Quarterly Report (10-q)

0001161582false--12-31Q120220.00011000000000000.0001740000000145517394117949694120000000110500021310002131001026000On November 5, 2019, the Company amended the Agreement with one 24.5% shareholder of EZ-CLONE to extend the date to purchase the remaining 49% of stock of EZ-CLONE in exchange for a 20% extension fee (a total of $171,000 for the 49% or $85,500 for each 24.5% shareholder) of the $855,000 cash payable at the earlier of the closing of $2,000,000 in funding or nine months (July 2020)23510000000010260001026000On November 5, 2019, the Company amended the Agreement with one 24.5% shareholder of EZ-CLONE to extend the date to purchase the remaining 49% of stock of EZ-CLONE in exchange for a 20% extension fee (a total of $171,000 for the 49% or $85,500 for each 24.5% shareholder) of the $855,000 cash payable at the earlier of the closing of $2,000,000 in funding or nine months (July 2020). The Company did not close the purchase of the remaining 49% of stock of EZ-CLONE by the extended deadline.1105000At closing, we paid 51% of this amount totaling $2,040,000 via a (i) a cash payment of $645,000; and (ii) the issuance of 715,385 restricted shares of our common stock valued $1,395,000. The Agreement called for the Company, upon delivery of the remaining 49% of EZ-Clone stock, to acquire such stock within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of Company’s common stock at a value of 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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

March 31, 2022

 

☐	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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of May 15, 2022, there were 145,517,394 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 March 31, 2022, and December 31, 2021 (audited)		3
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2022, and 2021		4
	Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three months ended March 31, 2022, and 2021		5
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022, and 2021		6
	Notes to the Condensed Consolidated Financial Statements		7
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operation		20
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk		23
ITEM 4	Controls and Procedures		23
PART II	OTHER INFORMATION
ITEM 1	Legal Proceedings		25
ITEM IA	Risk Factors		26
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds		26
ITEM 3	Defaults Upon Senior Securities		26
ITEM 6	Exhibits		27
	SIGNATURES		29

 

2

Table of Contents

 

ITEM 1. FINANCIAL STATEMENTS

 

GROWLIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
		March 31, 2022				December 31, 2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	448,627			$	363,863
Accounts receivable - trade, net of allowance for doubtful accounts of $3,900 and $10,000 As of 3/31/22 and 12/31/21, respectively			39,156				366,789
Inventory			1,223,515				1,299,560
Deposits			18,995				18,995
Total current assets			1,730,293				2,049,207
Property and equipment, net			235,918				249,906
Intangible assets, net			291,073				459,002
Goodwill			781,749				781,749
Other receivables from related parties			161,000				161,000
Operating lease right of use asset			357,610				407,166
TOTAL ASSETS		$	3,557,643			$	4,108,030
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Accounts payable - trade			992,113				1,146,344
Accrued expenses			194,188				219,398
Notes payable- PPP/EIDL loans, current			870,757				1,034,994
Note payable to bank			132,538				137,728
Derivative liability			1,604,630				1,698,272
Convertible notes payable, net			2,474,557				2,583,816
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			204,652				197,915
Federal and state income taxes payable			556,952				556,952
Total current liabilities			9,161,587				9,706,419
LONG TERM LIABILITIES:
Deferred tax liability			71,000				106,000
Non-current portion of operating lease right of use liability			172,929				229,222
Total long term liabilities			243,929				335,222
STOCKHOLDERS' DEFICIT
Preferred stock - $0.0001 par value, 10,000,000 shares authorized, no shares issued and outstanding at 3/31/2022 and 12/31/201, respectively
Common stock - $0.0001 par value, 740,000,000 shares authorized, 145,517,394 and 117,949,694 shares issued and outstanding at 3/31/2022 and 12/31/2021 , respectively			397,954				395,198
Additional paid in capital			154,677,287				153,985,229
Accumulated deficit			(160,923,114	)			(160,314,038	)
Total stockholders' deficit			(5,847,873	)			(5,933,611	)
TOTAL LIABILITIES AND  STOCKHOLDERS' DEFICIT		$	3,557,643			$	4,108,030

 

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
		March 31, 2022				March 31, 2021
NET REVENUE		$	860,356			$	1,672,946
Cost of goods sold			442,664				776,644
Gross Profit			417,692				896,302
Operating expenses			993,879				1,060,432
Loss from operations			(576,187	)			(164,130	)
OTHER INCOME (EXPENSE):
Change in fair value of derivative			(78,051	)			(61,419	)
Interest expense, net			(137,238	)			(783,506	)
Loss on debt conversions, net			(18,154	)			(1,730,838	)
Gain on forgiveness of debt			165,553
Total other expense, net			(67,890	)			(2,575,763	)
LOSS BEFORE INCOME TAXES			(644,077	)			(2,739,893	)
Income taxes			35,000				(136,788	)
NET LOSS		$	(609,077	)		$	(2,876,681	)
Basic and diluted  loss per share		$	(0.00	)		$	(0.05	)
Weighted average shares of common stock outstanding- basic and diluted			130,183,544				59,450,818

 

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 December 31, 2020			51,843,221			$	388,586			$	147,278,311			$	(154,841,370	)		$	(7,174,472	)
Stock based compensation for stock options			-				-				5,643				-				5,643
Stock based compensation for warrants			-				-				-				-				-
Shares issued for services rendered			-				-				-				-				-
Shares issued for convertible note and interest conversion			15,339,018				1,534				3,158,064				-				3,159,597
Shares issued for convertible note commitment fee			-				-				-				-				-
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	)
Balance as of December 31, 2021			117,949,694			$	395,198			$	153,985,229			$	(160,314,038	)		$	(5,933,611	)
Shares issued for convertible note conversion			27,567,700				2,756				692,059								694,815
Shares issued for convertible note commitment fee																			-
Net loss for the three months ended March 31, 2022															(609,077	)			(609,077	)
Balance as of March 31, 2022			145,517,394			$	397,954			$	154,677,287			$	(160,923,114	)		$	(5,847,873	)

 

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

 

5

Table of Contents

  

GROWLIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		Three Months Ended
		March 31, 2022				March 31, 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(609,077	)		$	(2,876,681	)
Adjustments to reconcile net loss to net cash (used in) operating activities
Depreciation expense			13,988				8,998
Amortization of intangible assets			167,929				167,929
Share-based compensation expense			-				5,643
Non Cash Interest Expense			141,078				722,316
Loss on debt Conversion			18,154				1,730,838
Change in fair value of derivative			78,051				61419
Loss on debt settlement
Gain on forgiveness of debt			(165,553	)
Changes in operating assets and liabilities:
Accounts receivable			327,633				432,057
Inventory			76,045				(299,338	)
Other assets							-
Deposits							-
Right of use, net							1,671
Accounts payable			(154,231	)			15,806
Accrued expenses			(25,210	)			(1,357	)
Change in deferred taxes			(35,000	)			(29,388	)
Change in federal and state taxes payable							166,176
Cash Used in operating activities			(166,193	)			106,089
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of PP&E							-
Cash Used in investing activities			-				-
CASH FLOWS FROM FINANCING ACTIVITIES:
Warrant exercise
Payment of notes			(19,043	)			(1,049,004	)
Proceeds from notes payable			270,000				2,085,455
Proceeds from issuance of common stock
Net cash provided by financing activities			250,957				1,036,451
NET CHANGE IN CASH AND CASH EQUIVALENTS			84,764				1,142,540
CASH AND CASH EQUIVALENTS, beginning of period			363,863				383,144
CASH AND CASH EQUIVALENTS, end of period		$	448,627			$	1,525,684
Non-cash investing and financing activities:
Fair value of shares issued for convertible note and interest conversion		$	676,661			$	1,428,759
Fair value of derivaitives as debt discount		$	142,238

 

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

 

6

Table of Contents

  

GROWLIFE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION

 

GrowLife, Inc. (“GrowLife” or the “Company”) is incorporated under the laws of the State of Delaware and is headquartered in Kirkland, Washington. The Company was founded in 2012 with the Closing of the Agreement and Plan of Merger with SGT Merger Corporation.

 

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

 

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

 

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

 

Presently the parties are providing legal briefs to the Federal court to determine if rescission should be granted. If we are unsuccessful and the court grants Plaintiffs’ request for rescission the resulting actions are speculative at this time but could include the return of the consideration exchanged as part of the acquisition subject to certain adjustments as the result of several variables which the court will consider. If the court denies Plaintiffs request for rescission the litigation will continue regarding the breach of contract claims and contractual remedies for breach and the Court may or may not dissolve the preliminary injunction as a result.

 

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

 

At March 31, 2022 and December 31, 2020, the Company had 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 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. The reverse stock split of 1 for 150 was effective at the open of business on November 27, 2019, whereupon the shares of common stock began trading on a split-adjusted basis. The Company’s CUSIP number for the Company’s common stock changed to 39985X203. All warrant, option, share and per share information in this Form 10-K gives retroactive effect to the 1-for-150 reverse split with all numbers rounded up to the nearest whole share.

 

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

 

7

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NOTE 2 – GOING CONCERN  

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred net losses of $609,077 and $2,876,681 for the three months ended March 31, 2022 and 2021, respectively. Net cash used in operating activities was $166,193 for the three months ended March 31, 2022. Net cash provided by operations was $106,089 for the three months ended March 31, 2021.

 

The Company anticipates that it will record losses from operations for the foreseeable future. As of March 31, 2022, the Company’s accumulated deficit was $161 million. The Company has limited capital resources, and operations to date have been funded with the proceeds from private equity and debt financings. These conditions raise substantial doubt about our ability to continue as a going concern.

 

The Company believes that its cash on hand will be sufficient to fund our operations only until July 31, 2022. The Company needs additional financing to implement our business plan and to service our ongoing operations and pay our current debts. There can be no assurance that we will be able to secure any needed funding, or that if such funding is available, the terms or conditions would be acceptable to us. If we are unable to obtain additional financing when it is needed, we will need to restructure our operations, and divest all or a portion of our business. We may seek additional capital through a combination of private and public equity offerings, debt financings and strategic collaborations. Debt financing, if obtained, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, and could increase our expenses and require that our assets secure such debt. Equity financing, if obtained, could result in dilution to the Company’s then-existing stockholders and/or require such stockholders to waive certain rights and preferences. If such financing is not available on satisfactory terms, or is not available at all, the Company may be required to delay, scale back, eliminate the development of business opportunities and our operations and financial condition may be materially adversely affected. See Note 19 – Subsequent Events.

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS

 

Basis of Presentation - The condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the condensed consolidated financial statements have been included. Such adjustments are of a normal, recurring nature. The condensed consolidated financial statements, and the accompanying notes, are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and do not contain certain information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.

 

The Company has evaluated subsequent events through the date of the filing of its Form 10-Q with the Securities and Exchange Commission. Other than those events disclosed in Note 19, the Company is not aware of any other significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial statements.

 

Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly 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. 

 

Accounts Receivable and Revenue – The company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which requires the application of the five-step-principles-based-accounting-model for revenue recognition. These steps include (1) a legally enforceable contract, written or unwritten is identified; (2) performance obligations in the contracts are identified; (3) the transaction price reflecting variable consideration, if any, is identified; (4) the transaction price is allocated to the performance obligations; and (5) revenue is recognized when the control of goods is transferred to the customer at a particular time or over time. Our hydroponic sales are cash or credit card. Our EZ-CLONE sales include credit, cash, 3% discount upon receipt within ten days and, we extend thirty day terms to select customers. We have not incurred any costs to acquire contracts that would require capitalization as of March 31, 2022 and 2021. Accounts receivable are reviewed periodically for collectability. As of March 31, 2022 and December 31, 2021, the Company has an allowance for doubtful accounts totaling $3,899 and $10,000, respectively.

 

Sales Returns - We allow customers to return defective products when they meet certain established criteria as outlined in our sales terms and conditions. It is our practice to regularly review and revise, when deemed necessary, our estimates of sales returns, which are based primarily on actual historical return rates. We record estimated sales returns as reductions to sales, cost of goods sold, and accounts receivable and an increase to inventory. Returned products which are recorded as inventory are valued based upon the amount we expect to realize upon its subsequent disposition.

 

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Concentration of Credit and Sales Risk -

 

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

 

Customers with over 10% of sales- the Company had two customers of EZ-CLONE that represented approximately 48% and 15% of consolidated revenue for the year three months ended March 31, 2022.

 

Customers with over 10% of outstanding accounts receivable- one customer totaling 63% and 70% as of March 31, 2022 and 2021, respectively.

 

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

 

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

 

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

 

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

 

Goodwill - The Company reviews its acquired goodwill for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. In reviewing its goodwill, the Company performs a qualitative analysis to determine if it is more-likely-than-not that the goodwill is impaired. If the qualitative analysis indicates that goodwill is likely impaired, the Company calculates the fair value of its goodwill by allocating the fair value of the business unit containing the goodwill to all its tangible and intangible assets and liabilities, with the residual fair value allocated to goodwill. The excess, if any, of the goodwill carrying value in excess of its fair value would be recognized as an impairment loss. Management has concluded that, based on a qualitative analysis, it is more-likely-than-not that goodwill has not been impaired as of March 31, 2022 or December 31, 2021.

 

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 March 31, 2022, and December 31, 2021 are based upon the short-term nature of the assets and liabilities. The Company’s derivative financial instruments are considered Level 3 instruments. See Note 12.

 

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Derivative Financial Instruments –Pursuant to ASC 815 “Derivatives and Hedging”, the Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. The Company then determines if embedded derivative must bifurcated and separately accounted for. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The variable conversion features of the Convertible Notes Payable  are considered derivatives, see Note 12. For derivative financial instruments, the Company uses the Binomial pricing model to value the derivative instruments at inception and on subsequent valuation dates. The Company uses the following assumptions when using the model: (i) risk-free interest rate of 1%; (ii) expected life of one year; (iii) expected dividend of 0%; and (iv) expected volatility ranging from 110% – 134%.  The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date. 

 

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

 

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

 

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

 

As of March 31, 2022, there are warrants for the purchase of 686,666 shares of common shares at a $1.64 average exercise price. In addition, we have an unknown number of common shares to be issued under the convertible notes financing agreements because the number of shares ultimately issued depends on the price at which the holder converts its debt to shares and exercises its warrants. The lower the conversion or exercise prices, the more shares that will be issued to the holder upon the conversion of debt to shares. The Company will not know the exact number of shares of stock issued to the holder until the debt is actually converted to equity.

 

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

 

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

 

Advertising – Advertising costs are charged to operating expenses as incurred. Advertising and marketing costs for the three months ended March 31, 2022 were $59,036.

 

Comprehensive loss – Comprehensive loss is defined as the change in equity of a business during a period from non-owner sources. There were no differences between net loss for the three months ended March 31, 2022 and 2021 and comprehensive loss for those periods.

 

Research and Development Expenses – There are no research and development expenses for the three months ended March 31, 2022 and 2021, respectively.

 

Recent Accounting Pronouncements

 

In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The amendment is meant to simplify the accounting for convertible instruments by removing certain separation models in subtopic 470-20 for convertible instruments. The amendment also changed the method used to calculate dilutes EPS for convertible instruments and for instruments that may be settled in cash. The amendment is effective for years beginning after December 15, 2021, with early adoption for years beginning after December 15, 2020 including interim periods for those fiscal years. The Company adopted this standard on January 1, 2022, noting no material impact.

 

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

 

NOTE 4 –BUSINESS COMBINATIONS, ACQUISITION PAYABLE AND OTHER TRANSACTION

 

Acquisition of EZ-CLONE Enterprises, Inc.

 

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

 

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

 

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

 

As of March 31, 2022 and December 31, 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 accelerated the Company’s revenue growth, increased the Company gross margins and added additional personnel.

 

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

 

For accounting purposes, from the October 15, 2018 the Company consolidated EZ-Clone given their control and treated its obligation to acquire the remaining interest in EZ-Clone. The Company considers EZ-Clone considers EZ-Clone to be 100% owned. At March 31, 2022 and December 31, 2021 the Company has recorded $2,131,000 as a liability, $1,026,000 of which is due in cash and $1,105,000 is due in stock.

 

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

 

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NOTE 5 – INVENTORY

 

Inventory as of March 31, 2022 and December 31, 2021 consisted of the following:

 

		March 31, 2022				December 31, 2021
Raw materials		$	740,729			$	723,834
Work in process			335,451				375,083
Finished goods			130,011				183,318
Inventory deposits			17,324				17,325
		$	1,223,515			$	1,299,560

 

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

 

NOTE 6 – PROPERTY AND EQUIPMENT

 

Property and equipment as of March 31, 2022 and December 31, 2021 consists of the following:

 

		March 31, 2022				December 31, 2021
Machinery, equipment and tooling		$	356,867			$	356,867
Computer equipment			16,675				16,675
Leasehold equipment			14,702				14,702
Automobile			157,728				157,728
Total		$	545,972			$	545,972
Less accumulated depreciation and amortization			(310,054	)			(296,066	)
Net property and equipment		$	235,918			$	249,906

 

Total depreciation expense was $13,988 and $8,988 for the three months ended March 31, 2022 and for the year ended December 31, 2021, 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 March 31, 2022 and December 31, 2021 consisted of the following: 

 

		Estimated life		March 31, 2022				December 31, 2021
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					(2,059,927	)			(1,891,998	)
				$	291,073			$	459,002
Goodwill		Indefinite
				$	781,749			$	781,749
Total Intangibles and Goodwill				$	1,072,822			$	1,240,751

 

Total amortization expense was $167,929 and $167,929 for the three months ended March 31, 2022 and 2021, respectively.  

 

NOTE 8- LEASES

 

The Company previously entered into operating leases for warehouse and corporate facilities. These leases have terms which range from two to five years, and often include options to renew. These operating leases rights are listed as separate line items on the Company’s March 31, 2022 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 March 31, 2022 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. As of March 31, 2022, total right-of-use assets and operating lease liabilities for remaining long-term lease was $357,610 and $377,581, respectively. During the three months ended March 31, 2022 and 2021, the Company recognized approximately $59,000 in total lease costs for the leases.

 

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NOTE 9- ACCOUNTS PAYABLE

 

Accounts payable were $992,113 and $1,146,344 as of March 31, 2022, and December 31, 2021, 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 $194,188 and $219,398 as of March 31, 2022, and December 31, 2021, respectively. Such liabilities consisted of amounts due to sales tax, payroll and restructuring expense liabilities.

 

NOTE 11 –NOTES PAYABLE

 

Notes Payable as of March 31, 2022 consisted of the following:

 

		Interest Rate				Principal				Accrued Interest				Balance
Government Assistance Notes
Economic Injury Disaster Loan (EZC)			3.75%			$	149,900			$	10,524			$	160,424
Paycheck Protection Program			1%				362,500				6,818				369,318
Paycheck Protection Program			1%				337,050				3,965				341,015
						$	849,450			$	21,307			$	870,757
Secured Promisory Note
Comercial Bank			3.44%			$	132,538			$	-			$	132,538

 

		Inteerest Rate				Principal				Accrued Interest				Discount				Balance
Convertible Promisory Notes
Bucktown 2-6-21			8%			$	600,791			$	24,312			$	-			$	625,103
Silverback 2-12-21			10%				948,218				147,139				-				1,095,357
Bucktown 8-25-21			8%				335,000				16,470				-				351,470
Bucktown 11-5-21			8%				225,000				7,282				-				232,282
Sixth Street 1-4-22			8%				223,850			$	4,319			$	(95,515	)			132,654
Sixth Street 3-11-22			8%				86,350			$	442			$	(48,901	)			37,891
						$	2,419,209			$	199,964			$	(144,416	)		$	2,474,757

 

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

 

		Inteerest    Rate				Principal				Accrued Interest				Balance
Government Assistance Notes
Economic Injury Disaster Loan (EZC)			3.75%			$	149,900			$	10,524			$	160,424
Economic Injury Disaster Loan (GLI)			3.75%				149,900				15,652				165,552
Paycheck Protection Program			1%				362,500				6,350				368,850
Paycheck Protection Program			1%				337,050				3,118				340,168
						$	999,350			$	35,644			$	1,034,994
Secured Promisory Note
Comercial Bank			3.44%			$	137,728			$	-			$	137,728

 

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		Inteerest Rate				Principal				Accrued Interest				Discount				Balance
Convertible Promisory Notes
Bucktown 2-6-21			8%			$	780,791			$	10,303			$	-			$	791,094
Silverback 2-12-21			10%				1,125,118				82,308				-				1,207,426
Bucktown 8-25-21			8%				335,000				9,511				-				344,511
Bucktown 11-5-21			8%				225,000				2,666				-				227,666
						$	2,465,909			$	104,788			$	-			$	2,570,697
Amortizing Promisory Note
First Fire			12%				12,141				978				-				13,119
						$	2,478,050			$	105,766			$	-			$	2,583,816

 

Government Assistance Notes Payable

 

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

 

On June 19, 2020, the Company, including its EZ-CLONE subsidiary, received two loans totaling $299,800 under the Economic Injury Disaster Loan Program of the U.S. Small Business Administration’s 7(a) Loan Program pursuant to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Pub. Law 116-136, 134 Stat. 281 (2020). Repayment terms on the loans are monthly principal and interest totaling approximately $1,392 over a 30-year term at 3.75%. In addition, the loan contains a 12-month payment deferral beginning on the loan date. There is no prepayment penalty on the EIDL loans. One of the EIDL loans was forgiven in February 2022.

 

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

 

Convertible Promissory Notes

 

FirstFire Global Opportunities Fund, LLC

 

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

 

Silverback Capital Corporation

 

During 2020 Silverback Capital Corporation (“Silverback”) purchased from Iliad $993,855 of Iliad’s outstanding note balance with the Company. During the three months ended March 31, 2021, Silverback purchased all the remaining outstanding notes the Company had with Chicago Ventures, Iliad and Odyssey of $1,139,182. Silverback assumed the terms of the original notes. On March 16, 2021, the Company executed the following agreements with Silverback: (i) Securities Purchase Agreement; and (ii) Convertible Promissory Note for $165,000.

 

The 10% Notes are convertible at the holder’s option into the Company’s common stock at 65% of the lower of $1.35 or the current fair market value of the stock. During the three months ended March 31, 2022, Silverback converted principal and interest of $176,900 into 15,800,000 shares of our common stock at an average per share conversion price of $0.0112.

 

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Bucktown Capital LLC

 

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

 

The total amount of funding under the Bucktown Agreements is $3,088,000 as represented in the Secured Convertible Promissory Note (“Note”). The total purchase price for this Note is $2,850,000; the Note carries an aggregate original issue discount of $228,000 and a transaction expense amount of $10,000. The Note is comprised of two (2) tranches (each, a “Tranche”), consisting of (i) an initial Tranche in an amount equal to $928,000 and any interest, costs, fees or charges accrued thereon or added thereto under the terms of the Note and the Bucktown Agreements (the “Initial Tranche”), and (ii) an additional Tranche, which is exclusively dedicated for the purchase of the remaining equity interest in EZ-CLONE, in the amount of $2,160,000.00, plus any interest, costs, fees or charges accrued thereon or added thereto under the terms of the Note and the Bucktown Agreements (the “Subsequent Tranche”). The Initial Tranche shall correspond to $68,000 of the OID and the Transaction Expense Amount and may be converted into shares of Common Stock at any time after the Purchase Price Date. The Subsequent Tranche corresponds to the Investor Note and $160,000 of the aggregate OID.

 

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

 

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

 

During the three months ended March 31, 2022, Bucktown converted principal of $180,000 into 11,767,700 shares of our common stock at a per share conversion price of $0.0153.        

 

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

 

Sixth Street Lending LLC

 

On January 4, 2022, and on March 11, 2022, the Company entered into the following agreements with Sixth Street Lending: (i) Securities Purchase Agreements; and (ii) Secured Convertible Promissory Notes. The total amount for these Notes is $310,200; the Note carries an aggregate original issue discount of $32,500 and a transaction expense amount of $7,700. The Notes have an interest rate of eight percent (8%). The Note is convertible, at Sixth Street’s option, into the Company’s common stock at a 25% discount from the market price. Based on the variable conversion price, the Company recorded initial derivative liabilities and an increase in the debt discount.

 

NOTE 12 – DERIVATIVE LIABILITY

 

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

 

If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (BCF). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20. Debt with Conversion and Other Options. In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method. The debt is convertible at  a range  of  between 25% to 45% discount to the fair value of the Company’s common stock requiring the conversion feature to be bifurcated from the host debt contract and accounting for separately as a derivative, resulting in periodic revaluations. The notes underlying the derivatives are short term in nature and generally converted to stock in less than one year. The derivative is valued at period end with the key inputs being current stock price and the conversion feature.

 

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There was a derivative liability of $1,604,630 and $1,698,272 as of March 31, 2022 and December 31, 2021, respectively. For the three months ended March 31, 2022 and 2021, the Company recorded non-cash income of $78,051 and $61,419, respectively, related to the “change in fair value of derivative” expense related to the convertible note financing. These were the only changes in level 3 fair value instruments during such periods.

 

Derivative liability as of March 31, 2022 was as follows:

 

Balance, December 31, 2021		$	1,698,272
Additions			142,238
Conversions			(313,931	)
Change in fair value			78,051
Balance, March 31, 2022		$	1,604,630

 

NOTE 13 – RELATED PARTY TRANSACTIONS AND CERTAIN RELATIONSHIPS

 

Notes Receivable from Related Parties

 

EZ-CLONE had $161,000 due from its two founders at March 31, 2022 and December 31, 2021. The notes bear interest at 3% and are due in July, 2041.

 

NOTE 14 – EQUITY

 

Authorized Capital Stock

 

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

 

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

 

Preferred Stock

 

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

 

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

 

Capital Stock Issued and Outstanding

 

As of March 31, 2022, the Company had issued and outstanding securities of 145,517,394 shares of common stock.

 

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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.

 

Warrants

 

At March 31, 2022 and December 31, 2021 the Company had 686,666 warrants outstanding at a weighted average exercise price of $1.64, all of which are exercisable.

 

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

 

NOTE 15– STOCK OPTIONS

 

Description of Stock Option Plan

 

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

 

Determining Fair Value under ASC 718

 

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

 

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Stock Option Activity

 

At March 31, 2022 and December 31, 2021 there were no stock options issued or outstanding.

 

NOTE 17 – COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS

 

Legal Proceedings

 

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

 

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

 

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

 

On September 15, 2020, the Company received notice that William Blackburn and Brad Mickelsen, minority shareholders of EZ-CLONE Enterprises, Inc. (“Plaintiffs”), a majority owned subsidiary of the Company, filed a complaint against the Company and its officers 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. Subsequent to September 29, 2020, the parties are providing legal briefs to the Federal court to determine if rescission should be granted. We cannot determine the outcome of these proceedings.

 

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

 

As of March 31, 2022, the Company recorded a liability of $2,131,000 for acquisition payable of which a $1,105,000 is payable in stock and $1,026,000 is payable in cash.

 

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 – INCOME TAXES

 

The Company has incurred losses since inception, which have generated net operating loss carryforwards. The net operating loss carryforwards arise solely from United States sources. EZ-CLONE currently files its own separate tax return as it does not meet the qualifications for being included in the Company’s consolidated tax returns. During 2021 and 2020 EZ-CLONE generated taxable income and our tax expense relates to estimated taxes owed by EZ-CLONE. For the three months ended March 31, 2022 EZ-CLONE incurred a loss, and a deferred tax benefit was recorded in the amount of $35,000.

 

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At December 31, 2021 the Company has net operating loss carryforwards of approximately $24.9 million which expire in 2022-2038. Because it is not more likely than not that sufficient tax earnings will be generated to utilize the net operating loss carryforwards, the deferred tax asset related to the net operating loss carryforwards has a corresponding 100% valuation allowance. Additionally, under the Tax Reform Act of 1986, the amounts of, and benefits from, net operating losses may be limited in certain circumstances, including a change in control.

 

Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. There can be no assurance that the Company will be able to utilize any net operating loss carryforwards in the future. The Company is subject to possible tax examination for the years 2014 through 2021. 

 

NOTE 19 – SUBSEQUENT EVENTS

 

On May 17, 2022, the Company entered into the following agreements with AJB Capital Investments LLC: (i) Securities Purchase Agreement; and (ii) Secured Convertible Promissory Note; (iii) Common Stock Purchase Warrant; and (iv) Security Agreement.  The total amount of the Note is $750,000; the Note carries an aggregate original issue discount of $75,000. The Note

 carries an interest rate of ten percent (10%) per annum and matures on November 17, 2022. Should the Note be extended at that time the interest rate increases to eighteen percent (18%). The Note is convertible, at AJB Capital’s option, into the Company’s common stock at the lowest market price during the previous twenty days. In connection with executing the Note the Company will issue 7,500,000 shares of its common stock. Should the Note be extended, the Company will issue an additional 5,000,000 shares. The Warrant agreement allows for AJB to purchase 6,000,000 shares at $0.05 per share and has a five-year term.              

 

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

 

For the three months ended March 31, 2022, GrowLife is reporting a 49% decline in EZ-CLONE revenue compared to the same period of the prior year. Gross profit for the three months ended March 31, 2022 declined to 49% compared to 54% for the same period the prior year. Operating expenses increased 2% to $1,085,000 compared to the same period the prior year. As a result, the loss from operations increased to $662,000 for the three months ended March 31, 2022 compared to a loss of $164,000 for the three months ended March 31, 2021.

 

GrowLife expenses from financing in other expenses includes changes in derivative, interest expenses and debt conversions had a great improvement with a decline in the three months ended March 31, 2022 from the same period the prior year as they were reduced from a $2,576,000 loss to $225,000 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 March 31, 2022, we had 14 full-time and part-time employees. Marco Hegyi, our Chief Executive Officer, is based in Kirkland, Washington. In addition, we employ 12 full-time and part time employees at EZ-CLONE in Sacramento, CA. None of our employees are subject to a collective bargaining agreement or represented by a trade or labor union.

 

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.    

 

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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.

 

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.

 

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 MARCH 31, 2022, AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2021

  

		Three Months ended March 31, (Dollars in thousands)
		2022				2021				$ Variance				% Variance
Net revenue		$	860			$	1,673			$	(813	)			-49	%
Cost of good sold			443				777				(334	)			-43	%
Gross profit			417				896				(479	)			-53	%
Operating expenses			993				1,060				(67	)			-6	%
Operating (loss)			(576	)			(164	)			(412	)			251	%
Other expense
Change in fair value of derivative			(78	)			(61	)			(17	)			28	%
Interest expense, net			(137	)			(784	)			647				-83	%
Loss on debt conversions			(18	)			(1,731	)			1,713				-99	%
Gain on debt forgiveness			165								165				100	%
Total other income (expense)			(68	)			(2,576	)			2,508				-97	%
(Loss) before income taxes			(644	)			(2,740	)			2,096				-76	%
Income taxes			35				(137	)			172				-126	%
Net (loss)		$	(609	)		$	(2,877	)		$	2,268				-79	%

  

Net revenue for the three months ended March 31, 2022, decreased by $813,000 to $860,000 from $1,4673,000 for the three months ended March 31, 2021. The decreased performance of EZ-CLONE revenue is a result EZ-CLONE's lower backlog and a d--ecrease in the business environment for the products.

 

Cost of Goods Sold

 

Cost of sales for the three months ended March 31, 2022, decreased by $334,000 to $443,000 from $777,000 for the three months ended March 31, 2021. The decrease was due to the decreased EZ-CLONE sales, as discussed above.

 

Gross profit was $418,000 for the three months ended March 31, 2022, as compared to a gross profit of $896,000 for the three months ended March 31, 2021. The gross profit percentage was 49% for the three months ended March 31, 2022, as compared to 54% for the three months ended March 31, 2021. The decrease was due to significant decline EZ-CLONE revenueand increase freight costs.

 

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Operating Expenses

 

Operating expenses for the three months ended March 31, 2022, were $993,000 as compared to $1,060,000 for the three months ended March 31, 2021. The decrease was related to decrease in compensation and related benefit costs.

  

Other Expense

 

Other expense for the three months ended March 31, 2022, was $68,000 as compared to $2,576,000 for the three months ended March 31, 2021. The decrease in other income (expense) for the three months ended March 31, 2022 compared to the same period the prior year, included (i) a decrease in the change in fair value of the derivative liability of $17,000 (ii) a decrease in interest expense of $647,000; (iii) a decrease in loss on debt conversions of $1,713,000 due to the decrease in the amount of convertible debt converted into stock of the Company and (iv) gain on forgiveness of one of the EIDL loans by the government of $165,000. 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.

 

Net Loss

 

Net loss for the three months ended March 31, 2022 was $607,000 as compared to $2,877,000 for the three months ended March 31, 2021, for the reasons discussed above.

 

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 March 31, 2022, we had an accumulated deficit of $161 million, cash and cash equivalents of $449,000 and a working capital deficit of $2,042,000, excluding derivative liability, convertible debt, acquisition costs payable in stock and right of use liability. Net cash used in operating activities was $166,000 for the three months ended March 31, 2022.

 

The Company believes that its cash on hand will be sufficient to fund our operations until July 31, 2022. 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. See Note 19 – Subsequent Events.

 

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.

 

January 4, and March 22, 2022, Sixth Street Lending Financing

 

On January 4, 2022, and March 22, 2022 the Company executed the following agreements with Sixth Street Lending LLC: (i) Securities Purchase Agreement; (ii) and Convertible Promissory Note (collectively the “Sixth Street Agreements”). The Company entered into the Sixth Street Agreements with the intent to acquire working capital to grow the Company’s businesses and to repay certain outstanding obligations owed.

 

The total purchase price for these Notes is $310,200; the Notes carry an aggregate original issue discount of $32,500 and a transaction expense amount of $7,700. The Company agreed to reserve five times the number of shares based on the redemption value with a minimum of 101,063,653 shares of its common stock for issuance upon conversion of the Notes, if that occurs in the future. If not converted sooner, the Notes are due one year from the execution date. The Note has an interest rate of eight percent (8%) per annum. The Notes are convertible, at Sixth Street’s option, into the Company’s common stock at a 25% discount from the market price.

 

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Operating Activities

 

Net cash used in operating activities for the three months ended March 31, 2022, was $166,000. This amount was primarily related to a (i) net loss of $348,000; and (ii) a net working capital increase of $157,000; (iii) depreciation of $14,000; (iv) amortization of intangible assets of $168,000; (v) accrued interest and amortization of issuance costs on convertible notes payable and losses on conversions of $119,000; (v) change in derivative liability of $111,000; and (vi) gain on forgiveness of debt of $166,000.

 

Financing Activities

 

Net cash provided by financing activities for the three months ended March 31, 2022, was $251,000. The amount related to proceeds from note payable of $270,000, offset by repayment of notes payable of $19,000.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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

 

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. Based on this evaluation, our principal executive and principal financial officers concluded as of March 31, 2022, 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, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

 

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

 

Audit Committee:

 

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

 

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

 

Contractual Terms and Obligations

 

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

 

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

 

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

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control-Integrated Framework. Based on its evaluation, management has concluded that the Company’s internal control over financial reporting was not effective as of March 31, 2022.

 

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

 

c) Changes in Internal Control over Financial Reporting

 

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

 

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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 and its officer 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. After reviewing all pleadings and oral arguments at the hearing, the Court issued a ruling granting Plaintiffs’ request for a preliminary injunction. The parties provided legal briefs to the Federal court to determine if rescission should be granted. The Court did not reach a decision on this issue, and denied without prejudice, the Company’s effort to reverse the preliminary injunction. The Company is currently reviewing all options in this matter including settlement discussions.

 

As of December 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 March 31, 2022 and December 31, 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%.

 

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ITEM 1A. Risk Factors.

 

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

 

ITEM 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 March 31, 2022, we had the following sales of unregistered sales of equity securities:

 

Debt of $356,900 was converted into 27,657,700 shares of our common stock at a per share conversion price of $0.013.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

 

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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 740,000,000 shares. Filed herewith.
4.1				GrowLife, Inc. Second Amended and Restated 2017 Stock Incentive Plan filed as an Annex 1 to the Company’s Definitive Revised Schedule 14A filed with the SEC on September 24, 2021, and hereby incorporated by reference.
4.2				Form of Warrants. Filed as exhibits to the Company’s Form 8-K and filed with the SEC on February 28, 2020, and hereby incorporated by reference.
10.1				Compilation of Securities Purchase Agreement and Warrant to Purchase Common Stock dated February 9, 2018 entered into by and between GrowLife, Inc. and St. George Investments LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on February 15, 2018, and hereby incorporated by reference.
10.2				Compilation of Securities Purchase Agreement, Secured Promissory Notes, and Security Agreement by and between GrowLife, Inc. and Iliad Research and Trading, L.P. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 16, 2018, and hereby incorporated by reference.
10.3				Rights Offering to Shareholders filed in Amendment No.1 of Form S-1. Filed with the SEC on September 18, 2018, and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on September 21, 2018, and hereby incorporated by reference.
10.4				Rights Offering to Shareholders filed in Amendment No.1 of Form S-1. Filed with the SEC on September 18, 2018, and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on September 21, 2018, and hereby incorporated by reference.
10.5				Purchase and Sale agreement dated October 10, 2018, by and between GrowLife, Inc. and EZ-CLONE Enterprises LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 18, 2018, and hereby incorporated by reference.
10.6				Compilation of Securities Purchase Agreement, Warrant, Secured Promissory Notes, and Security Agreement by and between GrowLife, Inc. and Iliad Research and Trading, L.P. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 17, 2018, and hereby incorporated by reference.
10.7				Marco Hegyi Employment Agreement dated October 15, 2018. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 17, 2018, and hereby incorporated by reference.
10.8				Joseph Barnes Employment Agreement dated October 15, 2018. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 17, 2018, and hereby incorporated by reference.
10.9				Termination of Existing Agreements and Release Agreement accepted February 15, 2019, entered into by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on February 20, 2019, and hereby incorporated by reference.
10.10				Compilation of Securities Purchase Agreement, Secured Promissory Notes, and Security Agreement by and between GrowLife, Inc. and Odyssey Research and Trading, LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 30, 2019, and hereby incorporated by reference.
10.11				Amendment No. 1 to Purchase and Sale Agreement dated October 23, 2019, entered into by between GrowLife, Inc. and William Blackburn. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 12, 2019, and hereby incorporated by reference.
10.12				Compilation of Securities Purchase Agreement, Secured Promissory Notes, and Security Agreement. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on February 5, 2020, and hereby incorporated by reference.
10.13				Compilation of Labrys Securities Purchase Agreement, Self-Amortization Promissory Note and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 15, 2020, and hereby incorporated by reference.
10.14				Compilation of EMA Securities Purchase Agreement, Self-Amortization Promissory Note and Other Agreements. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 15, 2020, and hereby incorporated by reference.

 

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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		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.
10.18		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.
10.19		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.
10.20		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.
10.21		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 November 12, 2021, and hereby incorporated by reference.
10.22		Securities Purchase Agreement and Convertible Promissory Note with Sixth Street Lending LLC dated January 4, 2022.  Filed with the SEC on May 16, 2022 as exhibit to our Form 10-K and incorporated herein by reference.
10.23		Securities Purchase Agreement and Convertible Promissory Note with Sixth Street Lending LLC dated March 8, 2022. Filed with the SEC on May 16, 2022 as exhibit to our Form 10-K and incorporated herein by reference.
10.24		Compilation of AJB Capital Investments LLC, Securities Purchase Agreement, and Other Agreements dated May 17, 2022. *
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 *
99.1		Amended and Restated Audit Committee Charter, dated October 16, 2015. Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on October 26, 2015, and hereby incorporated by reference.
99.2		Compensation Committee Charter dated May 15, 2014. Attached as an exhibit to the Company’s Form 8-K dated June 3, 2014 and filed with the SEC on June 9, 2014, and hereby incorporated by reference.
99.3		Amended and Restated Nominations and Governance Charter, dated October 16, 2015.Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on October 26, 2015, and hereby incorporated by reference.
99.4		Amended and Restated Insider Trading Policy, dated October 16, 2015. Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on October 26, 2015, and hereby incorporated by reference.
101.INS*		Inline XBRL Instance Document
101.SCH*		Inline XBRL Taxonomy Extension Schema Document
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

*Filed Herewith.

 

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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: May 23, 2022	By:	/s/ Marco Hegyi
		Marco Hegyi
		Chief Executive Officer and President
		(Principal Executive Officer)

 

Date: May 23, 2022	By:	/s/ Marco Hegyi
		Marco Hegyi
		(Interim Principal Financial and Accounting Officer)

 

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