Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. GROWLIFE, INC. (1161582) 10-Q published on May 24, 2021 at 4:40 pm
Reporting Period: Mar 30, 2021
On April 5, 2021, the Company entered into a joint Warrant Settlement Agreement with St. George Investments LLC (“St. George”) and Iliad Research and Trading, L.P. (“Iliad”) to resolve a dispute related the calculation of shares issuable under warrants issued in prior financings. In the Warrant Settlement Agreement, in exchange for certain covenants by the Company, St. George agreed that upon the exercise of its warrant of up to 11,750,000 shares of the Company’s common stock it would cancel the balance of the warrant related to a February 9, 2018 subscription agreement. Concurrently, Iliad agreed that upon the exercise of its warrant up to 2,500,000 shares of the Company’s common stock it would cancel the balance of the warrant related to an October 15, 2018 Securities Purchase Agreement. The Company recorded a loss on debt settlement of $2,423,000 for the year ended December 31, 2020 and accrued a liability for the future issuance of shares. On April 5, 2021, the Company issued 2,500,000 shares upon the exercise of the warrant to reduce by $425,000 its obligation On May 7, 2021, the Company issued another 3,500,000 shares upon the exercise of the warrant to further reduce by $595,000 its debt settlement obligation. The Company received no proceeds from these April and May 2021 cashless warrant exercises. The Company expects to issue an additional 8,250,000 shares to settle the remaining approximately $1.4 million of debt settlement obligation through cashless warrant exercises.
On April 23, 2021, the Company was notified that it was in default on its notes held by Silverback Capital Corporation (“Silverback”) which totaled $1,444,329 at March 31, 2021. The reason for the default was the Company’s inability to provide the reserve share requirement as specified in the notes. The penalty for the reserve share default was an increase in the outstanding note balances by 15%, an increase in the conversion discount by 5% to 60%, and a default interest rate on the outstanding note balances of 22%.
As a result of the reserve share default, on May 7, 2021 Silverback demanded immediate payment in full of all of their notes. On May 10, 2021, when Silverback had not been paid in full, Silverback presented another default notice for lack of payment. The penalty for the non-payment default was an increase in the outstanding note balances by another 15%, an additional increase in the conversion discount by 5%, and a default interest rate on the outstanding note balances of 22%. The Company and Silverback are in discussion to resolve these defaults. As of May 24, 2021, Silverback has applied two material default notices to convertible notes payable asserting the balance owed totaled $1,817,311.
Revenues remained relatively flat with less than a 1% growth year over year and down 16% from last quarter due to EZ-CLONE's primary sales dependency on major distribution partners. The Company closed the lower margin hydroponics reselling business as of December 31, 2020. The operating losses of $164,000 also reflect non-cash amortization for EZ-CLONE and bad debt expense of $196,000.
Finally, the first quarter stock trading spike, where the Company’s share price rose from $0.12 to $0.50 per share, unfortunately increased the level of debt conversions by 2-4 times the normal level resulting in a loss on debt conversion of $1,730,838 during the quarter ended March 31, 2021 compared to $30,138 during the quarter ended March 31, 2020 However, since we see debt as an interim necessity and not an on-going business factor, GrowLife Management considers the cash performance portion of the Statement of Operations a more accurate indicator of the long-term health of the business. Cash provided by operating activities was $106,089 during the quarter ended March 31, 2021 compared to $422,780 cash used in operations during the quarter ended March 31, 2020.
EZ-CLONE had one customer that was more than 24% of our sales and 31.3% of our accounts receivable for the quarter ended March 31, 2021 and 45.7% of our sales and 87.7% of our accounts receivable for the year ended December 31, 2020. There are inherent risks whenever a large percentage of total sales and accounts receivable are concentrated with a limited number of customers. It is not possible for us to predict the future level of demand for our services and products that will be generated by this customer or the future demand for the products and services of this customer in the end-user marketplace. In addition, sales from larger customers may fluctuate from time to time based on the commencement and completion of projects, the timing of which may be affected by market conditions or other factors, some of which may be outside of our control. Further, some of our contracts with larger customers permit them to terminate our services at any time (subject to notice and certain other provisions). If any of our major customers experience declining or delayed sales due to market, economic or competitive conditions, we could be pressured to reduce the prices we charge for our services or we could lose the customer. Any such development could have an adverse effect on our margins and financial position, and would negatively affect our sales and results of operations and/or trading price of our common stock. There can be no assurance that our sales will not continue to be sufficiently concentrated among a limited number of customers.
We are currently in default of the notes held by Silverback. As of March 31, 2021 the notes held by Silverback totaled $1,444,329. The notes provides that in the event of default, the lender may, at its option, elect to increase the outstanding balance applying the default effect (defined as outstanding balance at date of default. As of May 24, 2021, Silverback has applied two material default notices to convertible notes payable totaling $1,817,311, each of which increased the balance by 15%, increased interest to 22% and each increased the conversion discount by 5%. The defaults were due to a failure to keep sufficient reserves to meet obligations and failure to pay the entire note balance upon Silverbacks demand. We cannot predict whether Silverback will institute any further rights with respect to the Note defaults and may imply further discounts and penalties. Further the default which Silverback has alleged may apply to other creditors and they may also institute penalties for such defaults. We cannot give any assurance that it will be able to pay such creditors or that claims will not be asserted in addition to the amounts which the Company believes it is liable for at this time.