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PHOT > SEC Filings for PHOT > Form 10-Q on 13-Aug-2013All Recent SEC Filings

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Form 10-Q for GROWLIFE, INC.


13-Aug-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 June 30, 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 experience and the quality of indoor and outdoor urban gardening. In addition to manufacturing and marketing proprietary GrowLife owned brands such as Stealth Grow, Phototron and SG Sensors, GrowLife companies are active from coast to coast in the United State in specialty market retail from store locations and through our ownership of prominent on-line retailers Greners.com, 58Hydro.com and StealthGrow.com 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 2013, GrowLife also launched company business units that are active in industry events, media and consulting services for the urban gardening industry.

GrowLife's focus on the urban gardening industry in the United States is limited to strictly legal products. Our business units are organized and operated 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.

Year-to-date 2013 revenue from net sales increased to $1,625,625 from the $300,255 recorded in the comparable period in 2012. For the quarter ended June 30, 2013, revenue was $872,557, an increase of $664,111, or three times, the $208,446 for the same period in 2012. We believe that our significant revenue growth is a result of (1) our strategic acquisitions, (2) product expansion, and
(3) business alliances.

Expansion and growth remain our driving themes for GrowLife in 2013. GrowLife is actively engaged in building and integrating its national sales channels both brick and mortar stores and on-line stores. Our GrowLife Hydroponics business unit currently includes store locations in California, Colorado, Massachusetts, Maine and New Hampshire. The store locations are expected in the company is actively in expansion of its retail sales operations in with 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 enhance the profitable expansion of the Company in the United States.

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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.

Principal Channels:

GROWLIFE HYDROPONICS owns and operates specialty hydroponics stores in California, Colorado, Massachusetts, Maine and New Hampshire. Our stores strive 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.

GRENERS.COM, 58HYDRO.COM and STEALTHGROW.COM are GrowLife owned and operated on-line suppliers of a full range of hydroponic equipment for shipment worldwide. All of our on-line sales channels take pride in a commitment to service, sales and next day delivery of GrowLife company brands along with over 3,000 products SKU's sourced from all over the world, in most cases uniquely for the requirements of our specialty market.

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 the 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.

Results of Operations

Three and Six Months Ended June 30, 2013 Compared to June 30, 2012

Revenue and cost of revenue

For the three months ended June 30 2013, our revenue was $872,557, which represents an increase of $664,111 as compared to the $208,446 for the same three-month period in 2012. This increase was mainly due to the successful implementation of our acquisition program, which included the June 7, 2013 acquisition of RMH/EGC (see "NOTE 6 - PURCHASE - ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER").

For the six months ended June 30 2013, our revenue was $1,625,625 as compared to $300,255 for the same period in fiscal year 2012. As previously stated, the increase in revenue is primarily due to the Company's acquisition strategy, as the 2013 results include revenue from Greners, Urban Garden Supply, and RMH/EGC. Fiscal year 2012 results do not contain any revenue from these three business units, as they were each acquired after June 30, 2012.

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Cost of revenue for the three month periods ended June 30, 2013 and 2012 was $684,693 and $116,329, respectively. For the six months ended June 30, 2013, cost of revenue totaled $1,196,277 while cost of revenue for the same six-month period in 2012 totaled $200,096. As previously stated, the fiscal year 2013 results include cost of revenue from Greners, Urban Garden Supply, and RMH/EGC. Fiscal year 2012 results do not contain any cost of revenue from these three business units, as they were each acquired after June 30, 2012.

Gross profit for the three-month periods ending June 30, 2013 and 2012 was $187,864 and $92,117, respectively. Year-to-date 2013 gross profit was $429,348 and the same period in 2012 recorded gross profit of 100,159.

Expenses

Total general and administrative expenses for the three months ended June 30, 2013 were $1,279,059 an increase of $869,869 from the $409,190 incurred during the same three-month period in 2012. Non-cash general and administrative expenses for the three months ended June 30, 2013 totaled $677,098, with $570,700 related to common stock issued for consulting services, $57,375 related to common stock issued to employees, $28,749 related to the amortization of intangible assets, and $20,274 related to common stock issued as payment for rent. General and administrative expenses for the three and six month periods ended June 30, 2013 include expenses to support both Greners and Urban Garden Supply, which were acquired in the second half of fiscal year 2012 and therefore have no general and administrative expenses in the three and six month periods ending June 30, 2012.

For the six-month periods ending June 30, 2013 and 2012, general and administrative expenses were $2,007,464 and $534,334, respectively. Included in the $2,007,464 of general and administrative expenses for the six months ended June 30, 2013 was $883,472 of non-cash expenses that consisted of $602,367 related to common stock issued for consulting services, $204,833 related to common stock issued to employees, $55,998 related to the amortization of intangible assets, and $20,274 related to common stock issued as payment for rent. The general and administrative expenses for year-to-date 2013 include expenses to support both Greners and Urban Garden Supply, which have no corresponding expense in the same six-month period in fiscal year 2012 because both entities were acquired after June 30, 2012.

The following is a brief analysis of select general and administrative expenses:

Consulting expenses totaled $463,649 during the three-month period ended June 30, 2013. This consisted primarily of $433,000 in non-cash expense paid to a third-party firm by the issuance of 5,700,000 shares of the Company's common stock. This firm was retained by the Company to assist in fundraising endeavors while also assisting in promoting the GrowLife name/brand. For the six months ended June 30, 2013, consulting expenses totaled $494,649, of which $438,000 were for the previously mentioned third-party consulting firm, $17,000 were for consulting services relating to StealthGrow, and $27,499 was for consultants working for RMH/EGC.

Accounting and audit fees during the three months ended June 30, 2013 were $77,741, which consisted primarily of $22,843 to our independent outside auditors and $48,333 to a third-party consultant. For the six months ended June 30, 2013, accounting and audit fees were $159,385, which consisted primarily of $51,716 to our independent outside auditors and $83,333 to a third-party consultant. The third-party consultant, whose contract with the Company was terminated as of June 30, 2013, was paid $30,000 in cash and $53,333 by the issuance of 5,333,334 shares of the Company's common stock during the six months ended June 30, 2013.

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Advertising expense during the three months ended June 30, 2013 was $56,940, with year-to-date 2013 advertising expense totaling $118,638. The Company recorded year-to-date 2013 advertising expense of $54,736 for Phototron, $45,842 for Greners, and $15,650 to promote the GrowLife name/brand, and $2,410 for advertising related to its retail stores.

Rents, repairs, and security totaled $103,810 during the six months ended June 30, 2013. For the six month period ending June 30, 2013, the Company incurred rents, repairs, and security totaling $72,721 in relation to Greners, Urban Garden Supply, and RMH/EGC. There were no such expenses incurred during the same six-month period in fiscal year 2012, as none of these entities had been acquired as of June 30, 2012.

During the six months ended June 30, 2013, the Company incurred expenses of $177,976 in relation to new business development. This consisted of $58,000 for the Company's Cannabis.org website/joint venture, $92,976 in relation to GrowLife Productions, Inc., $15,000 in relation to the STVB joint venture, and $12,000 relating to another potential joint venture. No such expenses were recorded in the same six-month period of fiscal year 2012. Of the $177,976 expense recorded for new business development, $71,000 was non-cash and was paid by the issuance of 1,762,300 shares of the Company's common stock.

The Company recorded investor relations/public relations expense of $98,926 during the six months ending June 30, 2013. Of this, $21,700 was non-cash and was paid via the issuance of 620,000 shares of the Company's common stock. For the three-month period ended June 30, 2013, investor relations/public relations expense was $75,741, of which $21,700 was non-cash as previously mentioned. 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. These press releases and other promotional materials are considered necessary by the Company as a way to keep the investment community apprised of both the Company's operations and strategic vision.

Legal expenses totaled $44,680 during the six months ended June 30, 2013 and $20,061 for the three months ended June 30, 2013. 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 relating to the Company's Phototron business was $17,666 during the six months ended June 30, 2013. The website is substantially all new in terms of graphics/design and has a significantly improved, and more efficient, online ordering system.

During the six-month period ended June 30, 2013, the Company recorded $25,000 in compensation to members of its Board of Directors, all of which was non-cash and paid via the issuance of shares of the Company's common stock.

Other Expenses

During the quarter ended June 30, 2013, the Company incurred other expenses totaling $525,772 versus $439,647 during the same period in fiscal year 2012. Included in the $525,772 for the quarter ending June 30, 2013 was $250,000 of non-cash expense related to the 5,000,000 warrants issued to GMF, $242,453 of non-cash expense related to conversion features associated with the 6% Notes issued during fiscal year 2012, and $33,319 of interest expense.

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Other expenses for the six months ending June 30, 2013 and 2012 were $1,221,813 and $444,231, respectively. The $1,221,813 for the six-month period ended June 30, 2013 consisted of $909,994 in non-cash charges relating to the Company's 6% Senior Secured Convertible Notes and 10% Senior Convertible Notes, $250,000 of non-cash expense related to the 5,000,000 warrants issued to GMF, and $61,819 of interest expense.

As previously mentioned, amortization of intangible assets resulted in an expense of $28,749 during the quarter ended June 30, 2013 and $55,998 for the six months ended June 30, 2013. This expense is in relation to the amortization of $595,000 of intangible assets acquired via the acquisitions of SGT, Greners, Urban Garden, and RMH/EGC. The Company will continue to amortize these intangible assets at a quarterly expense of $28,749 per quarter until the entire $595,000 of intangible assets has been fully amortized.

Note that $1,159,994, or 95%, of the $1,221,813 of year-to-date 2013 "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 June 30, 2013 was $1,616,967 with
the same period in fiscal 2012 incurring a net loss of $756,720. As noted above
in "Other Expenses", a significant portion of the Company's net loss for
year-to-date 2013 is related to non-cash expenses. The following is a brief
summary of the non-cash expenses incurred by the Company year-to-date 2013:

                                                     Q1 Net Loss      Q2 Net Loss        YTD 2013
Net Loss - GAAP basis                                $ (1,182,962 )   $ (1,616,967 )   $ (2,799,929 )
Less non-cash expenses:
  Non cash warrant expense                                      -          250,000          250,000
  Non cash interest expense                               495,038          242,453          737,491
  Change in fair value of derivative                      169,753                -          169,753
  Amortization of intangible assets                        27,249           28,749           55,998
  Loss on extinguishment of debt                            2,750                -            2,750
  Depreciation of plant & equipment                         2,843            4,742            7,585
  Services render for common stock                        179,125          648,349          827,474
Total non-cash expenses                                   876,758        1,174,293        2,051,051

Net loss excluding non-cash items - Non-GAAP basis   $   (306,204 )   $   (442,674 )   $   (748,878 )

Liquidity and Capital Resources

As of June 30, 2013, we had negative working capital of $1,123,913 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 six months ended June 30, 2013, the Company used $807,857 of cash to fund its operating activities as compared to $281,587 used to fund operations in the same period last year.

The Company used $2,357 of cash to make leasehold improvements on one of its stores during the six months ended June 30, 2013 while using $1,753 to purchase fixed assets during the same six-month period in fiscal 2012.

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During the six months ended June 30, 2013, the Company generated net proceeds of $1,485,929 through financing activities, with $830,000 from the issuance of short-term notes payable, $623,260 generated by the sale of 17,807,433 shares of its common stock at $0.035 per share, $156,000 generated through the issuance of a 10% convertible note, $39,177 in net proceeds from a credit line, $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 $1,682,437 generated via financing activities during the six-month period ended June 30, 2013 was partially offset by $196,508 in debt and interest payments made by the Company which resulted in net proceeds of $1,485,929 from financing activities. During the same six-month period in fiscal 2012, the Company generated net proceeds of $249,799 via $120,402 of member contributions and $129,397 via related party advances.

On August 6, 2013, the Company amended the terms of the Revolving Note (see NOTE
12 - REVOLVING PROMISSORY NOTE and NOTE 17- SUBSEQUENT EVENTS). The amendment increased the maximum amount of the advances that the Company can request under the Revolving Note from the original amount of $550,000 to the revised amount of $750,000. The Revolving Note was also amended to state that any additional requests for additional draws by the Company under the Revolving Note shall be at the sole discretion of W-Net. These were the only terms of the Revolving Note that were amended. Immediately after signing the amendment to the Revolving Note, the Company requested a $75,000 advance under the Revolving Note which was promptly granted by the Holder. At the time of this filing the Company had requested, and been granted, an aggregate of $625,000 in advances under the Revolving Note.

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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