For the three months ended March 31, 2022, GrowLife is reporting a 49% decline
in EZ-CLONE revenue compared to the same period of the prior year. Gross profit
for the three months ended March 31, 2022 declined to 49% compared to 54% for
the same period the prior year. Operating expenses increased 2% to $1,085,000
compared to the same period the prior year. As a result, the loss from
operations increased to $662,000 for the three months ended March 31, 2022
compared to a loss of $164,000 for the three months ended March 31, 2021.
GrowLife expenses from financing in other expenses includes changes in
derivative, interest expenses and debt conversions had a great improvement with
a decline in the three months ended March 31, 2022 from the same period the
prior year as they were reduced from a $2,576,000 loss to $225,000 loss.
GrowLife spent much of 2021 extensively seeking new business expansion
opportunities for the Company while continuing to explore a way to resolve and
settle the EZ-CLONE litigation matter with their cooperation. In October we
announced our agreement with My Fungi and mushroom strategy. Moving into the
mushroom cultivation equipment space is a natural progression for GrowLife and
working with My Fungi is the perfect illustration of how we are leveraging our
long history of cultivation expertise to bring innovative and high-demand
products to emerging markets. We believe our shareholders may benefit by
GrowLife moving forward and capitalizing on the many opportunities available to
the Company.
Employees
As of March 31, 2022, we had 14 full-time and part-time employees. Marco Hegyi,
our Chief Executive Officer, is based in Kirkland, Washington. In addition, we
employ 12 full-time and part time employees at EZ-CLONE in Sacramento, CA. None
of our employees are subject to a collective bargaining agreement or represented
by a trade or labor union.
Competition
Covering two countries across all cultivator segments creates competitors that
also serve as partners. Large commercial cultivators have found themselves
willing to assume their own equipment support by buying large volume purchased
directly from certain suppliers and distributors such as Hawthorne and
HydroFarm. Other key competitors on the retail side consist of local and
regional hydroponic resellers of indoor growing equipment.
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Intellectual Property and Proprietary Rights
Our intellectual property consists of brands and their related trademarks and
websites, customer lists and affiliations, product know-how and technology, and
marketing intangibles.
Our other intellectual property is primarily in the form of trademarks and
domain names. We also hold rights to several website addresses related to our
business including websites that are actively used in our day-to-day business
such as www.shopgrowlife.com, and www.growlifeinc.com.We have a policy of
entering into confidentiality and non-disclosure agreements with our employees,
some of our vendors and customers as necessary.
OUR COMMON STOCK
As of March 17, 2020, we commenced trading on the OTCQB Market ("OTCQB") after
successfully up-listing from the OTC Pink Market.
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations
information and presentation of that data as a percentage of change from
period-to-period.
THREE MONTHS ENDED MARCH 31, 2022, AS COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2021
Three Months ended March 31,
(Dollars in thousands)
2022 2021 $ Variance % Variance
Net revenue $ 860 $ 1,673 $ (813 ) -49 %
Cost of good sold 443 777 (334 ) -43 %
Gross profit 417 896 (479 ) -53 %
Operating expenses 993 1,060 (67 ) -6 %
Operating (loss) (576 ) (164 ) (412 ) 251 %
Other expense
Change in fair value of derivative (78 ) (61 ) (17 ) 28 %
Interest expense, net (137 ) (784 ) 647 -83 %
Loss on debt conversions (18 ) (1,731 ) 1,713 -99 %
Gain on debt forgiveness 165 165 100 %
Total other income (expense) (68 ) (2,576 ) 2,508 -97 %
(Loss) before income taxes (644 ) (2,740 ) 2,096 -76 %
Income taxes 35 (137 ) 172 -126 %
Net (loss) $ (609 ) $ (2,877 ) $ 2,268 -79 %
Net revenue for the three months ended March 31, 2022, decreased by $813,000 to
$860,000 from $1,4673,000 for the three months ended March 31, 2021. The
decreased performance of EZ-CLONE revenue is a result EZ-CLONE's lower backlog
and a d--ecrease in the business environment for the products.
Cost of Goods Sold
Cost of sales for the three months ended March 31, 2022, decreased by $334,000
to $443,000 from $777,000 for the three months ended March 31, 2021. The
decrease was due to the decreased EZ-CLONE sales, as discussed above.
Gross profit was $418,000 for the three months ended March 31, 2022, as compared
to a gross profit of $896,000 for the three months ended March 31, 2021. The
gross profit percentage was 49% for the three months ended March 31, 2022, as
compared to 54% for the three months ended March 31, 2021. The decrease was due
to significant decline EZ-CLONE revenueand increase freight costs.
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Operating Expenses
Operating expenses for the three months ended March 31, 2022, were $993,000 as
compared to $1,060,000 for the three months ended March 31, 2021. The decrease
was related to decrease in compensation and related benefit costs.
Other Expense
Other expense for the three months ended March 31, 2022, was $68,000 as compared
to $2,576,000 for the three months ended March 31, 2021. The decrease in other
income (expense) for the three months ended March 31, 2022 compared to the same
period the prior year, included (i) a decrease in the change in fair value of
the derivative liability of $17,000 (ii) a decrease in interest expense of
$647,000; (iii) a decrease in loss on debt conversions of $1,713,000 due to the
decrease in the amount of convertible debt converted into stock of the Company
and (iv) gain on forgiveness of one of the EIDL loans by the government of
$165,000. The change in derivative liability is the non-cash change in the fair
value and relates to our derivative instruments. The increase in non-cash
interest related to accrued interest expense on our notes payable. The loss on
debt conversions related debt conversion of our notes payable at prices below
the market price. The gain on extinguishment of warrants related to a gain on
the warrant settlement.
Net Loss
Net loss for the three months ended March 31, 2022 was $607,000 as compared to
$2,877,000 for the three months ended March 31, 2021, for the reasons discussed
above.
We expect losses to continue as we implement our business plan.
LIQUIDITY AND CAPITAL RESOURCES
We adopted the Financial Accounting Standards Board's ("FASB") Accounting
Standard Codification ("ASC") Topic 205-40, Presentation of Financial Statements
- Going Concern, which requires that management evaluate whether there are
relevant conditions and events that, in the aggregate, raise substantial doubt
about the entity's ability to continue as a going concern and to meet its
obligations as they become due within one year after the date that the financial
statements are issued.
The accompanying financial statements have been prepared assuming that we will
continue as a going concern. However, since inception, we have sustained
significant operating losses and such losses are expected to continue for the
foreseeable future. As of March 31, 2022, we had an accumulated deficit of $161
million, cash and cash equivalents of $449,000 and a working capital deficit of
$2,042,000, excluding derivative liability, convertible debt, acquisition costs
payable in stock and right of use liability. Net cash used in operating
activities was $166,000 for the three months ended March 31, 2022.
The Company believes that its cash on hand will be sufficient to fund our
operations until July 31, 2022. The majority of the Company's cash is currently
held at EZ-CLONE and as a result of the ongoing litigation with EZ-CLONE
Founder's, such cash is not accessible for general corporate use. See Note 19 -
Subsequent Events.
To fund further GrowLife operations, we will need to raise additional capital.
We may obtain additional financing in the future through the issuance of its
common stock, or through other equity or debt financings. Our ability to
continue as a going concern or meet the minimum liquidity requirements in the
future is dependent on its ability to raise significant additional capital, of
which there can be no assurance. If the necessary financing is not obtained or
achieved, we will likely be required to reduce its planned expenditures, which
could have an adverse impact on the results of operations, financial condition
and our ability to achieve its strategic objective. There can be no assurance
that financing will be available on acceptable terms, or at all. The financial
statements contain no adjustments for the outcome of these uncertainties. These
factors raise substantial doubt about our ability to continue as a going concern
and have a material adverse effect on our future financial results, financial
position and cash flows.
January 4, and March 22, 2022, Sixth Street Lending Financing
On January 4, 2022, and March 22, 2022 the Company executed the following
agreements with Sixth Street Lending LLC: (i) Securities Purchase Agreement;
(ii) and Convertible Promissory Note (collectively the "Sixth Street
Agreements"). The Company entered into the Sixth Street Agreements with the
intent to acquire working capital to grow the Company's businesses and to repay
certain outstanding obligations owed.
The total purchase price for these Notes is $310,200; the Notes carry an
aggregate original issue discount of $32,500 and a transaction expense amount of
$7,700. The Company agreed to reserve five times the number of shares based on
the redemption value with a minimum of 101,063,653 shares of its common stock
for issuance upon conversion of the Notes, if that occurs in the future. If not
converted sooner, the Notes are due one year from the execution date. The Note
has an interest rate of eight percent (8%) per annum. The Notes are convertible,
at Sixth Street's option, into the Company's common stock at a 25% discount from
the market price.
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Operating Activities
Net cash used in operating activities for the three months ended March 31, 2022,
was $166,000. This amount was primarily related to a (i) net loss of $348,000;
and (ii) a net working capital increase of $157,000; (iii) depreciation of
$14,000; (iv) amortization of intangible assets of $168,000; (v) accrued
interest and amortization of issuance costs on convertible notes payable and
losses on conversions of $119,000; (v) change in derivative liability of
$111,000; and (vi) gain on forgiveness of debt of $166,000.
Financing Activities
Net cash provided by financing activities for the three months ended March 31,
2022, was $251,000. The amount related to proceeds from note payable of
$270,000, offset by repayment of notes payable of $19,000.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as that term is defined in
Item 303 of Regulation S-K) that are reasonably likely to have a current or
future material effect on our financial condition, revenue or expenses, results
of operations, liquidity, capital expenditures or capital resources.
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GROWLIFE, INC. 
