GROWLIFE, INC. 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
FINANCIAL PERFORMANCE
We continued to operate and provide essential business services on a
state-by-state basis, as determined by state laws amid the COVID-19 pandemic.
The cannabis and hemp industries that service the medicinal demand are seeing
great support from the states. Additionally, this is planting season for many
hemp farmers across the country, it is imperative for
Our year to date revenue was
These key metrics deserve a moment of pause and explanation. First, year over
year is down 26% and even with the
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However, the tipping of the blended gross margins towards the EZ-CLONE business drives them up to 39% in comparison to fourth quarter's 21% and last year's overall 30%.
As a result of the cost reductions implemented during the year ended
Finally, the Company continues to generate growth by investing in its EZ-CLONE
products, sales and marketing efforts and thus reports a loss for the three
months ended
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
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
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 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
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
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,
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,
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
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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.
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
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.comand 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
The
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Government Regulation
Currently, there are thirty three states plus the
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
OUR COMMON STOCK
As of
PRIMARY RISKS AND UNCERTAINTIES
We are exposed to various risks related to legal proceedings, our need for additional financing, the sale of significant numbers of our shares, the potential adjustment in the exercise price of our convertible debentures and a volatile market price for our common stock. These risks and uncertainties are discussed in more detail below in Part II, Item 1A.
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations
information and presentation of that data as a percentage of change from
period-to-period.
(dollars in thousands)
Three Months Ended March 31,
2020 2019 $ Variance % Variance
Net revenue $1,661 $2,244 $(583) -26.0%
Cost of goods sold 1,008 1,473 (465) 31.6%
Gross profit 653 771 (118) -15.3%General and administrative expenses 1,358 2,130 (772) 36.2% Operating loss
(705) (1,359) 654 51.5%
Other income (expense): Change in fair value of derivative (278) 487 (765) -157.1% Interest expense, net
(281) (120) (161) -134.2%
Loss on debt conversions (30) (1,346) 1,316 97.8%
Total other expense, net (589) (979) 390 39.8%
Loss before income taxes (1,294) (2,338) 1,044 44.7%
Income taxes - current benefit - - - -100.0%
Net loss $(1,294) $(2,338) $1,044 44.7%
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THREE MONTHS ENDED
Revenue
Net revenue for the three months ended
Cost of Goods Sold
Cost of sales for the three months ended
Gross profit was
General and Administrative Expenses
General and administrative expenses for the three months ended
Non-cash general and administrative expenses for the three months ended
Non-cash general and administrative expenses for the three months ended
Other Expense
Other expense for the three months ended
The other expense for the three months ended
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Net Loss
Net loss for the three months ended
Net loss for the three months ended
Net loss for the three months ended
We expect losses to continue as we implement our business plan.
LIQUIDITY AND CAPITAL RESOURCES
We adopted the
The accompanying financial statements have been prepared assuming that we will
continue as a going concern. However, since inception, we have sustained
significant operating losses and such losses are expected to continue for the
foreseeable future. As of
To fund further operations, we will need to raise additional capital. We may obtain additional financing in the future through the issuance of its common stock, or through other equity or debt financings. Our ability to continue as a going concern or meet the minimum liquidity requirements in the future is dependent on its ability to raise significant additional capital, of which there can be no assurance. If the necessary financing is not obtained or achieved, we will likely be required to reduce its planned expenditures, which could have an adverse impact on the results of operations, financial condition and our ability to achieve its strategic objective. There can be no assurance that financing will be available on acceptable terms, or at all. The financial statements contain no adjustments for the outcome of these uncertainties. These factors raise substantial doubt about our ability to continue as a going concern and have a material adverse effect on our future financial results, financial position and cash flows.
Funding Agreements with
We have various 10% Convertible Promissory Notes with the above entities. We
currently have
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Operating Activities
Net cash used in operating activities for the three months ended
Financing Activities
Net cash provided by financing activities for the three months ended
Our contractual cash obligations as ofMarch 31, 2020 are summarized in the table below: Less Than Total 1 Year 1-3 Years Contractual Cash Obligations Operating lease cash payments$633,375 $211,246 $422,129
Convertible notes payable and accrued interest 3,462,594 3,462,594 - Notes payable and capital leases
104,144 104,144 -
Acquisition of 49% of
$5,226,113 $4,803,984 $422,129
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
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