Company Quick10K Filing
Growlife
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 3,760 $0
10-Q 2019-11-12 Quarter: 2019-09-30
S-1 2019-09-04 Public Filing
10-Q 2019-08-09 Quarter: 2019-06-30
10-Q 2019-05-14 Quarter: 2019-03-31
10-K 2019-03-08 Annual: 2018-12-31
10-Q 2018-11-14 Quarter: 2018-09-30
S-1 2018-08-31 Public Filing
10-Q 2018-08-02 Quarter: 2018-06-30
10-Q 2018-05-01 Quarter: 2018-03-31
10-K 2018-03-28 Annual: 2017-12-31
10-Q 2017-11-02 Quarter: 2017-09-30
10-Q 2017-08-11 Quarter: 2017-06-30
10-Q 2017-05-08 Quarter: 2017-03-31
10-K 2017-03-31 Annual: 2016-12-31
10-Q 2016-11-14 Quarter: 2016-09-30
10-Q 2016-08-12 Quarter: 2016-06-30
10-Q 2016-05-16 Quarter: 2016-03-31
10-K 2016-04-14 Annual: 2015-12-31
10-Q 2015-12-01 Quarter: 2015-09-30
10-Q 2015-11-13 Quarter: 2015-06-30
10-Q 2015-10-14 Quarter: 2015-03-31
10-K 2015-09-30 Annual: 2014-12-31
10-Q 2014-11-19 Quarter: 2014-09-30
10-Q 2014-08-19 Quarter: 2014-06-30
10-Q 2014-05-15 Quarter: 2014-03-31
10-K 2014-03-31 Annual: 2013-12-31
10-Q 2013-11-14 Quarter: 2013-09-30
10-Q 2013-08-13 Quarter: 2013-06-30
10-Q 2013-05-14 Quarter: 2013-03-31
10-K 2013-04-01 Annual: 2012-12-31
10-Q 2012-11-15 Quarter: 2012-09-30
10-Q 2012-08-20 Quarter: 2012-06-30
10-Q 2012-05-15 Quarter: 2012-03-31
10-K 2012-04-04 Annual: 2011-12-31
10-Q 2011-11-21 Quarter: 2011-09-30
10-Q 2011-08-15 Quarter: 2011-06-30
10-Q 2011-05-17 Quarter: 2011-03-31
10-K 2011-02-02 Annual: 2010-12-31
10-K 2010-12-13 Annual: 2010-09-30
10-Q 2010-08-13 Quarter: 2010-06-30
10-Q 2010-05-13 Quarter: 2010-03-31
10-Q 2010-01-13 Quarter: 2009-12-31
8-K 2019-11-26 Amend Bylaw, Other Events, Exhibits
8-K 2019-11-18 Other Events
8-K 2019-11-14 M&A, Exhibits
8-K 2019-11-05 Enter Agreement, M&A, Off-BS Arrangement
8-K 2019-10-03 Exhibits
8-K 2019-07-23 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2019-03-08
8-K 2019-03-04 Exhibits
8-K 2019-02-15 Leave Agreement, Sale of Shares, Regulation FD
8-K 2018-12-06 Officers, Other Events
8-K 2018-12-06 Regulation FD
8-K 2018-11-16 Regulation FD
8-K 2018-11-08 Regulation FD
8-K 2018-10-15 Enter Agreement, M&A, Off-BS Arrangement
8-K 2018-10-15 Exhibits
8-K 2018-10-15 Enter Agreement, Off-BS Arrangement, Sale of Shares
8-K 2018-09-18
8-K 2018-08-17 Enter Agreement, M&A, Off-BS Arrangement, Exhibits
8-K 2018-08-10 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2018-03-20 Sale of Shares, Exhibits
8-K 2018-03-20 Other Events, Exhibits
8-K 2018-03-12 Enter Agreement, Other Events, Exhibits
8-K 2018-02-16 Enter Agreement, M&A, Other Events, Exhibits
8-K 2018-02-09 Enter Agreement, Sale of Shares, Other Events, Exhibits
8-K 2018-02-02 Other Events
8-K 2017-10-05
PHOT 2019-09-30
Item 1. Financial Statements
Note 1 – Description of Business and Organization
Note 2 – Liquidity and Management Plan  
Note 3 – Significant Accounting Policies: Adoption of Accounting Standards
Note 4 – Transactions
Note 5 – Inventory
Note 6 – Property and Equipment
Note 7 – Intangible Assets
Note 8- Leases
Note 9- Accounts Payable
Note 10- Accrued Expenses
Note 11– Convertible Notes Payable, Net
Note 12 – Derivative Liability
Note 13 – Related Party Transactions and Certain Relationships
Note 14 – Equity
Note 15– Stock Options
Note 16 – Commitments, Contingencies and Legal Proceedings
Note 17 – Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures
Part II.     Other Information
Item 1.  Legal Proceedings.
Item 1A. Risk Factors.
Item 2.                        
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5.                        
Item 6. Exhibits
EX-31.1 growlife_ex311.htm
EX-31.2 growlife_ex312.htm
EX-32.1 growlife_ex321.htm
EX-32.2 growlife_ex322.htm

Growlife Earnings 2019-09-30

PHOT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
WORK
TRWH
UGRO
VIR
XTEG
VERY
VIE
BLPG 0 2 5 3 1 -4 -4 -0 32% 0.0 -282%
DGTW 0 0 3 -0 -0 -6 -4 -0 12,618% 0.0 -16,557%
BHAT

10-Q 1 growlife_10q.htm FORM 10-Q Blueprint
 
 

 
 
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 ended September 30, 2019
OR
 
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
(State or other jurisdiction of
incorporation or organization)
90-0821083
(I.R.S. Employer Identification No.)
 
5400 Carillon Point
Kirkland, WA 98033
(Address of principal executive offices and zip code)
 
(866) 781-5559
 (Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2
 
Large accelerated filer
Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
 
As of November 12, 2019, there were 3,858,188,075 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.
 
 

 
 
 

TABLE OF CONTENTS
 
 
   
 PAGE
PART I FINANCIAL INFORMATION
 
ITEM 1
 3
 
 3
 
 4
 
 5
 
 6
 
 7
ITEM 2
 25
ITEM 3
 37
ITEM 4
 37
 
 38
ITEM 1
 38
ITEM 1A
 38
ITEM 2
 47
ITEM 3
 47
ITEM 4
 47
ITEM 5
 47
ITEM 6
 48
 
                  SIGNATURES
 52
 
 
 

 
 

 
 
ITEM 1.
FINANCIAL STATEMENTS
 
GROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS 
 
 
 
September 30, 2019
 
 
December 31, 2018
 
ASSETS
 
(Unaudited)
 
 
 (Audited)
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
Cash and cash equivalents
 $201,072 
 $2,334,377 
Accounts receivable - trade, net of allowance for doubtful accounts of $5,690 as of 9/30/2019 and 12/31/2018
  451,829 
  42,254 
Inventory, net
  705,682 
  792,664 
Prepaid costs
  40,877 
  3,418 
Deposits
  43,416 
  51,916 
Current portion of right of use asset
  153,756 
  - 
Total current assets
  1,596,632 
  3,224,629 
 
    
    
PROPERTY AND EQUIPMENT, NET
  180,989 
  712,866 
INTANGIBLE ASSETS
  2,424,682 
  3,280,453 
NON-CURRENT PORTION OF RIGHT OF USE ASSET
  423,205 
  - 
TOTAL ASSETS
 $4,625,508 
 $7,217,948 
 
    
    
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
    
    
 
    
    
CURRENT LIABILITIES:
    
    
Accounts payable - trade
 $1,390,381 
 $1,054,371 
Accrued expenses
  417,135 
  261,954 
Accrued expenses - related parties
  24,793 
  73,585 
Derivative liability
  1,434,074 
  1,795,473 
Convertible notes payable
  3,262,710 
  3,404,133 
Notes payable- related parties
  104,144 
  100,020 
Capital lease payable
  1,241 
  8,534 
Deferred revenue
  - 
  89,504 
Current portion of right of use liability
  140,772 
  - 
Total current liabilities
  6,775,250 
  6,787,574 
 
    
    
NON-CURRENT PORTION OF RIGHT OF USE LIABILITY
  445,927 
  - 
 
    
    
COMMITMENTS AND CONTINGENCIES
  - 
  - 
 
    
    
STOCKHOLDERS' DEFICIT
    
    
Preferred stock - $0.0001 par value, 10,000,000 shares authorized, no shares
    
    
 issued and outstanding
  - 
  - 
Common stock - $0.0001 par value, 6,000,000,000 shares authorized, 3,858,188,075
    
    
and 3,437,599,095 shares issued and outstanding at 9/30/2019 and 12/31/2018, respectively
  385,807 
  343,749 
Additional paid in capital
  142,374,422 
  139,331,067 
Accumulated deficit
  (147,198,605)
  (141,176,087)
Total stockholders' deficit
  (4,438,376)
  (1,501,271)
 
    
    
NON CONTROLLING INTEREST IN EZ-CLONE ENTERPRISES, INC.
  1,842,707 
  1,931,645 
 
    
    
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
 $4,625,508 
 $7,217,948 
 
    
    
 
The accompanying notes are an integral part of these consolidated financial statements.
 
  
3
 
 
GROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
Three Months Ended,
 
 
Nine Months Ended,
 
 
 
September 30, 2019
 
 
September 30, 2018
 
 
September 30, 2019
 
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET REVENUE
 $2,298,792 
 $953,949 
 $6,743,804 
 $2,871,300 
COST OF GOODS SOLD
  1,552,892 
  898,962 
  4,551,223 
  2,628,413 
GROSS PROFIT
  745,900 
  54,987 
  2,192,581 
  242,887 
GENERAL AND ADMINISTRATIVE EXPENSES
  1,810,190 
  1,116,724 
  5,992,915 
  3,220,994 
RESTRUCTURING EXPENSE- FLOORING DIVISION
  305,895 
  - 
  305,895 
  - 
RESTRUCTURING EXPENSE- RETAIL STORES AND ONLINE SALES
  250,000 
  - 
  250,000 
  - 
OPERATING LOSS
  (1,620,185)
  (1,061,737)
  (4,356,229)
  (2,978,107)
 
    
    
    
    
OTHER INCOME (EXPENSE):
    
    
    
    
Change in fair value of derivative
  (147,331)
  (120,286)
  361,179 
  1,534,812 
Interest expense, net
  (182,323)
  (365,859)
  (409,666)
  (1,075,092)
Impairment of acquired assets
  - 
  (60,000)
  - 
  (60,000)
Loss on debt conversions
  (132,131)
  (645,483)
  (1,706,740)
  (5,999,009)
Total other expense, net
  (461,785)
  (1,191,628)
  (1,755,227)
  (5,599,289)
 
    
    
    
    
LOSS BEFORE INCOME TAXES
  (2,081,970)
  (2,253,365)
  (6,111,456)
  (8,577,396)
 
    
    
    
    
Income taxes - current benefit
  - 
  - 
  - 
  - 
 
    
    
    
    
NET LOSS
  (2,081,970)
  (2,253,365)
  (6,111,456)
  (8,577,396)
 
    
    
    
    
Net loss attrituable to noncontrolling interest in EZ-Clone Enterprises, Inc.
  82,219 
  - 
  88,938 
  - 
 
    
    
    
    
NET LOSS ATTRIBUTABLE TO GROWLIFE, INC. AND SUBSIDIARIES
 $(1,999,751)
 $(2,253,365)
 $(6,022,518)
 $(8,577,396)
COMMON SHAREHOLDERS
    
    
    
    
 
    
    
    
    
Basic and diluted loss per share
 $(0.00)
 $(0.00)
 $(0.00)
 $(0.00)
 
    
    
    
    
Weighted average shares of common stock outstanding- basic and diluted
  3,811,207,769 
  2,996,701,771 
  3,699,619,210 
  2,882,328,973 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
  
4
 
  
 GROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
 
 
 
 Common Stock
 
 
 Additional Paid
 
 
 Accumulated
 
 
 Stockholders'
 
 
 
 Shares
 
 
 Amount
 
 
 in Capital
 
 
 Deficit
 
 
 (Deficit)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2018
  2,367,634,022 
  236,752 
  123,678,069 
  (129,731,305)
  (5,816,484)
Stock based compensation for stock options
  - 
  - 
  5,898 
  - 
  5,898 
Stock based compensation for warrants
  - 
  - 
  48,750 
  - 
  48,750 
Shares issued for debt conversion
  900,000 
  90 
  17,910 
  - 
  18,000 
Shares issued for services rendered
  7,660,274 
  766 
  152,440 
  - 
  153,206 
Shares issued for convertible note and interest conversion
  482,267,243 
  48,227 
  7,302,052 
  - 
  7,350,279 
Shares issued for common stock
  55,098,118 
  5,510 
  1,094,490 
  - 
  1,100,000 
Net loss for the three months ended March 31, 2018
  - 
  - 
  - 
  (4,241,875)
  (4,241,875)
 
    
    
    
    
    
Balance as of March 31, 2018
  2,913,559,657 
  291,345 
  132,299,609 
  (133,973,180)
  (1,382,226)
 
    
    
    
    
    
Stock based compensation for stock options
  - 
  - 
  10,231 
  - 
  10,231 
Stock based compensation for warrants
  - 
  - 
  48,750 
  - 
  48,750 
Shares issued for convertible note and interest conversion
  31,126,632 
  3,113 
  622,229 
  - 
  625,342 
Shares issued for common stock
  10,078,700 
  1,008 
  198,992 
  - 
  200,000 
Net loss for the three months ended June 30, 2018
  - 
  - 
  - 
  (2,082,156)
  (2,082,156)
 
    
    
    
    
    
Balance as of June 30, 2018
  2,954,764,989 
  295,466 
  133,179,811 
  (136,055,336)
  (2,580,059)
 
    
    
    
    
    
Stock based compensation for stock options
  - 
  - 
  13,481 
  - 
  13,481 
Stock based compensation for warrants
  - 
  - 
  48,750 
  - 
  48,750 
Shares issued for convertible note and interest conversion
  99,453,385 
  9,945 
  1,285,758 
  - 
  1,295,703 
Net loss for the three months ended September 30, 2018
  - 
  - 
  - 
  (2,253,365)
  (2,253,365)
 
    
    
    
    
    
Balance as of September 30, 2018
  3,054,218,374 
  305,411 
  134,527,800 
  (138,308,701)
  (3,475,490)
 
    
    
    
    
    
Balance as of January 1, 2019
  3,437,599,095 
  343,749 
  139,331,067 
  (141,176,087)
  (1,501,271)
Stock based compensation for stock options
  - 
  - 
  16,016 
  - 
  16,016 
Stock based compensation for warrants
  - 
  - 
  24,000 
  - 
  24,000 
Shares issued for debt conversion
  - 
  - 
  - 
  - 
  - 
Shares issued for services rendered
  20,916,216 
  2,092 
  163,308 
  - 
  165,400 
Shares issued for convertible note and interest conversion
  84,156,195 
  8,416 
  726,731 
  - 
  735,147 
Shares issued for purchase of warrant
  125,000,000 
  12,500 
  987,500 
  - 
  1,000,000 
Noncontrolling interest in EZ-Clone Enterprises, Inc.
  - 
  - 
  - 
  (25,528)
  (25,528)
Net loss for the three months ended March 31, 2019
  - 
  - 
  - 
  (2,338,325)
  (2,338,325)
 
    
    
    
    
    
Balance as of March 31, 2019
  3,667,671,506 
  366,757 
  141,248,622 
  (143,539,940)
  (1,924,561)
 
    
    
    
    
    
Stock based compensation for stock options
  - 
  - 
  16,231 
  - 
  16,231 
Stock based compensation for warrants
  - 
  - 
  24,000 
  - 
  24,000 
Shares issued for services rendered
  1,267,255 
  126 
  8,908 
  - 
  9,034 
Shares issued for convertible note and interest conversion
  86,861,670 
  8,685 
  589,413 
  - 
  598,098 
Warrant exercise
  3,916,667 
  392 
  (392)
  - 
  - 
Noncontrolling interest in EZ-Clone Enterprises, Inc.
  - 
  - 
  - 
  32,247 
  32,247 
Net loss for the three months ended June 30, 2019
  - 
  - 
  - 
  (1,690,941)
  (1,690,941)
 
    
    
    
    
    
Balance as of June 30, 2019
  3,759,717,098 
  375,960 
  141,886,782 
  (145,198,634)
  (2,935,892)
 
    
    
    
    
    
Stock based compensation for stock options
  - 
  - 
  16,356 
  - 
  16,356 
Stock based compensation for warrants
  - 
  - 
  24,000 
  - 
  24,000 
Shares issued for convertible note and interest conversion
  93,470,977 
  9,347 
  422,784 
  - 
  432,131 
Shares issued for convertible note and commitment shares
  5,000,000 
  500 
  24,500 
  - 
  25,000 
Noncontrolling interest in EZ-Clone Enterprises, Inc.
  - 
  - 
  - 
  81,999 
  81,999 
Net loss for the three months ended September 30, 2019
  - 
  - 
  - 
  (2,081,970)
  (2,081,970)
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
5
 
 
GROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Nine Months Ended,
 
 
 
September 30, 2019
 
 
September 30, 2018
 
 
 
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net loss
 $(6,022,518)
 $(8,577,396)
Adjustments to reconcile net loss to net cash (used in)
    
    
operating activities
    
    
Depreciation
  68,655 
  50,292 
Restructuring Expense - stores & flooring
  555,895 
  - 
Amortization of intangible assets
  855,771 
  - 
Stock based compensation
  120,603 
  175,860 
Common stock issued for services
  174,435 
  153,206 
Amortization of debt discount
  - 
  660,472 
Change in fair value of derivative liability
  (361,179)
  (1,542,060)
Accrued interest on convertible notes payable
  185,032 
  301,885 
Loss on debt conversions
  1,706,740 
  6,170,022 
Noncontrolling interest in EZ-CLONE Enterprises, Inc.
  88,938 
  - 
Changes in operating assets and liabilities:
    
    
Accounts receivable
  (409,575)
  - 
Inventory
  86,982 
  (20,983)
Prepaids costs
  (37,459)
  - 
Deposits
  8,500 
  - 
Right of use, net
  9,738 
  - 
Accounts payable
  336,010 
  150,820 
Accrued expenses
  110,812 
  120,872 
Deferred revenue
  (89,504)
  - 
 CASH (USED IN) OPERATING ACTIVITIES
  (2,612,125)
  (2,357,010)
 
    
    
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
Investment in purchased assets
  (5,319)
  (250,000)
NET CASH (USED IN) INVESTING ACTIVITIES:
  (5,319)
  (250,000)
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
Repayment of convertible notes payable
  (659,205)
  - 
Proceeds from Crossover Capital Find I LLC Secured Advance Note
  250,000 
    
Proceeds from notes payable
  900,637 
  1,435,000 
Repayment on capital lease
  (7,293)
  - 
Share issuances to St. George Investments LLC
  - 
  1,300,000 
NET CASH PROVIDED BY FINANCING ACTIVITIES
  484,139 
  2,735,000 
 
    
    
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
  (2,133,305)
  127,990 
 
    
    
CASH AND CASH EQUIVALENTS, beginning of period
  2,334,377 
  69,191 
 
    
    
CASH AND CASH EQUIVALENTS, end of period
 $201,072 
 $197,180 
 
    
    
Supplemental disclosures of cash flow information:
    
    
 
    
    
Non-cash investing and financing activities:
    
    
Shares issued for convertible note and interest conversion
 $745,000 
 $3,067,295 
Common shares issued for accounts payable
 $- 
 $18,000 
Shares issued for purchase of warrant from CANX USA LLC
 $1,000,000 
 $- 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
6
 
GROWLIFE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
 
The accompanying unaudited condensed consolidated financial statements of GrowLife, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated financial statements have been included.
 
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on March 8, 2019. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results for the year ending December 31, 2019 or any future interim period.
 
These financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report filed on Form 10-K for the year ended December 31, 2018. The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results expected for the full fiscal year, or for any other fiscal period.
 
GrowLife, Inc. (“GrowLife” or the “Company”) is incorporated under the laws of the State of Delaware and is headquartered in Kirkland, Washington. The Company was founded in 2012 with the Closing of the Agreement and Plan of Merger with SGT Merger Corporation. On June 7, 2013, GrowLife Hydroponics completed the purchase of Rocky Mountain Hydroponics, LLC, a Colorado limited liability company (“RMC”), and Evergreen Garden Center, LLC, a Maine limited liability company (“EGC”). The effective date of the purchase was June 7, 2013.
 
The Company’s goal of becoming the nation’s largest cultivation facility service provider for the production of organics, herbs and greens and plant-based medicines has not changed. The Company’s mission is to best serve more cultivators in the design, build-out, expansion and maintenance of their facilities with products of high quality, exceptional value and competitive price. Through a nationwide network of knowledgeable representatives, GrowLife provides essential and hard-to-find goods including media (i.e., farming soil), industry-leading hydroponics equipment, organic plant nutrients, and thousands more products to specialty grow operations across the United States.
 
On October 15, 2018, in connection with the Company’s strategy to become a dominate cultivation facilities provider, the Company closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation. EZ-CLONE is the manufacturer of multiple award-winning products specifically designed for the commercial cloning and propagation stage of indoor plant cultivation including cannabis, food, and other hydroponic farming. The Company acquired 51% of EZ-CLONE stock for $2,040,000, payable as follows: (i) a cash payment of $645,000; and (ii) the issuance of 107,307,692 restricted shares of the Company’s common stock at a price of $0.013 per share or $1,395,000. The Company is consolidating the operations of EZ-Clone and treating the 49% that the Company does not control as non-controlling interest.
 
The Company has the obligation with the delivery of EZ-CLONE common stock to acquire the remaining 49% of EZ-CLONE within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000. On November 5, 2019, the Company extended the closing of the remaining 49% with one 24.5% shareholder by up to nine months by agreeing to a 20% extension fee of the $855,000 cash payment, payable at the earlier of the closing of $2,000,000 in funding or the nine months. The Company continues to negotiate with the second shareholder for the remaining 24.5%.
 
 
 
7
 
 
 
As of September 30, 2019, the Company closed retail stores in Portland, Maine, Encino, California and Calgary, Canada and online sales. Also, we are expecting to close the sale of the flooring division located in Grand Prairie, Texas. The Company expects to reduce losses and cash costs by up to $100,000 per month starting October 1, 2019. As of September 30, 2019, The Company recorded restructuring expense of $306,000 for the closure of the flooring division primarily related to equipment write down and $250,000 for the closure of the retail stores, related store leases and online sales. See Note 4 for additional details.
 
On October 17, 2017, the Company was informed by Alpine Securities Corporation (“Alpine”) that Alpine has demonstrated compliance with the Financial Industry Regulatory Authority (“FINRA”) Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of 1934. The Company filed an amended application with the OTC Markets to list the Company’s common stock on the OTCQB and begin to trade on this market as of March 20, 2018. As of March 4, 2019, the Company no longer trades on the OTCQB, but is not quoted on the pink sheets quotation system. As a result of the Company’s bid price closing below $0.01 for more than 30 consecutive calendar days. 
 
NOTE 2
LIQUIDITY AND MANAGEMENT PLAN
 
The Company has 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 the Company will continue as a going concern. However, since inception, the Company has sustained significant operating losses and such losses are expected to continue for the foreseeable future. As of September 30, 2019, the Company had an accumulated deficit of $$147,198,605, cash and cash equivalents of $201,072 and a working capital deficit of $494,818, (less derivative liability, convertible debt, right of use liability and deferred revenue). Additionally, the Company used in operating activities $2,612,125, $3,854,506, and $2,082,493 for the nine months ended September 30, 2019 and the years ended December 31, 2018 and 2017 respectively. The Company will require additional cash funding to fund operations through November 2020. Accordingly, management has concluded that the Company does not have sufficient funds to support operations within one year after the date the financial statements are issued and, therefore, the Company concluded there was substantial doubt about the Company’s ability to continue as a going concern.
 
To fund further operations, the Company will need to raise additional capital. The Company may obtain additional financing in the future through the issuance of its common stock, or through other equity or debt financings. The Company’s 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, the Company will likely be required to reduce its planned expenditures, which could have an adverse impact on the results of operations, financial condition and the Company’s 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 the Company’s ability to continue as a going concern and have a material adverse effect on the Company’s future financial results, financial position and cash flows.
 
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS
 
Basis of Presentation - The accompanying consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”).
 
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. Inter-Company items and transactions have been eliminated in consolidation.
 
 
 
8
 
 
 
Cash and Cash Equivalents - The Company classifies highly liquid temporary investments with an original maturity of nine months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit.  At September 30, 2019, the Company had uninsured deposits in the amount of $0.
 
Accounts Receivable and Revenue – The company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which requires the application of the five-step-principles-based-accounting-model for revenue recognition. These steps include (1) a legally enforceable contract, written or unwritten is identified; (2) performance obligations in the contracts are identified; (3) the transaction price reflecting variable consideration, if any, is identified; (4) the transaction price is allocated to the performance obligations; and (5) revenue is recognized when the control of goods is transferred to the customer at a particular time or over time. Our hydroponic sales are cash or credit card. For EZ-CLONE, we extend thirty day terms to our customers. Accounts receivable are reviewed periodically for collectability.
 
Sales Returns - We allow customers to return defective products when they meet certain established criteria as outlined in our sales terms and conditions. It is our practice to regularly review and revise, when deemed necessary, our estimates of sales returns, which are based primarily on actual historical return rates. We record estimated sales returns as reductions to sales, cost of goods sold, and accounts receivable and an increase to inventory. Returned products which are recorded as inventory are valued based upon the amount we expect to realize upon its subsequent disposition. As of September 30, 2019, and December 31, 2018, there was a reserve for sales returns of $20,000, respectively, which is minimal based upon our historical experience.
 
Inventories - Inventories are recorded on a first in first out basis Inventory consists of raw materials, work in process and finished goods and components sold by EZ-CLONE to it distribution customers. In addition, finished goods includes products hydroponics, which is product purchased from distributors, and in some cases directly from the manufacturer, and resold to its hydroponics customers. Inventory is valued at the lower of cost or market. The reserve for inventory was $30,000 and $120,000 as of September 30, 2019 and December 31, 2018, respectively.
 
Property and Equipment – Equipment consists of machinery, equipment, tooling, computer equipment and leasehold improvements, which are stated at cost less accumulated depreciation and amortization. Depreciation is computed by the straight-line method over the estimated useful lives or lease period of the relevant asset, generally 3-10 years, except for leasehold improvements which are depreciated over the lesser of the life of the lease or 10 years. 
 
Long Lived Assets – The Company reviews its long-lived assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.
 
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.
 
 
 
9
 
 
 
Fair Value Measurements and Financial Instruments - ASC Topic 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
 
Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
 
Derivative financial instruments -The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
 
Stock Based Compensation - The Company has share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options and warrants to purchase shares of Company common stock at the fair market value at the time of grant. Stock-based compensation cost to employees is measured by the Company at the grant date, based on the fair value of the award, over the requisite service period under ASC Topic 718. For options issued to employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit.  Grants of stock to non-employees and other parties are accounted for in accordance with the ASC Topic 505.
 
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 September 30, 2019, there are also (i) stock option grants outstanding for the purchase of 82.5 million common shares at a $0.010 average exercise price; (ii) warrants for the purchase of 362.8 million common shares at a $0.023 average exercise price; and (iii) 118.4 million shares related to convertible debt that can be converted at $0.0025 per share. In addition, we have an unknown number of common shares to be issued under the Crossover financing agreements in the case of default. In addition, we have an unknown number of common shares to be issued under the Chicago Venture, Iliad and St. George financing agreements because the number of shares ultimately issued to Chicago Venture depends on the price at which Chicago Venture converts its debt to shares and exercises its warrants. The lower the conversion or exercise prices, the more shares that will be issued to Chicago Venture upon the conversion of debt to shares. We will not know the exact number of shares of stock issued to Chicago Venture until the debt is actually converted to equity.
 
As of September 30, 2018, there are also (i) stock option grants outstanding for the purchase of 63 million common shares at a $0.009 average exercise price; (ii) warrants for the purchase of 595 million common shares at a $0.031 average exercise price; and (iii) 109 million shares related to convertible debt that can be converted at $0.0025 per share. In addition, we have an unknown number of common shares to be issued under the Chicago Venture Partners, L.P. financing agreements.
 
 
 
10
 
 
 
Dividend Policy - The Company has never paid any cash dividends and intends, for the foreseeable future, to retain any future earnings for the development of our business. Our future dividend policy will be determined by the board of directors on the basis of various factors, including our results of operations, financial condition, capital requirements and investment opportunities.
 
Use of Estimates - In preparing these unaudited interim consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions included in our consolidated financial statements relate to the valuation of long-lived assets, estimates of sales returns, inventory reserves and accruals for potential liabilities, and valuation assumptions related to derivative liability, equity instruments and share based compensation. 
 
Recent Accounting Pronouncements
 
A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to the Company’s consolidated financial statements.
 
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new standard effective January 1, 2019 on a modified retrospective basis and did not restate comparative periods. The Company elected the package of practical expedients permitted under the transition guidance, which allows the Company to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and the Company’s initial direct costs for any leases that exist prior to adoption of the new standard. The Company also elected to combine lease and non-lease components and to keep leases with an initial term of twelve months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term.
 
The Company determines if an arrangement is a lease at inception. Operating and finance leases are included in Right of Use ("ROU") assets, and lease liability obligations in the Company’s consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liability obligations represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company accounts for lease agreements with lease and non-lease components and account for such components as a single lease component. As most of the Company’s leases do not provide an implicit rate, we estimated our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The ROU asset also includes any lease payments made and excludes lease incentives and lease direct costs. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. Please refer to Note 8 for additional information.
 
NOTE 4 – TRANSACTIONS
 
Acquisition of 51% of EZ-CLONE Enterprises, Inc.
 
On October 15, 2018, in connection with the Company’s strategy to become a dominate cultivation facilities provider, the Company closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation that was founded in January 2000. EZ-CLONE is the manufacturer of multiple award-winning products specifically designed for the commercial cloning and propagation stage of indoor plant cultivation including cannabis, food, and other hydroponic farming. The Company has proprietary products and services such as the Commercial Pro System, Hobbyist Cloning Systems, Cloning Tents, Coco Collars, Coco Seed Starters, Rooting Gel, and Clear Rez. Technical Support, know-how and overall knowledge is also considered proprietary. The Company trademarks are EZ-CLONE and EZ-CLONE CRIB.
 
 
 
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This acquisition is expected to accelerate the Company’s revenue growth, increase the Company gross margins and add additional manufacturing and research and development personnel.
 
The Company acquired 51% of EZ-CLONE for $2,040,000, payable as follows: (i) a cash payment of $645,000; and (ii) the issuance of 107,307,692 restricted shares of the Company’s common stock at a price of $0.013 per share or $1,395,000. The Company has the obligation with the delivery of EZ-CLONE common stock to acquire the remaining 49% of EZ-CLONE within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000. On November 5, 2019, the Company extended the closing of the remaining 49% with one 24.5% shareholder by up to nine months by agreeing to a 20% extension fee of the $855,000 cash payment, payable at the earlier of the closing of $2,000,000 in funding or the nine months. The Company continues to negotiate with the second shareholder for the remaining 24.5%.
 
The cost to acquire these assets has been preliminarily allocated to the assets acquired according to estimated fair values and is subject to adjustment when additional information concerning asset valuations is finalized, but no later than December 31, 2019. The preliminary purchase price allocation is as follows:
 
Item
  
 Common Stock
 $1,395,000 
 Cash
  645,000 
Assets acquired
  (911,294)
Liabilities acquired
  334,375 
Non-controlling interest
  1,960,000 
 
    
Intangibles acquired
 $3,423,081 
 
 
The results of operations of EZ-CLONE were included in the Consolidated Statements of Operations for the period October 15, 2018 to September 30, 2019.
 
Termination of Agreements with CANX, LLC
 
On February 15, 2019, the Company entered into a Termination of Existing Agreements and Release with CANX USA, LLC, a Nevada limited liability company. In exchange for the Agreement and cancellation of the CANX Agreements and Warrants, the Company agreed to issue $1,000,000 of restricted common stock priced at the February 7, 2019 closing price of $0.008, or 125,000,000 restricted common stock shares. The Company recorded a loss on debt conversion of $1,000,000 during the nine months ended September 30, 2019. Pursuant to the Agreement, the Parties agreed to terminate, release and discharge all existing and further rights and obligations between the Parties under, arising out of, or in any way related to that certain Waiver and Modification Agreement and Amended and Restated Joint Venture Agreement made as of July 10, 2014, and any ancillary agreements or instruments thereto, including, but not limited to, the Warrants issued to CANX entitling CANX to purchase 540,000,000 shares of the Company’s common stock at an exercise price of $0.033.
 
 
 
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Restructuring Expense
 
As of September 30, 2019, the Company closed retail stores in Portland, Maine, Encino, California and Calgary, Canada and online sales. Also we are expecting to close the sale of the flooring division located in Grand Prairie, Texas. The Company expects to reduce losses and cash costs by up to $100,000 per month starting October 1, 2019. As of September 30, 2019, The Company recorded restructuring expense of $306,000 for the sale of the flooring division and $250,000 for the closure of the retail stores and online sales.
 
On October 3, 2017, the Company closed the acquisition of 51% of the Purchased Assets from David Reichwein, a Pennsylvania resident, GIP International Ltd, a Hong Kong corporation and DPR International LLC, a Pennsylvania limited liability corporation. The Purchased Assets include intellectual property, copy rights and trademarks related to reflective tiles and flooring.
The Company did not acquire business, customer lists or employees.
 
The Company acquired its 51% interest in the Purchased Assets for $400,000. The Company funded equipment and rent of an office lease. On February 16, 2018, the Company purchased the remaining 49% of the Purchased Assets in exchange for a one-time payment of $250,000.
 
NOTE 5 – INVENTORY
 
Inventory as of September 30, 2019 and December 31, 2018 consisted of the following:
 
 
 
September 30,
 
 
December 31,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Raw materials
 $515,862 
 $417,570 
Work in process
  40,147 
  35,280 
Finished goods
  179,673 
  459,814 
Inventory reserve
  (30,000)
  (120,000)
   Total
 $705,682 
 $792,664 
 
Inventory consists of raw materials, work in process and finished goods and components sold by EZ-CLONE to it distribution customers. In addition, finished goods includes products hydroponics, which is product purchased from distributors, and in some cases directly from the manufacturer, and resold to its hydroponics customers.
 
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.
 
 
 
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NOTE 6 – PROPERTY AND EQUIPMENT
 
Property and equipment as of September 30, 2019 and December 31, 2018 consists of the following:
 
 
 
September 30,
 
 
December 31,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Machinery, equipment and tooling
 $356,867 
 $943,326 
Computer equipment
  16,675 
  16,675 
Leasehold improvements
  19,922 
  14,703 
     Total property and equipment
  393,464 
  974,704 
Less accumulated depreciation and amortization
  (212,475)
  (261,839)
     Net property and equipment
 $180,989 
 $712,866 
 
 
Property and equipment, net of accumulated depreciation, were $180,989 and $712,866 as of September 30, 2019 and December 31, 2018, respectively. Accumulated depreciation was $212,475 and $261,839 as of September 30, 2019 and December 31, 2018, respectively. Total depreciation expense was $68,655 and $50,292 for the nine months ended September 30, 2019 and 2018, respectively. All equipment is used for manufacturing, selling, general and administrative purposes and accordingly all depreciation is classified in cost of goods sold, selling, general and administrative expenses.
 
On October 15, 2018, the Company acquired 51% of EZ-CLONE Enterprises, Inc. and acquired $244,203 of net property and equipment.
 
During the year ended December 31, 2018, the Company retired fully depreciated assets of $358,156. During the nine months ended September 30, 2019, the Company disposed in connection with the closure of the flooring division assets with a net book value of $423,442.
 
NOTE 7 – INTANGIBLE ASSETS
 
Intangible assets as of September 30, 2019 and December 31, 2018 consisted of the following: 
 
 
Estimated
 
September 30,
 
 
December 31,
 
 
Useful Lives
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
Customer lists
3 years
 $1,604,341 
 $1,604,341 
Intellectual property
3 years
  1,818,740 
  1,818,740 
Less: accumulated amortization
 
  (998,399)
  (142,628)
    Intangible assets, net
 
 $2,424,682 
 $3,280,453 
 
Total amortization expense was $855,771 and $0 for the nine months ended September 30, 2019 and 2018, respectively.
 
 
 
14
 
 
 
On October 15, 2018, in connection with the Company’s strategy to become a dominate cultivation facilities provider, the Company closed the Purchase and Sale Agreement the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation that was founded in January 2000. The Company acquired 51% of EZ-CLONE for $2,040,000, payable as follows: (i) a cash payment of $645,000; and (ii) the issuance of 107,307,692 restricted shares of the Company’s common stock at a price of $0.013 per share or $1,395,000. The Company has the obligation with the delivery of EZ-CLONE common stock to acquire the remaining 49% of EZ-CLONE within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000. On November 5, 2019, the Company extended the closing of the remaining 49% with one 24.5% shareholder by up to nine months by agreeing to a 20% extension fee of the $855,000 cash payment, payable at the earlier of the closing of $2,000,000 in funding or the nine months. The Company continues to negotiate with the second shareholder for the remaining 24.5%.
 
The fair value of the intangible assets associated with the assets acquired was $3,423,081 estimated by using a discounted cash flow approach based on future economic benefits. In summary, the estimate was based on a projected income approach and related discounted cash flows over five years, with applicable risk factors assigned to assumptions in the forecasted results.
 
NOTE 8- LEASES
 
The Company has entered into operating leases for retail and corporate facilities. These leases have terms which range from two to five years, and often include options to renew. These operating leases are listed as separate line items on the Company's September 30, 2019 Consolidated Balance Sheet, and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are also listed as separate line items on the Company's September 30, 2019 Consolidated Balance Sheet. Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized right-of-use assets and lease liabilities for operating leases of approximately $1,253,000 on January 1, 2019. Operating lease right-of-use assets and liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. During the quarter ended September 30, 2019, the Company has cancelled all but one lease and has recognized the rent and termination fees related to the cancelled leases as an expense in the current period. As of September 30, 2019, total right-of-use assets and operating lease liabilities for remaining long term lease was approximately $576,961 and $586,699, respectively. In the nine months ended September 30, 2019, the Company recognized approximately $167,238 in total lease costs for the lease.
 
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
 
Information related to the Company's operating right-of-use assets and related lease liabilities as of and for the nine months ended September 30, 2019 were as follows:
 
 Cash paid for ROU operating lease liability
 $167,238 
 Weighted-average remaining lease term
  4 years
 
 Weighted-average discount rate
  10%

Minimum future lease payments as of September 30, 2019
 
 
 
 2019
 $53,279 
 2020
  216,300 
 2021
  222,792 
 2022
  229,476 
 2023
  236,352 
 
  958,199 
Imputed interest
  (95,820)
Total Lease liablity
 $862,379
 
 
NOTE 9- ACCOUNTS PAYABLE
 
Accounts payable were $1,390,381 and $1,054,371 as of September 30, 2019 and December 31, 2018, respectively. Such liabilities consisted of amounts due to vendors for inventory purchases, audit, legal and other expenses incurred by the Company. The increase relates to inventory purchased at EZ-CLONE for production for sales during the quarter ended December 31, 2019.
 
 
 
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NOTE 10- ACCRUED EXPENSES
 
Accrued expenses were $417,135 and $261,954 as of September 30, 2019 and December 31, 2018, respectively. Such liabilities consisted of amounts due to sales tax, payroll and restructuring expense liabilities.
 
NOTE 11– CONVERTIBLE NOTES PAYABLE, NET
 
Convertible notes payable as of September 30, 2019 consisted of the following:
 
 
 
 
 
 
 
 
 
 
 
 
Balance
 
 
 
 
 
 
Accrued
 
 
Debt
 
 
As of
 
 
 
Principal
 
 
Interest
 
 
Discount
 
 
September 30, 2019
 
10% OID Convertible Promissory Notes
 $2,362,306 
 $300,977 
 $- 
 $2,663,283 
7% Convertible Note
  270,787 
  29,445 
  - 
  300,232 
Secured Advance Note
  299,195 
  - 
  - 
  299,195 
 
 $2,932,288 
 $330,422 
 $- 
 $3,262,710 
 
Convertible notes payable as of December 31, 2018 consisted of the following:
 
 
 
 
 
 
 
 
 
 
 
 
Balance
 
 
 
 
 
 
Accrued
 
 
Debt
 
 
As of
 
 
 
Principal
 
 
Interest
 
 
Discount
 
 
December 31, 2018
 
10% OID Convertible Promissory Notes
 $2,982,299 
 $135,780 
 $- 
 $3,118,079 
7% Convertible note
  270,787 
  15,267 
  - 
  286,054 
 
 $3,253,086 
 $151,047 
 $- 
 $3,404,133 
 
    
    
    
    
 
7% Convertible Notes Payable
 
On March 12, 2018, the Company entered into a Second Amendment to the Note. Pursuant to the Amendment, the Note’s maturity date has been extended to December 31, 2019, and interest accrues at 7% per annum, compounding on the maturity date. Additionally, after review of the Note and accrued interest, the Parties agreed that as of March 12, 2018, the outstanding balance on the Note was $270,787.
 
As of September 30, 2019, the outstanding principal on this 7% convertible note was $270,787 and accrued interest was $29,445, which results in a total liability of $300,232. The Debt is convertible  at the holder’s option  into the Company’s common stock at $.0025 or approximately 118 million shares.
 
 
 
16
 
 
 
10% Convertible Promissory Notes
 
Funding from Chicago Venture Partners, L.P. (“Chicago Venture”), Iliad Research and Trading, L.P. (“Iliad”) and Odyssey Research and Trading, LLC, (“Odyssey”)
 
As of December 31, 2018, the outstanding principal balance due to Chicago Venture and Iliad was $2,982,299 and accrued interest was $135,780, which results in a total amount of $3,118,079.
 
During the year ended December 31, 2018, Chicago Venture and Iliad converted principal and interest of $3,104,181 into 525,587,387 shares of our common stock at a per share conversion price of $0.0059 with a fair value of $7,756,330. The Company recognized $6,565,415 loss on debt conversions during the year ended December 31, 2018.
 
During the year ended December 31, 2018, the Company recorded an OID debt discount expense of $660,472 to interest expense related to the Chicago Venture and Iliad financing.
 
As of September 30, 2019, the outstanding principal balance due to Chicago Venture, Iliad and Odyssey was $2,362,306 and accrued interest was $300,977, which results in a total amount of $2,663,383.
 
During the nine months ended September 30, 2019, Chicago Venture and Iliad converted principal and accrued interest of $1,045,000 into 264,488,842 shares of our common stock at an average per share conversion price of $.00395 with a fair value of $1,765,395. The Company recognized $720,375 loss on debt conversions during the nine months ended September 30, 2019.
 
Securities Purchase Agreement, Secured Promissory Notes and Security Agreement Odyssey Research and Trading, LLC, (“Odyssey”)
 
On July 23, 2019, the Company executed the following agreements with Odyssey: (i) Securities Purchase Agreement; (ii) Secured Promissory Notes; and (iii) Security Agreement (collectively the “Odyssey Agreements”). The Company entered into the Odyssey Agreements with the intent to acquire working capital to grow the Company’s businesses.
 
The total amount of funding under the Odyssey Agreements is $1,105,000. The Convertible Promissory Note carries an original issue discount of $100,000 and a transaction expense amount of $5,000, for total debt of $1,105,000. The Company agreed to reserve three times the number of shares based on the redemption value with a minimum of 500 million shares of its common stock for issuance upon conversion of the Debt, if that occurs in the future. If not converted sooner, the Debt is due on or before July 22, 2020. The Debt carries an interest rate of ten percent (10%). The Debt is convertible, at Odyssey’s option, into the Company’s common stock at $0.010 per share subject to adjustment as provided for in the Secured Promissory Notes.
 
The Company’s obligation to pay the Debt, or any portion thereof, is secured by all of the Company’s assets.
 
The Company has $659,335 available under the Notes as of September 30, 2019, but cannot access the available funds.
 
The Debt is convertible  at the holder’s option  into the Company’s common stock at 65% of the lower of the current fair market value of the stock. Based upon the closing price of the stock at September 30, 2019, the notes would convert to approximately 940 million shares.
 
Secured Advance Note with Crossover Capital Fund I LLC (“Crossover”)
 
On September 20, 2019, the Company closed a Secured Advance Note with Crossover Capital Fund I LLC (the "Crossover Note"). The Company entered into the Crossover Note with the intent to acquire working capital to grow the Company’s businesses. The total amount of funding under the Crossover Note is $250,000. The Crossover Note carries an original issue discount of $57,400 and a transaction expense amount of $7,000, for total debt of $308,400. The Company agreed to reserve three times the number of shares based on the conversion value in case of default under the Crossover Note, if that occurs in the future. The Crossover Note is due in nine months and is repayable weekly at $9,205. The Crossover Note is convertible into the Company’s common stock at the market value share price subject to adjustment as provided for in the Crossover Note in the case of default. The Company’s obligation to pay the Crossover Note, or any portion thereof, is secured by all of the Company’s assets. As of September 30, 2019, the outstanding principal balance due Crossover was $299,195 and the Company expensed the original issue discount of $57,400 and a transaction expense amount of $7,000. The Company also issued 5,000,000 shares of common stock to Crossover as a commitment fee that was valued at fair market value at $25,000 or $.005 per share and was expensed during the nine months ended September 30, 2019.
 
 
 
17
 
 
 
NOTE 12 – DERIVATIVE LIABILITY
 
The Convertible Notes payable include a  conversion feature that pursuant ASC 815 “Derivatives and Hedging”, has been  identified as an embedded derivative financial instrument and which the Company has elected to account for under the fair value method  of accounting.  
 
If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (BCF). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20. Debt with Conversion and Other Options. In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method. The debt is convertible at the lesser of 65% of the fair value of the Company’s common stock or $0.009 requiring the conversion feature to be bifurcated from the host debt contract and accounting for separately as a derivative, resulting in periodic revaluations.
 
There was a derivative liability of $1,434,074 as of September 30, 2019. For the nine months ended September 30, 2019, the Company recorded non-cash income of $508,730 related to the “change in fair value of derivative” expense related to the Chicago Venture and Iliad financing. During the nine months ended September 30, 2019, Chicago Venture and Iliad converted principal and accrued interest of $1,045,000 into 264,488,842 shares of our common stock at a per share conversion price of $.00395 with a fair value of $1,765,395. The Company recognized $720,355 loss on debt conversions during the nine months ended September 30, 2019.
 
Derivative liability as of September 30, 2019 was as follows:
 
 
 
 
 
 
 
 
 
 
 
 
Carrying
 
 
 
Fair Value Measurements Using Inputs
 
 
Amount at
 
Financial Instruments
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Instruments
 $- 
 $- 
 $1,434,074 
 $1,434,074 
 
    
    
    
    
Total
 $- 
 $- 
 $1,434,074 
 $1,434,074 
 
Derivative liability as of December 31, 2018 was as follows:
 
 
 
 
 
 
 
 
 
 
 
 
Carrying
 
 
 
Fair Value Measurements Using Inputs
 
 
Amount at
 
Financial Instruments
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Instruments
 $- 
 $- 
 $1,795,747 
 $1,795,747 
 
    
    
    
    
Total
 $- 
 $- 
 $1,795,747 
 $1,795,747 
 
    
    
    
    
 
 
 
 
18
 
 
The change in the value of the derivative during 2019 is related solely to change in fair value. The fair value of the derivative is being calculated primarily based upon the market value of the underlying stock and the conversion terms.
 
NOTE 13 – RELATED PARTY TRANSACTIONS AND CERTAIN RELATIONSHIPS
 
Related Party Transactions
 
Transactions with Katherine McLain
 
Ms. Katherine McLain was appointed as a director on February 14, 2017. On February 22, 2019, the Company issued 8,108,108 shares of our common stock to Katherine McLain valued at $0.0074 per share or $60,000. This issuance was an annual award for independent director services.
 
Transaction with Thom Kozik
 
Mr. Kozik was appointed as a director on October 5, 2017. On February 22, 2019, the Company issued 8,108,108 shares of our common stock to Mr. Kozik valued at $0.0074 per share or $60,000. This issuance was an annual award for independent director services.
 
NOTE 14 – EQUITY
 
Authorized Capital Stock
 
The Company has authorized 6,010,000,000 shares of capital stock, of which 6,000,000,000 are shares of voting common stock, par value $0.0001 per share, and 10,000,000 are shares of preferred stock, par value $0.0001 per share. On October 24, 2017 the Company filed a Certificate of Amendment of Certificate of Incorporation with the Secretary of State of the State of Delaware to increase the authorized shares of common stock from 3,000,000,000 to 6,000,000,000 shares.
 
Non-Voting Preferred Stock
 
Under the terms of our articles of incorporation, the Company’s board of directors is authorized to issue shares of non-voting preferred stock in one or more series without stockholder approval. The Company’s board of directors has the discretion to determine the rights, preferences, privileges and restrictions, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of non-voting preferred stock.
 
The purpose of authorizing the Company’s board of directors to issue non-voting preferred stock and determine the Company’s rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of non-voting preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. Other than the Series B and C Preferred Stock discussed below, there are no shares of non-voting preferred stock presently outstanding and we have no present plans to issue any shares of preferred stock.
 
 
 
 
19
 
 
Common Stock
 
Unless otherwise indicated, all of the following sales or issuances of Company securities were conducted under the exemption from registration as provided under Section 4(2) of the Securities Act of 1933 (and also qualified for exemption under 4(5), formerly 4(6) of the Securities Act of 1933, except as noted below). All of the shares issued were issued in transactions not involving a public offering, are considered to be restricted stock as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that effect. 
 
The Company has compensated consultants and service providers with restricted common stock during the development of our business and when our capital resources were not adequate to provide payment in cash.
 
During the nine months ended September 30, 2019, the Company had the following issuances of unregistered equity securities to accredited investors unless otherwise indicated:
 
During the nine months ended September 30, 2019, the Company issued 22,183,471 shares to suppliers for services provided. The Company valued the shares at $174,435 per share or $0.0079.
 
During the nine months ended September 30, 2019, Chicago Venture and Iliad converted principal and accrued interest of $1,045,000 into 264,488,842 shares of our common stock at a per share conversion price of $.00395 with a fair value of $1,765,395. The Company recognized $720,375 loss on debt conversions during the nine months ended September 30, 2019.
 
On February 15, 2019, the Company entered into a Termination of Existing Agreements and Release with CANX USA, LLC, a Nevada limited liability company. In exchange for the Agreement and cancellation of the CANX Agreements and Warrants, the Company agreed to issue $1,000,000 of restricted common stock priced at the February 7, 2019 closing price of $0.008, or 125,000,000 restricted common stock shares. The Company recorded a loss on debt conversion of $1,000,000 during the nine months ended September 30, 2019. Pursuant to the Agreement, the Parties agreed to terminate, release and discharge all existing and further rights and obligations between the Parties under, arising out of, or in any way related to that certain Waiver and Modification Agreement and Amended and Restated Joint Venture Agreement made as of July 10, 2014, and any ancillary agreements or instruments thereto, including, but not limited to, the Warrants issued to CANX entitling CANX to purchase 540,000,000 shares of the Company’s common stock at an exercise price of $0.033.
 
On May 2, 2019, the Company issued 3,916,667 shares valued at $0.006 to a former employee related to a cashless stock option exercise.
 
The Company issued 5,000,000 shares of common stock to Crossover as a commitment fee that was valued at fair market value at $25,000 or $.005 per share and was expensed during the nine months ended September 30, 2019.
 
Warrants
 
The Company had the following warrant activity during the nine months ended September 30, 2019:
 
On February 15, 2019, the Company entered into a Termination of Existing Agreements and Release with CANX USA, LLC, a Nevada limited liability company. In exchange for the Agreement and cancellation of the CANX Agreements and Warrants, the Company agreed to issue $1,000,000 of restricted common stock priced at the February 7, 2019 closing price of $0.008, or 125,000,000 restricted common stock shares. The Company recorded a loss on debt conversion of $1,000,000 during the nine months ended September 30, 2019. Pursuant to the Agreement, the Parties agreed to terminate, release and discharge all existing and further rights and obligations between the Parties under, arising out of, or in any way related to that certain Waiver and Modification Agreement and Amended and Restated Joint Venture Agreement made as of July 10, 2014, and any ancillary agreements or instruments thereto, including, but not limited to, the Warrants issued to CANX entitling CANX to purchase 540,000,000 shares of the Company’s common stock at an exercise price of $0.033.
 
 
 
20
 
 
A summary of the warrants issued as of September 30, 2019 is as follows:
 
 
 
September 30, 2019
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
Average
 
 
 
 
 
 
Exercise
 
 
 
Shares
 
 
Price
 
Outstanding at January 1, 2019
  902,825,146 
 $0.029 
Issued
  - 
  - 
Exercised
  - 
  - 
Forfeited
  (540,000,000)
  (0.033)
Expired
  - 
  - 
Outstanding at September 30, 2019
  362,825,146 
 $0.023 
Exerciseable at September 30, 2019
  346,825,146 
 $0.022 
 
A summary of the status of the warrants outstanding as of September 30, 2019 is presented below:
 
   September 30, 2019 
 
 
 
 
Weighted
 
 
Weighted
 
 
 
 
 
Weighted
 
 
 
 
 
Average
 
 
Average
 
 
 
 
 
Average
 
 
Number of
 
 
Remaining
 
 
Exercise
 
 
Shares
 
 
Exercise
 
 
Warrants
 
 
Life
 
 
Price
 
 
Exerciseable
 
 
Price
 
  - 
  - 
 $- 
  - 
 $- 
  55,000,000 
  6.91 
  0.010 
  55,000,000 
  0.010 
  48,000,000 
  5.00 
  0.012 
  32,000,000 
  0.012 
  48,687,862 
  3.33 
  0.050 
  48,687,862 
  0.050 
  211,137,284 
  2.07 
  0.021 
  211,137,284 
  0.021 
  362,825,146 
  3.05 
 $0.023 
  346,825,146 
 $0.022 
 
Warrants had no intrinsic value as of September 30, 2019.
 
The warrants were valued using the following assumptions:
 
Dividend yield
0%
Expected life
1-5 Years
Expected volatility
70-200%
Risk free interest rate
0.78-2.6%
 
 
 
 
21
 
 
NOTE 15– STOCK OPTIONS
 
Description of Stock Option Plan
 
On December 6, 2018, the Company’s shareholders voted to approve the First Amended and Restated 2017 Stock Incentive Plan to increase the shares issuable under the plan from 100 million to 200 million. The Company has 100,000,000 shares available for issuance. The Company has outstanding unexercised stock option grants totaling 100,000,000 shares at an average exercise price of $0.010 per share as of December 31, 2018. The Company filed registration statements on Form S-8 to register 200,000,000 shares of the Company’s common stock related to the 2017 Stock Incentive Plan and First Amended and Restated 2017 Stock Incentive Plan.
 
Determining Fair Value under ASC 505
 
The Company records compensation expense associated with stock options and other equity-based compensation using the Black-Scholes-Merton option valuation model for estimating fair value of stock options granted under our plan. The Company amortizes the fair value of stock options on a ratable basis over the requisite service periods, which are generally the vesting periods. The expected life of awards granted represents the period of time that they are expected to be outstanding.  The Company estimates the volatility of our common stock based on the historical volatility of its own common stock over the most recent period corresponding with the estimated expected life of the award. The Company bases the risk-free interest rate used in the Black Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid any cash dividends on our common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model and adjusts share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed.
 
Stock Option Activity
 
During the nine months ended September 30, 2019, the Company had the following stock option activity:
 
On February 6, 2019, the Company issued a stock option grant to an advisory board member for 500,000 shares of common stock at an exercise price of $0.008 per share. The stock option grant vests quarterly over three years and is exercisable for 3 years. The stock option grant was valued at $1,000.
 
On April 26, 2019, the Company issued stock option grants to two employees for 3,000,000 shares of common stock at an exercise price of $0.010 per share. The stock option grant vests quarterly over three years and is exercisable for 3 years. The stock option grants were valued at $3,000.
 
On April 2, 2019, the Company amended the exercise price on stock option grants for five million shares and changed the exercise price from $0.020 to $0.010 per share.
 
On May 2, 2019, the Company issued 3,916,667 shares valued at $0.006 to a former employee related to a cashless stock option exercise. As a result, a stock option grant for 15,083,333 shares issued at $0.006.
 
During the nine months ended September 30, 2019, a stock option grant for 2,000,000 shares of common stock at an exercise price of $0.02 per share expired.
 
 
 
22
 
 
 
As of September 30, 2019, there are 82,500,000 options to purchase common stock at an average exercise price of $0.0099 per share outstanding under the 2017 Amended and Restated Stock Incentive Plan. The Company recorded $48,693 and $29,619 of compensation expense, net of related tax effects, relative to stock options for the nine months ended September 30, 2019 and 2018 in accordance with ASC Topic 505. Net loss per share (basic and diluted) associated with this expense was approximately ($0.00). As of September 30, 2019, there is $96,268 of total unrecognized costs related to employee granted stock options that are not vested. These costs are expected to be recognized over a period of approximately 3.62 years.
 
Stock option activity for the period ended September 30, 2019 is as follows:
 
 
 
 Options
 
 
 Exercise Price
 
 
  $
 
Outstanding as of January 1, 2019
  100,000,000 
 $0.0094 
 $940,000 
Granted
  3,500,000 
  0.0080 
  34,000 
Exercised
  (3,916,667)
  (0.0060)
  (23,500)
Forfeitures
  (17,083,333)
  (0.0076)
  (130,500)
Outstanding as of September 30, 2019
  82,500,000 
 $0.0099 
 $820,000 


    
    
    
  
The following table summarizes information about stock options outstanding and exercisable at September 30, 2019:
 
 
 
 
 
 
 
 
Weighted
 
 
Weighted
 
 
 
 
 
Weighted
 
 
 
 
 
 
 
 
Average
 
 
Average
 
 
 
 
 
Average
 
 
Range of
 
 
Number
 
 
Remaining Life
 
 
Exercise Price
 
 
Number
 
 
Exercise Price
 
 
Exercise Prices
 
 
Outstanding
 
 
In Years
 
 
Exerciseable
 
 
Exerciseable
 
 
Exerciseable
 
 $0.006 
  12,000,000 
  3.25 
 $0.006 
  8,000,000 
 $0.006 
  0.007 
  10,000,000 
  3.25 
  0.007 
  6,666,667 
  0.007 
  .008-.009 
  2,500,000 
  1.30 
  .008-.009 
  1,583,333 
  0.008 
  0.010 
  20,000,000 
  3.11 
  0.010 
  15,833,333 
  0.010 
  0.012 
  38,000,000 
  4.25 
  0.012 
  12,666,667 
  0.012 
    
  82,500,000 
  3.62 
 $0.010 
  44,750,000 
 $0.009 
 
Stock option grants totaling 82,500,000 shares of common stock no intrinsic value as of September 30, 2019.
 
The stock option grants were valued using the following assumptions:
 
Dividend yield
0%
Expected life
1-5 Years
Expected volatility
70-200%
Risk free interest rate
0.78-2.6%
 
 
 
 
23
 
 
 
NOTE 16 – COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
 
Legal Proceedings
 
From time to time, the Company may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although we cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and may be adjusted from time to time according to developments.
 
The Company’s know of no material, existing or pending legal proceedings against our Company, nor is the Company involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any director, officer or any affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to the Company’s interest.
 
As of September 30, 2019, the Company closed retail stores in Portland, Maine, Encino, California and Calgary, Canada. The Company is negotiating with the landlords and the Company has recorded restructuring reserves.
 
Operating Leases
 
On May 31, 2019, the Company rented space at 5400 Carillon Point, Kirkland, Washington 98033 for $623 per month for the Company’s corporate office and use of space in the Regus network, including California. The Company’s agreement expires May 31, 2020.
 
On December 14, 2018, GrowLife, Inc. entered into a lease agreement with Pensco Trust Company for a 28,000 square feet industrial space at 10170 Croydon Way, Sacramento, California 95827 used for the assembly and sales of plastic parts by EZ-CLONE. The monthly lease payment is $17,000 and increased approximately 3% per year. The lease expires on December 31, 2023.
 
Terminated Leases
 
On October 1, 2017, GrowLife Hydroponics, Inc. entered into a lease in Calgary, Canada. The monthly lease is approximately $3,246. The lease expires September 30, 2022. This lease was terminated effective September 30, 2019.
 
On December 19, 2017, GrowLife Innovations, Inc. entered into a lease in Grand Prairie, Texas dated October 9, 2017, for 5,000 square feet for the manufacturing and distribution of its flooring products. The monthly lease payment is $15,000. The lease expires December 1, 2022 and can be renewed. This lease was terminated effective September 30, 2019 with the expected sale of the flooring division.
 
On July 2, 2018, GrowLife Hydroponics, Inc. entered into a store lease for 1,950 square feet in Portland, Maine. The monthly lease is approximately $2,113, with 3% increases in year two and three. The lease expires July 2, 2021 and can be extended. This lease was terminated effective September 30, 2019.
 
 
 
24
 
 
 
On August 31, 2018, GrowLife, Inc. entered into the Fourth Amendment to the Lease Agreement for the store in Encino, California. The monthly lease is approximately $6,720, with a 3% increase on March 1, 2019. The lease expires September 1, 2019 and the Company is required to provide six months’ notice to terminate the lease. This lease was terminated effective September 30, 2019.
 
NOTE 17 – SUBSEQUENT EVENTS
 
The Company evaluates subsequent events, for the purpose of adjustment or disclosure, up through the date the financial statements are available.
 
The Company had the following material events subsequent to September 30, 2019:
 
On October 21, 2019 and November 12, 2019, the Company filed Amendments to Registration Statements on Form S-1 for the registration of 625 million shares at $0.004 per share or $2,500,000.
 
On November 5, 2019, the Company extended the closing of the remaining EZ-CLONE 49% with one 24.5% shareholder by up to nine months by agreeing to a 20% extension fee of the $855,000 cash payment, payable at the earlier of the closing of $2,000,000 in funding or the nine months. The Company continues to negotiate with the second shareholder for the remaining 24.5%.
 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-looking statements in this report reflect the good-faith judgment of our management and the statements are based on facts and factors as we currently know them. Forward-looking statements are subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, but are not limited to, those discussed below as well as those discussed elsewhere in this report (including in Part II, Item 1A (Risk Factors)). Readers are urged not to place undue reliance on these forward-looking statements because they speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report.
 
THE COMPANY AND OUR BUSINESS
 
GrowLife, Inc. (“GrowLife” or the “Company”) is incorporated under the laws of the State of Delaware and is headquartered in Kirkland, Washington. We were founded in 2012 with the Closing of the Agreement and Plan of Merger with SGT Merger Corporation.
 
FINANCIAL PERFORMANCE
 
First, our year to date revenue was $6.7 million as compared to $2.9 million for nine months ended September 30, 2018. We well outpaced last year by more than doubling gross revenues.
 
Next, gross profits, or revenue after our cost of sales, was reported at $2.2 million for nine months ended September 30, 2019 as compared to last year’s $243,000; a 803% year-over-year increase. This is attributed to the EZ-CLONE business acquisition, which brought in significantly higher margins along with our continuing GrowLife business revenue, resulting in blended gross margin of 32.5%, up from 8.5% during the nine months ended September 3, 2019. As the EZ-CLONE business represents a greater percentage of our sales, we expect to see these gross margins increase further. 
 
Finally, the Company continues to generate growth by investing in its EZ-CLONE acquisition, sales and marketing efforts and thus reports a loss for the nine months ended September 30, 2019.  We believe that expansion spending is necessary in a high-growth market such as the cannabis, hemp and CBD-related businesses.
 
 
 
 
25
 
 
 
As of September 30, 2019, we closed retail stores in Portland, Maine, Encino, California and Calgary, Canada and online sales. Also we are expecting to close the sale of the flooring division located in Grand Prairie, Texas. We expect to reduce losses and cash costs by up to $100,000 per month starting October 1, 2019. As of September 30, 2019, we recorded restructuring expense of $306,000 for the closure of the flooring division related to the equipment write down and $250,000 for the closure of the retail stores, related leases and online sales.
 
SO WHERE ARE WE INVESTING? CLONING AND CBD
 
We see the greatest opportunity for our Company in further positioning ourselves as the industry leader in plant cloning, and more specifically, as the leader in cloning of hemp plants grown for CBD extraction. Hemp production was recently legalized in the United States, subject to certain federal and state restrictions, creating a completely new market opportunity where countless farmers are switching their operations to hemp. Some conservative reports estimate that more than 500 million hemp plants will be planted in 2019, with farmers looking to grow hemp to provide raw materials to the exploding CBD market. Unfortunately, a lot of hemp growers do not understand the intricacies of growing hemp, especially for CBD extraction. Not all hemp plants can be used to create CBD products. Plants need to be rich in CBD, not THC, be the correct gender, and be healthy and large enough to process. In order to achieve this, the only way to start plants is by using genetically modified and feminized seeds or through cloning.
 
To position as a future industry leader, we believe that we need the foresight to project the growing hemp and CBD industry of the future and to stay ahead of trends, and to strategically position our company accordingly. This includes the booming need for CBD-rich hemp.
 
Toward the end of 2018, we announced the majority acquisition of a company called EZ-CLONE Enterprises. EZ-CLONE was and is known as the industry-leading supplier of commercial-grade cloning and propagation equipment. This was a part of this strategic positioning plan.
 
Cannabis cultivators have been cloning their favorite strains from mother plants for years, using various methods like tabletop growing. These methods are extremely labor and space intensive. As the demand for cannabis and CBD-rich hemp increases through further legalization, so will the demand for more and more starters, whether CLONEs or seeds. And while cloning is the preferred method of production for many growers, cloning can be time and labor intensive, and takes a lot of space in most grow facilities.
 
In late 2017, EZ-CLONE developed its Pro unit, which is one of the largest and the most efficient cloning systems on the market. It is commercially scalable and allows cultivators to clone high volumes of plants, in a short timeframe, as short as 14 days, with the least amount of human and environmental resources consumed than ever previously seen. These systems decrease the need for resources such as labor and planting area, and we estimate that cultivators reduce their costs by over 20% per plant using CLONEs vs. seed while simultaneously producing the highest-quality plants possible. This system is so unique, we recently announced a patent issuance on this system and hope to secure further intellectual property protection on EZ-CLONE products in the coming months and years.
 
We believe this illustrates how GrowLife is positioned as an innovator of this industry-leading cloning solution, to capitalize not only on the emerging cannabis industry but now the exploding hemp CBD industry. In just the few months since taking over operations at EZ-CLONE, we have seen an increase in revenue of over 130% relative to last year.
 
In addition to the Pro unit, the EZ-CLONE product line has systems of all sizes designed for any size grow room or facility, consumable products such as rooting compound, and everything needed to operate these systems. Since our acquisition, we have added a subscription-based service to provide monthly shipments to cultivators with everything necessary to CLONE in our systems, as well as struck a deal with technology company Emerald Metrics to add spectral imaging add-ons to our Pro systems that allow growers to see the health of their CLONEs through any computer or mobile device.
 
 
 
 
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We have all heard statistics such as the CBD industry will reach $20 billion by 2024. We believe these forecasts could be understated. Analysts continue to be shocked at the rise of consumer acceptance of CBD products, and more and more large companies will begin to debut CBD products, and demand for raw hemp-based CBD will grow accordingly. Additionally, we are seeing many hemp growers losing crop viability due to the way they are starting plants, some losing crops to cross-pollination and some even being burned down by the DEA when they have too high of levels of THC. We believe this is a testament as to how much demand for hemp crops will continue to grow, and growers will continue to search for the best way to grow hemp to avoid these issues. And I reiterate that cloning is really the best way to ensure a healthy crop with the proper CBD content. We plan to be the hemp CBD heroes with our, for lack of a better word, revolutionary cloning products. We have made strides to reach hemp farmers and educate them on the benefits of cloning, launching our resource and sales channel at EZCLONEHemp.com, attending hemp-focused tradeshows, and ramping up our sales force in hemp-heavy states where traditional agricultural is making the switch to hemp.
 
IN SUMMARY
 
Moving forward, we believe there will continue to be innovation in plant-growing equipment after the planting stage, but this not involve our present intended operations. We are not going to create the best LED light, or trimming machine. We are going to stick with focusing on our core competencies: helping cultivators with jump-starting their crops, reduce their costs and grow better plants. We’re going to help them with the equipment needed to grow their own clones, address innovation in the cloning process and educate cultivators on the necessity of cloning in order to maximize yield and grow high CBD strains, and even potentially provide the clones themselves.
 
We believe that through our strategic investment in EZ-CLONE, we have positioned ourselves very well to capitalize on this expanding market opportunity. Where EZ-CLONE was able to create a quality product with steady growth, GrowLife has propelled it into an international brand being utilized by some of the largest grow operations in the world.
 
Recently we have been investing capital into building out our manufacturing capacity for the EZ-CLONE product line to prepare for this continued growth. We currently have a sizable backlog of orders and need to have the manufacturing capacity to not only fulfill these orders but keep up with demand. Growth on this scale requires capital.
 
Through a nationwide network of knowledgeable representatives, GrowLife continues to provide essential and hard-to-find goods including media (i.e., farming soil), industry-leading hydroponics equipment, organic plant nutrients, and thousands more products to specialty grow operations across the United States.
 
Please follow our shareholder updates for more to come on our financing. If we secure this financing we can then dedicate funds toward increasing our manufacturing capacity, hiring additional sales and support staff and actualize on our vision of being the leading source of plant starters and equipment for the hemp and cannabis market and meet the demand as it continues to rise.
 
We believe with the revenue growth and increased margins described, our fundamentals are strong, our positioning is focused and trajectory is encouraging. To put it is simply, we are ready and prepared to make our place in one of the largest shifts in mainstream wellness and agriculture in history.
 
Employees
 
As of September 30, 2019, we had twenty seven full-time and part-time employees. Marco Hegyi, our Chief Executive Officer, is based in Kirkland, Washington. Mark E. Scott, our Chief Financial Officer, is based primarily in Seattle, Washington. We have approximately 13 full and part time employees located throughout the United States who operate our businesses. We employ 12 full-time and part-time employees at EZ-CLONE in Sacramento, CA. None of our employees are subject to a collective bargaining agreement or represented by a trade or labor union. We believe that we have a good relationship with our employees.
 
Key Partners
 
Our key customers vary by state and are expected to be more defined as the company moves from its retail walk-in purchasing sales strategy to serving cultivation facilities directly and under predictable purchasing contracts.  
 
Our key suppliers include distributors and manufacturers. All the products purchased and resold are applicable to indoor growing for organics, greens, and plant-based medicines.
 
 
 
 
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Competition
 
Covering two countries across all cultivator segments creates competitors that also serve as partners. Large commercial cultivators have found themselves willing to assume their own equipment support by buying large volume purchased directly from certain suppliers and distributors such as Hawthorne and HydroFarm. Other key competitors on the retail side consist of local and regional hydroponic resellers of indoor growing equipment. On the e-commerce business, GrowersHouse.com, Hydrobuilder.com and smaller online resellers using Amazon and eBay e-commerce market systems.
 
Intellectual Property and Proprietary Rights
 
Our intellectual property consists of brands and their related trademarks and websites, customer lists and affiliations, product know-how and technology, and marketing intangibles.
 
Our other intellectual property is primarily in the form of trademarks and domain names. We also hold rights to several website addresses related to our business including websites that are actively used in our day-to-day business such as www.shopgrowlife.com, www.growlifeinc.com, www.growlifeeco.com and www.greners.com.
 
We have applied for two patents related to the vertical room product previously discussed.
 
We have a policy of entering into confidentiality and non-disclosure agreements with our employees, some of our vendors and customers as necessary.
 
Acquisition of EZ-CLONE
 
On October 15, 2018, we closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation. EZ-CLONE is the manufacturer of multiple award-winning products specifically designed for the commercial cloning and propagation stage of indoor plant cultivation including cannabis, food, and other hydroponic farming. We acquired 51% of EZ-CLONE for $2,040,000, payable as follows: (i) a cash payment of $645,000; and (ii) the issuance of 107,307,692 restricted shares of our common stock at a price of $0.013 per share or $1,395,000.
 
 
 
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We have the obligation with the delivery of EZ-CLONE common stock to acquire the remaining 49% of EZ-CLONE within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000. On November 5, 2019, we extended the closing of the remaining 49% with one 24.5% shareholder by up to nine months by agreeing to a 20% extension fee of the $855,000 cash payment, payable at the earlier of the closing of $2,000,000 in funding or the nine months. We continue to negotiate with the second shareholder for the remaining 24.5%.
 
 
 
Government Regulation
 
Currently, there are thirty three states plus the District of Columbia that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. There are currently ten states and the District of Columbia that allow recreational use of cannabis. As of September 30, 2019, the policy and regulations of the Federal government and its agencies is that cannabis has no medical benefit and a range of activities including cultivation and use of cannabis for personal use is prohibited on the basis of federal law and may or may not be permitted on the basis of state law. Active enforcement of the current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the willingness of customers of GrowLife to invest in or buy products from GrowLife. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect revenues and profits of the GrowLife companies.
 
All this being said, many reports show that the majority of the American public is in favor of making medical cannabis available as a controlled substance to those patients who need it. The need and consumption will then require cultivators to continue to provide safe and compliant crops to consumers. The cultivators will then need to build facilities and use consumable products, which GrowLife provides.
 
OUR COMMON STOCK
 
On October 17, 2017, we were informed by Alpine Securities Corporation (“Alpine”) that Alpine has demonstrated compliance with the Financial Industry Regulatory Authority (“FINRA”) Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of 1934. As of March 4, 2019, the Company no longer trades on the OTCQB, but is not quoted on the pink sheets quotation system as a result of the Company’s bid price closing below $0.01 for more than 30 consecutive calendar days.
 
PRIMARY RISKS AND UNCERTAINTIES
 
We are exposed to various risks related to legal proceedings, our need for additional financing, the sale of significant numbers of our shares, the potential adjustment in the exercise price of our convertible debentures and a volatile market price for our common stock. These risks and uncertainties are discussed in more detail below in Part II, Item 1A. 
 
 
 
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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.
 
(dollars in thousands)
 
 
 
Three Months Ended September 30,
 
 
 
2019
 
 
2018
 
 
$ Variance
 
 
% Variance
 
Net revenue
 $2,299 
 $954 
 $1,345 
  141.0%
Cost of goods sold
  1,553 
  899 
  654 
  -72.7%
Gross profit
  746 
  55 
  691 
  1256.4%
General and administrative expenses
  1,810 
  1,117 
  693 
  -62.0%
Restructuring expense- flooring division
  306 
  - 
  306