10-Q: GrowLife Inc. Reports Second Quarter 2023 Results Amidst Expansion into Mushroom Cultivation

GrowLife Inc. announced its second quarter financial results, highlighting its strategic move into the mushroom cultivation market through the acquisition of Bridgetown Mushrooms.

Summary

• GrowLife Inc. reported its financial results for the second quarter ended June 30, 2023.
• The company completed the acquisition of Bridgetown Mushrooms on January 6, 2023, marking its entry into the mushroom cultivation space.
• Net revenue for the quarter was $147,000, entirely from Bridgetown Mushrooms' sales.
• The company reported a gross profit of $103,000, with a gross profit percentage of 70%.
• Operating expenses for the quarter were $678,000, up from $363,000 in the same period last year, primarily due to the addition of employees and increased sales and marketing expenses.
• The company incurred a net loss from continuing operations of $3,377,000, compared to $1,228,000 in the second quarter of 2022.
• The increased net loss was attributed to higher operating expenses, a $215,000 increase in the change in fair value of derivative liability, a $1,552,000 increase in net interest expense, and a $553,000 impairment of intangible assets.
• As of June 30, 2023, GrowLife had an accumulated deficit of $169 million and cash and cash equivalents of $5,000.
• The company acknowledged the need for additional funding to execute its business plans and continue as a going concern.

Sentiment

Score: 2

Explanation: The document reflects a negative sentiment due to the significant net loss, low cash reserves, defaults on debt obligations, and the need for additional financing. The uncertainty surrounding the company's ability to continue as a going concern further contributes to the negative outlook.

Positives

• The acquisition of Bridgetown Mushrooms represents a strategic move into a new and potentially lucrative market.
• Bridgetown Mushrooms has a strong presence in the Pacific Northwest and multiple sales channels.
• The company achieved a high gross profit percentage of 70% for the second quarter of 2023.
• GrowLife is leveraging its cultivation expertise to bring innovative products to emerging markets.

Negatives

• The company reported a significant net loss from continuing operations of $3,377,000 for the second quarter of 2023.
• Operating expenses increased substantially due to the acquisition and expansion.
• The company has a large accumulated deficit of $169 million.
• GrowLife's cash and cash equivalents are very low at $5,000.
• There is substantial doubt about the company's ability to continue as a going concern without additional financing.
• The company is in default on several of its convertible promissory notes.
• An impairment charge of $553,000 was recognized related to the purchase of Bridgetown Mushrooms due to reduced expectations for future sales.
• The company faces litigation related to the previous acquisition of EZ-CLONE Enterprises, Inc.

Risks

• The company needs additional financing to implement its business plan and service its ongoing operations.
• There is no assurance that GrowLife will be able to secure needed funding on acceptable terms, or at all.
• If unable to obtain additional financing, the company may need to restructure operations and divest all or a portion of its business.
• Debt financing could increase expenses and require assets to secure such debt.
• Equity financing could result in dilution to existing stockholders.
• The company is subject to various legal proceedings, including litigation related to the EZ-CLONE acquisition.
• The company's intellectual property may be difficult to protect.
• Competition in the mushroom cultivation market is primarily from local or regional growers.
• The company is in default on several of its convertible promissory notes due to failure to timely file its Form 10-K for 2022.

Future Outlook

The company believes that moving into the mushroom cultivation space is a natural progression for GrowLife and that it may benefit shareholders by capitalizing on the opportunities available in this market. However, the company anticipates recording losses from operations for the foreseeable future and needs additional financing to implement its business plan.

Management Comments

• 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 opportunities available to the Company.

Industry Context

The announcement relates to the broader trend of companies expanding into the growing market for gourmet and functional mushrooms. The demand for these products is increasing due to their perceived health benefits and culinary uses. GrowLife's acquisition of Bridgetown Mushrooms positions it to capitalize on this trend.

Comparison to Industry Standards

• The document does not provide specific details on comparable companies or projects to allow for a direct comparison to industry standards.
• However, it mentions that competition is primarily made up of local or regional mushroom growers who mostly supply restaurants, distributors, and grocery stores with gourmet mushrooms.
• These competitors are mostly privately held enterprises, making it difficult to determine operating performance comparisons.

Corporate Governance

Legal Proceedings

• On September 15, 2020, the Company received notice that William Blackburn and Brad Mickelsen (Plaintiffs), minority shareholders of EZ-CLONE Enterprises, Inc., filed a complaint against the Company in the Superior Court of California, County of Sacramento (Complaint) for claims related to breach under the Purchase and Sale Agreement dated October 15, 2018 between the Company and Plaintiffs.
• On December 29, 2022, the Company entered into a Settlement Agreement and Mutual General Release (SAMGA) with Mr. Blackburn.
• Mr. Mickelsen refused to participate in negotiating the SAMGA.
• On May 10, 2023, Mr. Mickelsen filed a Motion for Summary Judgment in the original lawsuit against Growlife and the former CEO, seeking 100% of the damages claimed for breach of contract.
• On January 24, 2024 Coventry Enterprises filed a Complaint in the Superior Court in the State of Delaware alleging breach of contract and seeking damages of $265,811.

Stakeholder Impact

• Shareholders: Potential dilution from equity financing and uncertainty about the company's future.
• Employees: Potential impact on job security if the company fails to secure additional funding or improve financial performance.
• Creditors: Increased risk due to the company's defaults on debt obligations and financial instability.
• Customers: Potential impact on product availability and quality if the company faces operational challenges.
• Suppliers: Potential impact on payment for goods and services if the company's financial situation deteriorates.

Next Steps

• The company needs to secure additional funding to continue operations and implement its business plan.
• GrowLife will likely seek private and public equity offerings, debt financings, or strategic collaborations.
• The company needs to address its defaults on convertible promissory notes.
• GrowLife will need to improve its financial performance and reduce its operating losses.
• The company will continue to integrate and develop the Bridgetown Mushrooms business.

Key Dates

Keywords

mushroom cultivation, organic mushrooms, gourmet mushrooms, functional mushrooms, mycology supplies, Bridgetown Mushrooms, GrowLife Inc, acquisition, convertible debt, warrants, financial results, Oregon, Pacific Northwest