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PHOT > SEC Filings for PHOT > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for GROWLIFE, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for GROWLIFE, INC.


14-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This discussion summarizes the significant factors affecting our operating results, financial condition and liquidity and cash flows for the months ended March 31, 2013 and 2012. The discussion and analysis that follows should be read together with the condensed consolidated financial statements and the notes to the financial statements included elsewhere in this report. Except for historical information, the matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. Our actual results could differ materially from the results anticipated in any forward-looking statements as a result of a variety of factors, including those discussed in the section of our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on April 1, 2013, captioned "Risk Factors."

Overview

General

GrowLife companies manufacture and supply branded equipment and expendables that promote and enhance the characteristics of quality and quantity of indoor and outdoor urban gardening. We believe that the acquisition of online retailer Greners is particularly noteworthy because it provides us with control of a recognized distribution channel for the industry. GrowLife also controls premier industry portal www.cannabis.org, which we believe will serve as another widely recognized and authoritative social channel for branded product promotion, sales and information as and to the extent the regulatory landscape changes. To complement brand awareness and to drive product sales, during 2012, we also launched company business units that are active in industry events, media and consulting services for the urban gardening industry.

We have focused on the urban gardening industry in the United States and have targeted such industry with products not subject to illegal substance regulatory regimes. GrowLife and its business units are organized and aim to operate in accordance with applicable state and federal laws. Accordingly, if and to the extent that state and federal laws permit the nationwide legal use of marijuana and/or medical marijuana, we expect to commercialize our products in that market.

Our revenue from net sales has steadily increased quarter over quarter throughout 2012. For the first quarter of 2013 revenue increased $86,089, or 12.8%, as compared to the fourth quarter of fiscal year 2012. Compared against Q1 2012, revenue increased $668,900, which we believe is a result of our product expansion, business alliances and strategic acquisitions.

Expansion and growth are our driving themes for GrowLife in 2013. GrowLife is actively engaged in improving and expanding its lineup of branded products through organic development, business alliances and acquisition. SGSensors.com, and its wireless automation products for grow rooms is a prominent example of our product development and brand extension. SG Sensors products are expected to be available for commercial sale in the summer of 2013. GrowLife is also actively engaged in building upon its direct to customers sales business by expansion and promotion of Phototron products to a wider consumer market. Finally, GrowLife remains actively engaged in exploring strategic acquisitions that will allow expansion of the company in the United States.

Through its wholly owned subsidiaries and divisions, GrowLife is positioning for rapid expansion of the scope of its business operations in the event of a substantive relaxation of state and federal laws related to cultivation, distribution and sale of cannabis related products, including industrial hemp. The pace of regulatory reform on a state and federal level from a prohibition stance to a tax and regulate approach, which are inherently uncertain future events, will largely determine the pace and the precise scope of expansion for GrowLife divisions and subsidiaries into portions of the business of cannabis in the United States in which GrowLife does not currently participate.

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Brands:

STEALTH GROW LED is a leading brand of Hi-Power LED lights for indoor growing. Stealth Grow LED introduced the SG 602, the first quad band LED product with the intensity to replace energy inefficient 600 watt HPS lamps then expanded its line of industry leading LED products with the SG Veg, an extremely powerful LED light source that outperforms 1000 watt Metal Halide light sources. Stealth Grow LED further expanded its product offerings with the SG 1250 HO and the industry leading Nite Light, to allow growers to perform all necessary tasks during the dark cycle without interfering with plant photoperiods.

SGSENSORS is an operating division of SGT that markets wireless monitoring and control equipment to operate all major grow room functions. The product line allows 24/7 access to all lighting, irrigation, environmental and security controls through the use of a smart phone, tablet or CPU with optional cloud based data storage. High Times Magazine has featured the wonders of this new remote control grow room equipment as the cover story of its November 2012 issue for products that will release to commercial markets in the Summer of 2013.

PHOTOTRON is a 25 year old USA manufacturer of plant growing systems complete with its own self-contained attractive cabinet with a full line of accessories including nutrients, media, timers and controls. With favorable results in many different states on medical and even recreational cannabis initiatives in 2012, the company believes that the addressable market for its plants growing systems has expanded considerably. New initiatives will be rolled out throughout 2013, most of which will be direct to consumers, for direct sales of Phototron units and accessories into the expanding addressable market.

Channels:

GRENERS.COM is a Sonoma County, California based online supplier of a full range of hydroponic equipment for shipment worldwide. Started as a family business, its core strengths lie in its extensive and continuously updated product offering, its knowledgeable staff and their commitment to informative product reviews for customers, next day shipping across the country. Greners joined the GrowLife family of companies in July 2012. With the added resources of GrowLife, Greners is set to expand its business in 2013 through volume growth in supply of end user customers, increased commitment to unique opportunities for wholesale distribution and retail sales of GrowLife company brands.

GROWLIFE HYDROPONICS owns and operates a specialty hydroponics store in Los Angeles doing business as Urban Garden Supplies. Our store strives to provide realistic, hands on product demonstrations of core technology in a one stop shopping environment with well-informed full service sales and technical staff. Our core brands are first and foremost technology products that flourish where they can be demonstrated.

CANNABIS.ORG is an information portal for the medical marijuana industry that is in development by GrowLife with the objective of establishing the premier informational portal for the industry worldwide that , in the event of regulatory change, can also be a major revenue driver for expansion of GrowLife brands, a platform for establishing additional partnering and revenue share relationships and direct revenue generation through a myriad of ad revenue opportunities.

Other:

GROWLIFE PRODUCTIONS is a wholly owned business unit dedicated to promotion of GrowLife's core brands through co-production and co-sponsorship of entertainment, lifestyle, music and film events across the country. GrowLife Productions aims to foster a growing community around GrowLife brands.

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Results of Operations

Three Months Ended March 31, 2013 Compared to March 31, 2012

Revenue and cost of revenue

For the three months ended March 31 2013 our revenue was $760,709, which represents an increase of $668,900 as compared to the $91,809 for the three-month period ended March 31, 2012. This increase was mainly due to the successful implementation of our acquisition program.

Cost of revenue during the three month periods ended March 31, 2013 and 2012 were $511,583 and $83,767, respectively. This resulted in gross profit of $249,126 for Q1 2013 and $8,042 during Q1 2012. Gross profit in the quarter ended March 31, 2013 equated to 32.7% of revenue, which represents a significant improvement from the 8.8% achieved in the first quarter of 2012.

Expenses

During the three months ended March 31, 2013 our general and administrative expenses were $708,869, an increase of $583,725 from the $125,144 incurred during the three months ended March 31, 2012.

On a comparative basis, operating expenses for the three months ended March 31, 2013 increased $583,725 as compared to the same period in 2012. Wages and related taxes increased $214,337 on a year-to-year basis, primarily due to the acquisitions of SG Technologies Inc., Greners, and Urban Garden. These three operating entities recorded wages and related taxes of $189,845; there were no similar wage and payroll tax expense in Q1 2012 because none of these entities had yet been acquired. Also, note that $132,458 of the wages paid during the first quarter of 2013 were non-cash, as the Company issued 7,545,833 shares of its common stock in exchange for wages.

The following is a brief analysis of select operating expenses:

During the three months ended March 31, 2013, accounting and audit fees increased $77,370 as compared to the same period in 2012. The accounting and audit fees include approximately $46,372 of audit fees for our fiscal year ended December 31, 2012. The Company also paid a third-party consultant $35,000 during the quarter ended March 31, 2013 to perform additional accounting functions. We paid this consultant $15,000 in cash and the remaining $20,000 was paid by the issuance of 2,000,000 shares of the Company's common stock.

Advertising expense increased $41,577 during the three months ended March 31, 2013 as compared to the same period in 2012. The Company incurred advertising expense of $22,860 for Greners during the three months ended March 31, 2013, with no similar expense incurred during the same period in 2012. In addition, the Company recorded $24,413 of advertising expense in relation to Phototron during the three months ended March 31, 2013, which also has no similar expense incurred during the same period in 2012.

Rents, repairs, and security increased $28,440 during the three months ended March 31, 2013 as compared to the same period in 2012. The increase is due entirely to the fact that the Company had three additional facilities during the three months ended March 31, 2013 as compared to the same period in 2012. The three additional facilities were for SGT, Greners, and Urban Garden, all of which were acquired by the Company after March 31, 2012.

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During the three months ended March 31, 2013, the Company incurred expenses of $34,010 and $21,667 with relation to GrowLife Productions, Inc. and Cannabis.org, respectively. Neither of these ventures were in development during the first quarter of 2012, and therefore no similar expense was incurred during the first quarter of 2012. Both GrowLife Productions and Cannabis.org are critical elements of the Company's global branding strategy, and the Company will continue to invest in the development of both GrowLife Productions and Cannabis.org during fiscal year 2013. Note that $11,667 of the Cannabis.org expense was non-cash, as the Company secured these services by issuing 333,333 shares of its common stock in lieu of cash.

The Company recorded investor relations/public relations expense of $28,185 and legal expense of $24,619 during the quarter ended March 31, 2013 as compared to zero in the same three month period in 2012. As a publicly traded company, the Company frequently issues press releases and other promotional information, all of which comes at a cost to the Company. In addition, being a publicly traded company requires filings with the Securities and Exchange Commission ("SEC"), which often requires the Company to retain independent outside legal counsel to review these, and other, critical filings and documents.

Website production expense was $22,742 during the three months ended March 31, 2013. Almost all of this was in relation to a major overhaul of the Phototron, Inc. website, which the Company hopes to have online during the second quarter of 2013. The website will be substantially all new in terms of graphics/design and will have a significantly improved, and more efficient, online ordering system.

The Company recorded $15,000 in compensation to members of our Board of Directors, all of which was non-cash and paid by the Company issuing 1,500,000 shares of its common stock.

Other Expenses

During the quarter ended March 31, 2013, the Company incurred other expenses totaling $723,219 versus only $4,584 during the same period in fiscal year 2012. Included in the $723,219 first quarter charge is $667,541 of non-cash expense related to conversion features associated with the 6% Notes issued during fiscal year 2012 and the 10% Convertible Notes issued in January 2013. Note that there was no similar expense incurred during the three month period ended March 31, 2012.

The Company also incurred $523,467 of net interest expense during the first quarter of 2013 as compared to only $4,584 during the same quarter in fiscal 2012. The increase in interest expense, as measured on a year-to-year basis, is due to the Company having $495,038 of non cash interest expense as of March 31, 2013 compared to $0 non cash interest expense as of March 31, 2012.

Amortization of intangible assets resulted in an expense of $27,249 during the quarter ended March 31, 2013. This expense is in relation to the amortization of $505,000 of intangible assets acquired via the acquisitions of SGT, Greners, and Urban Garden. The Company will continue to amortize these intangible assets at a quarterly expense of $27,249 until the entire $505,000 of intangible assets has been fully amortized.

Note that $694,790 of the $723,219 of other expense is non-cash, which means it does not have an adverse affect on the Company's cash flows.

Loss

The net loss for the three month period ended March 31, 2013 was $1,182,962 with the same period in fiscal 2012 incurring a net loss of $121,686. As noted above in the "Other Expenses" section, a significant portion of the Company's loss in the first quarter of 2013 is related to non-cash expenses. The following is a brief summary of the non-cash expenses:

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                                          Q1 2013
Net loss                               $ (1,182,962 )

Less non-cash expenses:
  Non cash interest expense                 495,038
  Change in fair value of derivative        169,753
  Amortization of intangible assets          27,249
  Loss on extinguishment of debt              2,750
  Depreciation of plant & equipment           2,843
  Services render for common stock          179,125
Total non-cash expenses                     876,758

Adjusted net loss                      $   (306,204 )

Liquidity and Capital Resources

As of March 31, 2013, we had working capital of $349,139 as compared to a working capital deficiency of $67,202 at December 31, 2012. The Company has relied, and will continue to rely, on funds generated through operations, through loans, and through the selling of shares of our common stock to fund our operations.

During the three months ended March 31, 2013, the Company used $318,214 of cash to fund its operating activities as compared to $235,732 used to fund operations in the same period last year.

The Company did not use any cash to purchase fixed assets during the three months ended March 31, 2013 while using $1,753 to purchase fixed assets during the same three month period in fiscal 2012.

During the first quarter of 2013, the Company generated net proceeds of $528,252 through financing activities, with $534,760 generated by the sale of 15,278,861 shares of its common stock at $0.035 per share, $156,000 generated through the issuance of a 10% convertible note, $25,000 from a related party note payable, and $9,000 from the exercising of 470,237 shares of common stock via a stock option with an exercise price of $0.019 per share. The $724,760 generated via financing activities in the first quarter of 2013 was partially offset by $196,508 in debt and interest payments made by the Company. During the same three month period in fiscal 2012, the Company generated net proceeds of $219,299 via $120,402 of member contributions and $98,897 via related party advances.

Unless our operations generate significant revenues and cash flows from operating activities, our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing, other collaborative agreements and strategic alliances. Our management is actively engaged in seeking additional capital to fund our operations in the short to medium term. We also intend to obtain, where appropriate, increases of the amounts available to us under existing revolving promissory notes. Such additional funds may not become available on acceptable terms and there can be no assurance that any additional funding that we do obtain will be sufficient to meet our needs in the long term.

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