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PHOT > SEC Filings for PHOT > Form 10-Q/A on 27-Jun-2014All Recent SEC Filings

Show all filings for GROWLIFE, INC.

Form 10-Q/A for GROWLIFE, INC.


27-Jun-2014

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 three month periods ended March 31, 2014 and 2013. 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, 2013 filed with the Securities and Exchange Commission on March 31, 2014, captioned "Risk Factors."

Overview

General

GrowLife companies manufacture and supply branded equipment and expendables, with expendables being products such as nutrients and soils that are consumed as part of the cultivation process and therefore needing to be replenished on a continual basis that promote and enhance the characteristics of quality and quantity of indoor and outdoor urban gardening. 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. As and to the extent the state and federal regulatory landscape changes, we will continue opportunistic expansion of our business in regional and state-by-state markets of legal medical marijuana across the United States. The GrowLife family of companies now includes the online distribution hub Greners, the pioneering and expanding Stealth Grow product line, and retail stores that can service customers from coast to coast.

With regard to the products sold at our retail hydroponics stores in our business to business relationships, and directly, the Company typically purchases its products from the actual manufacturer or a wholesale distributor and resells the products. Most of our vendors provide payment terms ranging from seven (7) days to thirty (30) days while some require payment at the time we purchase them. The Company also more directly manages supply chains in which GrowLife company branded products are produced, principally under the Stealth Grow brand, or under a co-brand shared by GrowLife, Stealth Grow, and the brands of our business to business partners. With regard to our Phototron units, the Company purchases the required materials and then assembles the actual working unit at our Gardena, CA facility, with the finished, and working, Phototron unit then being shipped directly to our customers.

We have focused on the urban gardening industry in the United States and have targeted legal growers of medical marijuana and general gardening enthusiasts. The majority of the products that we sell are primarily used in the cultivation, in a legal and law abiding manner, of cannabis but can also be used to cultivate most any flowers and/or vegetables. 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.

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From time to time, the Company may make modest investments in public or even privately held companies in our industry segment in order to facilitate business opportunities of the Company. The first such investment by the Company occurred in May 2013, when the Company made an investment in the amount of $1,160 in Vape Holdings, Inc. ("Vape"), a Nevada corporation. Following a series of transactions that are detailed in "NOTE 9 - INVESTMENT IN A RELATED PARTY", Vape Holdings, Inc. became a public company. Through its investment, GrowLife received and still owns as of the time of this filing 200,428 shares in Vape Holdings, Inc. (OTCQB: VAPE).

Sterling Scott, the Company's Chief Executive Officer and Chairman of the Board, has a personal investment in Vape as well. As of the time of this filing, Mr. Scott holds 257,320 shares of Vape's common stock. As a result of Mr. Scott's ownership of Vape common stock, the Company has deemed Vape to be a related party and therefore has recorded its investment in Vape as an "Investment in a related party" on its balance sheet. It should also be noted that the current Chief Executive Officer of Vape is the former President of GrowLife, Inc.

Net revenue in the three month period ended March 31, 2014 was $2,382,836, which represents an increase of $1,622,128, or approximately three times, the $760,708 of net revenue in the same period of fiscal year 2013. The primary factor in the significant increase in net revenue is due to the $1,437,639 of net revenue from the five (5) retail stores acquired in The Company's acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC (see "NOTE 3 PURCHASE
- ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER"). This acquisition occurred in June 2013, which means that no such revenue is included in the three month period ended March 31, 2013. Also included in the increase in net revenue is a $96,962 year-to-year gain posted by Greners.com, the Company's online hydroponics superstore, and a $109,118 year-to-year gain by Soja, Inc. (dba Urban Garden Supply and a wholly-owned subsidiary of GrowLife Hydroponics, Inc.). The above mentioned increases in net revenue were partially offset by a $21,591 decrease in net revenue by Phototron, Inc. and SG Technologies, Corp.

The following is a summary of the Company's net revenue by brand:

                                        Revenue By Brand

                                                                   For the Three Months Ended
                                                                   March 31,          March 31,
                                                                      2014               2013
GrowLife Hydroponics, Inc. (1) (2)                               $    1,670,710       $  123,953
Greners.com                                                             634,879          537,917
Phototron & SG Technologies, Corp.                                       77,247           98,838
                                                                 $    2,382,836       $  760,708

(1) Includes Soja, Inc. (dba Urban Garden Supply) and Rocky Mountain Hydroponics, LLC, and Evergreen Garden Center, LLC in 2014 and only Soja, Inc. in
2013. See "Note 3 - PURCHASE - ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER" for a pro-forma comparison

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Brands:

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.

STEALTH GROW is a brand identifier for a range of different indoor gardening products, including Hi-Power LED lights for indoor growing.

Rocky Mountain Hydroponics & Organics“ and 58HYDRO“ are GrowLife company brands for retail stores, and an online store respectively.

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.

GROWLIFE HYDROPONICS owns and operates seven specialty hydroponics stores, with two in California, two in Colorado, one in Maine, one in Massachusetts, and one in New Hampshire.. Our stores 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. Our GrowLife Productions business unit is no longer actively engaged in discussions or collaboration with Strategic Global Investments, Inc.

Competition

All of GrowLife's brands and its retail and online distribution channels compete for customers and sales with many different companies and products that are competitive today and likely to be even more competitive in the future. Accordingly, it is essential that GrowLife and its companies continue to develop, improve, and refine brands and the value propositions that are offered to customers.

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Competition in the retail hydroponics industry is significant, as competing stores continually open. With regard to competition in the markets that our retail stores serve, there are numerous retail hydroponics stores within a relatively short distance from the Company's stores.

As for the Company's SG Technologies subsidiary, which specializes in lighting equipment, there is also significant competition in this market, as more companies enter this market while at the same time introducing lower-cost products imported from countries such as China.

With regard to the Company's Phototron subsidiary, which makes proprietary "grow chambers", there are not very many companies that manufacture similar products. However, the competition, or challenges, faced by Phototron have more to do with the fact that its products serve a niche market consisting of individuals interested in growing only one plant at a time. This niche market is becoming more challenging due to the fact that an increasing number of consumers are no longer interested in a "one plant" solution.

The competition for the Company's Greners.com subsidiary, which specializes in the online sale of hydroponics products, is also substantial as other, competing online hydroponics stores have entered the market.

With regard to our company's size relative to its competition, that is difficult to gauge as most of our competition is privately held and does not publicly report their earnings. We do know of several competitors who own and operate more retail hydroponics stores than we currently do, but they are privately held and, therefore, we are unable to determine their size in terms of annual revenue.

We also face competition from other public companies that offer equipment and expendables. Moreover, as the negative stigma associated with some types of urban gardening such as cannabis plants diminishes, it is very possible that other better capitalized public and private companies many enter the market and may effectively challenge the value proposition offered by GrowLife companies. These competitors may be able to attract customers more easily because of their financial resources. Our larger competitors can also devote substantially more resources to business development and may adopt more aggressive pricing policies. We will compete on the strength of our multiple business opportunities, product offerings, and management.

While our management believes that we have the opportunity to be successful in the urban agriculture market, there can be no assurance that we will be successful in accomplishing our business initiatives, or that we will be able to maintain significant levels of revenues, or recognize net income, from the sale of our products and services.

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 more than 30 website addresses related to our business including websites that are actively used in our day-to-day business such as www.growlifeinc.com, www.stealthgrow.com, www.phototron.com, www.greners.com, www.cannabis.org, and www.urbangardensupplies.com.

We have a policy of entering into confidentiality and non-disclosure agreements with our employees and some of our vendors and customers as we deem necessary. These agreements and policies are intended to protect our intellectual property, but we cannot ensure that these agreements or the other steps we have taken to protect our intellectual property will be sufficient to prevent theft, unauthorized use or adverse infringement claims. We cannot prevent piracy of our methods and features, and we cannot determine the extent to which our methods and features are being pirated.

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Government Regulation

Currently, there are twenty states plus the District of Columbia that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Fifteen other states are considering legislation to similar effect. As of the date of this writing, the policy and regulations of the Federal government and its agencies is that cannabis has no medical benefit and a range of activities including cultivation and use of cannabis for personal use is prohibited on the basis of federal law and may or may not be permitted on the basis of state law. Active enforcement of the current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the willingness of customers of GrowLife to invest in or buy products from GrowLife. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect revenues and profits of the GrowLife companies.

Employees

As of March 31, 2014, we had 47 employees. Since inception, we have never had a work stoppage, and our employees are not represented by a labor union. We consider our relationship with our employees to be positive.

Results of Operations

Three Months Ended March 31, 2014 Compared to March 31, 2013

Revenue and cost of revenue

Net revenue in the three month period ended March 31, 2014 was $2,382,836, which represents an increase of $1,622,128, or approximately three times, the $760,709 of net revenue in the same period of fiscal year 2013. The primary factor in the significant increase in net revenue is due to the $1,437,639 of net revenue from the five (5) retail stores acquired in the Company's acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC (see "NOTE 3 PURCHASE
- ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER"). This acquisition occurred in June 2013, which means that no such revenue is included in the three month period ended March 31, 2013. Also included in the increase in net revenue is a $96,962 year-to-year gain posted by Greners.com, the Company's online hydroponics superstore, and a $109,118 year-to-year gain by Soja, Inc. (dba Urban Garden Supply and a wholly-owned subsidiary of GrowLife Hydroponics, Inc.). The above mentioned increases in net revenue were partially offset by a $21,591 decrease in net revenue by Phototron, Inc. and SG Technologies, Inc.

Cost of revenue for the three month period ended March 31, 2014 was $1,862,958, or 78.2% of net revenue, while cost of revenue in the same three month period in fiscal year 2013 was $511,583, or 67.3% of net revenue. The increase in the Company's cost of revenue, as measured as a percentage of net revenue, is a result of increased competition, which results in the Company selling its products at a higher discount.

Gross profit for the three month period ended March 31, 2014 was $519,878, or 21.8% of net revenue while gross profit for the same period in fiscal year 2013 was $249,126, or 32.7% of net revenue. As previously stated, the decrease in gross profit, as measured as a percentage of net revenue, is a result of increased price discounting.

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Other Expenses (Restated)

During the three month period ended March 31, 2014, the Company incurred net other expenses totaling $69,007,238 versus net other expenses of $695,970 during the same period in fiscal year 2013. The $69,007,238 was comprised of $34,507,607 of non-cash "change in fair value of derivative" expense (see "NOTE
13 - DERIVATIVE LIABILITY"), $758,348 of non-cash interest expense related to the amortization of the debt discount associated with the Company's convertible notes payable, $41,500 of accrued and unpaid interest expense related to the Company's notes payable and $33,700,000 in interest expense related to the CANX 100,000,000 warrant (see "NOTE 4 - JOINT VENTURE AGREEMENT WITH CANX USA") These expenses were partially offset by $217 of interest income.

The $695,970 of net other expenses incurred during the three month period ended March 31, 2013 consisted of $495,038 of non-cash interest expense related to the amortization of the debt discount associated with the Company's convertible notes payable, $169,753 of non-cash "change in fair value of derivative" expense, $28,429 of accrued and unpaid interest expense related to the Company's notes payable, and $2,750 of non-cash "loss on extinguishment of debt" related to the Company's note payable issued to the former owners of Greners.

Note that $69,340,955 , or 99%, of the $69,382,238 of net other expenses incurred during the three month period ended March 31, 2014 is non-cash, which means it does not have an adverse effect on the Company's cash flows.

Loss

The net loss for the three month period ended March 31, 2014 was $71,473,949
with the same period in fiscal 2013 incurring a net loss of $1,182,962. As noted
above in "Other Expenses", a significant portion of the Company's net loss for
the three month periods ended March 31, 2014 and 2013 is related to non-cash
expenses. The following is a brief summary of the non-cash expenses incurred by
the Company during the three month periods ended March 31, 2014 and 2013:

                                                                        Three Months Ended
                                                                March 31, 2014
                                                                  (Restated)         March 31, 2013
Net loss - GAAP basis                                          $    (71,473,949 )   $     (1,182,962 )
Less non-cash expenses:
  Non cash interest expense                                          34,499,331              521,220
  Change in fair value of derivative                                 34,507,607              169,753
  Gain (loss) on extinguishment of debt                                       -                2,750
  Amortization of intangible assets                                      26,637               27,249
  Depreciation of plant & equipment                                       9,831                2,843
  Stock option expense                                                  151,701                    -
  Services rendered for common stock                                  1,645,000              179,125
Total non-cash expenses                                              70,840,107              902,940

Net loss excluding non-cash items - Non-GAAP basis             $       (633,842 )   $       (280,022 )




                                                         Three Months Ended
                                                      March 31,      March 31,       Year-to-Year
                                                        2014            2013            Change
GrowLife, Inc.                                       $   548,114     $  273,413     $       274,701
GrowLife Hydroponics, Inc.                               459,674         51,955             407,719
Greners.com                                              110,093        124,226             (14,133 )
Phototron, Inc. & SG Technologies, Inc.                   72,007        107,399             (35,392 )
                                                     $ 1,189,888     $  556,993     $       632,895

Non-cash general and administrative expenses for the three month period ended March 31, 2014 totaled $1,645,000, with $1,160,000 related to common stock issued to the Company's four (4) independent Board Directors per an August 2012 Board grant, $475,000 related to shares issued to the Company's investor/public relations firm per a November 2013 agreement, and $10,000 related to shares issued to a third party consultant (see "NOTE 20 - STOCKHOLDERS' DEFICIT"). During the same three month period in fiscal year 2013, non-cash general and administrative expenses totaled $179,125, which consisted of $137,458 related to shares issued to employees of the Company, $20,000 related to shares issued to a third party consultant, $11,667 related to shares issued in connection with the Company's "cannabis.org" website, and $10,000 related to shares issued to the Company's two (2) independent Board Directors per an August 2012 Board grant.

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For the three month period ended March 31, 2014, the Company recorded non-cash stock option expense in the amount of $151,701 in relation to the expensing of options granted in November 2013 to Sterling Scott, the Company's Chief Executive Officer, John Genesi, the Company's Chief Financial Officer, and Rob Hunt, the President of GrowLife Hydroponics, Inc. and a Director of the Company (see "NOTE 20 - STOCKHOLDERS' DEFICIT"). These stock option grants were recorded in accordance with Financial Accounting Standards Board (FASB) ASC Topic 718, "Compensation - Stock Compensation". The Company measured, and recorded, the fair value of the option grant as of the date of grant and is amortizing the computed value of the option grant over the related vesting period. There was no stock option expense for the same three month period in fiscal year 2013.

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

Wages and related taxes totaled $556,534 in the three month period ended March 31, 2014 as compared to $126,878. The $429,656 increase is primarily due to (1) the $256,922 of wages and related taxes associated with the Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC ("RMH/EGC") stores that the Company acquired in June 2013 (see "NOTE 3 PURCHASE - ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER"), and (2) the $165,126 increase in wages and related taxes incurred by GrowLife, Inc. As previously stated, the three month period ended March 31, 2013 does not include any expenses related to RMH/EGC as that acquisition occurred in June 2013. Also, as previously stated, the increase in wages and related taxes incurred by GrowLife, Inc. was due (1) to increased headcount at GrowLife, Inc. (four (4) employees earning base salaries of at least $150,000 per year were on GrowLife's payroll at one time or another during the three month period ended March 31, 2014 who were not on GrowLife's payroll at any time during the same three month period in fiscal 2013), and (2) the fact that Sterling Scott, the Company's Chief Executive Officer, was paid a salary during the three months ended March 31, 2014 while receiving no salary during the same three month period in fiscal year 2013.

Rents, repairs, and security totaled $125,893 during the three month period ended March 31, 2014, which represents an increase of $85,671 as compared to the $40,222 incurred during the same three month period in fiscal year 2013. Rents, repairs, and security related to the RMH/EGC stores acquired in June 2013 accounted for $70,370 of the increase while rent expense incurred by GrowLife, Inc. accounted for an additional $20,274 of the increase. These increases were partially offset by the $6,516 decrease in rent expense incurred by Greners during the three month period ended March 31, 2014.

Legal expenses totaled $61,639 during the three month period ended March 31, 2014 as compared to $24,619 for the same three month period in fiscal year 2013. The increase in legal fees is primarily attributable to the Company's special shareholder meeting (see "NOTE 7 - SPECIAL MEETING OF SHAREHOLDERS"), its dealings with CANX USA, LLC (see "NOTE 4 - JOINT VENTURE AGREEMENT WITH CANX USA, LLC"), and its dealings with Wise Phoenix, LLC and AJOA Holdings, LLC (see "NOTE 5 - INTEREST PURCHASE AGREEMENT WITH WISE PHOENIX, LLC AND AJOA HOLDINGS,
LLC").

Consulting and professional fees totaled $80,509 during the three month period ended March 31, 2014, which represents an increase of $30,027 as compared to the $50,482 incurred during the three month period ended March 31, 2013. The increase was due primarily to the $33,696 paid to a third party consultant to provide employee recruiting services to the Company during the three month period ended March 31, 2014.

Travel and related expenses were $53,768 during the three month period ended March 31, 2014, which represents an increase of $47,091 as compared to the $6,677 incurred during the three month period ended March 31, 2013. The increase is due primarily to the Company's management team traveling among its various offices and stores.

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Health insurance expenses were $24,215 during the three month period ended March 31, 2014, while the Company incurred zero health insurance expense during the three month period ended March 31, 2013. The increase is due to the Company implementing a Group Health Insurance Plan for its employees during the three month period ended March 31, 2014.

Accounting and audit fees during the three month period ended March 31, 2014 were $36,585 as compared to $51,985 during the same three month period in fiscal year 2013. The decrease is primarily due to the fact that the Company retained a third party consultant to provide accounting/audit support during the three month period ended March 31, 2013. This consultant was paid $15,000 during the three month period ended March 31, 2013.

Advertising expense during the three month period ended March 31, 2014 was $45,573, while advertising expense in the same period during fiscal year 2013 was $54,698. The Company incurred advertising expense of $11,410 in relation to . . .

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