assets are capitalized
and amortized on a straight-line basis over their estimated useful
life, if the life is determinable. If the life is not determinable,
amortization is not recorded. We regularly perform reviews to
determine if facts and circumstances exist which indicate that the
useful lives of our intangible assets are shorter than originally
estimated or the carrying amount of these assets may not be
recoverable. When an indication exists that the carrying amount of
intangible assets may not be recoverable, we assess the
recoverability of our assets by comparing the projected
undiscounted net cash flows associated with the related asset or
group of assets over their remaining lives against their respective
carrying amounts. Such impairment test is based on the lowest level
for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. Impairment,
if any, is based on the excess of the carrying amount over the
estimated fair value of those assets.
Goodwill-The Company reviews
its acquired goodwill for impairment annually or more frequently if
events or changes in circumstances indicate that the carrying
amount may not be recoverable. In reviewing its goodwill, the
Company performs a qualitative analysis to determine if it is
more-likely-than-not that the goodwill is impaired. If the
qualitative analysis indicates that goodwill is likely impaired,
the Company calculates the fair value of its goodwill by allocating
the fair value of the business unit containing the goodwill to all
its tangible and intangible assets and liabilities, with the
residual fair value allocated to goodwill. The excess, if any, of
the goodwill carrying value in excess of its fair value would be
recognized as an impairment loss. Management has concluded that,
based on a qualitative analysis, it is more-likely-than-not that
goodwill has not been impaired as of December 31, 2019 and
2018.
Fair Value Measurements and Financial Instruments
– ASC Topic 820, Fair Value Measurement and Disclosures,
defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. This topic also establishes a fair
value hierarchy, which requires classification based on observable
and unobservable inputs when measuring fair value. The
fair value hierarchy distinguishes between assumptions based on
market data (observable inputs) and an entity’s own
assumptions (unobservable inputs). The hierarchy
consists of three levels:
|
Level 1
– Quoted prices in active markets for identical assets and
liabilities;
|
|
Level 2 – Inputs other than level one inputs that are either
directly or indirectly observable; and.
|
|
Level 3 –
Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
|
The
recorded value of other financial assets and liabilities, which
consist primarily of cash and cash equivalents, accounts
receivable, other current assets, and accounts payable and accrued
expenses approximate the fair value of the respective assets and
liabilities as of December 31, 2019 and 2018 are based upon the
short-term nature of the assets and liabilities.
Derivative Financial Instruments –Pursuant to ASC 815
“Derivatives and Hedging”, the Company evaluates all of
its financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded
derivatives. The Company then determines if embedded derivative
must bifurcated and separately accounted for. For derivative
financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and
is then re-valued at each reporting date, with changes in the fair
value reported in the consolidated statements of operations. For
stock-based derivative financial instruments, the Company uses a
Black-Scholes-Merton option pricing model to value the derivative
instruments at inception and on subsequent valuation dates. The
classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as
current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within twelve months
of the balance sheet date.
Stock Based Compensation – We have share-based compensation plans
under which employees, consultants, suppliers and directors may be
granted restricted stock, as well as options to purchase shares of
our common stock at the fair market value at the time of grant.
Stock-based compensation cost is measured by us at the grant date,
based on the fair value of the award, over the requisite service
period using an estimated forfeiture rate. For options issued to
employees, we recognize stock compensation costs utilizing the fair
value methodology over the related period of
benefit. Grants of stock options and stock to
non-employees and other parties are accounted for in accordance
with the ASC 718.
Convertible Securities – Based upon ASC 815-15, we have
adopted a sequencing approach regarding the application of ASC
815-40 to convertible securities issued subsequent to September 30,
2015. We will evaluate our contracts based upon the earliest
issuance date.
Net Loss Per Share - Under the
provisions of ASC Topic 260, “Earnings per Share,”
basic loss per common share is computed by dividing net loss
available to common shareholders by the weighted average number of
shares of common stock outstanding for the periods presented.
Diluted net loss per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that would then share in the income of the
Company, subject to anti-dilution limitations. The common stock
equivalents have not been included as they are
anti-dilutive.
As of
December 31, 2019, there are also (i) stock option grants
outstanding for the purchase of 550,000 common shares at an $1.491 average
exercise price; and (ii) warrants for the purchase of 2,418,834 shares of common shares at a
$3.465 average exercise price. In
addition, we have an unknown number of common shares to be issued
under the Crossover financing agreements in the case of default. In
addition, we have an unknown number of common shares to be issued
under the Chicago Venture, Iliad and St. George financing
agreements because the number of shares ultimately issued to
Chicago Venture depends on the price at which Chicago Venture
converts its debt to shares and exercises its warrants. The lower
the conversion or exercise prices, the more shares that will be
issued to Chicago Venture upon the conversion of debt to shares. We
will not know the exact number of shares of stock issued to Chicago
Venture until the debt is actually converted to
equity.
As of
December 31, 2018, there are also (i) stock option grants
outstanding for the purchase of 666,667 common shares at a $1.485 average
exercise price; (ii) warrants for the purchase of 6,018,834 common shares at a $0.029 average
exercise price; and (iii) 752,281 shares
related to convertible debt that can be converted at $4.53 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.
F-9
Dividend Policy - The Company
has never paid any cash dividends and intends, for the foreseeable
future, to retain any future earnings for the development of our
business. Our future dividend policy will be determined by the
board of directors on the basis of various factors, including our
results of operations, financial condition, capital requirements
and investment opportunities.
Use of Estimates - In preparing these consolidated financial
statements in conformity with GAAP, management is required to make
estimates and assumptions that may affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the consolidated financial statements
and the reported amount of revenues and expenses during the
reporting periods. Actual results could differ from those
estimates. Significant estimates and assumptions included in our
consolidated financial statements relate to the valuation of
long-lived assets, estimates of sales returns, inventory reserves
and accruals for potential liabilities, and valuation assumptions
related to derivative liability, equity instruments and share based
compensation.
Reclassifications - The Company
has reclassified certain items from 2018 to be consistent with the
2019 presentation.
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 –BUSINESS COMBINATIONS, ACQUISITION PAYABLE AND OTHER
TRANSACTION
Acquisition of EZ-CLONE Enterprises, Inc.
On
October 15, 2018, in connection with the Company’s strategy
to become a dominate cultivation facilities provider, 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.
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 total purchase
price was $4 million of which $1,500,000 is payable in cash and
$2.5 million payable in stock. At closing, we paid 51% of
this amount totaling $2,040,000 via a (i) a cash payment of
$645,000; and (ii) the issuance of 715,385 restricted shares of our
common stock valued $1,395,000.
The
October 15, 2018 agreement called for the Company, upon delivery of
the remaining 49% of EZ Clone stock, to acquire such stock within
one year for $1,960,000, payable as follows: (i) a cash payment of
$855,000; and (ii) the issuance of Company’s common stock at
a value of $1,105,000. On November 5, 2019, the Company amended the
purchase agreement with one 24.5% shareholder obligating the
Company to purchase the remaining 49% of stock by agreeing to a 20%
extension fee ($171,000) of the $855,000 cash payable at the
earlier of the closing of $2,000,000 in funding or nine months
(July 2020). As of December 31, 2019, the $171,000 extension fee
has not been paid and we continue in discussion with the
shareholders regarding paying the remaining purchase price
payable.
F-10
The
Company accounted for the acquisition in accordance with ASC 805,
“Business Combinations”. ASC 805 defines the acquirer
in a business combination as the entity that obtains control of one
or more businesses in a business combination and establishes the
acquisition date as the date that the acquirer achieves control.
ASC 805 requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values as
of that date.
For
accounting purposes, from the October 15, 2018 acquisition date and
through September 30, 2019, the Company has consolidated EZ Clone
given their control and have treated its ability to acquire the
remaining 49% interest in EZ Clone as a de facto option to buy and
has thus categorized it as non-controlling until November 5, 2019
when the amended purchase agreement obligates the Company to
purchase the remaining 49%. Effective in the quarter beginning
October 1, 2019, the Company for accounting purposes, considers EZ
Clone to be 100% owned and thus eliminated the non-controlling
interest and recorded an acquisition payable related to the balance
owed. As of December 31, 2019, the Company has an acquisition
payable totaling $1,926,000, of which $1,026,000 is current and
$900,000 is categorized as long term since stock is expected to be
issued to settle this and will not utilize current assets. The
total liability consists of the discounted value of the future
payments of $1,960,0000 and the $171,000 extension fee payable. The
Company will accrete the difference between the carrying value of
the acquisition payable and the contractual obligations as interest
expense through July 2020 when payment is due. The Company treated
the $171,000 as a financing fee and expensed it as interest expense
in 2019. During the fourth quarter of 2019, the Company recorded a
non cash financing charge as interest expense totaling
approximately $410,000 to recognize the acquisition payable and to
eliminate the non controlling interest.
As of
the acquisition date in October 2018, the Company recognized
approximately $3.4 million of intangible assets and began
amortizing them over 3 years. In the fourth quarter of 2019, the
Company completed its evaluation of assets acquired and finalized
its asset valuation. The finalized valuation resulted in lower
intangible assets from the original assessment, allocating some of
the intangible to Goodwill and determined that the life of definite
life intangibles to be 5 years (See Note 7). The Company adjusted
the cost basis and accumulated amortization, reducing both, but did
not change 2019 amortization expense that had been recorded through
September 30, 2019 which was in excess of $800,000. The change in
the purchase accounting also resulted in the recording of a
deferred tax liability and the lowering of non-controlling interest
by $587,750 and such reclassification was made to the December 31,
2018 balance sheet.
The
summary of assets acquired and liabilities assumed is based upon
the Company final evaluation done in the fourth quarter of 2019 and
is detailed below.
|
Intangible
assets
|
$2,351,000
|
|
Goodwill
|
781,749
|
|
Net working
capital
|
551,000
|
|
Propety and
equipment
|
318,000
|
|
Defered tax
liability
|
(587,750)
|
|
|
$3,413,999
|
The fair value of the intangible assets associated with the assets
acquired was $2,351,000 estimated by using a discounted cash flow
approach based on future economic benefits. In summary, the
estimate was based on a projected income approach and related
discounted cash flows over five years, with applicable risk factors
assigned to assumptions in the forecasted results.
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. 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 $1.20, or 833,333 restricted
common stock shares. The Company recorded a loss on debt conversion
of $1,000,000 during the year ended December 31, 2019. 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 3,600,000
shares of the Company’s common stock at an exercise price of
$4.95.
Restructuring Expense
The
Company closed retail stores in Portland, Maine, Encino, California
and Calgary, Canada and online sales as of September 30, 2019.
Also, during 2019
Company closed the sale of the flooring division located in Grand
Prairie, Texas while during 2018 the Company made the final
$250,000 payment to complete our acquisition. The Company expects
to reduce losses and cash costs by up to $100,000 per month
starting October 1, 2019. During the year ended December 31, 2019,
the Company recorded restructuring expense of $306,000 in
connection with the sale of the flooring division and $250,000 for
the closure of the retail stores and online sales. The sale of the
flooring division generated no proceeds.
F-11
NOTE 5 – INVENTORY
Inventory
at EZ-CLONE as of December 31, 2019 and 2018 consisted of the
following:
|
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
|
|
|
|
Raw
materials
|
$329,482
|
$417,570
|
|
Work
in process
|
49,253
|
35,280
|
|
Finished
goods
|
92,703
|
459,814
|
|
Inventory
deposits
|
129,236
|
-
|
|
Inventory
reserve
|
-
|
(120,000)
|
|
Total
|
$600,674
|
$792,664
|
Raw
materials consist of supplies for product lines at
EZ-CLONE.
Finished
goods inventory relates to product lines 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, 2019 and 2018 consists of the
following:
|
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
|
|
|
|
Machinery,
equipment and tooling
|
$356,867
|
$943,327
|
|
Computer
equipment
|
16,675
|
16,675
|
|
Leasehold
improvements
|
14,703
|
14,703
|
|
Total
property and equipment
|
388,245
|
974,705
|
|
Less
accumulated depreciation and amortization
|
(221,763)
|
(261,839)
|
|
Net
property and equipment
|
$166,482
|
$712,866
|
F-12
Property and equipment, net of accumulated depreciation, were
$166,482 and $712,866 as of December 31, 2019 and 2018,
respectively. Accumulated depreciation was $221,763 and $261,839 as
of December 31, 2019 and 2018, respectively. Total depreciation
expense was $89,232 and $80,125 for the years ended December 31,
2019 and 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 15, 2018, the Company acquired 51% of EZ-CLONE
Enterprises, Inc. and acquired $318,000 of net property and
equipment.
During
the year ended December 31, 2018, the Company retired fully
depreciated assets of $358,156. During the year ended December 31,
2019, the Company disposed in connection with the closure of the
flooring division assets with a net book value of
$423,442.
NOTE 7 – INTANGIBLE
ASSETS
Intangible assets as of December 31, 2019 and 2018 consisted of the
following:
|
|
Estimated Useful
Lives
|
December
31,
2019
|
December
31,
2018
|
|
|
|
|
|
|
Customer
Lists
|
5
Years
|
$1,297,000
|
$1,604,341
|
|
Intellectual
Property
|
5
Years
|
1,054,000
|
1,036,991
|
|
less accumulated
amortization
|
|
(548,566)
|
(142,628)
|
|
Net Intangible
assets-definitive life
|
|
1,802,434
|
2,498,704
|
|
|
|
|
|
|
Goodwill-indefinite
life
|
N/A
|
781,749
|
781,749
|
|
|
|
|
|
|
Total intangible
assets and goodwill
|
|
$2,584,183
|
$3,280,453
|
As of
the acquisition date in October 2018, the Company originally
recognized approximately $3.4 million of intangible assets and
began amortizing them over 3 years. In the fourth quarter of 2019,
the Company completed its evaluation of assets acquired and
finalized its asset valuation. The finalized valuation resulted in
lower intangible assets from the original assessment, allocated
some of the intangible to Goodwill and determined that the life of
definite life intangibles to be 5 years. In the 4th quarter of 2019,
The Company adjusted the cost basis and accumulated amortization,
reducing both, but did not change 2019 amortization expense that
had been recorded through September 30, 2019 which was in excess of
$800,000. .
Total amortization expense was $838,262 and $142,628 for the years
ended December 31, 2019 and 2018, respectively. Amortization
expense for the intangibles will be approximately $470,000 for
years 2020 through 2022 and approximately $392,000 in
2023.
NOTE 8- LEASES
The
Company previously entered into operating leases for retail and
corporate facilities. These leases have terms which range from two
to five years, and often include options to renew. These operating
leases are listed as separate line items on the Company's December
31, 2018 Consolidated Balance Sheet and represent the
Company’s right to use the underlying asset for the lease
term. The Company’s obligation to make lease payments are
also listed as separate line items on the Company's December 31,
2018 Consolidated Balance Sheet. Based on the present value of the
lease payments for the remaining lease term of the Company's
existing leases, the Company recognized right-of-use assets and
lease liabilities for operating leases of approximately $1,378,000
on January 1, 2019. Operating lease right-of-use assets and
liabilities commencing after January 1, 2019 are recognized at
commencement date based on the present value of lease payments over
the lease term. During the quarter ended September 30, 2019, the
Company has cancelled all but one lease and has recognized the rent
and termination fees related to the cancelled leases as an expense
in the current period. As of December 31, 2019, total right-of-use
assets and operating lease liabilities for remaining long term
lease was approximately $538,522 and $551,506, respectively. During
the year ended December 31, 2019, the Company recognized
approximately $222,984 in total lease costs for the
lease.
Because
the rate implicit in each lease is not readily determinable, the
Company uses its incremental borrowing rate to determine the
present value of the lease payments.
F-13
Information
related to the Company's operating right-of-use assets and related
lease liabilities as of and for the year ended December 31, 2019
were as follows:
Cash paid for ROU operating lease liability
$210,000
Weighted-average
remaining lease term 4 years
Weighted-average
discount rate 10 %
|
Year
|
$
|
|
2019
|
$196,612
|
|
2020
|
216,300
|
|
2021
|
222,792
|
|
2022
|
229,476
|
|
2023
|
236,352
|
|
Total
lease liability
|
1,101,532
|
|
Less
imputed interest
|
(178,028)
|
|
Total
lease liability
|
$923,504
|
NOTE 9- ACCOUNTS PAYABLE
Accounts payable were $1,157,090 and $1,054,371 as of December
31, 2019 and 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 March 31, 2020. During the year ended December
31, 2019, the Company negotiated some settlements with various
vendors which resulted in recognizing a gain of $268,000, such
amount was recorded as part of the loss on debt conversions on the
statement of operations.
NOTE 10- ACCRUED EXPENSES
Accrued expenses were $259,093 and $261,954 as of December 31,
2019 and 2018, respectively. Such liabilities consisted of amounts
due to sales tax, payroll and
restructuring expense liabilities.
NOTE 11 – CONVERTIBLE NOTES PAYABLE, NET
Convertible
notes payable as of December
31, 2019 consisted of the following:
|
|
|
|
|
Balance
|
|
|
|
|
|
As of
|
|
|
Principal
|
Accrued Interest
|
Debt Discount
|
December 31, 2019
|
|
10% OID Convertible
Promissory Notes
|
$2,195,007
|
$220,980
|
$-
|
$2,415,987
|
|
Secured
Advance Note
|
205,228
|
-
|
-
|
205,228
|
|
12%
Convertible Promissory Notes
|
281,600
|
3,055
|
(21,591)
|
263,064
|
|
|
$2,681,835
|
$224,035
|
$(21,591)
|
$2,884,279
|
F-14
Convertible
notes payable as of December
31, 2018 consisted of the following:
|
|
|
|
|
Balance
|
|
|
|
|
|
As of
|
|
|
Principal
|
Accrued Interest
|
Debt Discount
|
December 31, 2018
|
|
10% OID Convertible
Promissory Notes
|
$2,982,299
|
$135,780
|
$-
|
$3,118,079
|
|
7%
Convertible note
|
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. As of December 31, 2018, the outstanding
principal balance due to Forglen LLC was $270,787 and accrued
interest was $15,267, which results in a total amount of
$286,054.
On
December 17, 2019, Forglen LLC converted the remaining principal
and accrued interest of $305,075 into 1,375,285 shares of the
Company’s common stock at a per share conversion price of
$0.222.
10% Convertible Promissory Notes
Funding from Chicago Venture Partners, L.P. (“Chicago
Venture”), Iliad Research and Trading, L.P.
(“Iliad”) and Odyssey Research and Trading, LLC,
(“Odyssey”). The Company typically issues original
issuance discount notes with these parties that has a stated
interest rate of typically 10%. Accrued interest represents the
interest to be accreted over the remaining term of the notes. These
notes contain terms and conditions that are deemed beneficial
conversion features and the Company recognizes a derivative
liability related to these terms until the notes are converted.
Upon the conversion of these notes, the Company records a loss on
debt conversion and reduces their derivative liability. The notes
may be converted to common stock after six months until they are
converted.
As
of December 31, 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 converted
principal and interest of $3,104,181 into 3,503,916 shares of our
common stock at a per share conversion price of $0.8859 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 December 31, 2019, the
outstanding principal balance due to Chicago Venture, Iliad and
Odyssey was $2,195,007 and accrued interest was $220,980, which
results in a total amount of $2,415,987.
During
the year ended December 31, 2019, Chicago Venture and Iliad
converted principal and accrued interest of $1,357,872 into
3,120,521 shares of our common stock at a per share conversion
price of $0.766 with a fair value of $2,284,081. The Company
recognized $926,208 loss on debt conversions during the year ended
December 31, 2019.
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement Odyssey Research and Trading, LLC,
(“Odyssey”)
On July
23, 2019, the Company executed the following agreements with
Odyssey: (i) Securities Purchase Agreement; (ii) Secured Promissory
Notes; and (iii) Security Agreement (collectively the
“Odyssey Agreements”). The Company entered into the
Odyssey Agreements with the intent to acquire working capital to
grow the Company’s businesses.
F-15
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
3,333,334 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
$1.50 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.
The
Company has approximately $645,000 available under the Notes as of
December 31, 2019 but cannot currently access the available
funds.
The 10%
Notes are convertible at the holder’s option into the
Company’s common stock at 65% of the lower of $1.35 or the
current fair market value of the stock. Based upon the closing
price of the stock at December 31, 2019, the notes would convert to
approximately 10,822,822 shares.
Secured Advance Note with Crossover Capital Fund I LLC
(“Crossover”)
On
September 20, 2019, the Company closed a Secured Advance Note with
Crossover Capital Fund I LLC (the “Crossover Note”).
The Company entered into the Crossover Note with the intent to
acquire working capital to grow the Company’s businesses. The
total amount of funding under the Crossover Note is $250,000. The
Crossover Note carries an original issue discount of $57,400 and a
transaction expense amount of $7,000, for total debt of $308,400.
On December 22, 2019, the Note incased by $25,700. The original
issue discount was immediately recorded as interest expense due to
the note maturity being less than one year. The Company agreed to
reserve three times the number of shares based on the conversion
value in case of default under the Crossover Note, if that occurs
in the future. The Crossover Note is due in nine months and is
repayable weekly at $9,205. The Crossover Note is convertible into
the Company’s common stock at the market value share price
subject to adjustment as provided for in the Crossover Note in the
case of default. The Company’s obligation to pay the
Crossover Note, or any portion thereof, is secured by all of the
Company’s assets. As of December
31, 2019, the outstanding principal balance due Crossover
was $205,228. The Company also issued 33,333 shares of common stock
to Crossover as a commitment fee that was valued at fair market
value at $25,000 or $0.75 per share and expensed as interest
expense during the year ended December 31, 2019.
12% Convertible Promissory Notes
The
Company entered into Convertible Promissory Notes with Power Up
Lending Group Ltd on November 18, 2019 and December 9, 2019 for
$281,600 to fund short-term working capital. The Notes accrues
interest at a rate of 12% per annum and became due in one year and
are convertible into common stock at 75% of market value after six
months. The Company received cash of $250,000, and
recorded interest expense of $3,055, a transaction expense amount
of $6,000 and amortization of debt discount of $21,591. The Company
recorded as interest expense in 2019 the value of the beneficial
conversion feature of $93,867 related to the potential conversion
at a discount after six months.
NOTE 12 – DERIVATIVE LIABILITY
The
Convertible Notes payable include a conversion feature that
pursuant ASC 815 “Derivatives and Hedging”, has been
identified as an embedded derivative financial instrument and which
the Company has elected to account for under the fair value
method of accounting.
If the
conversion features of conventional convertible debt provide for a
rate of conversion that is below market value, this feature is
characterized as a beneficial conversion feature (BCF). A BCF is
recorded by the Company as a debt discount pursuant to ASC Topic
470-20. Debt with Conversion and Other Options. In those
circumstances, the convertible debt is recorded net of the discount
related to the BCF and the Company amortizes the discount to
interest expense over the life of the debt using the effective
interest method. The debt is convertible at the lesser of 65% of
the fair value of the Company’s common stock or $1.35
requiring the conversion feature to be bifurcated from the host
debt contract and accounting for separately as a derivative,
resulting in periodic revaluations. The notes underlying the
derivatives are short term in nature and generally converted to
stock in less than one year. The derivative is valued at period end
with the key inputs being current stock price and the conversion
feature.
There
was a derivative liability of $1,300,915 and $1,795,473 as of
December 31, 2019 and 2018. For
the year ended December 31, 2019, the Company recorded non-cash
income of $496,338 related to the “change in fair value of
derivative” expense related to the Chicago Venture and Iliad
financing.
F-16
Derivative
liability as of December 31,
2019 was as follows:
|
|
Fair Value Measurements Using Inputs
|
Amount at
|
||
|
Financial Instruments
|
Level 1
|
Level 2
|
Level 3
|
December 31, 2019
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative
Instruments
|
$-
|
$-
|
$1,300,915
|
$1,300,915
|
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$1,300,915
|
$1,300,915
|
Derivative
liability as of December 31,
2018 was as follows:
|
|
Fair
Value Measurements Using Inputs
|
Carrying
Amount at
|
||
|
Financial
Instruments
|
Level
1
|
Level
2
|
Level
3
|
December
31, 2018
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative
Instruments
|
$-
|
$-
|
$1,795,747
|
$1,795,747
|
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$1,795,747
|
$1,795,747
|
The
change in the value of the derivative during 2019 and 2018 resulted
in a benefit totaling $496,338 and $977,732 and these were the only
changes in level 3 fair value instruments during such
years.
NOTE 13 – RELATED PARTY
TRANSACTIONS AND CERTAIN RELATIONSHIPS
Since
January 1, 2018, the Company engaged in the following reportable
transactions with our directors, executive officers, holders of
more than 5% of our voting securities, and affiliates or
immediately family members of our directors, executive officers and
holders of more than 5% of our voting securities.
Certain Relationships
Please
see the transactions with Chicago Venture Partners, L.P. discussed
in Notes 11, 13 and 14.
F-17
Related Party Transactions
Transactions with Marco Hegyi
On
October 21, 2018, a 5 year Warrant for Mr. Hegyi to purchase up to
66,666 shares of our common stock at an exercise price of $1.50 per
share vested. The warrant was valued at $390,000 and we recorded
$178,750 as compensation expense for the year ended December 31,
2018. On October 15, 2018, Mr. Hegyi received Warrants to purchase
up to 320,000 shares of our common stock at an exercise price of
$1.80 per share and which vest on October 15, 2018, 2019 and 2020.
The Warrants are exercisable for 5 years. The warrants that vested
on October 15, 2019 and 2018 were valued at $192,000 and we
recorded compensation expense of $96,000 for the years ended
December 31, 2019 and 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 16 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 133,333 shares of common stock at an
exercise price of $1.80 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. The Company recorded
$13,333 and $2,833 as compensation expense for the years ended
December 31, 2019 and 2018, respectively.
On
October 15, 2018, the Company’s 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. See Note 16 for additional details.
Transaction with Joseph Barnes
On October 15, 2018, Mr. Barnes was granted an option to purchase
120,000 shares of common stock at an exercise price of $1.80
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. The Company recorded $12,000 and $2,550 as compensation
expense for the years ended December 31, 2019 and 2018,
respectively.
On
October 15, 2018, the Company’s 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 16 for
additional details.
Transactions with Katherine McLain
Ms.
Katherine McLain was appointed as a director on February 14, 2017.
On February 1, 2018, the Company issued 19,288 shares of the
Company’s common stock to Katherine McLain that was valued at
$2.00 per share or $57,863. On February 22, 2019, the Company
issued 54,054 shares of the Company’s common stock to
Katherine McLain valued at $1.11 per share or $60,000. This
issuance was an annual award for independent director
services.
Transaction with Thom Kozik
Mr.
Kozik was appointed as a director on October 5, 2017. On February
1, 2018, the Company issued 6,521 shares of the Company’s
common stock to Thom Kozik that was valued at $3.00 per share or
$19,562. On February 22, 2019, the Company issued 54,054 shares of
the Company’s common stock to Mr. Kozik valued at $1.11 per
share or $60,000. This issuance was an annual award for independent
director services.
Notes Payable to Related Parties
EZ-CLONE
has $104,144 and $104,020 due to relatives of the shareholders as
of December 31, 2019 and 2018, respectively.
F-18
NOTE 14 – EQUITY
Authorized Capital Stock
On
October 9, 2019, the Company approved the reduction of authorized
capital stock, whereby the total number of the Company’s
authorized common stock decreased from 6,000,000,000 by a ratio of
1 for 50, to 120,000,000 shares. On
November 20, 2019, the Company filed a Certificate of Amendment of
Certificate of Incorporation with the Secretary of State of the
State of Delaware. As a result of the reduction, we have an
aggregate 130,000,000 authorized shares consisting of : (i)
120,000,000 shares of common stock, par value $0.0001 per share,
and (ii) 10,000,000 shares of preferred stock, par value $0.0001
per share.
The reverse stock split of 1 for 150 was effective at the open of
business on November 27, 2019 whereupon the shares of the
Company’s common stock began trading on a split-adjusted
basis. Our CUSIP number will change to 39985X203.
Non-Voting Preferred Stock
Under
the terms of our articles of incorporation, our board of directors
is authorized to issue shares of non-voting preferred stock in one
or more series without stockholder approval. Our board of directors
has the discretion to determine the rights, preferences, privileges
and restrictions, dividend rights, conversion rights, redemption
privileges and liquidation preferences, of each series of
non-voting preferred stock.
The
purpose of authorizing our board of directors to issue non-voting
preferred stock and determine our rights and preferences is to
eliminate delays associated with a stockholder vote on specific
issuances. The issuance of non-voting preferred stock, while
providing flexibility in connection with possible acquisitions,
future financings and other corporate purposes, could have the
effect of making it more difficult for a third party to acquire or
could discourage a third party from seeking to acquire, a majority
of our outstanding voting stock. Other than the Series B and C
Preferred Stock discussed below, there are no shares of non-voting
preferred stock presently outstanding and we have no present plans
to issue any shares of preferred stock.
Capital Stock Issued and Outstanding
As
of December 31, 2019, the Company had issued and outstanding
securities of 28,677,147 shares of common stock.
Voting Common Stock
Holders
of the Company’s common stock are entitled to one vote for
each share held on all matters submitted to a vote of stockholders
and do not have cumulative voting rights. An election of directors
by our stockholders shall be determined by a plurality of the votes
cast by the stockholders entitled to vote on the election. On all
other matters, the affirmative vote of the holders of a majority of
the stock present in person or represented by proxy and entitled to
vote is required for approval, unless otherwise provided in our
articles of incorporation, bylaws or applicable law. Holders of
common stock are entitled to receive proportionately any dividends
as may be declared by our board of directors, subject to any
preferential dividend rights of outstanding preferred
stock.
In the
event of our liquidation or dissolution, the holders of common
stock are entitled to receive proportionately all assets available
for distribution to stockholders after the payment of all debts and
other liabilities and subject to the prior rights of any
outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The
rights, preferences and privileges of holders of common stock are
subject to and may be adversely affected by the rights of the
holders of shares of any series of preferred stock that we may
designate and issue in the future.
Unless otherwise indicated, all of the following sales or issuances
of Company securities were conducted under the exemption from
registration as provided under Section 4(2) of the Securities Act
of 1933 (and also qualified for exemption under 4(5), formerly 4(6)
of the Securities Act of 1933, except as noted below). All of the
shares issued were issued in transactions not involving a public
offering, are considered to be restricted stock as defined in Rule
144 promulgated under the Securities Act of 1933 and stock
certificates issued with respect thereto bear legends to that
effect.
The Company has compensated consultants and service providers with
restricted common stock during the development of our business and
when our capital resources were not adequate to provide payment in
cash.
During the year ended December 31, 2019, the Company had the
following issuances of unregistered equity securities to accredited
investors unless otherwise indicated:
During
the year ended December 31, 2019, the Company issued 147,890 shares
to suppliers for services provided. The Company valued the shares
at $174,435 per share or $1.179.
F-19
During
the year ended December 31, 2019, Chicago Venture and Iliad
converted principal and accrued interest of $1,357,872 into
3,120,521 shares of our common stock at a per share conversion
price of $0.766 with a fair value of $2,284,081. The Company
recognized $926,208 loss on debt conversions during the year ended
December 31, 2019.
On
February 15, 2019, the Company entered into a Termination of
Existing Agreements and Release with CANX USA, LLC, a Nevada
limited liability company. 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 $1.20, or 833,333 restricted
common stock shares. The Company recorded a loss on debt conversion
of $1,000,000 during the year ended December 31. 2019. 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 3,600,000
shares of the Company’s common stock at an exercise price of
$4.95.
On May
2, 2019, the Company issued 26,111 shares valued at $1.90 to a
former employee related to a cashless stock option
exercise.
On
September 21, 2019, The Company issued 33,333 shares of common
stock to Crossover as a commitment fee that was valued at fair
market value at $25,000 or $0.75 per share and was expensed during
the year ended December 31, 2019.
On November 27, 2019, the Company issued 35,011 fractional shares
as a result of the reverse stock split that was effective at the
open of business on November 27, 2019.
The
Company issued 188,335 shares in conjunction with resolving a
business matter. The Company valued the shares at $0.60 per share
of $113,000 and this amount was recorded as a loss on debt
conversions during the twelve months ended December 31,
2019.
On
December 17, 2019, Forglen LLC converted principal and accrued
interest of $305,075 into 1,375,285 shares of the Company’s
common stock at a per share conversion price of
$0.222.
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 51,068 shares to three
directors. The shares were valued at the fair market price of $3.00
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 846,677 at $0.3803 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 109,637 shares of our common
stock at $.3803 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 16,000 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 $2.0625 per share.
During
the year ended December 31, 2018, the Company issued 41,667 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 $1.56 per share or $65,000.
During
the year ended December 31, 2018, Chicago Venture converted
principal and interest of $3,104,181 into 3,503,916 shares of our
common stock at a per share conversion price of $0.8859 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 6,667 shares at $0.90 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) 324,586 Shares of newly issued restricted Common
Stock of the Company at $3.081 per share; and (b) the Warrant. St.
George has paid the entire Purchase Price for the
Securities.
F-20
The Warrant is exercisable for a period of five (5) years from the
Closing, for the purchase of up to 324,586 shares of the
Company’s Common Stock at an exercise price of $7.50 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 42,735
shares of newly issued restricted Common Stock of the Company at a
purchase price of $2.34 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 33,003 shares of newly issued restricted Common Stock
of the Company at a purchase price of $3.03 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 34,188 shares of newly issued restricted Common Stock of
the Company at a purchase price of $2.925 per share.
On
October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-Clone and issued 715,385 restricted shares of our
common stock at a price of $1.95 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 1,407,582 shares of common
stock at $1.80 per share.
Warrants
The
Company had the following warrant activity during the year ended
December 31, 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. 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 $1.20, or 833,333 restricted
common stock shares. The Company recorded a loss on debt conversion
of $1,000,000 during the year ended December 31, 2019. 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 3,600,000
shares of the Company’s common stock at an exercise price of
$4.95.
A
summary of the warrants issued as of December 31, 2019 is as
follows:
|
|
December 31, 2019
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
Exercise
|
|
|
Shares
|
Price
|
|
Outstanding
at January 1, 2019
|
6,018,834
|
$4.350
|
|
Issued
|
-
|
$-
|
|
Exercised
|
-
|
$-
|
|
Forfeited
|
(3,600,000)
|
$(4.950)
|
|
Expired
|
-
|
$-
|
|
Outstanding
at December 31, 2019
|
2,418,834
|
$3.465
|
|
Exerciseable
at December 31, 2019
|
2,312,168
|
$-
|
F-21
A
summary of the status of the warrants outstanding as of December
31, 2019 is presented below:
|
|
December 31, 2019
|
|||
|
|
Weighted
|
Weighted
|
|
Weighted
|
|
|
Average
|
Average
|
|
Average
|
|
Number of
|
Remaining
|
Exercise
|
Shares
|
Exercise
|
|
Warrants
|
Life
|
Price
|
Exerciseable
|
Price
|
|
366,667
|
6.66
|
$1.500
|
366,667
|
$1.500
|
|
320,000
|
4.83
|
1.800
|
213,333
|
1.800
|
|
1,407,582
|
1.83
|
3.150
|
1,407,582
|
3.150
|
|
324,586
|
3.08
|
7.500
|
324,586
|
7.500
|
|
-
|
-
|
-
|
-
|
-
|
|
2,418,834
|
2.77
|
$3.465
|
2,312,168
|
$3.374
|
Warrants
had no intrinsic value as of December 31, 2019.
The
warrants were valued using the following assumptions:
|
Dividend
yield
|
0%
|
|
Expected
life
|
1-5 Years
|
|
Expected
volatility
|
70-200%
|
|
Risk
free interest rate
|
0.78-2.6%
|
NOTE 15– STOCK OPTIONS
Description of Stock Option Plan
The
Company has 1,333,333 shares available for issuance under the First
Amended and Restated 2017 Stock Incentive Plan. The Company has
outstanding unexercised stock option grants totaling 550,000 shares
at an average exercise price of $1.491 per share as of December 31,
2019. The Company filed registration statements on Form S-8 to
register 1,333,333 shares of our common stock related to the 2017
Stock Incentive Plan and First Amended and Restated 2017 Stock
Incentive Plan.
Determining Fair Value under ASC 718
The Company records compensation expense associated with stock
options and other equity-based compensation using the
Black-Scholes-Merton option valuation model for estimating fair
value of stock options granted under our plan. The Company
amortizes the fair value of stock options on a ratable basis over
the requisite service periods, which are generally the vesting
periods. The expected life of awards granted represents the period
of time that they are expected to be outstanding. The
Company estimates the volatility of our common stock based on the
historical volatility of its own common stock over the most recent
period corresponding with the estimated expected life of the award.
The Company bases the risk-free interest rate used in the Black
Scholes-Merton option valuation model on the implied yield
currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term equal to the expected life of the award.
The Company has not paid any cash dividends on our common stock and
does not anticipate paying any cash dividends in the foreseeable
future. Consequently, the Company uses an expected dividend yield
of zero in the Black-Scholes-Merton option valuation model and
adjusts share-based compensation for changes to the estimate of
expected equity award forfeitures based on actual forfeiture
experience. The effect of adjusting the forfeiture rate is
recognized in the period the forfeiture estimate is
changed.
F-22
Stock Option Activity
During the year ended December 31, 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 3,333 shares of common stock at an
exercise price of $1.20 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 20,000 shares of common stock at an exercise
price of $1.50 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 33,333 shares and changed the exercise price from
$3.00 to $1.50 per share.
On May
2, 2019, the Company issued 26,111 shares valued at $0.90 to a
former employee related to a cashless stock option exercise related
to a stock option grant for 100.556 shares issued at
$0.90.
During the year ended December 31, 2019, a stock option grant for
13,333 shares of common stock at an exercise price of $3.00
per share expired.
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
13,333 shares of common stock at an exercise price of $3.20
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
6,667 shares of common stock at an exercise price of $3.00
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
13,333 shares of common stock at an exercise price of $3.00
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
12,333 shares of common stock at an exercise price of $3.00
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 133,333 shares of common stock at an
exercise price of $1.80 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
120,000 shares of common stock at an exercise price of $1.80
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, 2019, there are 550,000 options to purchase
common stock at an average exercise price of $1.49 per share
outstanding under the 2017 Amended and Restated Stock Incentive
Plan. The Company recorded $62,132 and $44,682 of compensation
expense, net of related tax effects, relative to stock options for
the year ended December 31, 2019 and 2018 in accordance with ASC
Topic 718. As of December 31, 2019, there is $68,638 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 3.37 years.
F-23
Stock option activity for the year ended December 31, 2019 is as
follows:
|
|
|
Weighted Average
|
|
|
|
Options
|
Exercise Price
|
$
|
|
Outstanding
as of December 31, 2017
|
373,333
|
$1.07
|
400,000
|
|
Granted
|
300,000
|
1.95
|
596,000
|
|
Exercised
|
(6,667)
|
0.90
|
(6,000)
|
|
Forfeitures
|
-
|
-
|
-
|
|
Outstanding
as of January 1, 2019
|
666,667
|
1.41
|
940,000
|
|
Granted
|
23,333
|
1.20
|
34,000
|
|
Exercised
|
(26,111)
|
(0.90)
|
(23,500)
|
|
Forfeitures
|
(113,889)
|
(1.15)
|
(130,500)
|
|
Outstanding
as of December 31, 2019
|
550,000
|
$1.49
|
820,000
|
The following table summarizes information about stock options
outstanding and exercisable at December 31,
2019:
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Average
|
Weighted
|
|
Average
|
|
Range of
|
Number
|
Remaining Life
|
Average
|
Number
|
Exercise Price
|
|
Exercise Prices
|
Outstanding
|
In Years
|
Exercise Price
|
Exerciseable
|
Exerciseable
|
|
$0.90
|
80,000
|
3.00
|
$0.90
|
60,000
|
$0.90
|
|
1.05
|
66,667
|
3.00
|
1.05
|
50,000
|
1.05
|
|
1.2-1.35
|
16,667
|
1.05
|
1.2-1.35
|
11,944
|
1.2-1.35
|
|
1.50
|
133,333
|
2.86
|
1.50
|
108,333
|
1.50
|
|
1.80
|
253,333
|
4.00
|
1.80
|
105,556
|
1.80
|
|
|
550,000
|
3.37
|
$1.491
|
335,833
|
$1.25
|
Stock
option grants totaling 550,000 shares of common stock no intrinsic
value as of December 31, 2019.
The
stock option grants were valued using the following
assumptions:
|
Dividend
yield
|
0%
|
|
Expected
life
|
1-5 Years
|
|
Expected
volatility
|
70-200%
|
|
Risk
free interest rate
|
0.78-2.6%
|
F-24
NOTE 16 – COMMITMENTS,
CONTINGENCIES AND LEGAL PROCEEDINGS
Legal Proceedings
From time to time, the Company may become subject to various legal
proceedings that are incidental to the ordinary conduct of its
business. Although the Company cannot accurately predict the amount
of any liability that may ultimately arise with respect to any of
these matters, it makes provision for potential liabilities when it
deems them probable and reasonably estimable. These provisions are
based on current information and may be adjusted from time to time
according to developments.
The Company’s know of no material, existing or pending legal
proceedings against our Company, nor is the Company involved as a
plaintiff in any material proceeding or pending litigation. There
are no proceedings in which any director, officer or any
affiliates, or any registered or beneficial shareholder, is an
adverse party or has a material interest adverse to the
Company’s interest.
As of
September 30, 2019, the Company closed retail stores in Portland,
Maine, Encino, California and Calgary, Canada. The Company is
negotiating with the landlords and the Company has recorded
restructuring reserves.
Operating Leases
The Company is obligated under the following leases for its various
facilities.
On May
31, 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 December 14, 2018, GrowLife, Inc. entered into a lease agreement
with Pensco Trust Company for a 28,000 square feet industrial space
at 10170 Croydon Way, Sacramento, California 95827 used for the
assembly and sales of plastic parts by EZ-CLONE. The monthly lease
payment is $17,500 and increased approximately 3% per year. The
lease expires on December 31, 2023.
Terminated Leases
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. This lease was terminated
effective September 30, 2019.
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. This lease
was terminated effective September 30, 2019 with the sale of the
flooring division.
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. This lease was
terminated effective September 30, 2019.
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. This lease was terminated effective September
30, 2019.
F-25
Employment Agreements
Employment Agreement with Marco Hegyi
On
October 15, 2018, the Board of Directors approved an Employment
Agreement with Marco Hegyi pursuant to which we engaged Mr. Hegyi
as its Chief Executive Officer through October 15,
2021.
Mr.
Hegyi’s annual compensation is $275,000. Mr. Hegyi is also
entitled to receive an annual bonus equal to four percent (4%) of
the Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
Mr. Hegyi received
320,000 warrants in October 2018 as follows: (i) Warrant to
purchase up to 106,667 shares of our common stock at an exercise
price of $1.80 per share which vested immediately; and (ii) two
Warrants to purchase up to 106,667 shares of common stock of the
Company at an exercise price of $1.80 per share. One warrant for
106,667 shares of our common stock vested on October 15, 2019.
Additional warrants for 106,667 shares of the Company’s
common stock vest on October 15, 2020 and 2021, respectively. The
Warrants are exercisable for 5 years.
Mr.
Hegyi is entitled to participate in all group employment benefits
that are offered by the Company to its senior executives and
management employees from time to time, subject to the terms and
conditions of such benefit plans, including any eligibility
requirements. In addition, the Company will purchase and maintain
during the Term an insurance policy on Mr. Hegyi’s life in
the amount of $2,000,000 payable to Mr. Hegyi’s named heirs
or estate as the beneficiary.
If the Company terminates Mr. Hegyi’s employment at any time
prior to the expiration of the Term without Cause, as defined in
the Employment Agreement, or if Mr. Hegyi terminates his employment
at any time for “Good Reason” or due to a
“Disability”, Mr. Hegyi will be entitled to receive (i)
his Base Salary amount through the end of the Term; and (ii) his
Annual Bonus amount for each year during the remainder of the
Term.
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 133,333
shares of the Company’s Common Stock under our 2017 Amended
and Restated Stock Incentive Plan at an exercise price of $1.80 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, 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.
F-26
Employment Agreement with Joseph Barnes
On
October 15, 2018, the 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.
The
Board of Directors granted Mr. Barnes an option to purchase 120,000
shares of the Company’s Common Stock under the
Company’s 2017 Amended and Restated Stock Incentive Plan at
an exercise price of $1.80 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 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 17 – INCOME TAXES
The
Company has incurred losses since inception, which have generated
net operating loss carryforwards. The net operating loss
carryforwards arise solely from United States
sources. EZ Clone currently files its own separate tax
return as it does not meet the qualifications for being included in
the Company’s consolidated tax returns. Taxable losses and
the future benefit of EZ Clone losses since our transaction with
them in October 2018 have not been material.
The
Company has net operating loss carryforwards of approximately
$21,528,000, which expire in 2022-2037. 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 $21,528,000 was established as
of December 31, 2019. 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 2014 through
2019.
For the year ended December 31, 2019, the Company’s effective
tax rate was a benefit of 2%, this was solely the result of the
reduction of the deferred tax liability originally recorded in 2018
in connection with the acquisition of EZ Clone. In accordance with
the ASC 740, “Accounting for income taxes”, and in
connection with the acquisition of EZ Clone the Company recorded a
deferred tax liability of $587,750 related to the inside basis
difference between book and tax basis of intangible assets
acquired. Beginning in 2019, the deferred tax liability is reduced
annually by $117,550 as the difference in book and tax basis
becomes less. The reduction of the deferred tax liability resulted
in a tax benefit of $117,550 in 2019.
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 years ending December 31, 2019 and
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.
F-27
The principal components of the Company’s deferred tax assets
and liabilities at December 31, 2019 and 2018 are as
follows:
|
|
2019
|
2018
|
|
Net
operating loss carryforwards
|
$4,520,814
|
$3,917,000
|
|
Less
valuation allowance
|
(4,520,814)
|
(3,917,000)
|
|
Net
deferred tax assets
|
-
|
-
|
|
Deferred
tax liability-intangible basis difference
|
(470,200)
|
(587,750)
|
|
Net
deferred tax liability
|
$(470,200)
|
$(587,750)
|
|
|
|
|
|
Change
in valuation allowance
|
$(603,814)
|
$(848,008)
|
A reconciliation of the United States Federal Statutory rate to the
Company’s effective tax rate for the years ended December 31,
2019 and 2018 is as follows:
|
|
2019
|
2018
|
|
Federal
statutory rate
|
-21.0%
|
-21.0%
|
|
State
statuatory rate
|
-6.0%
|
-6.0%
|
|
Change
in valuation allowance
|
27.0%
|
27.0%
|
|
Reduction
in deferred tax liability
|
2%
|
0.0%
|
|
Effective
tax rate-benefit
|
2%
|
0.0%
|
The
Company’s tax returns for 2014 to 2019 are open to review by
the Internal Revenue Service.
NOTE 18– 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,
2019:
COVID-19 Pandemic
Presently,
the impact of COVID-19 has not shown any imminent adverse effects
on the Company’s business, especially since states across the
United States—including California—has deemed cannabis
businesses as “essential,” allowing the Company’s
business to continue its operations. This notwithstanding, it is
still unknown and difficult to predict what adverse effects, if
any, COVID-19 can have on the Company’s business, or against
the various aspects of same.
As of
the date of this Annual Report, COVID-19 coronavirus has been
declared a pandemic by the World Health Organization, has been
declared a National Emergency by the United States Government and
has resulted in several states being designated disaster zones.
COVID-19 coronavirus caused significant volatility in global
markets. The spread of COVID-19 coronavirus has caused public
health officials to recommend precautions to mitigate the spread of
the virus, especially as to travel and congregating in large
numbers. In addition, certain states and municipalities have
enacted, and additional cities are considering, quarantining and
“shelter-in-place” regulations which severely limit the
ability of people to move and travel and require non-essential
businesses and organizations to close.
Recent
shelter-in-place and essential-only travel regulations could
negatively impact the Company’s customers. In addition, while
the Company’s products are manufactured in the United States,
the Company still could experience significant supply chain
disruptions due to interruptions in operations at any or all of our
suppliers’ facilities or downline suppliers. If the Company
experiences significant delays in receiving our products the
Company will experience delays in fulfilling orders and ultimately
receiving payment, which could result in loss of sales and a loss
of customers, and adversely impact our financial condition and
results of operations. The current status of COVID-19 coronavirus
closures and restrictions could also negatively impact the
Company’s ability to receive funding from the Company’s
existing capital sources as each business is and has been affected
uniquely.
F-28
Trading on OTCQB
As of March 17, 2020, the Company commenced trading on the
OTCQB Market ("OTCQB") after successfully up-listing from the OTC
Pink Market.
Debt Conversion
On
March 6, 2020, Chicago Venture converted principal and accrued
interest of $100,000 into 605,294 shares of the Company’s
common stock at a per share conversion price of
$0.165.
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement with Chicago Venture Partners, L.P (Chicago
Venture)
On January 30, 2020, the Company executed the following agreements
with Chicago Venture: (i) Securities Purchase Agreement; (ii)
Secured Convertible Promissory Notes (“Notes”); and
(iii) Security Agreement (collectively the “Chicago Venture
Agreements”). The Company entered into the Chicago Venture
Agreements with the intent to acquire working capital to grow the
Company’s businesses.
The total amount of funding under the CVP Agreements is $500,000 in
various tranches. The Notes carry an original issue discount of
$50,000 and a transaction expense amount of $5,000, for total debt
of $555,000 (“Debt”). The Company agreed to reserve
53,333 shares of its common stock for issuance upon conversion of
the Debt, if that occurs in the future. If not converted sooner,
the Debt is due on or before January 29, 2021. The Debt carries an
interest rate of ten percent (10%). The Debt is convertible, at
CVP’s option, into the Company’s common stock at $0.30
per share subject to adjustment as provided for in the Notes. The
Company received approximately $500,000 of funding under the
chicago Venture agreements in 2020.
The Company’s obligation to pay the Debt, or any portion
thereof, is secured by all of the Company’s
assets.
Secured Advance Note with Crossover Capital Fund I LLC
(“Crossover”)
On
September 20, 2019, the Company closed a Secured Advance Note with
Crossover Capital Fund I LLC (the “Crossover Note”). As
of December 31, 2019, the
outstanding principal balance due Crossover was $205,228. The
Crossover Note is due in nine months and is repayable weekly at
$9,205. The balance as of March 26, 2020 is $168,408 and the
Company is working with Crossover on past due
payments.
F-29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, GrowLife, Inc. (the "Registrant")
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
GROWLIFE, INC.
|
|
|
|
|
|
|
Date: April 1, 2020
|
By:
|
/s/ Marco Hegyi
|
|
|
|
Marco Hegyi
|
|
|
|
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
|
|
|
By:
|
/s/ Mark E. Scott
|
|
|
|
Mark Scott
|
|
|
|
Chief Financial Officer, Director and Secretary
(Principal Financial and Accounting Officer)
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
|
SIGNATURES
|
TITLE
|
DATE
|
|
|
|
|
|
/s/ Marco Hegyi
|
Chief Executive Officer and Director
|
April 1, 2020
|
|
Marco Hegyi
|
(Principal Executive Officer)
|
|
|
|
|
|
|
/s/ Mark E. Scott
|
Chief Financial Officer, Director and Secretary
|
April 1, 2020
|
|
Mark E. Scott
|
(Principal Financial/Accounting Officer)
|
|
|
|
|
|
|
/s/ Katherine McLain
|
Director
|
April 1, 2020
|
|
Katherine
McLain
|
|
|
|
/s/ Thom Kozik
|
Director
|
April 1, 2020
|
|
Thom
Kozik
|
|
|
46