Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period September 30, 2021

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission file number 000-50385

GrowLife, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		90-0821083
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

11335 NE 122nd Way, Suite 105
Kirkland, WA 98034
(Address of principal executive offices and zip code)

 

[phone]

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer (Do not check if a smaller reporting company)	☐	Smaller reporting company	☒
Emerging growth company	☐

 

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

 

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

 

As of November 22, 2021, there were 110,633,688 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.

 

  

TABLE OF CONTENTS

 

			Page Number
PART I	FINANCIAL INFORMATION
ITEM 1	Financial Statements (unaudited except as noted)		3
	Condensed Consolidated Balance Sheets as of September 30, 2021, and December 31, 2020 (audited)		3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021, and 2020		4
	Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three and nine months ended September 30, 2021, and 2020		5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021, and 2020		6
	Notes to the Condensed Consolidated Financial Statements		7
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operation		24
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk		29
ITEM 4	Controls and Procedures		29
PART II	OTHER INFORMATION
ITEM 1	Legal Proceedings		31
ITEM IA	Risk Factors		31
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds		40
ITEM 3	Defaults Upon Senior Securities		40
ITEM 6	Exhibits		41
	SIGNATURES		43

 

2

Table of Contents

 

 ITEM 1. FINANCIAL STATEMENTS 

 

GROWLIFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

		September 30, 2021				December 31, 2020
ASSETS						(Audited)
CURRENT ASSETS:
Cash and cash equivalents		$	1,221,651			$	383,144
Accounts receivable - trade, net of allowance for doubtful accounts of $55,690 and $5,690  as of 9/30/2021 and 12/31/2020, respectively			57,126				960,522
Other receivables			161,000				-
Inventory, net			1,298,398				570,524
Deposits			18,995				18,995
Total current assets			2,757,170				1,933,185
PROPERTY AND EQUIPMENT, NET			107,948				129,330
INTANGIBLE ASSETS, NET			626,931				1,130,718
GOODWILL			781,749				781,749
OPERATING LEASE RIGHT OF USE ASSET			254,373				380,247
TOTAL ASSETS		$	4,528,171			$	4,355,229
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Accounts payable - trade		$	1,159,607			$	1,146,195
Accrued expenses			134,294				2,592,251
Accrued expenses - related parties			46,076				37,394
Notes payable- PPP/EIDL loans, current			940,633				390,035
Derivative liability			1,501,384				1,101,436
Convertible notes payable, net			2,679,626				2,495,153
Notes payable- related party			-				49,144
Acquisition of EZ-CLONE Enterprises, Inc. payable in cash			1,026,000				1,026,000
Acquisition of EZ-CLONE Enterprises, Inc. payable in common stock			1,105,000				1,105,000
Current portion of operating lease right of use liability			140,772				140,772
Federal and state income taxes payable			752,766				343,125
Total current liabilities			9,486,158				10,426,505
LONG TERM LIABILITIES:
Deferred tax liability			264,485				352,649
Notes payable- PPP/EIDL, less current portion			287,601				485,679
Non-current portion of operating lease right of use liability			144,007				264,868
Total long term liabilities			696,093				1,103,196
COMMITMENTS AND CONTINGENCIES (Note 17)			-				-
STOCKHOLDERS' DEFICIT
Preferred stock - $0.0001 par value, 10,000,000 shares authorized, no shares			-				-
issued and outstanding at 9/30/2021 and 12/31/2020, respectively
Common stock - $0.0001 par value, 120,000,000 shares authorized, 97,349,997 and 51,843,221 shares issued and outstanding at 9/30/2021 and 12/31/2020 , respectively			393,137				388,587
Additional paid in capital			153,189,738				147,278,311
Accumulated deficit			(159,236,955	)			(154,841,370	)
Total stockholders' deficit			(5,654,080	)			(7,174,472	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	4,528,171			$	4,355,229

 

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

 

3

Table of Contents

  

GROWLIFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Three Months Ended,								Nine Months Ended,
		September 30, 2021				September 30, 2020				September 30, 2021				September 30, 2020
NET REVENUE		$	1,232,208			$	1,415,999			$	5,074,790			$	4,927,636
COST OF GOODS SOLD			815,790				919,421				2,683,406				3,049,782
GROSS PROFIT			416,418				496,578				2,391,384				1,877,854
GENERAL AND ADMINISTRATIVE EXPENSES			924,911				1,249,077				3,074,197				3,741,325
OPERATING LOSS			(508,493	)			(752,499	)			(682,813	)			(1,863,471	)
OTHER INCOME (EXPENSE):
Change in fair value of derivative			25,592				130,268				(399,948	)			(28,174	)
Interest expense, net			(435,919	)			(324,752	)			(1,666,288	)			(765,999	)
Loss on debt conversions and settlement, net			(291,364	)			(143,799	)			(2,370,369	)			(396,111	)
Gain on extinguishment of warrants			571,060				-				1,045,310				-
Total other expense, net			(130,631	)			(338,283	)			(3,391,295	)			(1,190,284	)
LOSS BEFORE INCOME TAXES			(639,124	)			(1,090,782	)			(4,074,108	)			(3,053,755	)
Income taxes - current benefit (expense)			29,388				29,388				(321,477	)			88,163
NET LOSS		$	(609,736	)		$	(1,061,394	)		$	(4,395,585	)			(2,965,592	)
Basic and diluted loss per share		$	(0.01	)		$	(0.03	)		$	(0.06	)		$	(0.08	)
Weighted average shares of common stock outstanding- basic and diluted			89,467,388				36,670,186				74,879,853				36,385,060

  

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

 

4

Table of Contents

  

GROWLIFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

 

																		Total
		Common Stock								Additional Paid				Accumulated				Stockholders'
		Shares				Amount				in Capital				Deficit				(Deficit)
Balance as of January 1, 2020			28,677,147			$	386,269			$	143,441,047			$	(148,461,532	)		$	(4,634,216	)
Stock based compensation for stock options			-				-				13,439				-				13,439
Stock based compensation for warrants			-				-				24,000				-				24,000
Shares issued for convertible note and interest conversion			605,294				61				149,510				-				149,571
Warrant exercise			146				-				460				-				460
Fractional shares issued related to reverse stock split			15				-				-				-				-
Net loss for the three months ended March 31, 2020			-				-				-				(1,293,675	)			(1,293,675	)
Balance as of March 31, 2020			29,282,602				386,330				143,628,456				(149,755,207	)			(5,740,421	)
Stock based compensation for stock options			-				-				13,439				-				13,439
Stock based compensation for warrants			-				-				24,000				-				24,000
Shares issued for services rendered			40,000				4				11,797				-				11,801
Shares issued for convertible note and interest conversion			3,991,108				400				835,007				-				835,407
Warrant exercise			8				-				25				-				25
Net loss for the three months ended June 30, 2020			-				-				-				(610,523	)			(610,523	)
Balance as of June 30, 2020			33,313,718				386,734				144,512,724				(150,365,730	)			(5,466,273	)
Stock based compensation for stock options			-				-				12,708				-				12,708
Stock based compensation for warrants			-				-				24,000				-				24,000
Shares issued for convertible note and interest conversion			5,592,072				559				945,664				-				946,223
Net loss for the three months ended September 30, 2020			-				-				-				(1,061,394	)			(1,061,394	)
Balance as of September 30, 2020			38,905,790				387,293				145,495,096				(151,427,124	)			(5,544,736	)
Balance as of January 1, 2021			51,843,221				388,586				147,278,311				(154,841,370	)			(7,174,472	)
Stock based compensation for stock options			-				-				5,643				-				5,643
Shares issued for convertible note and interest conversion			15,339,018				1,534				3,158,064				-				3,159,597
Net loss for the three months ended March 31, 2021			-				-				-				(2,876,681	)			(2,876,681	)
Balance as of March 31, 2021			67,182,239				390,120				150,442,018				(157,718,051	)			(6,885,913	)
Stock based compensation for stock options			-				-				4,916				-				4,916
Shares issued for convertible note and interest conversion			6,704,000				671				836,844				-				837,515
Shares issued for liability settlement			9,750,000				975				1,182,275				-				1,183,250
Shares issued for warrant exercise - cashless			813,758				81				(81	)			-				-
Net loss for the three months ended June 30, 2021			-				-				-				(909,168	)			(909,168	)
Balance as of June 30, 2021			84,449,997			$	391,847			$	152,465,972			$	(158,627,219	)		$	(5,769,400	)
Stock based compensation for stock options			-				-				4,916				-				4,916
Shares issued for convertible note and interest conversion			8,400,000				840				525,360				-				526,200
Shares issued for liability settlement			4,500,000				450				193,490				-				193,940
Net loss for the three months ended September 30, 2021			-				-				-				(609,736	)			(609,736	)
Balance as of September 30, 2021			97,349,997			$	393,137			$	153,189,738			$	(159,236,955	)		$	(5,654,080	)

 

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

 

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GROWLIFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Nine Months Ended,
		September 30, 2021				September 30, 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(4,395,585	)		$	(2,965,592	)
Adjustments to reconcile net loss to net cash (used in)
operating activities
Depreciation			21,382				27,864
Amortization of intangible assets			503,787				503,787
Stock based compensation			15,475				111,586
Common stock issued for services			-				11,801
Non cash interest and amortization of debt discount			1,368,855				793,970
Change in fair value of derivative liability			399,948				28,174
Loss on debt conversions			2,564,658				396,110
Loss on debt settlement			(1,045,310	)			-
Changes in operating assets and liabilities:
Accounts receivable			903,396				(224,986	)
Inventory			(727,874	)			(74,389	)
Other assets			(161,000	)			-
Right of use, net			5,013				9,738
Accounts payable			13,411				(79,494	)
Accrued expenses			(26,775	)			97,766
Change in deferred taxes			(88,164	)			(88,163	)
Change in federal and state taxes payable			409,641				-
CASH (USED IN) OPERATING ACTIVITIES			(239,142	)			(1,451,828	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of convertible notes payable			(1,307,806	)			(167,846	)
Proceeds from notes payable			2,385,455				2,213,019
Proceeds from the issuance of common stock			-				485
NET CASH PROVIDED BY FINANCING ACTIVITIES			1,077,649				2,045,658
NET INCREASE IN CASH AND CASH EQUIVALENTS			838,507				593,830
CASH AND CASH EQUIVALENTS, beginning of period			383,144				40,834
CASH AND CASH EQUIVALENTS, end of period		$	1,221,651			$	634,664
Supplemental disclosures of cash flow information:
Non-cash investing and financing activities:
Shares issued for convertible note and interest conversion		$	1,958,655			$	1,049,506
Shares issued for liability settlement		$	(1,377,190	)		$	-
Issuance of shares for issuance costs		$	-			$	349,020

 

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

 

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GROWLIFE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The accompanying unaudited consolidated condensed financial statements have been prepared by GrowLife, Inc. (“the Company,” “us,” “we,” or “our”) in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of our management, all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of the financial position, results of operations, and cash flows for the fiscal periods presented have been included.

 

These financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report filed on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on April 15, 2021. The results of operations for the nine months ended September 30, 2021, are not necessarily indicative of the results expected for the full fiscal year, or for any other fiscal period.

 

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 closed the lower margin hydroponics reselling business as of December 31, 2020.

 

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

 

On September 15, 2020, the Company received notice that William Blackburn and Brad Mickelsen (“Plaintiffs”), minority shareholders of EZ-CLONE Enterprises, Inc., a majority owned subsidiary of the Company, filed a complaint against the Company, its CEO and former CFO (“Officers”), in the Superior Court of California, County of Sacramento (“Complaint”) for claims related to breach under the Purchase and Sale Agreement dated October 15, 2018 between the Company and Plaintiffs. See As of December 4, 2020, our officers, both current and former, were dismissed from the case. The Plaintiffs are seeking rescission of the Purchase and Sale Agreement, unspecified damages in excess of ten thousand dollars, and other equitable relief. The Company cannot predict the outcome of these proceedings at this time. Note 17 for description of Legal Proceedings.

 

As of September 30, 2021, the Company has recorded a liability of $2,131,000 for acquisition payable of which a $1,105,000 is payable in stock and $1,026,000 is payable in cash.

 

On April 5, 2021, the Company entered into a joint Warrant Settlement Agreement with St. George Investments LLC (“St. George”) and Iliad Research and Trading, L.P. (“Iliad”) to resolve a dispute related the calculation of shares issuable under warrants issued in prior financings. In the Warrant Settlement Agreement, in exchange for certain covenants by the Company, St. George agreed that upon the exercise of its warrant of up to 11,750,000 shares of the Company’s common stock it would cancel the balance of the warrant related to a February 9, 2018, subscription agreement. Concurrently, Iliad agreed that upon the exercise of its warrant up to 2,500,000 shares of the Company’s common stock it would cancel the balance of the warrant related to an October 15, 2018, Securities Purchase Agreement. The Company recorded a loss on debt settlement of $2,423,000 for the year ended December 31, 2020, and accrued a liability for the future issuance of shares. On April 5, 2021, the Company issued 2,500,000 shares upon the exercise of the warrant to reduce by $425,000 its obligation. On May 7, 2021, the Company issued another 3,500,000 shares upon the exercise of the warrant to further reduce by $595,000 its debt settlement obligation. On June 10, 2021, the Company issued 3,750,000 shares upon the exercise of the warrant to reduce its obligation by $637,500. On August 23, 2021, the Company issued another 2,300,000 shares upon the exercise of the warrant to reduce its obligation by $391,000. On September 29, 2021, the Company issued 2,200,000 shares upon the exercise of the warrant to reduce its obligation by $374,000 and completely payoff the balance of its obligation. The Company received no proceeds from these April, May, June, August and September 2021 cashless warrant exercises. During quarter ended September 30, 2021, the Company recognized a gain on settlement of $571,060 when the fair value of the common shares issued were based on the stock price on the date of settlement

 

On April 23, 2021, the Company was notified that it was in default on its notes held by Silverback Capital Corporation which totaled $1,360,286 at September 30, 2021. The reason for the default was the Company’s inability to provide the reserve share requirement as specified in the notes. The penalty for the reserve share default was an increase in the outstanding note balances by 15%, an increase in the conversion discount by 5% to 60%, and a default interest rate on the outstanding note balances of 22%.

 

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As a result of the reserve share default, on May 7, 2021, Silverback demanded immediate payment in full of all of their notes. On May 10, 2021, when Silverback had not been paid in full, Silverback presented another default notice for lack of payment. The penalty for the non-payment default was an increase in the outstanding note balances by another 15%, an additional increase in the conversion discount by 5%, and a default interest rate on the outstanding note balances of 22%. The Company and Silverback are in discussion to resolve these defaults.

 

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 $4,395,585 $6,379,838 and $7,374,383 for the nine months ended September 30, 2021, and the years ended December 31, 2020, and 2019, respectively. Net cash used in operating activities was $(239,142), ($1,950,870) and ($2,909,811) for the nine months ended September 30, 2021, and the years ended December 31, 2020, and 2019, respectively.

 

The Company anticipates that it will record losses from operations for the foreseeable future. As of September 30, 2021, the Company’s accumulated deficit was $159,236,955. 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, 2020, includes an explanatory paragraph expressing the substantial doubt about the Company’s ability to continue as a going concern.

 

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

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS

 

Basis of Presentation - The accompanying consolidated financial statements include the accounts of the Company. 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 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 September 30, 2021, the Company had uninsured deposits in the amount of $971,651.

 

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. As of September 30, 2021, and December 31, 2020, the Company has an allowance for doubtful accounts totaling $55,690 and $5,690, respectively.

 

Other Receivable - The EZ-CLONE founders advanced themselves $161,000 during the three months ended September 30, 2021 to pay for legal expenses. The Company expects to contest these advances.

 

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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 September 30, 2021, and December 31, 2020, 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 and are recorded at the lower of cost or net realizable value. The Company reviews its inventory on a periodic basis to identify products that are slow moving and/or obsolete, and if such products are identified, the Company records the appropriate inventory impairment charge at such time.

 

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

 

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

 

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

 

Goodwill –The Company reviews its acquired goodwill for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. In reviewing its goodwill, the Company performs a qualitative analysis to determine if it is more-likely-than-not that the goodwill is impaired. If the qualitative analysis indicates that goodwill is likely impaired, the Company calculates the fair value of its goodwill by allocating the fair value of the business unit containing the goodwill to all its tangible and intangible assets and liabilities, with the residual fair value allocated to goodwill. The excess, if any, of the goodwill carrying value in excess of its fair value would be recognized as an impairment loss. Management has concluded that, based on a qualitative analysis, it is more-likely-than-not that goodwill has not been impaired as of September 30, 2021, and December 31, 2020.

 

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

 

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

 

Level 2 – Inputs other than level one inputs that are either directly or indirectly observable; and.   Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The recorded value of other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other current assets, and accounts payable and accrued expenses approximate the fair value of the respective assets and liabilities as of September 30, 2021, and December 31, 2020, 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 an embedded derivative must be 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.

 

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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 because their impact is antidilutive.

 

As of September 30, 2021, there are also (i) stock option grants outstanding for the purchase of 740,000 common shares at a $0.576 average exercise price; and (ii) warrants for the purchase of 2,094,094 shares of common shares at a $2.655 average exercise price, subject to adjustment as set forth in the warrants. In addition, we have an unknown number of common shares to be issued under the St. George, Iliad, Bucktown, EMA, First Fire and Silverback convertible promissory note financing agreements. In the case of default, the number of shares ultimately issued to the lenders depends on the price at which they convert their debt to shares and exercise their warrants. The lower the conversion or exercise prices, the more shares that will be issued upon the conversion of debt to shares. We will not know the exact number of shares of stock issued until the debt is actually converted to equity or warrants are exercised. See Note 18 for discussion of warrant settlement agreement.

 

As of September 30, 2020, there are also (i) stock option grants outstanding for the purchase of 506,667 common shares at a $1.496 average exercise price; and (ii) warrants for the purchase of 2,418,680 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, 12% convertible promissory note financing and Labrys 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.

 

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.

 

Income Taxes - In preparing the provision for estimated income taxes, the Company calculates income taxes separately for EZ- CLONE. As of September 30, 2021, and December 31, 2020, the Company has recorded a liability for EZ-Clone income taxes payable totaling $752,766 and $343,125, respectively.

 

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Recent Accounting Pronouncements

 

Based on the Company’s review of accounting standard updates issued since the filing of the 2020 Form 10-K, there have been no other newly issued or newly applicable accounting pronouncements that have had, or are expected to have, a significant impact on the Company’s consolidated financial statements.

 

NOTE 4 –BUSINESS COMBINATIONS, ACQUISITION PAYABLE AND OTHER TRANSACTION

 

Acquisition of EZ-CLONE Enterprises, Inc.

 

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

 

On September 15, 2020, the Company received notice that William Blackburn and Brad Mickelsen (“Plaintiffs”), minority shareholders of EZ-CLONE Enterprises, Inc., a majority owned subsidiary of the Company, filed a complaint against the Company, its CEO and former CFO (“Officers”), in the Superior Court of California, County of Sacramento (“Complaint”) for claims related to breach under the Purchase and Sale Agreement dated October 15, 2018 between the Company and Plaintiffs. On September 15, 2020, the Company filed a notice of removal with the California Superior Court, County of Sacramento and the United States District Court for the Eastern District of California. The case was removed to Federal District Court for the Eastern District of California and Plaintiffs filed an Ex Parte Application for TRO and an Order for Preliminary Injunction with the Federal Court. The TRO was granted on September 16, 2020, and a preliminary injunction hearing was scheduled for September 29, 2020. After reviewing all pleadings and oral arguments at the hearing, the Court issued a ruling granting Plaintiffs’ request for a preliminary injunction. This injunction provides Plaintiffs with operating control of EZ-CLONE and this control assures that Growlife will have little if any involvement in operations and that Growlife will be denied cash distributions for the foreseeable future.

 

As of December 4, 2020, our officers, both current and former, were dismissed from the case. The Plaintiffs are seeking rescission of the Purchase and Sale Agreement, unspecified damages in excess of ten thousand dollars, and other equitable relief. The Company cannot predict the outcome of these proceedings at this time.

 

As of September 30, 2021, the Company has recorded a liability of $2,131,000 for acquisition payable of which a $1,105,000 is payable in stock and $1,026,000 is payable in cash.

 

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

 

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

 

For accounting purposes, from the October 15, 2018 acquisition date and through November 4, 2019, the Company consolidated EZ-Clone given their control and 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 a non-controlling interest 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. During the fourth quarter of 2019, the Company recorded a noncash 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. During the nine months ended September 30, 2021, and 2020, respectively, the Company recorded a tax benefit of $88,164 and $88,163 related to book versus tax basis difference from the purchase accounting.

 

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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
Deferred 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.

 

NOTE 5 – INVENTORY

 

Inventory as of September 30, 2021, and December 31, 2020, consisted of the following:

 

		September 30,				December 31,
		2021				2020
Raw materials		$	757,255			$	456,723
Work in process			201,634				83,792
Finished goods			112,458				26,557
Inventory deposits			227,051				3,452
Total		$	1,298,398			$	570,524

 

NOTE 6 – PROPERTY AND EQUIPMENT

 

Property and equipment as of September 30, 2021, and December 31, 2020, consists of the following:

 

		September 30,				December 31,
		2021				2020
Machinery, equipment and tooling		$	356,867			$	356,867
Computer equipment			16,675				16,675
Leasehold improvements			14,703				14,702
Total property and equipment			388,245				388,244
Less accumulated depreciation and amortization			(280,297	)			(258,914	)
Net property and equipment		$	107,948			$	129,330

 

Total depreciation expense was $21,383 and $27,864 for the nine months ended September 30, 2021, and 2020, respectively. All equipment is used for manufacturing, selling, general and administrative purposes and accordingly all depreciation is classified in cost of goods sold, selling, general and administrative expenses.

 

NOTE 7 – INTANGIBLE ASSETS

 

Intangible assets as of September 30, 2021, and December 31, 2020, consisted of the following:

 

		Estimated				September 30, 2021				December 31, 2020
Customer Lists		3.5 Years				$	1,297,000			$	1,297,000
Intellectual Property		3.5 Years					1,054,000				1,054,000
less accumulated amortization							(1,724,069	)			(1,220,282	)
Net Intangible assets-definitive life						$	626,931			$	1,130,718
Goodwill-indefinite life		N/A				$	781,749			$	781,749
Total intangible assets and goodwill						$	1,408,680			$	1,912,467

 

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Total amortization expense was $503,788 for the nine months ended September 30, 2021, and 2020, respectively.

 

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 three months ended September 30, 2019, the Company cancelled all but one lease and has recognized the rent and termination fees related to the cancelled leases as an expense in the quarter ended September 30, 2019. As of September 30, 2021, and December 31, 2020, total right-of-use assets and operating lease liabilities for remaining long term lease was $284,788 and $405,640, respectively. During the nine months ended September 30, 2021, and 2020, the Company recognized approximately $167,094 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.

 

Information related to the Company's operating right-of-use assets and related lease liabilities as of and for the nine months ended September 30, 2021, were as follows:

 

Cash paid for ROU operating lease liability $167,094

Weighted-average remaining lease term 1.25 years

Weighted-average discount rate 10%

 

Year Ended
September 30,		$
2022		$	140,772
2023			184,007
			324,779
Imputed interest			(40,000	)
Total lease liability		$	284,779

 

NOTE 9- ACCOUNTS PAYABLE

 

Accounts payable were $1,159,607 and $1,146,195 as of September 30, 2021, and December 31, 2020, respectively. Such liabilities consisted of amounts due to vendors for inventory purchases, audit, legal and other expenses incurred by the Company.

 

NOTE 10- ACCRUED EXPENSES

 

Accrued expenses were $134,294 and $2,592,251 as of September 30, 2021, and December 31, 2020, respectively. Such liabilities consisted of amounts due to sales tax, payroll and restructuring expense liabilities. On April 5, 2021, the Company entered into a joint Warrant Settlement Agreement with St. George Investments LLC (“St. George”) and Iliad Research and Trading, L.P. (“Iliad”) to resolve a dispute related the calculation of shares issuable under warrants issued in prior financings. In the Warrant Settlement Agreement, in exchange for certain covenants by the Company, St. George agreed that upon the exercise of its warrant of up to 11,750,000 shares of the Company’s common stock it would cancel the balance of the warrant related to a February 9, 2018, subscription agreement. Concurrently, Iliad agreed that upon the exercise of its warrant up to 2,500,000 shares of the Company’s common stock it would cancel the balance of the warrant related to an October 15, 2018, Securities Purchase Agreement. The Company recorded a loss on debt settlement of $2,423,000 for the year ended December 31, 2020 and accrued a liability for the future issuance of shares. As of September 30, 2021, the remaining liability for this settlement totaled $0. During the quarter ended September 30, 2021, the Company issued 4,500,000 shares of common stock in connection with the warrant settlement and as of September 30, 2021, has 0 shares to be issued. During quarter ended September 30, 2021, the Company recognized a gain on settlement of $571,060 when the fair value of the common shares issued were based on the stock price on the date of settlement.

 

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As of September 30, 2019, the Company closed retail stores in Portland, Maine, Encino, California and Calgary, Canada. The Company has restructuring reserves to settle primarily real estate lease and other issues and such reserves totaled $171,464 and $209,577 as of September 30, 2021, and December 31, 2020, respectively.

 

NOTE 11 – CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE

 

Convertible notes payable as of September 30, 2021, consisted of the following:

 

														Balance
						Accrued				Debt				As of September 30,
Convertible Promissory Note Summary		Principal				Interest				Discount				2021
8% OID Convertible Promissory Notes		$	1,263,000			$	48,166			$	(63,175	)		$	1,247,990
10% OID Convertible Promissory Notes			1,337,018				23,268				(6,945	)			1,353,341
12% Self-Amortizing Promissory Notes			117,897				2,961				(42,564	)			78,295
Total		$	2,717,915			$	74,395			$	(112,685	)		$	2,679,626

 

Convertible notes payable as of December 31, 2020, consisted of the following:

 

														Balance
						Accrued				Debt				As of December 31,
		Principal				Interest				Discount				2020
10% OID Convertible Promissory Notes		$	1,453,163			$	432,144			$	-			$	1,885,307
12% Convertible Promissory Notes			253,000				5,888				(13,912	)			244,976
12% Self-Amortizing Promissory Notes			969,746				10,981				(615,857	)			364,870
		$	2,675,909			$	449,013			$	(629,769	)		$	2,495,153

 

8% OID Convertible Promissory Notes

 

														Balance
						Accrued				Debt				As of September 30,
8% OID Convertible Promissory Notes-		Principal				Interest				Discount				2021
Bucktown 2-26-21		$	928,000			$	45,625			$	(31,627	)		$	941,998
Bucktown 8-25-21			335,000				2,540				(31,548	)			305,992
Total		$	1,263,000			$	48,166			$	(63,175	)		$	1,247,990

 

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

 

The total amount of funding under the Bucktown Agreements is $3,088,000 as represented in the Secured Convertible Promissory Note. The total purchase price for this Note is $2,850,000; the Note carries an aggregate original issue discount of $228,000 and a transaction expense amount of $10,000. The Note is comprised of two (2) tranches, consisting of (i) an initial Tranche in an amount equal to $928,000 and any interest, costs, fees or charges accrued thereon or added thereto under the terms of the Note and the Bucktown Agreements, and (ii) an additional Tranche, which is exclusively dedicated for the purchase of the remaining equity interest in EZ-CLONE, in the amount of $2,160,000, plus any interest, costs, fees or charges accrued thereon or added thereto under the terms of the Note and the Bucktown Agreements. The Initial Tranche shall correspond to $68,000 of the OID and the Transaction Expense Amount and may be converted into shares of Common Stock at any time subsequent to the Purchase Price Date. The Subsequent Tranche corresponds to the Investor Note and $160,000 of the aggregate OID.

 

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

 

The Company’s obligation to pay the Note, or any portion thereof, is secured by all of the Company’s assets.

 

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On August 25, 2021, the Company executed the following agreement with Bucktown: (i) Securities Purchase Agreement; (ii) Secured Convertible Promissory Note (“Note”); and (iii) Security Agreement (collectively the “Bucktown Agreements”). The Company entered into the Bucktown Agreements with the intent to acquire working capital to grow the Company’s businesses and to hold our annual shareholder meeting.

 

The total amount of funding under the Bucktown Agreements is $335,000 as represented in the Note. The total purchase price for this Note is $300,000; the Note carries an aggregate original issue discount of $30,000 and a transaction expense amount of $5,000.

 

The Company agreed to reserve three times the number of shares based on the redemption value with a minimum of 100,000,000 shares of its common stock for issuance upon conversion of the Note, if that occurs in the future. If not converted sooner, the Note is due on or before August 25, 2022. The Note has an interest rate of eight percent (8%). The Note is convertible, at Bucktown’s option, into the Company’s common stock at $0.10 per share (“Lender Conversion Price”), subject to adjustment as provided for in the Note. However, in the event the Market Capitalization (as defined in the Note) falls below the Minimum Market Capitalization the Lender Conversion Price shall equal the lower of the Lender Conversion Price and the Market Price as of any applicable date of Conversion.

 

The Company’s obligation to pay the Note, or any portion thereof, is secured by all of the Company’s assets

 

10% OID Convertible Promissory Notes

 

														Balance
						Accrued				Debt				As of September 30,
10% OID Convertible Promissory Notes-		Principal				Interest				Discount				2021
Silverback 2-12-21 (7) - From Oddysey 7-22-19		$	1,172,018			$	14,408			$	-			$	1,186,426
Silverback 3-18-21 (8)			165,000				8,860				(6,945	)			166,915
Total		$	1,337,018			$	23,268			$	(6,945	)		$	1,353,341

  

On February 12, 2021 Silverback purchased a Note from Odyssey that was originally issued to Odyssey on July 22, 2019. Silverback assumed the terms and conditions of the original note. The Company typically issues original issuance discount notes that have 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.

 

On March 18, 2021, the Company executed the following agreement with Silverback Capital: Silverback Convertible Promissory Note (Silverback Note #8). The Company entered into Silverback Note #8 with the intent to payoff other more expensive debt with Power-Up Lending Group.

 

The total amount of funding under the Silverback Note #8 is $165,000 as represented in the Note. The total purchase price for this Note is $150,000; the Note carries an aggregate original issue discount of $15,000.

 

The Company agreed to reserve 8,000,000 shares of its common stock for issuance upon conversion of the Note, if that occurs in the future. If not converted sooner, the Note is due on or before March 16, 2022. The Note has an interest rate of ten percent (10%). The Note is convertible, at Silverback’s option, into the Company’s common stock at a 35% discount rate to market price.

 

As of September 30, 2021, the outstanding principal balance due Silverback was $1,337,018, $23,268 of accrued interest and $6,945 of remaining debt discount. On April 23, 2021, the Company was notified that it was in default on its notes held by Silverback Capital Corporation. The reason for the default was the Company’s inability to provide the reserve share requirement as specified in the notes. The penalty for the reserve share default was an increase in the outstanding note balances by 15%, an increase in the conversion discount by 5% to 60%, and a default interest rate on the outstanding note balances of 22%.

 

As a result of the reserve share default, on May 7, 2021, Silverback demanded immediate payment in full of all of their notes. On May 10, 2021, when Silverback had not been paid in full, Silverback presented another default notice for lack of payment. The penalty for the non-payment default was an increase in the outstanding note balances by another 15%, an additional increase in the conversion discount by 5%, and a default interest rate on the outstanding note balances of 22%. The Company and Silverback are in discussion to resolve these defaults.

 

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12% Convertible Promissory Notes

 

														Balance
						Accrued				Debt				As of September 30,
12% Self-Amortizing Promissory Notes		Principal				Interest				Discount				2021
EMA 10-2-20		$	68,882			$	2,034			$	(22,287	)		$	48,629
FirstFire 10-12-20			49,016				927				(20,277	)			29,666
Total		$	117,897			$	2,961			$	(42,564	)		$	78,295

 

EMA Financial LLC

 

On October 2, 2020, the Company executed the following agreements with EMA: (i) Securities Purchase Agreement; and (ii) Self-Amortization Promissory Note for $221,000 (“Note”); (collectively the “EMA Agreements”). The Company entered into the EMA Agreements with the intent to acquire working capital to grow the Company’s businesses and complete the EZ-CLONE Enterprises, Inc. acquisition.

 

FirstFire Global Opportunities Fund, LLC

 

On October 12, 2020, the Company executed the following agreements with FF: (i) Securities Purchase Agreement; and (ii) Self-Amortization Promissory Note (“Note”); (collectively the “FF Agreements”). The Company entered into the FF Agreements with the intent to acquire reduce debt.

 

Notes Payable

 

Notes payable as of September 30, 2021, consisted of the following:

 

														Balance
						Accrued				Debt				As of September 30,
		Principal				Interest				Discount				2021
1% Note Payble under Paycheck Protection Program (GLI) 4-14-20		$	362,500			$	5,408			$	-			$	367,908
1% Note Payble under Paycheck Protection Program (GLI) 2-3-21			337,055				2,236				-				339,291
1% Note Payble under Paycheck Protection Program (EZ) 5-3-20			203,329				2,930				-				206,259
3.75% Economic Injury Disaster Loan (GLI) 6-19-20			149,900				7,488				-				157,388
3.75% Economic Injury Disaster Loan (EZ) 6-19-20			149,900				7,488				-				157,388
Total notes payable			1,202,684				25,550				-				1,228,234
Less long term notes payable			(287,601	)			-				-				(287,601	)
Short term notes payable		$	915,083			$	25,550			$	-			$	940,633

 

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

  

		Principal				Accrued Interest				Debt Discount				Balance As of December 31, 2020
1% Note Payble under Paycheck Protection Program (GLI) 4-14-20		$	362,500			$	2,638			$	-			$	365,138
1% Note Payble under Paycheck Protection Program (EZ) 5-3-20			203,329				1,371				-				204,700
3.75% Economic Injury Disaster Loan (GLI) 6-19-20			149,900				3,001				-				152,901
3.75% Economic Injury Disaster Loan (EZ) 6-19-20			149,900				3,075				-				152,975
Total Notes Payable			865,629				10,085				-				875,714
Less Long Term Notes Payable			(485,679	)			-				-				(485,679	)
Short Term Notes Payable		$	379,950			$	10,085			$	-			$	390,035

      

On April 17, 2020, the Company received $362,500 under the Paycheck Protection Program of the U.S. Small Business Administration’s (SBA) 7(a) Loan Program pursuant to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Pub. Law 116-136, 134 Stat. 281 (2020). As of September 30, 2021, the Company recorded interest of $5,408 at 1%. The Company is utilizing the funds in accordance with the legal requirements and expects this loan to be forgiven during 2021.

 

On February 7, 2021, the Company received $337,055 under the Paycheck Protection Program of the U.S. Small Business Administration’s (SBA) 7(a) Loan Program pursuant to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Pub. Law 116-136, 134 Stat. 281 (2020). As of September 30, 2021, the Company recorded accrued of $2,236 at 1%. The Company is utilizing the funds in accordance with the legal requirements and expects this loan to be forgiven during 2021.

 

On May 7, 2020, EZ-CLONE received $203,329 under the Paycheck Protection Program of the U.S. Small Business Administration’s 7(a) Loan Program pursuant to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Pub. Law 116-136, 134 Stat. 281 (2020). As of September 30, 2021, the Company recorded accrued interest of $2,930 at 1%. The Company is utilizing the funds in accordance with the legal requirements and expects this loan to be forgiven during 2021.

 

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On June 19, 2020, the Company received $299,800 under the Economic Injury Disaster Loan Program of the U.S. Small Business Administration’s 7(a) Loan Program pursuant to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Pub. Law 116-136, 134 Stat. 281 (2020). Repayment terms on the loans are over a 30-year term at 3.75%. In addition, the loan contains a 12-month payment deferral beginning on the loan date. There is no prepayment penalty on an EIDL loan. As of September 30, 2021, the Company recorded accrued interest of $14,976. These loans were long term as of September 30, 2021.

 

NOTE 12 – DERIVATIVE LIABILITY

 

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

 

If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (BCF). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20. Debt with Conversion and Other Options. In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method. The debt is convertible at 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 $1,501,384 and $1,101,436 as of September 30, 2021, and December 31, 2020, respectively. For the nine months ended September 30, 2021, and 2020, the Company recorded non-cash expense $399,948 and $28,174 related to the “change in fair value of derivative” expense related to the Chicago Venture, Iliad and Silverback financings. These were the only changes in level 3 fair value instruments during such periods.

 

Derivative liability as of September 30, 2021, was as follows:

 

														Carrying
		Fair Value Measurements Using Inputs												Amount at September 30,
Financial Instruments		Level 1				Level 2				Level 3				2021
Liabilities:
Derivative Instruments		$	-			$	-			$	1,501,384			$	1,501,384
Total		$	-			$	-			$	1,501,384			$	1,501,384

 

Derivative liability as of December 31, 2020, was as follows:

 

														Carrying
		Fair Value Measurements Using Inputs												Amount at December 31,
Financial Instruments		Level 1				Level 2				Level 3				2020
Liabilities:
Derivative Instruments		$	-			$	-			$	1,101,436			$	1,101,436
Total		$	-			$	-			$	1,101,436			$	1,101,436

 

NOTE 13 – RELATED PARTY TRANSACTIONS AND CERTAIN RELATIONSHIPS

 

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

 

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Certain Relationships

 

Please see the transactions with Chicago Venture Partners, L.P., Iliad, St. George, and Silverback Capital Corporation discussed in Notes 1, 11, 12 and 18.

 

Related Party Transactions

 

Transactions with Michael E. Fasci Sr.

 

Please see transactions with Michael E. Fasci Sr. included in Notes 17.

 

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 130,000,000authorized 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 was changed to 39985X203.

 

Preferred Stock

 

Under the terms of our articles of incorporation, our board of directors is authorized to issue shares of 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 preferred stock.

 

The purpose of authorizing our board of directors to issue preferred stock and determine our rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of 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. There are no shares of preferred stock presently outstanding, and we have no present plans to issue any shares of preferred stock.

    

Voting Common Stock

 

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

 

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

 

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

 

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

 

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During the nine months ended September 30, 2021, the Company had the following issuances of unregistered equity securities to accredited investors unless otherwise indicated:

 

Debt and accrued interest of $1,958,654 was converted into 30,443,018 shares of the Company’s common stock at a per share conversion price of $0.069 which resulted in loss of debt of conversion $2,564,658.

  

The Company issued 14,250,000 shares for settlement of a liability to Iliad/St. George at $0.17 per share. During the three and nine month periods ending September 30, 2021 the liability decreased by $765,000 and $2,422,500 respectively. During the three and nine months ended September 30, 2021, the Company recognized a gain on settlement of $571,060 and $474,250, respectively, when the fair value of the common shares issued were based on the stock price on the date of settlement.

 

Warrants

 

Warrant Settlement Agreement

 

On April 5, 2021, the Company entered into a joint Warrant Settlement Agreement with St. George Investments LLC (“St. George”) and Iliad Research and Trading, L.P. (“Iliad”) to resolve a dispute related the calculation of shares issuable under warrants issued in prior financings. In the Warrant Settlement Agreement, in exchange for certain covenants by the Company, St. George agreed that upon the issuance of 11,750,000shares of the Company’s common stock it would cancel the balance of the warrant related to a February 9, 2018, subscription agreement. Concurrently, Iliad agreed that upon the issuance of 2,500,000 shares of the Company’s common stock it would cancel the balance of the warrant related to an October 15, 2018, Securities Purchase Agreement. The Company recorded a loss on debt settlement of $2,423,000 for the year ended December 31, 2020 and accrued a liability for the future issuance of shares. On April 5, 2021, the Company issued 2,500,000 shares upon the exercise of the warrant to reduce by $425,000 its obligation. On May 7, 2021, the Company issued another 3,500,000 shares upon the exercise of the warrant to further reduce by $595,000 its debt settlement obligation. On June 10, 2021, the Company issued 3,750,000 shares upon the exercise of the warrant to reduce its obligation by $637,500. On August 23, 2021, the Company issued another 2,300,000 shares upon the exercise of the warrant to reduce its obligation by $391,000. On September 29, 2021, the Company issued 2,200,000 shares upon the exercise of the warrant to reduce its obligation by $374,000 and completely payoff the balance of its obligation. The Company received no proceeds from these April, May, June, August, and September 2021 cashless warrant exercises. During the quarter ended September 30, 2021, the Company recognized a gain on settlement of $571,060 when the fair value of the common shares issued were based on the stock price on the date of settlement.

 

A summary of the warrants issued as of September 30, 2021, is as follows:

 

		September 30, 2021
						Weighted
						Average
						Exercise
		Shares				Price
Outstanding at January 1, 2021			3,451,737			$	2.464
Issued			-				-
Exercised			(813,758	)			0.109
Exercised			(324,586	)			7.460
Forfeited			(219,298	)			0.121
Expired			-				-
Outstanding at September 30, 2021			2,094,095			$	2.655
Exerciseable at September 30, 2021			2,094,095

 

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A summary of the status of the warrants outstanding as of September 30, 2021, is presented below:

 

			September 30, 2021
			Weighted				Weighted								Weighted
			Average				Average								Average
Number of			Remaining				Exercise				Shares				Exercise
Warrants			Life				Price				Exerciseable				Price
366,667				4.27				1.500				366,667				1.500
320,000				3.10				1.800				320,000				1.800
1,407,428				0.08				3.150				1,407,428				3.150
2,094,095				0.808			$	2.655				2,094,095			$	2.655

 

Warrants had no intrinsic value as of September 30, 2021.

 

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 740,000 shares at an average exercise price of $0.576 per share as of September 30, 2021. The Company filed registration statements on Form S-8 to register 1,333,333shares of our common stock related to the 2017 Stock Incentive Plan and First Amended and Restated 2017 Stock Incentive Plan.

 

Determining Fair Value under ASC 718

 

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

 

Stock Option Activity

 

The Company had the following stock option transactions during the nine months ended September 30, 2021:

 

On January 1, 2021, Mr. Fasci was granted an option to purchase 500,000 shares of the Company’s Common Stock under the Company’s 2018 Stock Incentive Plan at an exercise price of $0.12 per share. The Option vests quarterly over three years, has a five-year life and allows for a cashless exercise.

 

During the nine months ended September 30, 2021, executives and employees forfeited stock option grants for 266,667 shares with an exercise price of $1.47 per share.

 

There are currently 740,000 options to purchase common stock at an average exercise price of $0.576 per share outstanding as of September 30, 2021, under 2017 Stock Incentive Plan and First Amended and Restated 2017 Stock Incentive Plan. The Company recorded $15,475 and $26,879 of compensation expense, net of related tax effects, relative to stock options for the nine months ended September 30, 2021, and 2020 and in accordance with ASC 718. As of September 30, 2021, there is approximately $16,492 net of forfeitures 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 3.67 years.

 

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Stock option activity for the nine months ended September 30, 2021, and the years ended December 31, 2020, and 2019 were as follows:

 

		Options				Weighted Average				Option
		Shares				Exercise Price				$
Outstanding as of January 1, 2019			666,667			$	1.410			$	940,000
Granted			23,333				1.457				34,000
Exercised			(26,111	)			(0.900	)			(23,500	)
Forfeitures			(113,889	)			(1.146	)			(130,500	)
Outstanding as of December 31, 2019			550,000				1.491				820,000
Granted			-				-				-
Exercised			-				-				-
Forfeitures			(43,333	)			(1.431	)			(62,000	)
Outstanding as of December 31, 2020			506,667				1.496				758,000
Granted			500,000				0.120				60,000
Exercised			-				-				-
Forfeitures			(266,667	)			(1.470	)			(392,000	)
Outstanding as of September 30, 2021			740,000			$	0.576			$	426,000

  

The following table summarizes information about stock options outstanding and exercisable on September 30, 2021:

  

								Weighted												Weighted
								Average				Weighted								Average
Range of				Number				Remaining Life				Average				Number				Exercise Price
Exercise Prices				Outstanding				In Years				Exercise Price				Exerciseable				Exerciseable
$	0.12				500,000				4.50			$	0.12				125,000			$	0.12
	1.05				66,667				1.50				1.05				66,667				1.05
	1.50				53,333				1.25				1.50				178,333				1.50
	1.80				120,000				2.50				1.80				110,000				1.80
					740,000				3.67			$	0.576				480,000			$	1.15

   

Stock option grants totaling 740,000 shares of common stock had no intrinsic value as of September 30, 2021.

 

The stock option grants were valued using the following assumptions:

 

Dividend yield			0	%
Expected life		3 Years
Expected volatility		120		%
Risk free interest rate		0.37		%

   

16. SEGMENT REPORTING

 

The management of the Company considers the business to have two operating segments (i) the corporate entity and (ii) EZ-CLONE, a manufacturer of cloning products. EZ-CLONE has provided the majority of the Company’s gross margins during 2021 and 2020. The financial results from GrowLife are based on the sale of EZ-CLONE products. The Company closed the lower margin hydroponics reselling business as of December 31, 2020.

 

The reporting for the nine months ended September 30, 2021, and 2020 was as follows (in thousands):

 

										Segment
						Gross				Operating				Segment
Segment		Revenue				Profit				Profit (Loss)				Assets
Three Months Ended September 30, 2021
GrowLife, Inc. corporate		$	35			$	35			$	(397	)		$	1,507
EZ-CLONE cloning manufacturing			1,197				381				(112	)			3,021
Total segments		$	1,232			$	416			$	(509	)		$	4,528
Three Months Ended September 30, 2020
GrowLife distribution products		$	211			$	35			$	(680	)		$	416
EZ-CLONE cloning manufacturing (1)			1,205				462				(72	)			3,881
Total segments		$	1,416			$	497			$	(752	)		$	4,297
Nine Months Ended September 30, 2021
GrowLife, Inc. corporate		$	35			$	35			$	(1,487	)		$	1,507
EZ-CLONE cloning manufacturing			5,040				2,683				804				3,021
Total segments		$	5,075			$	2,391			$	(683	)		$	4,528
Nine Months Ended September 30, 2020
GrowLife distribution products		$	1,540			$	293			$	(1,944	)		$	416
EZ-CLONE cloning manufacturing (2)			3,388				1,585				81				3,881
Total segments		$	4,928			$	1,878			$	(1,863	)		$	4,297

 

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NOTE 17 – COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS

 

Legal Proceedings

 

From time to time, the Company may become subject to various legal proceedings that are incidental to the ordinary conduct of 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.

 

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

 

On September 15, 2020, the Company received notice that William Blackburn and Brad Mickelsen (“Plaintiffs”), minority shareholders of EZ-CLONE Enterprises, Inc., a majority owned subsidiary of the Company, filed a complaint against the Company, its CEO and former CFO (“Officers”), in the Superior Court of California, County of Sacramento (“Complaint”) for claims related to breach under the Purchase and Sale Agreement dated October 15, 2018 between the Company and Plaintiffs. On September 15, 2020, the Company filed a notice of removal with the California Superior Court, County of Sacramento and the United States District Court for the Eastern District of California. The case was removed to Federal District Court for the Eastern District of California and Plaintiffs filed an Ex Parte Application for TRO and an Order for Preliminary Injunction with the Federal Court. The TRO was granted on September 16, 2020, and a preliminary injunction hearing was scheduled for September 29, 2020. After reviewing all pleadings and oral arguments at the hearing, the Court issued a ruling granting Plaintiffs’ request for a preliminary injunction. This injunction provides Plaintiffs with operating control of EZ-CLONE and this control assures that Growlife will have little if any involvement in operations and that Growlife will be denied cash distributions for the foreseeable future.

 

As of December 4, 2020, our officers, both current and former, were dismissed from the case. The Plaintiffs are seeking rescission of the Purchase and Sale Agreement, unspecified damages in excess of ten thousand dollars, and other equitable relief. The Company cannot predict the outcome of these proceedings at this time.

 

As of September 30, 2021, the Company has recorded a liability of $2,131,000 for acquisition payable of which a $1,105,000 is payable in stock and $1,026,000 is payable in cash.

 

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On April 23, 2021, the Company was notified that it was in default on its notes held by Silverback Capital Corporation which totaled $1,360,216 at September 30, 2021. The reason for the default was the Company’s inability to provide the reserve share requirement as specified in the notes. The penalty for the reserve share default was an increase in the outstanding note balances by 15%, an increase in the conversion discount by 5% to 60%, and a default interest rate on the outstanding note balances of 22%.

 

As a result of the reserve share default, on May 7, 2021, Silverback demanded immediate payment in full of all of their notes. On May 10, 2021, when Silverback had not been paid in full, Silverback presented another default notice for lack of payment. The penalty for the non-payment default was an increase in the outstanding note balances by another 15%, an additional increase in the conversion discount by 5%, and a default interest rate on the outstanding note balances of 22%. The Company and Silverback are in discussion to resolve these defaults.

 

Employment Agreement with Michael E. Fasci Sr.

 

On January 1, 2021, the Company’s Compensation Committee entered into an Employment Agreement with Michael E. Fasci Sr. to serve as the Company’s Chief Financial Officer through December 31, 2023. Mr. Fasci formerly served as Chairman of the Board.

 

Mr. Fasci’s shall receive an annual salary of $165,000 and may earn an annual bonus equal to two percent (2%) of the Company’s EBITDA for that year. Mr. Fasci was also granted an option to purchase 500,000 shares of the Company’s Common Stock under the Company’s 2018 Stock Incentive Plan at an exercise price of $0.12 per share. The Option vests quarterly over three years, has a five-year life and allows for a cashless exercise. The stock option grant is subject to the terms and conditions of the Company’s Stock Incentive Plan, including vesting requirements.

 

In the events that Mr. Fasci’s continuous status as employee to the Company is terminated by the Company without Cause or Mr. Fasci terminates his employment with the Company for Good Reason as defined in the Fasci Agreement, or within twelve months after a Change in Control as defined in the Company’s Stock Incentive Plan, then 100% of the total number of Shares shall immediately become vested.

 

Mr. Fasci is entitled to participate in all group employment benefits that are offered by the Company to the Company’s senior executives and management employees from time to time, subject to the terms and conditions of such benefit plans, including any eligibility requirements.

 

If the Company terminates Mr. Fasci’s employment at any time prior to the expiration of the Term without Cause, as defined in the Employment Agreement, or if Mr. Fasci terminates his employment at any time for “Good Reason” or due to a “Disability,” Mr. Fasci 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.

 

Operating Leases

 

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

 

On May 31, 2021, the Company rented space at 11335 NE 122^nd Way, Suite 105, Kirkland, Washington 98034 for $623 per month for the Company’s corporate office and use of space in the Regus network, including California. The Company’s agreement expires May 31, 2022.

 

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

 

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 following material events subsequent to September 30, 2021:

 

Debt Conversions

 

On October 8, 2021, Silverback Capital Corporation converted principal and accrued interest of $56,540 into 2,200,000 shares of the Company’s common stock at a per share conversion price of $0.257. The Company recognized a loss on conversion on this transaction in the amount of $29,920.

 

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On October 28, 2021, Silverback Capital Corporation converted principal and accrued interest of $58,250 into 2,500,000 shares of the Company’s common stock at a per share conversion price of $0.233. The Company recognized a loss on conversion on this transaction in the amount of $33,000.

 

On November 5, 2021, Bucktown Capital converted principal and accrued interest of $200,000 into 8,583,691 shares of the Company’s common stock at a per share conversion price of $0.233. The Company recognized a loss on conversion on this transaction in the amount of $109,013.

 

Amendment to Articles of Incorporation

 

On November 5, 2021, the Company held its 2021 Annual Meeting of Stockholders, where stockholders approved an increase in the authorized shares of common stock (“Common Stock”) from 120,000,000 to 750,000,000 shares. As such, the Company filed a Certificate of Amendment of Certificate of Incorporation with the Secretary of State of the State of Delaware  on November 8, 2021. A conformed copy of the Certificate of Amendment of Certificate of Incorporation is filed as an exhibit to this Form 10-Q.

 

Securities Purchase Agreement, Secured Promissory Notes and Security Agreement with Bucktown

 

On November 8, 2021, the Company executed the following agreement with Bucktown: (i) Securities Purchase Agreement; (ii) Secured Convertible Promissory Note (“Note”); and (iii) Security Agreement (collectively the “Bucktown Agreements”). The Company entered into the Bucktown Agreements with the intent to acquire working capital to grow the Company’s businesses and to hold our annual shareholder meeting.

 

The total amount of funding under the Bucktown Agreements is $225,000 as represented in the Note. The total purchase price for this Note is $200,000; the Note carries an aggregate original issue discount of $20,000 and a transaction expense amount of $5,000.

 

The Company agreed to reserve three times the number of shares based on the redemption value with a minimum of 25,000,000 shares of its common stock for issuance upon conversion of the Note, if that occurs in the future. If not converted sooner, the Note is due on or before November 5, 2022. The Note has an interest rate of eight percent (8%). The Note is convertible, at Bucktown’s option, into the Company’s common stock at $0.10 per share (“Lender Conversion Price”), subject to adjustment as provided for in the Note. However, in the event the Market Capitalization (as defined in the Note) falls below the Minimum Market Capitalization the Lender Conversion Price shall equal the lower of the Lender Conversion Price and the Market Price as of any applicable date of Conversion.

 

The Company’s obligation to pay the Note, or any portion thereof, is secured by all of the Company’s assets as described in Schedule A to the Security Agreement. Copies of the Bucktown Agreements were attached on our Form 8-K filing filed November 12, 2021.

 

Expiration of Employment Agreements

 

The Employment Agreements for Mr. Hegyi and Mr. Barnes expired October 15, 2021 and they are employed without a contract.

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

 

For the three months ending September 30, 2021, GrowLife is reporting a 43% decline in EZ-CLONE sales in third quarter sales of $1,232,000 from second quarter of $2,170,000. Cost of goods increased from 41% to 66% for the same period. Gross margins were reduced to 34% down from second quarters of 59%. General and administrative expenses decreased by 14% to $925,000 and resulted with a $508,000 loss in the third quarter.

 

GrowLife expenses from financing in other expenses includes changes in derivative, interest expenses and debt conversions had a great improvement with a decline from last quarter as they were reduced from a $899,000 loss to $131,000 loss.

 

GrowLife spent much of 2021 extensively seeking new business expansion opportunities for the Company while continuing to explore a way to resolve and settle the EZ-CLONE litigation matter with their cooperation. In October we announced our agreement with My Fungi and mushroom strategy. Moving into the mushroom cultivation equipment space is a natural progression for GrowLife and working with My Fungi is the perfect illustration of how we are leveraging our long history of cultivation expertise to bring innovative and high-demand products to emerging markets. We believe our shareholders may benefit by GrowLife moving forward and capitalizing on the many opportunities available to the Company.

 

Employees

 

As of September 30, 2021, we had 4 full-time and part-time employees. Marco Hegyi, our Chief Executive Officer, is based in Kirkland, Washington. Michael E. Fasci was appointed Chief Financial Officer on January 1, 2021. In addition, we employ 13 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.

 

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.

 

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

 

On September 15, 2020, we received notice that William Blackburn and Brad Mickelsen (“Plaintiffs”), minority shareholders of EZ-CLONE Enterprises, Inc., a majority owned subsidiary of the Company, filed a complaint against the Company, its CEO and former CFO (“Officers”), in the Superior Court of California, County of Sacramento (“Complaint”) for claims related to breach under the Purchase and Sale Agreement dated October 15, 2018 between the Company and Plaintiffs. On September 15, 2020, we filed a notice of removal with the California Superior Court, County of Sacramento and the United States District Court for the Eastern District of California. The case was removed to Federal District Court for the Eastern District of California and Plaintiffs filed an Ex Parte Application for TRO and an Order for Preliminary Injunction with the Federal Court. The TRO was granted on September 16, 2020, and a preliminary injunction hearing was scheduled for September 29, 2020. After reviewing all pleadings and oral arguments at the hearing, the Court issued a ruling granting Plaintiffs’ request for a preliminary injunction. This injunction provides Plaintiffs with operating control of EZ-CLONE and this control assures that Growlife will have little if any involvement in operations and that Growlife will be denied cash distributions for the foreseeable future.

 

As of December 4, 2020, our officers, both current and former, were dismissed from the case. The Plaintiffs are seeking rescission of the Purchase and Sale Agreement, unspecified damages in excess of ten thousand dollars, and other equitable relief. The Company cannot predict the outcome of these proceedings at this time.

 

On April 23, 2021, we were notified that the Company was in default on its notes held by Silverback Capital Corporation which totaled $1,360,216 at September 30, 2021. The reason for the default was the Company’s inability to provide the reserve share requirement as specified in the notes. The penalty for the reserve share default was an increase in the outstanding note balances by 15%, an increase in the conversion discount by 5% to 60%, and a default interest rate on the outstanding note balances of 22%.

 

As a result of the reserve share default, on May 7, 2021, Silverback demanded immediate payment in full of all of their notes. On May 10, 2021, when Silverback had not been paid in full, Silverback presented another default notice for lack of payment. The penalty for the non-payment default was an increase in the outstanding note balances by another 15%, an additional increase in the conversion discount by 5%, and a default interest rate on the outstanding note balances of 22%. The Company and Silverback are in discussion to resolve these defaults. During the quarter ended September 30, 2021, the Company accrued no additional interest and penalties in connection with this dispute. Subsequent to September 30, 2021, Silverback converted notes and accrued interest totaling $114,790 into 4,700,000 shares of common stock.

 

OUR COMMON STOCK

 

As of March 17, 2020, we commenced trading on the OTCQB Market ("OTCQB") after successfully up-listing from the OTC Pink Market.

 

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PRIMARY RISKS AND UNCERTAINTIES

 

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

 

RESULTS OF OPERATIONS

 

The following table presents certain consolidated statement of operations information and presentation of that data as a percentage of change from period-to-period.

 

THREE MONTHS ENDED SEPTEMBER 30, 2021, AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2020

 

(dollars in thousands)

 

		Three Months Ended September 30,
		2021				2020				$ Variance				% Variance
Net revenue		$	1,232			$	1,416			$	(184	)			-13.0	%
Cost of goods sold			816				919				103				11.2	%
Gross profit			416				497				(81	)			-16.3	%
General and administrative expenses			925				1,249				324				25.9	%
Operating (loss)			(509	)			(752	)			243				32.3	%
Other income (expense):
Change in fair value of derivative			26				130				(104	)			-80.0	%
Interest expense, net			(436	)			(325	)			(111	)			-34.2	%
(Loss) on debt conversions			(291	)			(144	)			(147	)			-102.1	%
Gain on extinguishment of warrants			571				-				571				100.0	%
Total other expense, net			(130	)			(339	)			(362	)			-106.8	%
Loss before income taxes			(639	)			(1,091	)			(119	)			-10.9	%
Income taxes - current benefit			29				29				-				0.0	%
Net loss		$	(610	)		$	(1,062	)		$	(119	)			-11.2	%

 

Net revenue for the three months ended September 30, 2021, decreased by $184,000 to $1,232,000 from $1,416,000 for the three months ended September 30, 2020. The decrease resulted from both lower EZ-CLONE revenue, and by minimal hydroponic sales from the decision during 2020 to exit the hydroponics business and the elimination of the hydroponics sales personnel and the impact of the pandemic on the hydroponics segment during the year ended December 31, 2020. The hydroponics revenue for the three months ended September 30, 2021, was $35,000 as compared to $211,000 for the three months ended September 30, 2020. The EZ-CLONE revenue from its line of products for the three months ended September 30, 2021, was $1,197,000 as compared to $1,205,00 for the three months ended September 30, 2020. The decreased performance of EZ-CLONE revenue is a result EZ-CLONE's lower backlog and decreasing in sales revenue.

 

Cost of Goods Sold

 

Cost of sales for the three months ended September 30, 2021, decreased by $103,000 to $816,000 from $919,000 for the three months ended September 30, 2020. The decrease resulted from minimal sales in the lower margin hydroponics segment, and by decreased EZ-CLONE sales, as discussed above.

 

Gross profit was $416,000 for the three months ended September 30, 2021, as compared to a gross profit of $497,000 for the three months ended September 30, 2020. The gross profit percentage was 33.8% for the three months ended September 30, 2021, as compared to 35.1% for the three months ended September 30, 2020. The decrease was due to minimal sales in the lower margin hydroponics segment and from decreased EZ-CLONE sales.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended September 30, 2021, were $925,000 as compared to $1,249,000 for the three months ended September 30, 2020. The reductions was related to reduced salaries, marketing and legal expenses.

 

Non-cash general and administrative expenses for the three months ended September 30, 2021, of $176,000 included (i) depreciation of $3,000; (ii) amortization of intangible assets of $168,000; and (iii) stock-based compensation of $5,000 related to stock option grants and warrants.

 

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Non-cash general and administrative expenses for the three months ended September 30, 2020, included non-cash expenses of $214,000 including (i) depreciation of $9,000; (ii) amortization of intangible assets of $168,000; (iii) stock-based compensation of $37,000 related to stock option grants and warrants.

 

Other Expense

 

Other expense for the three months ended September 30, 2021, was $130,000 as compared to $339,000 for the three months ended September 30, 2020. The other expense for the three months ended September 30, 2021, included (i) a decrease in derivative liability of $26,000 (ii) interest expense of $436,000; (iii) loss on debt conversions of $291,000 and (iv) gain on extinguishment of warrants of $571,000. The change in derivative liability is the non-cash change in the fair value and relates to our derivative instruments. The increase in non-cash interest related to accrued interest expense on our notes payable. The loss on debt conversions related debt conversion of our notes payable at prices below the market price. The gain on extinguishment of warrants related to a gain on the warrant settlement.

 

Other expense for the three months ended September 30, 2020, was $339,000 as compared to other expense of $462,000 for the three months ended September 30, 2019. The other expense for the three months ended September 30, 2020, included (i) reduction in derivative liability of $130,000; offset by (ii) interest expense of $325,000; and (iii) loss on debt conversions of $144,000. 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 and amortization of issuance costs on our notes payable. The loss on debt conversions related to the conversion of our notes payable at prices below the market price.

 

Net Loss

 

Net loss for the three months ended September 30, 2021, was $610,000 as compared to $1,062,000 for the three months ended September 30, 2020, for the reasons discussed above.

 

Net loss for the three months ended September 30, 2021 included non-cash expenses of $33,000 including (i) depreciation of $3,000; (ii) amortization of intangible assets of $168,000; (iii) stock based compensation of $5,000 related to stock option grants and warrants; offset by (iv) accrued interest and amortization of issuance costs on convertible notes payable and losses on conversions of $117,000 and (v) change in derivative liability of $26,000.

 

Net loss for the three months ended September 30, 2020 included non-cash expenses of $477,000 including (i) depreciation of $9,000; (ii) amortization of intangible assets of $168,000; (iii) stock based compensation of $37,000 related to stock option grants and warrants; (iv) accrued interest and amortization of issuance costs on convertible notes payable of $250,000; and (v) loss on debt conversions of $143,000; offset by (vi) gain from change in derivative liability of $130,000.

 

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

 

NINE MONTHS ENDED SEPTEMBER 30, 2021, AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2020

 

(dollars in thousands)

 

		Nine Months Ended September 30,
		2021				2020				$ Variance				% Variance
Net revenue		$	5,075			$	4,928			$	147				3.0	%
Cost of goods sold			2,684				3,050				366				12.0	%
Gross profit			2,391				1,878				513				27.3	%
General and administrative expenses			3,074				3,741				667				-17.8	%
Operating profit (loss)			(683	)			(1,863	)			1,180				63.3	%
Other income (expense):
Change in fair value of derivative			(400	)			(28	)			(372	)			-1328.6	%
Interest expense, net			(1,666	)			(767	)			(899	)			-117.2	%
Loss on debt conversions			(2,370	)			(435	)			(1,935	)			-444.8	%
Gain on extinguishment of debt			1,045				39				1,006				2579.5	%
Total other expense, net			(3,391	)			(1,191	)			(2,200	)			-184.7	%
Loss before income taxes			(4,074	)			(3,054	)			(1,020	)			-33.4	%
Income taxes - current (provision) benefit			(322	)			88				(410	)			-465.9	%
Net loss		$	(4,396	)		$	(2,966	)		$	(1,430	)			-48.2	%

 

Net revenue for the nine months ended September 30, 2021, increased by $147,000 to $5,075,000 from $4,928,000 for the nine months ended September 30, 2020. The increase resulted from higher EZ-CLONE revenue, offset by minimal hydroponic sales from the decision during 2020 to exit the hydroponics business and the elimination of the hydroponics sales personnel and the impact of the pandemic on the hydroponics segment during the year ended December 31, 2020. The hydroponics revenue for the nine months ended September 30, 2021, was $35,000 as compared to $1,539,000 for the nine months ended September 30, 2020. The EZ-CLONE revenue from its line of products for the nine months ended September 30, 2021, was $5,040,000 as compared to $3,388,000 for the nine months ended September 30, 2020. The increased performance of EZ-CLONE revenue is a direct result of the EZ-CLONE's primary sales dependency on major distribution partners.

 

Cost of Goods Sold

 

Cost of sales for the nine months ended September 30, 2021, decreased by $366,000 to $2,684,000 from $3,050,000 for the nine months ended September 30, 2020. The decrease resulted from minimal sales in the lower margin hydroponics segment, offset by increased EZ-CLONE sales, as discussed above.

 

Gross profit was $2,391,000 for the nine months ended September 30, 2021, as compared to a gross profit of $1,878,000 for the nine months ended September 30, 2020. The gross profit percentage was 47.1% for the nine months ended September 30, 2021, as compared to 38.1% for the nine months ended September 30, 2020. The increase was due to minimal sales in the lower margin hydroponics segment, offset by increased EZ-CLONE sales. The gross profit in the quarter ended September 30, 2021, related entirely to EZ-CLONE. EZ-CLONE reported a gross profit percentage of 46.8% during the nine months ended September 30, 2020. The increase related to product mix with no sales of the commercial pro product line and a price increase that was implemented in 2020.

 

General and Administrative Expenses

 

General and administrative expenses for the nine months ended September 30, 2021, were $3,074,000 as compared to $3,741,000 for the nine months ended September 30, 2020. The variances were as follows: (i) a decrease in salaries, marketing, audit legal and other expenses.

 

Non-cash general and administrative expenses for the nine months ended September 30, 2021, of $541,000 included (i) depreciation of $22,000; (ii) amortization of intangible assets of $504,000; (iii) stock-based compensation of $15,000 related to stock option grants and warrants.

 

Non-cash general and administrative expenses for the nine months ended September 30, 2020, included non-cash expenses of $656,000 including (i) depreciation of $28,000; (ii) amortization of intangible assets of $504,000; (iii) stock-based compensation of $112,000 related to stock option grants and warrants; and (iv) common stock issued for services of $12,000.

 

Other Expense

 

Other expense for the nine months ended September 30, 2021, was $3,391,000 as compared to $1,191,000 for the nine months ended September 30, 2020. The other expense for the nine months ended September 30, 2021, included (i) an increase in derivative liability of $400,000 (ii) interest expense of $1,666,000; (iii) loss on debt conversions of $2,370,000 and (iv) gain on extinguishment of warrants of $1,045,000. The change in derivative liability is the non-cash change in the fair value and relates to our derivative instruments. The change in derivative liability is the non-cash change in the fair value and relates to our derivative instruments. The increase in non-cash interest related to accrued interest expense on our notes payable. The loss on debt conversions related debt conversion of our notes payable at prices below the market price. The gain on extinguishment of warrants related to a gain on the warrant settlement.

 

The other expense for the nine months ended September 30, 2020, included (i) loss from the increase in derivative liability of $28,000; (ii) interest expense of $767,000; and (iii) loss on debt conversions of $435,000; and (iv) offset by gain on extinguishment of $39,000. The change in derivative liability is the non-cash change in the fair value and relates to our derivative instruments. The non-cash interest related to accrued interest expense on our notes payable. The loss on debt conversions related to the conversion of our notes payable at prices below the market price.

 

Net Loss

 

Net loss for the nine months ended September 30, 2021, was $4,396,000 as compared to $2,966,000 for the nine months ended September 30, 2020, for the reasons discussed above.

 

Net loss for the nine months ended September 30, 2021 included non-cash expenses of $3,829,000 including (i) depreciation of $21,000; (ii) amortization of intangible assets of $504,000; (iii) stock based compensation of $15,000 related to stock option grants and warrants; (iv) accrued interest and amortization of issuance costs on convertible notes payable and losses on conversions of $2,888,000 and (v) change in derivative liability of $400,000.

 

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Net loss for the nine months ended September 30, 2020 included non-cash expenses of $1,769,000 including (i) depreciation of $28,000; (ii) amortization of intangible assets of $504,000; (iii) stock based compensation of $112,000 related to stock option grants and warrants; (iv) common stock issued for services of $12,000; (v) accrued interest and amortization of issuance costs on convertible notes payable of $689,000; (vi) change in derivative liability of $28,000; and (vii) loss on debt conversions of $395,000.

 

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

 

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 September 30, 2021, we had an accumulated deficit of $159.2 million, cash and cash equivalents of $1.2 million and a working capital deficit of $5,164,000 excluding derivative liability, convertible debt, right of use liability and deferred revenue). Net cash used in operating activities was $(239,000), ($1,951,000) and ($2,910,000) for the nine months ended September 30, 2021 and the years ended December 31, 2020, and 2019, respectively.

 

The Company believes that its cash on hand will be sufficient to fund our operations for at least the next 12 months. The majority of the Company’s cash is currently held at EZ-CLONE and as a result of the ongoing litigation with EZ-CLONE Founder’s, such cash is not accessible for general corporate use.

 

To fund further GrowLife 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.

 

February 26, 2021, Bucktown Financing

 

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

 

The total amount of funding under the Bucktown Agreements is $3,088,000 as represented in the Secured Convertible Promissory Note. The total purchase price for this Note is $2,850,000; the Note carries an aggregate original issue discount of $228,000 and a transaction expense amount of $10,000. The Note is comprised of two (2) tranches, consisting of (i) an initial Tranche in an amount equal to $928,000 and any interest, costs, fees or charges accrued thereon or added thereto under the terms of the Note and the Bucktown Agreements (the “Initial Tranche”), and (ii) an additional Tranche, which is exclusively dedicated for the purchase of the remaining equity interest in EZ-CLONE, in the amount of $2,160,000, plus any interest, costs, fees or charges accrued thereon or added thereto under the terms of the Note and the Bucktown Agreements (the “Subsequent Tranche”). The Initial Tranche shall correspond to $68,000 of the OID and the Transaction Expense Amount and may be converted into shares of Common Stock at any time subsequent to the Purchase Price Date. The Subsequent Tranche corresponds to the Investor Note and $160,000 of the aggregate OID.

 

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

 

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The Company’s obligation to pay the Note, or any portion thereof, is secured by all of the Company’s assets as described in Schedule A to the Security Agreement attached hereto and incorporated herein by this reference.

 

August 25, 2021 Bucktown Financing

 

On August 25, 2021, the Company executed the following agreement with Bucktown: (i) Securities Purchase Agreement; (ii) Secured Convertible Promissory Note (“Note”); and (iii) Security Agreement (collectively the “Bucktown Agreements”). The Company entered into the Bucktown Agreements with the intent to acquire working capital to grow the Company’s businesses and to hold our annual shareholder meeting.

 

The total amount of funding under the Bucktown Agreements is $335,000 as represented in the Note. The total purchase price for this Note is $300,000; the Note carries an aggregate original issue discount of $30,000 and a transaction expense amount of $5,000.

 

The Company agreed to reserve three times the number of shares based on the redemption value with a minimum of 100,000,000 shares of its common stock for issuance upon conversion of the Note, if that occurs in the future. If not converted sooner, the Note is due on or before August 25, 2022. The Note has an interest rate of eight percent (8%). The Note is convertible, at Bucktown’s option, into the Company’s common stock at $0.10 per share (“Lender Conversion Price”), subject to adjustment as provided for in the Note. However, in the event the Market Capitalization (as defined in the Note) falls below the Minimum Market Capitalization the Lender Conversion Price shall equal the lower of the Lender Conversion Price and the Market Price as of any applicable date of Conversion.

 

The Company’s obligation to pay the Note, or any portion thereof, is secured by all of the Company’s assets

 

Paycheck Protection Program Loan

 

On February 7, 2021, the Company received $337,055 under the Paycheck Protection Program of the U.S. Small Business Administration’s (SBA) 7(a) Loan Program pursuant to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Pub. Law 116-136, 134 Stat. 281 (2020). During the three months ended September 30, 2021, the Company recorded interest expense of $866 at 1%. The Company is utilizing the funds in accordance with the legal requirements and expects this loan to be forgiven during 2021.

 

Operating Activities

 

Net cash used in operating activities for the nine months ended September 30, 2021, was $239,000. This amount was primarily related to a (i) net loss of $4,396,000; and (ii) a net working capital decrease of $328,000, offset by (iii) $2,160,000 including (i) depreciation of $21,000; (ii) amortization of intangible assets of $504,000; (iii) stock based compensation of $15,000 related to stock option grants and warrants; (iv) accrued interest and amortization of issuance costs on convertible notes payable and losses on conversions of $2,888,000 and (v) change in derivative liability of $400,000.

 

Financing Activities

 

Net cash provided by financing activities for the three months ended September 30, 2021, was $870,000. The amount related to proceeds from note payable of $2,085,000, offset by repayment of convertible notes payable of $1,215,000.

 

Our contractual cash obligations as of September 30, 2021, are summarized in the table below:

 

						Less Than
Contractual Cash Obligations		Total				1  Year				1-3 Years				4-5 Years				Beyond
Operating lease cash payments		$	478,485			$	221,283			$	257,202			$	-			$	-
Convertible notes payable and accrued interest			2,679,626				2,679,626				-				-				-
Notes payable			1,228,234				940,633				24,000				24,000				239,601
Acquisition of 49% of EZ-CLONE Enterprises, Inc.			1,026,000				1,026,000				-				-				-
		$	5,412,346			$	4,867,542			$	281,202			$	24,000			$	239,601

 

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.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 

 

This item is not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES 

 

a) Evaluation of Disclosure Controls and Procedures

 

We conducted an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control-Integrated Framework. Based on this evaluation, our principal executive and principal financial officers concluded as of September 30, 2021, that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses in our internal controls over financial reporting discussed immediately below.

 

Identified Material Weaknesses

 

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

 

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

 

Audit Committee:

 

The current Audit Committee has one independent director, and the audit committee Chairman is an interim Named Executive Officer. We expect to expand this committee during 2022.

 

b) Changes in Internal Control over Financial Reporting

 

During the quarter ended September 30, 2021, there were no changes in our internal controls over financial reporting during this fiscal quarter, which were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that materially affected, or is reasonably likely to have a materially affect, on our internal control over financial reporting. The Company is not required by current SEC rules to include and does not include an auditor's attestation report. The Company's registered public accounting firm has not attested to Management's reports on the Company's internal control over financial reporting.

 

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PART II OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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

 

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.

 

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

 

On September 15, 2020, the Company received notice that William Blackburn and Brad Mickelsen (“Plaintiffs”), minority shareholders of EZ-CLONE Enterprises, Inc., a majority owned subsidiary of the Company, filed a complaint against the Company, its CEO and former CFO (“Officers”), in the Superior Court of California, County of Sacramento (“Complaint”) for claims related to breach under the Purchase and Sale Agreement dated October 15, 2018 between the Company and Plaintiffs. On September 15, 2020, the Company filed a notice of removal with the California Superior Court, County of Sacramento and the United States District Court for the Eastern District of California. The case was removed to Federal District Court for the Eastern District of California and Plaintiffs filed an Ex Parte Application for TRO and an Order for Preliminary Injunction with the Federal Court. The TRO was granted on September 16, 2020, and a preliminary injunction hearing was scheduled for September 29, 2020. After reviewing all pleadings and oral arguments at the hearing, the Court issued a ruling granting Plaintiffs’ request for a preliminary injunction. This injunction provides Plaintiffs with operating control of EZ-CLONE and this control assures that Growlife will have little if any involvement in operations and that Growlife will be denied cash distributions for the foreseeable future.

 

As of December 4, 2020, our officers, both current and former, were dismissed from the case. The Plaintiffs are seeking rescission of the Purchase and Sale Agreement, unspecified damages in excess of ten thousand dollars, and other equitable relief. The Company cannot predict the outcome of these proceedings at this time.

 

As of September 30, 2021, the Company has recorded a liability of $2,131,000 for acquisition payable of which a $1,105,000 is payable in stock and $1,026,000 is payable in cash.

 

On April 23, 2021, we were notified that the Company was in default on its notes held by Silverback Capital Corporation (which totaled $1,360,286 at September 30, 2021. The reason for the default was the Company’s inability to provide the reserve share requirement as specified in the notes. The penalty for the reserve share default was an increase in the outstanding note balances by 15%, an increase in the conversion discount by 5% to 60%, and a default interest rate on the outstanding note balances of 22%.

 

As a result of the reserve share default, on May 7, 2021, Silverback demanded immediate payment in full of all of their notes. On May 10, 2021, when Silverback had not been paid in full, Silverback presented another default notice for lack of payment. The penalty for the non-payment default was an increase in the outstanding note balances by another 15%, an additional increase in the conversion discount by 5%, and a default interest rate on the outstanding note balances of 22%. The Company and Silverback are in discussion to resolve these defaults. During the quarter ended September 30, 2021, the Company accrued no additional interest and penalties in connection with this dispute.

  

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. 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, or how COVID-19 will continue to affect the world as the virus case numbers rise and fall and further as vaccination plans and rules develop.

 

COVID-19 coronavirus was declared a pandemic by the World Health Organization, and on March 13, 2020, was declared a National Emergency by the United States Government and has resulted in several states being designated disaster zones. On February 24, 2021, President Biden issued a letter on the continuation of the National Emergency. 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 implemented quarantining and “shelter-in-place” regulations which severely limited the ability of people to move and travel and require non-essential businesses and organizations to close. While some states have lifted their “shelter-in-place” restrictions and travel bans, there is no certainty that an outbreak will not occur, and additional restrictions may be imposed again in response. As vaccinations become readily available, we cannot predict what restrictions may be imposed in the event of a vaccine mandate for travel to and from particular destinations.

 

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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.

 

Further 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 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.

 

If any of our employees, consultant, customers, or visitors were to become infected we could be forced to close our operations temporarily as a preventative measure to prevent the risk of spread which 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 Seattle, Washington and EZ-Clone is located in Sacramento, California, each of which have experienced restrictions on individuals and business shutdowns as the result of COVID-19. It is unclear at this time how these restrictions will be continued and/or amended as the pandemic evolves. We are hopeful that COVID-19 closures will have only a limited effect on our operations and revenues. We believe that with the introduction in early 2021 of the COVID-19 vaccinations that business restrictions will start to ease, however, we are actively monitoring, and will continue to actively monitor, the pandemic and the potential impact on its operations, financial condition, liquidity, suppliers, industry and workforce.

 

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 EZ-CLONE Enterprises, Inc.

 

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

 

On September 15, 2020, we received notice that William Blackburn and Brad Mickelsen (“Plaintiffs”), minority shareholders of EZ-CLONE Enterprises, Inc., a majority owned subsidiary of the Company, filed a complaint against the Company, its CEO and former CFO (“Officers”), in the Superior Court of California, County of Sacramento (“Complaint”) for claims related to breach under the Purchase and Sale Agreement dated October 15, 2018 between the Company and Plaintiffs. On September 15, 2020, we filed a notice of removal with the California Superior Court, County of Sacramento and the United States District Court for the Eastern District of California. The case was removed to Federal District Court for the Eastern District of California and Plaintiffs filed an Ex Parte Application for TRO and an Order for Preliminary Injunction with the Federal Court. The TRO was granted on September 16, 2020, and a preliminary injunction hearing was scheduled for September 29, 2020. After reviewing all pleadings and oral arguments at the hearing, the Court issued a ruling granting Plaintiffs’ request for a preliminary injunction. This injunction provides Plaintiffs with operating control of EZ-CLONE, and this control assures that Growlife will have little if any involvement in operations and that Growlife will be denied cash distributions for the foreseeable future.

 

The Complaint also alleges that the Company and its Officers made certain false representations and other claims to consummate the Transaction and as a result has failed to complete the second closing as required under Purchase and Sale Agreement. The Plaintiffs are seeking rescission of the Purchase and Sale Agreement, unspecified damages in excess of ten thousand dollars, and other equitable relief. The Company cannot predict the outcome of these proceedings at this time.

 

As of September 30, 2021, the Company has recorded a liability of $2,131,000 for acquisition payable of which a $1,105,000 is payable in stock and $1,026,000 is payable in cash.

 

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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 on the clone industry. If we fail to close on the remaining 49% of EZ-CLONE or settle the above legal action, we may experience direct consequences including, but not limited to, claims for breach of contract for failure to close on a contractual obligation, possible rescission of the EZ-CLONE acquisition, damages, and other equitable relief.

 

We have had substantial customer concentration at EZ-CLONE, with a limited number of customers accounting for a substantial portion of our sales and accounts receivable.

 

EZ-CLONE had one customer that was more than 48.1% of our sales for the nine months ended September 30, 2021, and 0% of our accounts receivable as of September 30, 2021, and 45.7% of our sales for the year ended December 31, 2020, and 87.7% of our accounts receivable as of December 31, 2020. There are inherent risks whenever a large percentage of total sales and accounts receivable are concentrated with a limited number of customers. It is not possible for us to predict the future level of demand for our services and products that will be generated by this customer or the future demand for the products and services of this customer in the end-user marketplace. In addition, sales from larger customers may fluctuate from time to time based on the commencement and completion of projects, the timing of which may be affected by market conditions or other factors, some of which may be outside of our control. Further, some of our contracts with larger customers permit them to terminate our services at any time (subject to notice and certain other provisions). If any of our major customers experience declining or delayed sales due to market, economic or competitive conditions, we could be pressured to reduce the prices we charge for our services or we could lose the customer. Any such development could have an adverse effect on our margins and financial position and would negatively affect our sales and results of operations and/or trading price of our common stock. There can be no assurance that our sales will not continue to be sufficiently concentrated among a limited number of customers.

 

Risks Associated with Securities Purchase Agreements with Chicago Venture Partners, L.P. (“Chicago Venture”), Iliad Research and Trading, L.P. (“Iliad”), Odyssey Research and Trading, LLC, (“Odyssey”), Bucktown Capital LLC (“Bucktown) and Silverback Capital Corporation (“Silverback”).

 

The Securities Purchase Agreements with Chicago Venture, Iliad, Bucktown and Odyssey will terminate if we file protection from our 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. These agreements have provided the Company substantial sources of capital in the past.

 

Our ability to require Chicago Venture, Iliad, Bucktown and Odyssey and all affiliated entities, to fund the Notes is at mutual discretion, subject to certain limitations. Chicago Venture, Iliad 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.

 

On September 1, 2020, Iliad sold $500,000 of their August 7, 2018, note with GrowLife to Silverback Capital Corporation (“Silverback”). On October 13, 2020, Iliad sold $243,854 of their October 15, 2018, note with GrowLife to Silverback. On November 18, 2020, Iliad sold $250,000 of their August 7, 2018, note with GrowLife to Silverback. On January 7, 2021, Iliad sold $500,000 of their 8/7/18 note with Growlife to Silverback. On February 2, 2021, Odyssey sold $610,659 of its January 30, 2020, note with GrowLife to Silverback. On February 2, 2021, Iliad sold $72,250 of its August 7, 2018, note with GrowLife to Silverback. On February 12, 2021, Odyssey sold $454,996 of its July 22, 2019, note with GrowLife to Silverback. Silverback is stepping into the same terms and conditions in the original notes.

 

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 are 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.

We are currently in default of its obligations to certain creditors

 

On April 23, 2021, we were notified that the Company was in default on its notes held by Silverback Capital Corporation which totaled $1,360,286 at September 30, 2021. The reason for the default was the Company’s inability to provide the reserve share requirement as specified in the notes. The penalty for the reserve share default was an increase in the outstanding note balances by 15%, an increase in the conversion discount by 5% to 60%, and a default interest rate on the outstanding note balances of 22%.

 

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As a result of the reserve share default, on May 7, 2021, Silverback demanded immediate payment in full of all of their notes. On May 10, 2021, when Silverback had not been paid in full, Silverback presented another default notice for lack of payment. The penalty for the non-payment default was an increase in the outstanding note balances by another 15%, an additional increase in the conversion discount by 5%, and a default interest rate on the outstanding note balances of 22%. The Company and Silverback are in discussion to resolve these defaults. During the quarter ended September 30, 2021, the Company accrued no additional interest and penalties in connection with this dispute.

 

We cannot predict whether Silverback will institute any further rights with respect to the Note defaults and may imply further discounts and penalties. Further the default which Silverback has alleged may apply to other creditors and they may also institute penalties for such defaults. We cannot give any assurance that it will be able to pay such creditors or that claims will not be asserted in addition to the amounts which the Company believes it is liable for at this time.

 

The Company's ability to satisfy claims of all its creditors in full is uncertain.

 

We are liable to various creditors, including in the aggregate amount of approximately $10.2 million. At September 30, 2021, we had an aggregate of $9.5 million of current liabilities and $0.7 million in long term liabilities. This is compared to current assets of $2.8 million as of September 30, 2021. No assurance can be given that we will be able to pay such creditors in full or that claims will not be asserted in addition to the amounts which we believe are liable for at this time.

 

Our common stock.

 

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.

 

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.” Defending such litigation may be lengthy and costly, strain our resources and divert management’s attention from their core responsibilities, which would have a negative impact on our business. 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.

 

Raising additional capital to implement our business plan and pay our debts will cause dilution to our existing stockholders. Our inability to raise additional capital may 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.

 

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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. 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.

 

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, 2020, and 2019 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 audit 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 September 30, 2021, we had an accumulated deficit of $159.2 million. There can be no assurance that we will achieve or maintain profitability.

 

We are subject to corporate governance and internal control reporting requirements, and our costs related to compliance with, or our failure to comply with existing and future requirements, could adversely affect our business.

 

We must comply with corporate governance requirements under the Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, as well as additional rules and regulations currently in place and that may be subsequently adopted by the SEC and the Public Company Accounting Oversight Board. These laws, rules, and regulations continue to evolve and may become increasingly stringent in the future. We are required to include management’s report on internal controls as part of our annual report pursuant to Section 404 of the Sarbanes-Oxley Act. We strive to continuously evaluate and improve our control structure to help ensure that we comply with Section 404 of the Sarbanes-Oxley Act. The financial cost of compliance with these laws, rules, and regulations is expected to remain substantial.

 

We cannot assure you that we will be able to fully comply with these laws, rules, and regulations that address corporate governance, internal control reporting, and similar matters. Failure to comply with these laws, rules and regulations could materially adversely affect our reputation, financial condition, and the value of our securities.

 

Our inability or failure to effectively manage our growth could harm our business and materially and adversely affect our operating results and financial condition.

 

Our strategy envisions growing our business. We plan to expand our product, sales, administrative and marketing organizations. Any growth in or expansion of our business is likely to continue to place a strain on our management and administrative resources, infrastructure and systems. As with other growing businesses, we expect that we will need to further refine and expand our business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise and manage new and retain contributing employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. We cannot assure you that we will be able to:

 

	●	expand our products effectively or efficiently or in a timely manner;
	●	allocate our human resources optimally;
	●	meet our capital needs;
	●	identify and hire qualified employees or retain valued employees; or
	●	incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth.

 

Our operating results may fluctuate significantly based on customer acceptance of our products. As a result, period-to-period comparisons of our results of operations are unlikely to provide a good indication of our future performance. Management expects that we will experience substantial variations in our net sales and operating results from quarter to quarter due to customer acceptance of our products. If customers do not accept our products, our sales and revenues will decline, resulting in a reduction in our operating income.

 

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Customer interest for our products could also be impacted by the timing of our introduction of new products. If our competitors introduce new products around the same time that we issue new products, and if such competing products are superior to our own, customers’ desire for our products could decrease, resulting in a decrease in our sales and revenues. To the extent that we introduce new products and customers decide not to migrate to our new products from our older products, our revenues could be negatively impacted due to the loss of revenue from those customers. In the event that our newer products do not sell as well as our older products, we could also experience a reduction in our revenues and operating income.

 

If we do not successfully generate additional products and services, or if such products and services are developed but not successfully commercialized, we could lose revenue opportunities.

 

Our future success depends, in part, on our ability to expand our product and service offerings. To that end we have engaged in the process of identifying new product opportunities to provide additional products and related services to our customers. The process of identifying and commercializing new products is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed. We may have to commit significant resources to commercializing new products before knowing whether our investments will result in products the market will accept. Furthermore, we may not execute successfully on commercializing those products because of errors in product planning or timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors providing those solutions before we do and a reduction in net sales and earnings.

 

The success of new products depends on several factors, including proper new product definition, timely completion and introduction of these products, differentiation of new products from those of our competitors, and market acceptance of these products. There can be no assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.

 

Our future success depends on our ability to grow and expand our customer base. Our failure to achieve such growth or expansion could materially harm our business.

 

To date, our revenue growth has been derived primarily from the sale of our products and through the purchase of existing businesses. Our success and the planned growth and expansion of our business depend on us achieving greater and broader acceptance of our products and expanding our customer base. There can be no assurance that customers will purchase our products or that we will continue to expand our customer base. If we are unable to effectively market or expand our product offerings, we will be unable to grow and expand our business or implement our business strategy. This could materially impair our ability to increase sales and revenue and materially and adversely affect our margins, which could harm our business and cause our stock price to decline.

 

If we incur substantial liability from litigation, complaints, or enforcement actions resulting from misconduct by our distributors, our financial condition could suffer. We will require that our distributors comply with applicable law and with our policies and procedures. Although we will use various means to address misconduct by our distributors, including maintaining these policies and procedures to govern the conduct of our distributors and conducting training seminars, it will still be difficult to detect and correct all instances of misconduct. Violations of applicable law or our policies and procedures by our distributors could lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or foreign regulatory authorities against us and/or our distributors and could consume considerable amounts of financial and other corporate resources, which could have a negative impact on our sales, revenue, profitability and growth prospects. As we are currently in the process of implementing our direct sales distributor program, we have not been, and are not currently, subject to any material litigation, complaint or enforcement action regarding distributor misconduct by any federal, state or foreign regulatory authority.

 

Our future manufacturers could fail to fulfill our orders for products, which would disrupt our business, increase our costs, harm our reputation and potentially cause us to lose our market.

 

We may depend on contract manufacturers in the future to produce our products. These manufacturers could fail to produce products to our specifications or in a workmanlike manner and may not deliver the units on a timely basis. Our manufacturers may also have to obtain inventories of the necessary parts and tools for production. Any change in manufacturers to resolve production issues could disrupt our ability to fulfill orders. Any change in manufacturers to resolve production issues could also disrupt our business due to delays in finding new manufacturers, providing specifications and testing initial production. Such disruptions in our business and/or delays in fulfilling orders would harm our reputation and would potentially cause us to lose our market.

 

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Our inability to effectively protect our intellectual property would adversely affect our ability to compete effectively, our revenue, our financial condition and our results of operations.

 

We may be unable to obtain intellectual property rights to effectively protect our business. Our ability to compete effectively may be affected by the nature and breadth of our intellectual property rights. While we intend to defend against any threats to our intellectual property rights, there can be no assurance that any such actions will adequately protect our interests. If we are unable to secure intellectual property rights to effectively protect our technology, our revenue and earnings, financial condition, and/or results of operations would be adversely affected.

 

We may also rely on nondisclosure and non-competition agreements to protect portions of our technology. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, that third parties will not otherwise gain access to our trade secrets or proprietary knowledge, or that third parties will not independently develop the technology.

 

We do not warrant any opinion as to non-infringement of any patent, trademark, or copyright by us or any of our affiliates, providers, or distributors. Nor do we warrant any opinion as to invalidity of any third-party patent or unpatentability of any third-party pending patent application.

 

Our industry is highly competitive, and we have less capital and resources than many of our competitors, which may give them an advantage in developing and marketing products similar to ours or make our products obsolete.

 

We are involved in a highly competitive industry where we may compete with numerous other companies who offer alternative methods or approaches, may have far greater resources, more experience, and personnel perhaps more qualified than we do. Such resources may give our competitors an advantage in developing and marketing products similar to ours or products that make our products obsolete. There can be no assurance that we will be able to successfully compete against these other entities.

 

Transfers of our securities may be restricted by virtue of state securities “blue sky” laws, which prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states.

 

Transfers of our common stock may be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to as "blue sky" laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because the securities held by many of our stockholders have not been registered for resale under the blue-sky laws of any state, the holders of such shares and persons who desire to purchase them should be aware that there may be significant state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions may prohibit the secondary trading of our common stock. Investors should consider the secondary market for our securities to be a limited one.

 

We are dependent on key personnel.

 

Our success depends to a significant degree upon the continued contributions of key management and other personnel, some of whom could be difficult to replace. The Employment Agreements for Mr. Hegyi and Mr. Barnes expired October 15, 2021 and they are employed without a contract. 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 no insurance.

 

We currently 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, Iliad, Odyssey, St. George and Bucktown and Silverback could have significant influence over matters submitted to stockholders for approval.

 

As a result of funding from Chicago Venture, Iliad, Odyssey, St. George, and Bucktown and Silverback and as previously detailed, they exercise significant control over us.

 

While there are limits on the ownership by each party, if 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.

 

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Trading in our stock is limited by the SEC’s penny stock regulations.

 

Our stock is categorized as a penny stock. The SEC has adopted Rule 15g-9 which generally defines "penny stock" to be any equity security that has a market price (as defined) less than US$5.00 per share or an exercise price of less than US $5.00 per share, subject to certain exclusions (e.g., net tangible assets in excess of $2,000,000 or average revenue of at least $6,000,000 for the last three years). The penny stock rules impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Finally, broker-dealers may not handle penny stocks under $0.10 per share.

 

These disclosure requirements reduce the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules would affect the ability of broker-dealers to trade our securities if we become subject to them in the future. The penny stock rules also could discourage investor interest in and limit the marketability of our common stock to future investors, resulting in limited ability for investors to sell their shares.

 

FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.

 

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

The market price of our common stock may be volatile.

 

The market price of our common stock has been and is likely in the future to be volatile. Our common stock price may fluctuate in response to factors such as:

 

●	Halting of trading by the SEC or FINRA.
●	Announcements by us regarding liquidity, legal proceedings, significant acquisitions, equity investments and divestitures, strategic relationships, addition or loss of significant customers and contracts, capital expenditure commitments, loan, note payable and agreement defaults, loss of our subsidiaries and impairment of assets,
●	Issuance of convertible or equity securities for general or merger and acquisition purposes,
●	Issuance or repayment of debt, accounts payable or convertible debt for general or merger and acquisition purposes,
●	Sale of a significant number of shares of our common stock by shareholders,
●	General market and economic conditions,
●	Quarterly variations in our operating results,
●	Investor relation activities,
●	Announcements of technological innovations,
●	New product introductions by us or our competitors,
●	Competitive activities, and
●	Additions or departures of key personnel.

 

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These broad market and industry factors may have a material adverse effect on the market price of our common stock, regardless of our actual operating performance. These factors could have a material adverse effect on our business, financial condition, and/or results of operations.

 

The sale of a significant number of our shares of common stock could depress the price of our common stock.

 

Sales or issuances of a large number of shares of common stock in the public market or the perception that sales may occur could cause the market price of our common stock to decline. As of September 30, 2021, there are also (i) stock option grants outstanding for the purchase of 740,000 common shares at a $0.576 average exercise price; and (ii) warrants for the purchase of 2,094,094 shares of common shares at a $2.655 average exercise price. We have an unknown number of common shares to be issued under the Chicago Venture, Iliad and St. George financing and Silverback agreements and warrants because the number of shares ultimately issued to the holder depends on the price at which the holder converts its debt to shares and exercises its warrants. These debt and warrant agreements include price protection features for the holders and can result in significant dilution to the Company. The lower the conversion or exercise prices, the more shares that will be issued to the holder upon the conversion of debt to shares. We will not know the exact number of shares of stock issued to the holder until the debt is actually converted to equity.

 

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 $0.0255 per share as calculated pursuant to terms of the notes 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. As discussed above, on April 5, 2021, we entered into a joint warrant settlement agreement with St. George and Iliad to resolve a dispute regarding prior financings wherein St. George and Iliad agreed once they have exercised the warrants for an aggregate 14.25 million shares of stock valued at approximately $2.4 million dollars, the balance of the warrant would be cancelled so long as the Company has increased its authorized common stock. The Company recorded a loss on debt conversion of $2.4 million in the period ended December 31, 2020. The conversion price of the convertible notes and warrants will have an impact on the market price of our common stock. Specifically, if under the terms of the convertible notes the conversion price goes down, then the market price, and ultimately the trading price, of our common stock will go down. If under the terms of the convertible notes the conversion price goes up, then the market price, and ultimately the trading price, of our common stock will likely go up. In other words, as the conversion price goes down, so does the market price of our stock. As the conversion price goes up, so presumably does the market price of our stock. The more the conversion price goes down, the more shares are issued upon conversion of the debt which ultimately means the more stock that might flood into the market, potentially causing a further depression of our stock.

 

We do not anticipate paying any cash dividends on our capital stock in the foreseeable future.

 

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business, and we do not anticipate paying any cash dividends on our capital stock in the foreseeable future. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

Anti-takeover provisions may limit the ability of another party to acquire our company, which could cause our stock price to decline.

 

Our certificate of incorporation, as amended, our bylaws and Delaware law contain provisions that could discourage, delay or prevent a third party from acquiring our company, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our common stock.

 

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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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

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.

 

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 September 30, 2021, we had the following sales of unregistered sales of equity securities:

 

Debt and accrued interest of $251,000 was converted into 8,400,000 shares of our common stock at a per share conversion price of $0.03. Debt conversions resulted in a loss of $291,364.

 

We issued 4,500,000 shares for settlement of a liability to Iliad/St. George at $0.175 per share. The liability as decreased by $193,940. During the three months ended September 30, 2021, we recognized a gain on settlement of $571,060 when the fair value of the common shares issued were based on the stock price on the date of settlement.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

 

On April 23, 2021, we were notified that the Company was in default on its notes held by Silverback Capital Corporation (“Silverback”) which totaled $1,360,286 at September 30, 2021. The reason for the default was our inability to provide the reserve share requirement as specified in the notes. The penalty for the reserve share default was an increase in the outstanding note balances by 15%, an increase in the conversion discount by 5% to 60%, and a default interest rate on the outstanding note balances of 22%.

 

As a result of the reserve share default, on May 7, 2021, Silverback demanded immediate payment in full of all of their notes. On May 10, 2021, when Silverback had not been paid in full, Silverback presented another default notice for lack of payment. The penalty for the non-payment default was an increase in the outstanding note balances by another 15%, an additional increase in the conversion discount by 5%, and a default interest rate on the outstanding note balances of 22%. The Company and Silverback are in discussion to resolve these defaults. During the quarter ended September 30, 2021, the Company accrued no additional interest and penalties in connection with this dispute.

 

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ITEM 6. EXHIBITS  

 

The exhibits required to be filed herewith by Item 601 of Regulation S-K, as described in the following index of exhibits, are attached hereto unless otherwise indicated as being incorporated by reference, as follows:

 

(a)

Exhibits

 

Exhibit No.		Description
3.1		Certificate of Incorporation. Filed as an exhibit to the Company’s Form 10-SB General Form for  Registration of Securities of Small Business Issuers filed with the SEC on December 7, 2007, and hereby incorporated by reference.
3.2		Second Amended and Restated Bylaws of GrowLife, Inc. dated October 16, 2015. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 26, 2015, and hereby incorporated by reference.
3.3		Certificate of Amendment of Certificate of Incorporation of GrowLife, Inc. dated October 23, 2017, to increase the authorized shares of Common Stock from 3,000,000,000 to 6,000,000,000 shares. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 24, 2017, and hereby incorporated by reference.
3.4		Amendment to Articles of Incorporation dated November 20, 2019. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 26, 2019, and hereby incorporated by reference.
3.5		Certificate of Amendment of Certificate of Incorporation of GrowLife, Inc. dated November 8, 2021, to increase the authorized shares of Common Stock from 120,000,000 to 750,000,000 shares. Filed herewith.
4.1		GrowLife, Inc. Second Amended and Restated 2017 Stock Incentive Plan filed as an Annex 1 to the Company’s Definitive Revised Schedule 14A filed with the SEC on September 24, 2021, and hereby incorporated by
4.2		Form of Warrants. Filed as exhibits to the Company’s Form 8-K and filed with the SEC on February 28, 2020, and hereby incorporated by reference.
10. 1		Compilation of Securities Purchase Agreement and Warrant to Purchase Common Stock dated February 9, 2018 entered into by and between GrowLife, Inc. and St. George Investments LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on February 15, 2018, and hereby incorporated by reference.
10.2		Compilation of Securities Purchase Agreement, Secured Promissory Notes, and Security Agreement by and between GrowLife, Inc. and Iliad Research and Trading, L.P. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 16, 2018, and hereby incorporated by reference.
10.3		Rights Offering to Shareholders filed in Amendment No.1 of Form S-1. Filed with the SEC on September 18, 2018, and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on September 21, 2018, and hereby incorporated by reference.
10.4		Rights Offering to Shareholders filed in Amendment No.1 of Form S-1. Filed with the SEC on September 18, 2018, and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on September 21, 2018, and hereby incorporated by reference.
10.5		Purchase and Sale agreement dated October 10, 2018, by and between GrowLife, Inc. and EZ-CLONE Enterprises LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 18, 2018, and hereby incorporated by reference.
10.6		Compilation of Securities Purchase Agreement, Warrant, Secured Promissory Notes, and Security Agreement by and between GrowLife, Inc. and Iliad Research and Trading, L.P. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 17, 2018, and hereby incorporated by reference.
10.7		Marco Hegyi Employment Agreement dated October 15, 2018. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 17, 2018, and hereby incorporated by reference.
10.8		Joseph Barnes Employment Agreement dated October 15, 2018. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 17, 2018, and hereby incorporated by reference.
10.9		Termination of Existing Agreements and Release Agreement accepted February 15, 2019, entered into by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on February 20, 2019, and hereby incorporated by reference.
10.10		Compilation of Securities Purchase Agreement, Secured Promissory Notes, and Security Agreement by and between GrowLife, Inc. and Odyssey Research and Trading, LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 30, 2019, and hereby incorporated by reference.

 

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10.11		Amendment No. 1 to Purchase and Sale Agreement dated October 23, 2019, entered into by between GrowLife, Inc. and William Blackburn. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 12, 2019, and hereby incorporated by reference.
10.12		Compilation of Securities Purchase Agreement, Secured Promissory Notes, and Security Agreement. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on February 5, 2020, and hereby incorporated by reference.
10.13		Compilation of Labrys Securities Purchase Agreement, Self-Amortization Promissory Note and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 15, 2020, and hereby incorporated by reference.
10.14		Compilation of EMA Securities Purchase Agreement, Self-Amortization Promissory Note and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 15, 2020, and hereby incorporated by reference.
10.15		Compilation of FF Securities Purchase Agreement, Self-Amortization Promissory Note and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 15, 2020, and hereby incorporated by reference.
10.16		Amendment 2 to Compilation of Labrys Securities Purchase Agreement, Self-Amortization Promissory Note and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on December 7, 2020, and hereby incorporated by reference.
10.17		Michael E. Fasci Executive Employment Agreement dated January 1, 2021. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on January 8, 2021, and hereby incorporated by reference.
10.18		Amendment 3 to Compilation of Labrys Securities Purchase Agreement, Self-Amortization Promissory Note and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on January 5, 2021, and hereby incorporated by reference.
10.19		Compilation of Bucktown Capital, LLC Securities Purchase Agreement, and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 5, 2021, and hereby incorporated by reference.
10.20		St. George and Iliad joint Warrant Settlement Agreement. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 9, 2021, and hereby incorporated by reference.
10.21		Compilation of Bucktown Capital, LLC  Securities Purchase Agreement, and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 5, 2021, and hereby incorporated by reference.
10.22		Compilation of Bucktown Capital, LLC  Securities Purchase Agreement, and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 12, 2021, and hereby incorporated by reference.
14.1		Code of Conduct and Ethics dated May 15, 2014. Attached as an exhibit to the Company’s Form 8-K filed and with the SEC on June 9, 2014, and hereby incorporated by reference.
31.01*		Certification of Principal Executive Officer Pursuant to Rule 13a-14
31.02*		Certification of Principal Financial Officer Pursuant to Rule 13a-14
32.01*		CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
32.02*		CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101.INS*		Inline XBRL Instance Document
101.SCH*		Inline XBRL Taxonomy Extension Schema Document
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

*	Filed Herewith.

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	GROWLIFE, INC.   (Registrant)
Date: November 22, 2021	By:	/s/ Marco Hegyi
		Marco Hegyi
		Chief Executive Officer and President
		(Principal Executive Officer)

 

Date: November 22, 2021	By:	/s/ Michael E. Fasci Sr.
		Michael E. Fasci Sr.
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

 

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