For the six months ended June 30, 2022, GrowLife is reporting a 69% decline in
EZ-CLONE revenue compared to the same period of the prior year. Gross profit for
the six months ended June 30, 2022 declined to 48% compared to 57% for the same
period the prior year. Operating expenses decreased 3% to $2,075,000 compared
to the same period the prior year. As a result, the loss from operations
increased to $1,506,000 for the six months ended June 30, 2022 compared to an
operating profit of $40,000 for the six months ended June 30, 2021.
Other expenses include changes in derivative liability, interest expenses, loss
on debt conversions, fair value of warrants issued and gain on debt
forgiveness. Other expenses had a significant improvement in the six months
ended June 30, 2022 from the same period the prior year as they were reduced
from a $3,475,000 loss to $1,007,000 loss. The improvement results from a
decline in interest expense and loss on conversions.
GrowLife has spent much of 2022 extensively seeking new business expansion
opportunities for the Company while continuing to explore options to resolve and
settle the EZ-CLONE litigation. On June 2, 2022 we announced our agreement with
Bridgetown Mushrooms and the Company's forward looking strategy. It is the
Company's belief that moving into the mushroom cultivation space is a natural
progression for GrowLife. The work with Bridgetown 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 June 30, 2022, we had 14 full-time and part-time employees. David
Dohrmann, our Chief Executive Officer, is based in Kirkland, Washington. In
addition, we employ 11 full-time and part time employees at EZ-CLONE in
Sacramento, CA. None of our employees are subject to a collective bargaining
agreement or represented by a trade or labor union.
Competition
Covering two countries across all cultivator segments creates competitors that
also serve as partners. Large commercial cultivators have found themselves
willing to assume their own equipment support by buying large volume purchased
directly from certain suppliers and distributors such as Hawthorne and
HydroFarm. Other key competitors on the retail side consist of local and
regional hydroponic resellers of indoor growing equipment.
Intellectual Property and Proprietary Rights
Our intellectual property consists of brands and their related trademarks and
websites, customer lists and affiliations, product know-how and technology, and
marketing intangibles.
Our other intellectual property is primarily in the form of trademarks and
domain names. We also hold rights to several website addresses related to our
business including websites that are actively used in our day-to-day business
such as www.shopgrowlife.com, and www.growlifeinc.com.We have a policy of
entering into confidentiality and non-disclosure agreements with our employees,
some of our vendors and customers as necessary.
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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 ENDEDJUNE 30, 2022, AS COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2021
Three Months ended June 30, (Dollars in thousands)
2022 2021 $ Variance % Variance
Net revenue $ 315 $ 2,169 $ (1,854 ) -85 %
Cost of good sold 164 889 (725 ) -82 %
Gross profit 151 1,280 (1,129 ) -88 %
Operating expenses 1,081 1,076 5 0 %
Operating (loss) (930 ) 204 (1,134 ) -556 %
Other expense
Change in fair value of
derivative (312 ) (364 ) 52 -14 %
Interest expense, net (571 ) (535 ) (36 ) 7 %
Gain on debt
forgiveness 18 18 100 %
Total other income
(expense) (865 ) (899 ) 34 -4 %
(Loss) before income
taxes (1,795 ) (695 ) (1,100 ) 158 %
Income taxes 111 (214 ) 325 -152 %
Net (loss) $ (1,684 ) $ (909 ) $ (775 ) 85 %
Net revenue for the three months ended June 30, 2022, decreased by $1,854,000 to
$315,000 from $2,169,000 for the three months ended June 30, 2021. The decreased
performance of EZ-CLONE revenue is being experienced throughout the industry.
Cost of Goods Sold
Cost of sales for the three months ended June 30, 2022, decreased by $725,000 to
$164,000 from $889,000 for the three months ended June 30, 2021. The decrease
was due to the decreased EZ-CLONE sales, as discussed above.
Gross profit was $151,00 for the three months ended June 30, 2022, as compared
to a gross profit of $1,280,000 for the three months ended June 30, 2021. The
gross profit percentage was 48% for the three months ended June 30, 2022, as
compared to 59% for the three months ended June 30, 2021. The decrease was due
to significant decline EZ-CLONE revenue and increase freight costs.
Operating Expenses
Operating expenses for the three months ended June 30, 2022, were $1,081,000 as
compared to $1,076,000 for the three months ended June 30, 2021.
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Other Expense
Other expense for the three months ended June 30, 2022, was $865,000 as compared
to $899,000 for the three months ended June 30, 2021. The decrease in other
income (expense) for the three months ended June 30, 2022 compared to the same
period the prior year, included (i) a decrease in the change in fair value of
the derivative liability of $52,000; (ii) an increase in interest expense of
$36,000; and (iii) gain of $18,000 on forgiveness of a portion of balance due to
a vendor. 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 June 30, 2022 was $1,759,000 as compared to
$909,000 for the three months ended June 30, 2021, for the reasons discussed
above.
SIX MONTHS ENDED JUNE 30, 2022, AS COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2021
Six Months ended June 30, (Dollars in thousands)
2022 2021 $ Variance % Variance
Net revenue $ 1,175 $ 3,842 $ (2,667 ) -69 %
Cost of good sold 606 1,666 (1,060 ) -64 %
Gross profit 569 2,176 (1,607 ) -74 %
Operating expenses 2,075 2,136 (61 ) -3 %
Operating (loss) (1,506 ) 40 (1,546 ) -3865 %
Other expense
Change in fair value of
derivative (390 ) (425 ) 35 -8 %
Interest expense, net (726 ) (3,049 ) 2,323 -76 %
Gain on debt forgiveness 183 0 183 100 %
Total other income
(expense) (933 ) (3,475 ) 2,542 -73 %
(Loss) before income
taxes (2,439 ) (3,435 ) 996 -29 %
Income taxes 146 (351 ) 497 -142 %
Net (loss) $ (2,293 ) $ (3,786 ) $ 1,493 -39 %
Net revenue for the six months ended June 30, 2022, decreased by $2,667,000 to
$1,175,000 from $3,842,000 for the six months ended June 30, 2021. The decreased
performance of EZ-CLONE revenue is a result of a decrease in the business
environment for the products.
Cost of Goods Sold
Cost of sales for the six months ended June 30, 2022, decreased by $1,060,000 to
$606,000 from $1,666,000 for the six months ended June 30, 2021. The decrease
was due to the decreased EZ-CLONE sales, as discussed above.
Gross profit was $569,000 for the six months ended June 30, 2022, as compared to
a gross profit of $2,176,000 for the six months ended June 30, 2021. The gross
profit percentage was 48% for the six months ended June 30, 2022, as compared
to, 57% for the six months ended June 30, 2021. The decrease was due to a
significant decline in EZ-CLONE revenue and an increase freight costs.
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Operating Expenses
Operating expenses for the six months ended June 30, 2022, were $2,075,000 as
compared to $2,136,000 for the six months ended June 30, 2021. The decrease was
related to a decrease in compensation and related benefit costs and advertising
costs during the three months ended June 30, 2022
Other Expenses
Other expenses for the six months ended June 30, 2022, were $933,000 as compared
to $3,475,000 for the six months ended June 30, 2021. The decrease in other
income (expense) for the six months ended June 30, 2022 compared to the same
period the prior year, included (i) a decrease in the change in fair value of
the derivative liability of $35,000; (ii) a decrease in interest expense of
$2,323,000; and (iii) gain on forgiveness of one of the EIDL loans by the
government of $165,000 and a portion of the amount due to a vendor of $18,000.
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 relates
to the accrued interest expense on our notes payable. The loss on debt
conversions relates to the debt conversion of our notes payable at prices below
the market price. The gain on extinguishment of warrants relates to a gain on
the warrant settlement.
Net Loss
Net loss for the six months ended June 30, 2022 was $2,368,000 as compared to
$3,786,000 for the six months ended June 30, 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 June 30, 2022, we had an accumulated deficit of $163
million, cash and cash equivalents of $277,000 and a working capital deficit of
$2,655,000, excluding derivative liability, convertible debt, acquisition costs
payable in stock and right of use liability. Net cash used in operating
activities was $1,054,000 for the six months ended June 30, 2022.
The Company believes it will require additional funding in order to execute its
business plans. The majority of the Company's cash is currently held at EZ-CLONE
and as a result of the ongoing litigation with EZ-CLONE Founder's, such cash is
not accessible for general corporate use.
To fund further GrowLife operations, we will need to raise additional capital.
We may obtain additional financing in the future through the issuance of its
common stock, or through other equity or debt financings. Our ability to
continue as a going concern or meet the minimum liquidity requirements in the
future is dependent on its ability to raise significant additional capital, of
which there can be no assurance. If the necessary financing is not obtained or
achieved, we will likely be required to reduce its planned expenditures, which
could have an adverse impact on the results of operations, financial condition
and our ability to achieve its strategic objective. There can be no assurance
that financing will be available on acceptable terms, or at all. The financial
statements contain no adjustments for the outcome of these uncertainties. These
factors raise substantial doubt about our ability to continue as a going concern
and have a material adverse effect on our future financial results, financial
position and cash flows.
May 17, 2022, AJB Capital Financing
On May 17, 2022, the Company entered into the following agreements with AJB
Capital Investments LLC: (i) Securities Purchase Agreement; and (ii) Promissory
Note; (iii) Common Stock Purchase Warrant; and (iv) Security Agreement. The
total amount of the Note is $750,000; the Note carries an aggregate original
issue discount of $75,000. The Note carries an interest rate of ten percent
(10%) per annum and matures on November 17, 2022. Should the Note be extended at
that time the interest rate increases to fifteen percent (15%). Upon default by
the Company, the Note is convertible by AJB Capital into the Company's common
stock at the lesser of the lowest trading price during the previous twenty
trading days either (i) ending on the date of conversion of the Note or (ii) the
date of the Note. In connection with executing the Note the Company will issue
7,500,000 shares of its common stock as an initial commitment fee. Should the
Note be extended, the Company will issue an additional 5,000,000 shares as an
extension commitment fee. The Warrant agreement allows for AJB to purchase
6,000,000 shares at $0.05 per share and has a five-year term
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Operating Activities
Net cash used in operating activities for the six months ended June 30, 2022,
was $1,054,000. This amount was primarily related to a (i) net loss of
$2,368,000; and (ii) a net working capital decrease of $32,000; (iii)
depreciation of $28,000; (iv) amortization of intangible assets of $336,000; (v)
accrued interest of $244,000; (vi) loss on debt conversion of $354,000; (vii)
change in derivative liability of $390,000; (viii) loss on extinguishment of
$163,000, and (ix) gain on forgiveness of debt of $183,000.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2022,
was $17,000. The amount related to purchase of capital equipment.
Financing Activities
Net cash provided by financing activities for the six months ended June 30,
2022, was $984,000 compared to $874.00 for six months ended June 30, 2021. The
amount related to proceeds from note payable of $1,009,000, offset by repayment
of notes payable of $25,000 for the six months ended June 30, 2022, was
$984,000.
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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