UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
 
For the fiscal year ended December 31, 2019
 
 TRANSACTION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
 
For the transaction period from ________ to ________
 
Commission file number 000-50385
 

 
GrowLife, Inc.
(Exact name of registrant as specified in its charter) 
 
Delaware
 
90-0821083
  (State or other jurisdiction of
incorporation or organization)
 
    (I.R.S. Employer Identification No.)
 
5400 Carillon Point
Kirkland, WA 98033
(Address of principal executive offices and zip code)
 
(866) 781-5559
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2
 
Large accelerated filer
Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   No
 
As of June 30, 2019 (the last business day of our most recently completed second fiscal quarter), based upon the last reported trade on that date, the aggregate market value of the voting and non-voting common equity held by non-affiliates (for this purpose, all outstanding and issued common stock minus stock held by the officers, directors and known holders of 10% or more of the Company’s common stock) was $23,254,528.
 
As of April 1, 2020, there were 29,282,602 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.
 
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
 
The following discussion, in addition to the other information contained in this report, should be considered carefully in evaluating us and our prospects. This report (including without limitation the following factors that may affect operating results) contains forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act") regarding us and our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. Additionally, statements concerning future matters such as revenue projections, projected profitability, growth strategies, development of new products, enhancements or technologies, possible changes in legislation and other statements regarding matters that are not historical are forward-looking statements.
 
Forward-looking statements in this report reflect the good faith judgment of our management and the statements are based on facts and factors as we currently know them. Forward-looking statements are subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, but are not limited to, those discussed below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those discussed elsewhere in this report. Readers are urged not to place undue reliance on these forward-looking statements which speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report.

 
 
 
TABLE OF CONTENTS
 
 
 
Page
PART 1
 
 
 
 
 
1
 
 
 
7
 
 
 
15
 
 
 
15
 
 
 
16
 
 
 
16
 
 
 
PART II
 
 
 
 
 
17
 
 
 
21
 
 
 
21
 
 
 
 
 
 
26
 
 
 
26
 
 
 
27
 
 
 
27
 
 
 
PART III
 
 
 
 
 
28
 
 
 
31
 
 
 
41
 
 
 
42
 
 
 
43
 
 
 
PART IV
 
 
 
 
 
44
 
 
 
46

 
 
 
PART I
 
ITEM 1.    DESCRIPTION OF BUSINESS
 
THE COMPANY AND OUR BUSINESS
 
Forward-looking statements in this report reflect the good-faith judgment of our management, and the statements are based on facts and factors as we currently know them. Forward-looking statements are subject to risks, uncertainties and actual results, and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, but are not limited to, those discussed below as well as those discussed elsewhere in this report (including in Part II, Item 1A (Risk Factors)). Readers are urged not to place undue reliance on these forward-looking statements because they speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report.
 
On October 9, 2019, we approved the reduction of authorized capital stock, whereby the total number of our authorized common stock decreased from 6,000,000,000 by a ratio of 1 for 50, to 120,000,000 shares. On November 20, 2019, we filed a Certificate of Amendment of Certificate of Incorporation with the Secretary of State of the State of Delaware. As a result of the reduction, we have an aggregate 130,000,000 authorized shares consisting of : (i) 120,000,000 shares of common stock, par value $0.0001 per share, and (ii) 10,000,000 shares of preferred stock, par value $0.0001 per share.
 
The reverse stock split of 1 for 150 was effective at the open of business on November 27, 2019 whereupon the shares of common stock began trading on a split-adjusted basis. Our CUSIP number for our common stock changed to 39985X203. All warrant, option, share and per share information in this Form 10-K gives retroactive effect to the 1-for-150 reverse split with all numbers rounded up to the nearest whole share.
 
THE COMPANY AND OUR BUSINESS
 
GrowLife, Inc. (“GrowLife” or the “Company”) is incorporated under the laws of the State of Delaware and is headquartered in Kirkland, Washington. We were founded in 2012 with the Closing of the Agreement and Plan of Merger with SGT Merger Corporation.
 
FINANCIAL PERFORMANCE
 
First, our 2019 revenue of $8.2 million as compared to $4.6 million for last year ending December 31, 2018, overall grew about 80% over the prior year.
 
Second, gross profits, or revenue after our cost of sales, was reported at $2.5 million for the year ending December 31, 2019 as compared to last year’s $468,000, a 432% year-over-year increase. This is attributed to the acquisition of the EZ-CLONE Enterprises Inc. (“EZ-CLONE”) line of products, which brought in significantly higher margins along with our continuing GrowLife business revenue, resulting in blended gross margin of 30.2%, up from 10.2%.
 
Finally, the Company continues to generate growth by investing in its EZ-CLONE acquisition, sales and marketing efforts and a result reported a loss for the year ending December 31, 2019.  We believe that expansion spending is necessary in a high-growth market such as the cannabis, hemp and CBD-related businesses.
 
As of December 31, 2019, we had closed all of our retail stores which we had previously operated in Portland, Maine, Encino, California and Calgary, and Canada online sales. During 2019 we also divested from the flooring division located in Grand Prairie, Texas. As a result of these changes, we expect to reduce losses and cash outflows by up to $100,000 per month starting October 1, 2019. During the quarter ended September 30, 2019, we recorded a restructuring expense of $306,000 for the closure of the flooring division related to the equipment write down and $250,000 for the closure of the retail stores, related leases and online sales.
 
 
1
 
 
GROWLIFE’S EVOLUTION
 
GrowLife is the customer’s champion, always focused on where we can add value to their success. When we asked cultivators over the years how we can best help them, at first it was with access to the best products. So the Company grew, through acquisitions, to seven retail stores and an e-commerce site with 12,000 products to reach areas where our stores could not. Then, large-scale cultivation operations required consultative engagements, and a direct sales team with professional growing expertise was added. As a result, less retail traffic led us to close many stores and turn a few into distribution hubs. Then, the industry saw consolidation and major price drops where cost of operations became the biggest demand.
 
GrowLife set the goal of increasing margins and revenue through an acquisition needed to offset the low margins and reduce high debt financing. We also began researching Cube, an initiative to lower production costs of dry weight Cannabis Flower to $0.50 per gram for our customers. We went from a reseller company to a technology company, which required more capital and more acquisitions. In 2018, our gross margins were cut in half and losses grew to about the same as our revenue.
 
In 2019, with the EZ-CLONE acquisition, we achieved our goals by raising gross margins to over 30% and revenue to over $8 million. We also reached our Cube goal of producing $0.50 per gram. Cube’s greatest cost savings came from space management, which led to labor, energy and waste efficiencies. We have posted our operating manual online and are providing the materials in an open source manner. We will sell the higher margin materials and avoid carrying expensive Cube inventory in order to focus on our clone business.
 
GROWLIFE’S FUTURE
 
GrowLife’s Goal
Be the nation’s leading supplier of plant clones
that grow plant-based medicines through systems, services and partnerships.
 
In 2019, billions of plants were grown to serve the demand of the plant-based medicines, more commonly referred to as the Cannabis and CBD markets. The source of propagation, or initial planting, is seeding or cloning (starters). The leader in cloning systems is EZ-CLONE. The economics have favored seeds until recently where controlling genetics, gender and yield to control the crop output, focus on certain geographic locations equipped with tobacco infrastructure are becoming a strategic investment.
 
GrowLife Mission
Measure its success by its customer’s success;
serving cultivators of all sizes as a reliable business partner and its shareholders with value and trust.
 
Our EZ-CLONE systems come in many sizes for different size customers. We seek and partner with the best genetics and propagators in the country. And, we make the best long-term decisions for our shareholders to deliver value, including maintaining management continuity to best serve them. Promptly and diligently taking action to qualify the Company for re-uplist back to the OTCQB from the Pink Sheets is an example of the Company’s commitment to its shareholders.
  
GrowLife’s Vision
Our clones are the essential factor for our customers now
and in the long-term in today’s Hemp CBD and tomorrow’s Cannabinoid Industry.
 
In 2019, we grew greatly by supplying EZ-CLONE, our leading cloning systems, to our cultivators across the country as we prepared to supply Hemp CBD clones. In 2020 we plan to supply millions of EZ-CLONEZ clones to CBD farmers. We seek to continue to deliver on our mission with our shareholders as the CBD clone industry grows and our role in it.
 
 
2
 
 
WHY CLONES ARE THE GAME CHANGER
 
Toward the end of 2018, we announced the majority acquisition of EZ-CLONE Enterprises Inc. EZ-CLONE is the industry-leading supplier of commercial-grade cloning and propagation equipment. This was a part of this strategic positioning plank to shift from reselling other products and control our own destiny, with locking in on an essential component in the cultivator’s supply chain.
 
Cannabis cultivators have been cloning their favorite strains from mother plants for decades, using various outdated conventional methods, like tabletop growing. These methods are extremely labor and space intensive. As the demand for cannabis and CBD-rich hemp increases through further legalization, so will the demand for more and more starters, whether clones or seeds. And while cloning is the preferred method of production for many growers, cloning can be time and labor intensive, and takes a lot of space in most grow facilities.
 
In late 2017, EZ-CLONE developed its Commercial Pro System, which is one of the largest and most efficient aeroponic cloning systems on the market. It is commercially scalable and allows cultivators to clone high volumes of plants in a timeframe as short as 10 days, with the least amount of human and environmental resources consumed than ever previously seen. These systems decrease the need for resources such as labor and planting area, and we estimate that cultivators reduce their costs by over 20% per plant using CLONEs vs. seed, while simultaneously producing the highest-quality plants possible. This system is so unique, we recently announced a patent issuance on this system and hope to secure further intellectual property protection on EZ-CLONE products in the coming months and years.
 
In addition to the Commercial Pro System, the EZ-CLONE product line has systems of all sizes designed for any size grow room or facility, consumable products such as EZ-CLONE’s Rooting Compound, Cloning Collars, Clear Rez and other items needed to operate these systems. Since our acquisition, we have added a subscription-based service to provide monthly shipments to cultivators with everything necessary to clone in our systems, as well as struck a deal with technology company Emerald Metrics to add multi-spectral imaging add-ons to our Commercial Pro Systems that allow growers to see the health of their clones through any computer or mobile device.
 
We believe this illustrates how GrowLife is positioned as an innovator of this industry-leading cloning solution, to capitalize not only on the emerging cannabis industry but now the exploding hemp CBD industry. Cloning in the Cannabis industry where genetics is important can still be managed with seeds, but when it comes to CBD where genetic and gender control dictates yield of revenue and crop regulatory compliance is determined by exact genetic make-up, cloning becomes essential.
 
WHY CLONES
 
To position GrowLife as the industry leader in clones, we believe that we need to deliver both systems and the highest quality clones in the growing hemp and CBD industry. This puts us ahead of trends, and to be the primary source of clones as well as propagation machinery and consumables for the booming CBD-rich hemp industry.
 
 
3
 
 
CBD VALUE CHAIN OPPORTUNITY
 
 
 
We see the greatest opportunity for our Company in further positioning ourselves as the industry leader in plant cloning, and more specifically, as the leader in cloning of hemp plants grown for CBD extraction. Hemp production was legalized in December 2018 in the United States, subject to certain federal and state restrictions, creating a completely new market opportunity where countless farmers are switching their operations to hemp. Some conservative reports estimate that more than 500 million hemp plants were planted in 2019, with farmers looking to grow hemp to provide raw materials to the exploding CBD market. Unfortunately, a lot of hemp growers do not understand the intricacies of growing hemp, especially for CBD extraction. Not all hemp plants can be used to create CBD products. Plants need to be rich in CBD, not THC, be the correct gender, and be healthy and large enough to process. In order to achieve this, the only way to start plants is by using genetically modified and feminized seeds or through cloning.
 
While there are many forecasts where the CBD industry will be billions of dollars, there is a distinction between CBD and industrial hemp, retail and planting, etc. We believe these forecasts can be influenced by many factors such as the quality and availability of certain genetics and distribution, which provides access to markets normally not available such as the growing eco-system at this market’s stage. We believe analysts will continue to raise their CBD forecasts for the upcoming years, and more large companies from the personal care and beverage industries will debut CBD products and demand for raw hemp-based CBD will grow accordingly.
 
Additionally, we are seeing many hemp growers losing crop viability due to the way they are starting plants. Some are losing crops to cross-pollination and some are even being burned down by the DEA when they have too high of levels of THC. We believe this is a testament as to how much demand for hemp crops will continue to grow, and growers will continue to search for the best way to grow hemp to avoid these issues. And we see that cloning is the best way to ensure a healthy crop with the proper CBD/THC content. We plan to be the hemp CBD champion with our standard operating procedures (SOP), superior genetics and large-scaled propagated clones. We have made strides to reach hemp farmers and educate them on the benefits of cloning, launching our resource and sales channel at EZCLONEHemp.com, attending hemp-focused trade shows and ramping up our sales force in hemp-heavy states,  where traditional agricultural is making the switch to hemp. We hand pick the best seeds with the best genetics to produce the best clones.
 
 
4
 
 
EZ-CLONEZ ECONOMICS
To make a compelling case to farmers the cost of clone versus seeds must work. The table shows an example of how an EZ-CLONEZ clone, if priced at $5.00, would compare to a seed priced at $0.50, when fully factored.
 
The case shows a clone is 30% less than seeds. When purchased in greater quantities, the pricing is lower and therefore savings may be greater. Additional factors of the clones, which are not included, that farmers can look into are greater yields and consistency from genetics and acre density in certain climate areas that may increase revenue for greater return.
 
Overall, our EZ-CLONEZ business development consultants have over 100 years of combined cultivation experience to assure the right clone, genetics and SOP are provided.

SUMMARY
 
With our strategic investment in EZ-CLONE, we have positioned ourselves to capitalize on expanding market opportunity. Where EZ-CLONE was able to create a quality product with steady growth, GrowLife has grown it and continues to expand it with clones into the Hemp CBD market. Whether it be system or plants, GrowLife will provide the best clones in the market to our customers.
 
We believe with the revenue growth and increased margins described, our fundamentals are strong, our positioning is focused and our strategy is true. To put it is simply, we are ready and prepared to make our place in one of the largest shifts in mainstream wellness and agriculture in history.
 
Employees
 
As of December 31, 2019, we had twenty six full-time and part-time employees. Marco Hegyi, our Chief Executive Officer, is based in Kirkland, Washington. Mark E. Scott, our Chief Financial Officer, is based primarily in Seattle, Washington. We have approximately 12 full and part time employees located throughout the United States who operate our businesses. In addition, we employ 12 full-time and part-time employees at EZ-CLONE in Sacramento, CA. None of our employees are subject to a collective bargaining agreement or represented by a trade or labor union. We believe that we have a good relationship with our employees.
 
Key Partners
 
In 2019, we saw thousands of customers purchase through hundreds of retailers who purchased our EZ-CLONE products from our distributors, Hawthorne and Hydrofarm, as well as directly from us across varying states. In 2020, we see this retail walk-in purchasing sales strategy to serving cultivation facilities, online selling and direct sales to continue to serve our customers across the nation.  
 
Our key suppliers include manufacturers for the production of our EZ-CLONE products. All the products purchased and resold are applicable to indoor growing for organics, greens, and plant-based medicines. In 2020 we have a new team of genetics and propagation partners who are facilitating the production of our EZ-CLONEZ clones in select states.
 
Competition
 
Covering two countries across all cultivator segments creates competitors that also serve as partners. Large commercial cultivators have found themselves willing to assume their own equipment support by buying large volume, purchased directly from certain suppliers and distributors such as Hawthorne and Hydrofarm. Other key competitors on the retail side consist of local and regional hydroponic resellers of indoor growing equipment. On the e-commerce business, GrowersHouse.com, Hydrobuilder.com and smaller online resellers using Amazon and eBay e-commerce market systems.
 
In the EZ-CLONEZ business, we expect the seed and many small clone providers in the Hemp CBD market to provide alternative to our products and compete with our products. Our propagation partners have been selected to have the capacity to serve large-scale farmers seeking to fulfill the demand for millions of clones.
 
 
5
 
 
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 several website addresses related to our business including websites that are actively used in our day-to-day business such as www.shopgrowlife.com, www.growlifeinc.com, and www.greners.com.
 
We have applied for two patents related to the vertical room Cube product previously discussed.
 
We have a policy of entering into confidentiality and non-disclosure agreements with our employees, some of our vendors and customers as necessary.
 
Acquisition of EZ-CLONE
 
On October 15, 2018, we closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation. EZ-CLONE is the manufacturer of multiple award-winning products specifically designed for the commercial cloning and propagation stage of indoor plant cultivation including cannabis, food, and other hydroponic farming. The total purchase price was $4 million of which $1,500,000 is payable in cash and $2.5 million payable in stock. At closing, we paid 51% of this amount totaling $2,040,000 via a (i) a cash payment of $645,000; and (ii) the issuance of 715,385 restricted shares of our common stock valued $1,395,000.
 
The October 15, 2018 agreement called for the Company, upon delivery of the remaining 49% of EZ Clone stock, to acquire such stock within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of Company’s common stock at a value of $1,105,000. On November 5, 2019, we amended the purchase agreement with one 24.5% owner obligating the Company to purchase the remaining 49% of stock by agreeing to a 20% extension fee ($171,000) of the $855,000 cash payable at the earlier of the closing of $2,000,000 in funding or nine months (July 2020). As of December 31, 2019, the $171,000 extension fee has not been paid and we continue in discussion with the shareholders about paying of the remaining purchase price payable.
 
  
 
Government Regulation
 
Currently, there are thirty three 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. There are currently ten states and the District of Columbia that allow recreational use of cannabis. As of December 31, 2019, 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.
 
All this being said, many reports show that the majority of the American public is in favor of making medical cannabis available as a controlled substance to those patients who need it. The need and consumption will then require cultivators to continue to provide safe and compliant crops to consumers. The cultivators will then need to build facilities and use consumable products, which GrowLife provides.
 
 
6
 
 
OUR COMMON STOCK
 
On October 17, 2017, we were informed by Alpine Securities Corporation (“Alpine”) that Alpine has demonstrated compliance with the Financial Industry Regulatory Authority (“FINRA”) Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of 1934. We filed an amended application with the OTC Markets to list the Company’s common stock on the OTCQB and begin to trade on this market as of March 20, 2018. As of March 4, 2019, we began to trade on the Pink Sheet stocks system. Our bid price had closed below $0.01 for more than 30 consecutive calendar days. As of March 17, 2020, we commenced trading on the OTCQB Market ("OTCQB") after successfully up-listing from the OTC Pink Market.
 
PRIMARY RISKS AND UNCERTAINTIES 
 
We are exposed to various risks related to legal proceedings, our need for additional financing, the sale of significant numbers of our shares, the potential adjustment in the exercise price of our convertible debentures and a volatile market price for our common stock. These risks and uncertainties are discussed in more detail below in Part I, Item 1A. 
 
WEBSITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION REPORTS
 
We file annual and quarterly reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any document we file at the SEC's Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information concerning filers. We also maintain a web site at http://www.growlifeinc.com that provides additional information about our Company and links to documents we file with the SEC. The Company's charters for the Audit Committee, the Compensation Committee, and the Nominating Committee; and the Code of Conduct & Ethics are also available on our website. The information on our website is not part of this Form 10-K.
 
ITEM 1A. RISK FACTORS
 
There are certain inherent risks which will have an effect on our development in the future and the most significant risks and uncertainties known and identified by our management are described below.
 
Risks Related to Pandemics 
 
The effects of the recent COVID-19 coronavirus pandemic are not immediately known, but may adversely affect our business, results of operations, financial condition, liquidity, and cash flow. 
 
Presently, the impact of COVID-19 has not shown any imminent adverse effects on our business, especially since states across the United States—including California—has deemed cannabis businesses as “essential,” allowing our business to continue its operations. This notwithstanding, it is still unknown and difficult to predict what adverse effects, if any, COVID-19 can have on our business, or against the various aspects of same.
 
As of the date of this Annual Report, COVID-19 coronavirus has been declared a pandemic by the World Health Organization, has been declared a National Emergency by the United States Government and has resulted in several states being designated disaster zones. COVID-19 coronavirus caused significant volatility in global markets. The spread of COVID-19 coronavirus has caused public health officials to recommend precautions to mitigate the spread of the virus, especially as to travel and congregating in large numbers. In addition, certain states and municipalities have enacted, and additional cities are considering, quarantining and “shelter-in-place” regulations which severely limit the ability of people to move and travel and require non-essential businesses and organizations to close.
 
It is unclear how such restrictions, which will contribute to a general slowdown in the global economy, will affect our business, results of operations, financial condition and our future strategic plans.
 
Recent shelter-in-place and essential-only travel regulations could negatively impact our customers. In addition, while our products are manufactured in the United States, we still could experience significant supply chain disruptions due to interruptions in operations at any or all of our suppliers’ facilities or downline suppliers. If we experience significant delays in receiving our products we will experience delays in fulfilling orders and ultimately receiving payment, which could result in loss of sales and a loss of customers, and adversely impact our financial condition and results of operations. The current status of COVID-19 coronavirus closures and restrictions could also negatively impact our ability to receive funding from our existing capital sources as each business is and has been affected uniquely.
 
In addition, our headquarters are located in Kirkland, Washington which was also recently subject of large COVID-19 outbreak. In response, Washington State governor, Jay Inslee, mandated a minimum 2 week stay at home order with exceptions only for essential businesses. While these restrictions are relatively recent as of the date of this Annual Report, it is unclear at this time how these restrictions will be amended as the pandemic evolves. We believe that since we are an essential business, we are hopeful that COVID-19 closures will have only a limited effect on our operations and revenues.
 
 
7
 
 
Risks Related to Securities Markets and Investments in Our Securities
 
General securities market uncertainties resulting from the COVID-19 pandemic. 
 
Since the outset of the pandemic the United States and worldwide national securities markets have undergone unprecedented stress due to the uncertainties of the pandemic and the resulting reactions and outcomes of government, business and the general population. These uncertainties have resulted in declines in all market sectors, increases in volumes due to flight to safety and governmental actions to support the markets. As a result, until the pandemic has stabilized, the markets may not be available to the Company for purposes of raising required capital.  Should we not be able to obtain financing when required, in the amounts necessary to execute on our plans in full, or on terms which are economically feasible we may be unable to sustain the necessary capital to pursue our strategic plan and may have to reduce the planned future growth and/or scope of our operations.
 
Risks Related to Our Business
 
Risks Associated with Securities Purchase Agreements with Chicago Venture Partners, L.P. (“Chicago Venture”), Iliad Research and Trading, L.P. (“Iliad”) and Odyssey Research and Trading, LLC, (“Odyssey”).
 
The Securities Purchase Agreements with Chicago Venture, Illiad and Odyssey will terminate if we file protection from its creditors, a Registration Statement on Form S-1 is not effective, and our market capitalization or the trading volume of our common stock does not reach certain levels. If terminated, we will be unable to draw down all or substantially all of Notes.
 
Our ability to require Chicago Venture, Illiad and Odyssey to fund the Notes is at mutual discretion, subject to certain limitations. Chicago Venture, Illiad and Odyssey are obligated to fund if each of the following conditions are met; (i) the average and median daily dollar volumes of our common stock for the twenty (20) and sixty (60) trading days immediately preceding the funding date are greater than $100,000; (ii) our market capitalization on the funding date is greater than $17,000,000; (iii) we are not in default with respect to share delivery obligations under the note as of the funding date; and (iv) we are current in our reporting obligations.
 
There is no guarantee that we will be able to meet the foregoing conditions or any other conditions under the Securities Purchase Agreements and/or Notes or that we will be able to draw down any portion of the amounts available under the Securities Purchase Agreements and/or Notes.
 
If we not able to draw down all amounts possible under the Securities Purchase Agreements or if the Securities Purchase Agreements are terminated, we may be forced to curtail the scope of our operations or alter our business plan if other financing is not available to us.
 
Risks Associated with EZ-CLONE Enterprises, Inc.
 
On October 15, 2018, we closed the Purchase and Sale Agreement with EZ-CLONE. EZ-CLONE is the manufacturer of multiple award-winning products specifically designed for the commercial cloning and propagation stage of indoor plant cultivation including cannabis, food, and other hydroponic farming. The total purchase price was $4 million of which $1,500,000 is payable in cash and $2.5 million payable in stock. At closing, we paid 51% of this amount totaling $2,040,000 via a (i) a cash payment of $645,000; and (ii) the issuance of 715,385 restricted shares of our common stock valued $1,395,000.
 
The October 15, 2018 agreement called for the Company, upon delivery of the remaining 49% of EZ Clone stock, to acquire such stock within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of Company’s common stock at a value of $1,105,000. On November 5, 2019, we amended the purchase agreement with one 24.5% owner obligating the Company to purchase the remaining 49% of stock by agreeing to a 20% extension fee ($171,000) of the $855,000 cash payable at the earlier of the closing of $2,000,000 in funding or nine months (July 2020). As of December 31, 2019, the $171,000 extension fee has not been paid and we continue in discussion with the shareholders about paying of the remaining purchase price payable.
 
Our acquisition of EZ-Clone thus far has been positive for our overall results of operations. Additionally, we have spent a significant amount of time and effort modifying our business plans and focuses toward the clone industry. If we fail to close on the remaining 49% of EZ-Clone we may experience direct consequences including, but not limited to, claims for breach of contract for failure to close on a contractual obligation.
 
 
8
 
 
Our common stock.
 
On October 17, 2017, we were informed by Alpine Securities Corporation (“Alpine”) that Alpine has demonstrated compliance with the Financial Industry Regulatory Authority (“FINRA”) Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of 1934. We filed an amended application with the OTC Markets to list the Company’s common stock on the OTCQB and begin to trade on this market as of March 20, 2018. As of March 4, 2019, we began to trade on the OTC Pink Sheet stocks system because our bid price had closed below $0.01 for more than 30 consecutive calendar days. As of March 17, 2020, we commenced trading on the OTCQB Market ("OTCQB") after successfully up-listing from the OTC Pink Market.
 
This action had a material adverse effect on our business, financial condition and results of operations. If we are unable to obtain additional financing when it is needed, we will need to restructure our operations, and divest all or a portion of our business.
 
We have been involved in Legal Proceedings.
 
We have been involved in certain disputes and legal proceedings as discussed in the section title “Legal Proceedings”. In addition, as a public company, we are also potentially susceptible to litigation, such as claims asserting violations of securities laws. Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. There can be no assurance that an adverse result in any future proceeding would not have a potentially material adverse on our business, results of operations or financial condition.
 
We may engage in acquisitions, mergers, strategic alliances, joint ventures and divestures that could result in final results that are different than expected.
 
In the normal course of business, we engage in discussions relating to possible acquisitions, equity investments, mergers, strategic alliances, joint ventures and divestitures. Such transactions are accompanied by a number of risks, including the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt on potentially unfavorable terms as well as impairment expenses related to goodwill and amortization expenses related to other intangible assets, the possibility that we may pay too much cash or issue too many of our shares as the purchase price for an acquisition relative to the economic benefits that we ultimately derive from such acquisition, and various potential difficulties involved in integrating acquired businesses into our operations.
 
From time to time, we have also engaged in discussions with candidates regarding the potential acquisitions of our product lines, technologies and businesses. If a divestiture such as this does occur, we cannot be certain that our business, operating results and financial condition will not be materially and adversely affected. A successful divestiture depends on various factors, including our ability to effectively transfer liabilities, contracts, facilities and employees to any purchaser; identify and separate the intellectual property to be divested from the intellectual property that we wish to retain; reduce fixed costs previously associated with the divested assets or business; and collect the proceeds from any divestitures.
 
If we do not realize the expected benefits of any acquisition or divestiture transaction, our financial position, results of operations, cash flows and stock price could be negatively impacted.
 
Our proposed business is dependent on laws pertaining to the marijuana industry.
 
Continued development of the marijuana industry is dependent upon continued legislative authorization of the use and cultivation of marijuana at the state level.  Any number of factors could slow or halt progress in this area.  Further, progress, while encouraging, is not assured.  While there may be ample public support for legislative action, numerous factors impact the legislative process.  Any one of these factors could slow or halt use of marijuana, which would negatively impact our proposed business.
 
Currently, thirty three states and the District of Columbia allow its citizens to use medical cannabis.  Additionally, ten states and the District of Columbia have legalized cannabis for adult use.  The state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. The Obama administration previously effectively stated that it is not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana.  The Trump administration position is unknown. However, there is no guarantee that the Trump administration will not change current policy regarding the low-priority enforcement of federal laws.  Additionally, any new administration that follows could change this policy and decide to enforce the federal laws strongly.  Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us and its shareholders.
 
Further, while we do not harvest, distribute or sell marijuana, by supplying products to growers of marijuana, we could be deemed to be participating in marijuana cultivation, which remains illegal under federal law, and exposes us to potential criminal liability, with the additional risk that our business could be subject to civil forfeiture proceedings.
 
The marijuana industry faces strong opposition. 
 
It is believed by many that large, well-funded businesses may have a strong economic opposition to the marijuana industry.  We believe that the pharmaceutical industry clearly does not want to cede control of any product that could generate significant revenue.  For example, medical marijuana will likely adversely impact the existing market for the current “marijuana pill” sold by mainstream pharmaceutical companies.  Further, the medical marijuana industry could face a material threat from the pharmaceutical industry, should marijuana displace other drugs or encroach upon the pharmaceutical industry’s products.  The pharmaceutical industry is well funded with a strong and experienced lobby that eclipses the funding of the medical marijuana movement.  Any inroads the pharmaceutical industry could make in halting or impeding the marijuana industry harm our business, prospects, results of operation and financial condition.
 
 
9
 
 
Marijuana remains illegal under Federal law.  
 
Marijuana is a Schedule-I controlled substance and is illegal under federal law.  Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal law.  Since federal law criminalizing the use of marijuana preempts state laws that legalize its use, strict enforcement of federal law regarding marijuana would harm our business, prospects, results of operation and financial condition.
 
Raising additional capital to implement our business plan and pay our debts will cause dilution to our existing stockholders, require us to restructure our operations, and divest all or a portion of our business.
 
We need additional financing to implement our business plan and to service our ongoing operations and pay our current debts. There can be no assurance that we will be able to secure any needed funding, or that if such funding is available, the terms or conditions would be acceptable to us.
 
If we raise additional capital through borrowing or other debt financing, we may incur substantial interest expense. Sales of additional equity securities will dilute on a pro rata basis the percentage ownership of all holders of common stock. When we raise more equity capital in the future, it will result in substantial dilution to our current stockholders.
 
If we are unable to obtain additional financing when it is needed, we will need to restructure our operations, and divest all or a portion of our business.
 
Closing of bank and merchant processing accounts could have a material adverse effect on our business, financial condition and/or results of operations.
 
As a result of the regulatory environment, we have experienced the closing of several of our bank and merchant processing accounts since March 2014. We have been able to open other bank accounts. However, we may have other banking accounts closed. These factors impact management and could have a material adverse effect on our business, financial condition and/or results of operations.
 
Federal regulation and enforcement may adversely affect the implementation of medical marijuana laws and regulations may negatively impact our revenues and profits. 
 
Currently, there are thirty three 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. Many 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 that may be used in connection with cannabis. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect revenues and profits of the GrowLife companies.
 
Our history of net losses has raised substantial doubt regarding our ability to continue as a going concern. If we do not continue as a going concern, investors could lose their entire investment.
 
Our history of net losses has raised substantial doubt about our ability to continue as a going concern, and as a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the years ended December 31, 2019 and 2018 with respect to this uncertainty. Accordingly, our ability to continue as a going concern will require us to seek alternative financing to fund our operations. This going concern opinion could materially limit our ability to raise additional funds through the issuance of new debt or equity securities or otherwise. Future reports on our financial statements may include an explanatory paragraph with respect to our ability to continue as a going concern.
 
We have a history of operating losses and there can be no assurance that we can again achieve or maintain profitability.
 
We have experienced net losses since inception. As of December 31, 2019, we had an accumulated deficit of $148.5 million. There can be no assurance that we will achieve or maintain profitability.
 
 
10
 
 
We are subject to corporate governance and internal control reporting requirements, and our costs related to compliance with, or our failure to comply with existing and future requirements, could adversely affect our business.
 
We must comply with corporate governance requirements under the Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, as well as additional rules and regulations currently in place and that may be subsequently adopted by the SEC and the Public Company Accounting Oversight Board. These laws, rules, and regulations continue to evolve and may become increasingly stringent in the future. We are required to include management’s report on internal controls as part of our annual report pursuant to Section 404 of the Sarbanes-Oxley Act. We strive to continuously evaluate and improve our control structure to help ensure that we comply with Section 404 of the Sarbanes-Oxley Act. The financial cost of compliance with these laws, rules, and regulations is expected to remain substantial.
 
We cannot assure you that we will be able to fully comply with these laws, rules, and regulations that address corporate governance, internal control reporting, and similar matters. Failure to comply with these laws, rules and regulations could materially adversely affect our reputation, financial condition, and the value of our securities.
 
Our inability or failure to effectively manage our growth could harm our business and materially and adversely affect our operating results and financial condition.
 
Our strategy envisions growing our business. We plan to expand our product, sales, administrative and marketing organizations. Any growth in or expansion of our business is likely to continue to place a strain on our management and administrative resources, infrastructure and systems. As with other growing businesses, we expect that we will need to further refine and expand our business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise and manage new and retain contributing employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. We cannot assure you that we will be able to:
 
 
expand our products effectively or efficiently or in a timely manner;
 
allocate our human resources optimally;
 
meet our capital needs;
 
identify and hire qualified employees or retain valued employees; or
 
incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth.
 
Our operating results may fluctuate significantly based on customer acceptance of our products. As a result, period-to-period comparisons of our results of operations are unlikely to provide a good indication of our future performance. Management expects that we will experience substantial variations in our net sales and operating results from quarter to quarter due to customer acceptance of our products. If customers don’t accept our products, our sales and revenues will decline, resulting in a reduction in our operating income.
 
Customer interest for our products could also be impacted by the timing of our introduction of new products. If our competitors introduce new products around the same time that we issue new products, and if such competing products are superior to our own, customers’ desire for our products could decrease, resulting in a decrease in our sales and revenues. To the extent that we introduce new products and customers decide not to migrate to our new products from our older products, our revenues could be negatively impacted due to the loss of revenue from those customers. In the event that our newer products do not sell as well as our older products, we could also experience a reduction in our revenues and operating income.
 
If we do not successfully generate additional products and services, or if such products and services are developed but not successfully commercialized, we could lose revenue opportunities.
 
Our future success depends, in part, on our ability to expand our product and service offerings. To that end we have engaged in the process of identifying new product opportunities to provide additional products and related services to our customers. The process of identifying and commercializing new products is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed. We may have to commit significant resources to commercializing new products before knowing whether our investments will result in products the market will accept. Furthermore, we may not execute successfully on commercializing those products because of errors in product planning or timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors providing those solutions before we do and a reduction in net sales and earnings.
 
The success of new products depends on several factors, including proper new product definition, timely completion and introduction of these products, differentiation of new products from those of our competitors, and market acceptance of these products. There can be no assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.
 
 
11
 
 
Our future success depends on our ability to grow and expand our customer base.  Our failure to achieve such growth or expansion could materially harm our business.
 
To date, our revenue growth has been derived primarily from the sale of our products and through the purchase of existing businesses. Our success and the planned growth and expansion of our business depend on us achieving greater and broader acceptance of our products and expanding our customer base. There can be no assurance that customers will purchase our products or that we will continue to expand our customer base. If we are unable to effectively market or expand our product offerings, we will be unable to grow and expand our business or implement our business strategy. This could materially impair our ability to increase sales and revenue and materially and adversely affect our margins, which could harm our business and cause our stock price to decline.
 
If we incur substantial liability from litigation, complaints, or enforcement actions resulting from misconduct by our distributors, our financial condition could suffer. We will require that our distributors comply with applicable law and with our policies and procedures. Although we will use various means to address misconduct by our distributors, including maintaining these policies and procedures to govern the conduct of our distributors and conducting training seminars, it will still be difficult to detect and correct all instances of misconduct. Violations of applicable law or our policies and procedures by our distributors could lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or foreign regulatory authorities against us and/or our distributors. and could consume considerable amounts of financial and other corporate resources, which could have a negative impact on our sales, revenue, profitability and growth prospects. As we are currently in the process of implementing our direct sales distributor program, we have not been, and are not currently, subject to any material litigation, complaint or enforcement action regarding distributor misconduct by any federal, state or foreign regulatory authority.
 
Our future manufacturers could fail to fulfill our orders for products, which would disrupt our business, increase our costs, harm our reputation and potentially cause us to lose our market.
 
We may depend on contract manufacturers in the future to produce our products. These manufacturers could fail to produce products to our specifications or in a workmanlike manner and may not deliver the units on a timely basis. Our manufacturers may also have to obtain inventories of the necessary parts and tools for production. Any change in manufacturers to resolve production issues could disrupt our ability to fulfill orders. Any change in manufacturers to resolve production issues could also disrupt our business due to delays in finding new manufacturers, providing specifications and testing initial production. Such disruptions in our business and/or delays in fulfilling orders would harm our reputation and would potentially cause us to lose our market. 
 
Our inability to effectively protect our intellectual property would adversely affect our ability to compete effectively, our revenue, our financial condition and our results of operations.
 
We may be unable to obtain intellectual property rights to effectively protect our business. Our ability to compete effectively may be affected by the nature and breadth of our intellectual property rights. While we intend to defend against any threats to our intellectual property rights, there can be no assurance that any such actions will adequately protect our interests. If we are unable to secure intellectual property rights to effectively protect our technology, our revenue and earnings, financial condition, and/or results of operations would be adversely affected.
 
We may also rely on nondisclosure and non-competition agreements to protect portions of our technology. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, that third parties will not otherwise gain access to our trade secrets or proprietary knowledge, or that third parties will not independently develop the technology.
 
We do not warrant any opinion as to non-infringement of any patent, trademark, or copyright by us or any of our affiliates, providers, or distributors. Nor do we warrant any opinion as to invalidity of any third-party patent or unpatentability of any third-party pending patent application. 
 
Our industry is highly competitive and we have less capital and resources than many of our competitors, which may give them an advantage in developing and marketing products similar to ours or make our products obsolete.
 
We are involved in a highly competitive industry where we may compete with numerous other companies who offer alternative methods or approaches, may have far greater resources, more experience, and personnel perhaps more qualified than we do. Such resources may give our competitors an advantage in developing and marketing products similar to ours or products that make our products obsolete. There can be no assurance that we will be able to successfully compete against these other entities.
 
Transfers of our securities may be restricted by virtue of state securities “blue sky” laws, which prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states.
 
Transfers of our common stock may be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to as "blue sky" laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because the securities held by many of our stockholders have not been registered for resale under the blue sky laws of any state, the holders of such shares and persons who desire to purchase them should be aware that there may be significant state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions may prohibit the secondary trading of our common stock. Investors should consider the secondary market for our securities to be a limited one.
 
 
12
 
 
We are dependent on key personnel.
 
Our success depends to a significant degree upon the continued contributions of key management and other personnel, some of whom could be difficult to replace. We do not maintain key man life insurance covering our officers. Our success will depend on the performance of our officers and key management and other personnel, our ability to retain and motivate our officers, our ability to integrate new officers and key management and other personnel into our operations, and the ability of all personnel to work together effectively as a team. Our failure to retain and recruit officers and other key personnel could have a material adverse effect on our business, financial condition and results of operations.
 
We have limited insurance.
 
We have no directors’ and officers’ liability insurance and limited commercial liability insurance policies. Any significant claims would have a material adverse effect on our business, financial condition and results of operations.  
 
Risks Related to our Common Stock
 
Chicago Venture, Illiad and Odyssey could have significant influence over matters submitted to stockholders for approval.
 
As a result of funding from Chicago Venture, Iliad and Odyssey as previously detailed, they exercise significant control over us.
 
While there are limits on the ownership by each party, ff these companies were to choose to act together, they would be able to significantly influence all matters submitted to our stockholders for approval, as well as our officers, directors, management and affairs. For example, these companies, if they choose to act together, could significantly influence the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of us on terms that other stockholders may desire.
 
Trading in our stock is limited by the SEC’s penny stock regulations.
 
Our stock is categorized as a penny stock. The SEC has adopted Rule 15g-9 which generally defines "penny stock" to be any equity security that has a market price (as defined) less than US$ 5.00 per share or an exercise price of less than US $5.00 per share, subject to certain exclusions (e.g., net tangible assets in excess of $2,000,000 or average revenue of at least $6,000,000 for the last three years). The penny stock rules impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Finally, broker-dealers may not handle penny stocks under $0.10 per share.
 
These disclosure requirements reduce the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules would affect the ability of broker-dealers to trade our securities if we become subject to them in the future. The penny stock rules also could discourage investor interest in and limit the marketability of our common stock to future investors, resulting in limited ability for investors to sell their shares.
 
FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.
 
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
 
 
13
 
 
The market price of our common stock may be volatile.
 
The market price of our common stock has been and is likely in the future to be volatile. Our common stock price may fluctuate in response to factors such as: 
 
 
Halting of trading by the SEC or FINRA.  
Announcements by us regarding liquidity, legal proceedings, significant acquisitions, equity investments and divestitures, strategic relationships, addition or loss of significant customers and contracts, capital expenditure commitments, loan, note payable and agreement defaults, loss of our subsidiaries and impairment of assets,
Issuance of convertible or equity securities for general or merger and acquisition purposes,
Issuance or repayment of debt, accounts payable or convertible debt for general or merger and acquisition purposes,
Sale of a significant number of shares of our common stock by shareholders,
General market and economic conditions,
Quarterly variations in our operating results,
Investor relation activities,
Announcements of technological innovations,
New product introductions by us or our competitors,
Competitive activities, and
Additions or departures of key personnel.
 
These broad market and industry factors may have a material adverse effect on the market price of our common stock, regardless of our actual operating performance. These factors could have a material adverse effect on our business, financial condition, and/or results of operations.
 
The sale of a significant number of our shares of common stock could depress the price of our common stock.
 
Sales or issuances of a large number of shares of common stock in the public market or the perception that sales may occur could cause the market price of our common stock to decline. As of December 31, 2019, there were approximately (i) 28,677,147 shares of common stock outstanding; (ii) stock option grants for the purchase of 550,000 shares of common stock at average exercise price of $1.491 per share; (iii) warrants to purchase an aggregate of we had warrants to purchase an aggregate of 2,418,834 shares of common stock with expiration dates between November 2021 and October 2028 at an exercise price of $3.465 per share; (iv) and unknown number of common shares to be issued under the Chicago Venture, Iliad and St. George financing agreements.
 
These stock option grant, warrant and contingent shares could result in further dilution to common stockholders and may affect the market price of the common stock.
 
Significant shares of common stock are held by our principal shareholders, other Company insiders and other large shareholders. As affiliates as defined under Rule 144 of the Securities Act or Rule 144 of the Company, our principal shareholders, other Company insiders and other large shareholders may only sell their shares of common stock in the public market pursuant to an effective registration statement or in compliance with Rule 144.
 
These stock option grant, warrant and contingent shares could result in further dilution to common stockholders and may affect the market price of the common stock.
 
Some of our convertible debentures and warrants may require adjustment in the conversion price.
 
Our Convertible Notes Payable may require an adjustment in the current conversion price of $0.221 per share if we issue common stock, warrants or equity below the price that is reflected in the convertible notes payable. Our warrant with St. George may require an adjustment in the exercise price. The conversion price of the convertible notes and warrants will have an impact on the market price of our common stock. Specifically, if under the terms of the convertible notes the conversion price goes down, then the market price, and ultimately the trading price, of our common stock will go down. If under the terms of the convertible notes the conversion price goes up, then the market price, and ultimately the trading price, of our common stock will likely go up. In other words, as the conversion price goes down, so does the market price of our stock. As the conversion price goes up, so presumably does the market price of our stock. The more the conversion price goes down, the more shares are issued upon conversion of the debt which ultimately means the more stock that might flood into the market, potentially causing a further depression of our stock.
 
 
14
 
 
We do not anticipate paying any cash dividends on our capital stock in the foreseeable future.
 
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business, and we do not anticipate paying any cash dividends on our capital stock in the foreseeable future. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
 
Anti-takeover provisions may limit the ability of another party to acquire our company, which could cause our stock price to decline.
 
Our certificate of incorporation, as amended, our bylaws and Delaware law contain provisions that could discourage, delay or prevent a third party from acquiring our company, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our common stock.
 
We may issue preferred stock that could have rights that are preferential to the rights of common stock that could discourage potentially beneficially transactions to our common shareholders.
 
An issuance of additional shares of preferred stock could result in a class of outstanding securities that would have preferences with respect to voting rights and dividends and in liquidation over our common stock and could, upon conversion or otherwise, have all of the rights of our common stock.  Our Board of Directors' authority to issue preferred stock could discourage potential takeover attempts or could delay or prevent a change in control through merger, tender offer, proxy contest or otherwise by making these attempts more difficult or costly to achieve.  The issuance of preferred stock could impair the voting, dividend and liquidation rights of common stockholders without their approval.
 
If the company were to dissolve or wind-up, holders of our common stock may not receive a liquidation preference.
 
If we were too wind-up or dissolve the Company and liquidate and distribute our assets, our shareholders would share ratably in our assets only after we satisfy any amounts we owe to our creditors.  If our liquidation or dissolution were attributable to our inability to profitably operate our business, then it is likely that we would have material liabilities at the time of liquidation or dissolution.  Accordingly, we cannot give you any assurance that sufficient assets will remain available after the payment of our creditors to enable you to receive any liquidation distribution with respect to any shares you may hold.
 
ITEM 1B.  UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.     PROPERTIES
 
Operating Leases
 
On May 31, 2019, we rented space at 5400 Carillon Point, Kirkland, Washington 98033 for $623 per month for our corporate office and use of space in the Regus network, including California. The agreement expires May 31, 2020.
 
On December 14, 2018, we entered into a lease agreement with Pensco Trust Company for a 28,000 square feet industrial space at 10170 Croydon Way, Sacramento, California 95827 used for the assembly and sales of plastic parts by EZ-CLONE. The monthly lease payment is $17,500 and increased approximately 3% per year. The lease expires on December 31, 2023.
 
 
15
 
 
Terminated Leases
 
On October 1, 2017, GrowLife Hydroponics, Inc. entered into a lease in Calgary, Canada. The monthly lease is approximately $3,246. The lease originally expired September 30, 2022. This lease was terminated effective September 30, 2019.
 
On December 19, 2017, GrowLife Innovations, Inc. entered into a lease in Grand Prairie, Texas dated October 9, 2017, for 5,000 square feet for the manufacturing and distribution of its flooring products. The monthly lease payment is $15,000. The lease originally expired December 1, 2022. This lease was terminated effective September 30, 2019 with the expected sale of the flooring division.
 
On July 2, 2018, GrowLife Hydroponics, Inc. entered into a store lease for 1,950 square feet in Portland, Maine. The monthly lease is approximately $2,113, with 3% increases in year two and three. The lease originally expired July 2, 2021. This lease was terminated effective September 30, 2019.
 
On August 31, 2018, GrowLife, Inc. entered into the Fourth Amendment to the Lease Agreement for the store in Encino, California. The monthly lease is approximately $6,720, with a 3% increase on March 1, 2019. The lease originally expired September 1, 2019 and the Company is required to provide six months’ notice to terminate the lease. This lease was terminated effective September 30, 2019.
 
ITEM 3.    LEGAL PROCEEDINGS
 
From time to time, we may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although we cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and may be adjusted from time to time according to developments.
 
We know of no material, existing or pending legal proceedings against our Company, nor is the Company involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any director, officer or any affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to the Company’s interest.
 
As of September 30, 2019, the Company closed retail stores in Portland, Maine, Encino, California and Calgary, Canada. The Company is negotiating with the landlords and the Company has recorded restructuring reserves.
 
ITEM 4.    MINE SAFETY DISCLOSURES
 
Not applicable. 
 
 
16
 

PART II
 
ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
General
 
The following description of our capital stock and provisions of our articles of incorporation and bylaws are summaries and are qualified by reference to our articles of incorporation and the bylaws. We have filed copies of these documents with the SEC as exhibits to our Form 10-K.
 
Authorized Capital Stock
 
On October 9, 2019, we approved the reduction of authorized capital stock, whereby the total number of our authorized common stock decreased from 6,000,000,000 by a ratio of 1 for 50, to 120,000,000 shares. On November 20, 2019, we filed a Certificate of Amendment of Certificate of Incorporation with the Secretary of State of the State of Delaware. As a result of the reduction, we have an aggregate 130,000,000 authorized shares consisting of: (i) 120,000,000 shares of common stock, par value $0.0001 per share, and (ii) 10,000,000 shares of preferred stock, par value $0.0001 per share.
 
The 1 for 150 reverse stock split was effective at the open of business on November 27, 2019 whereupon the shares of common stock began trading on a split-adjusted basis under the new CUSIP, 39985X203.
 
Capital Stock Issued and Outstanding
 
As of December 31, 2019, we have issued and outstanding securities on a fully diluted basis, consisting of:
 
● 28,677,147 shares of common stock;
● Stock option grants for the purchase of 550,000 shares of common stock at average exercise price of $1.491 per share;
● Warrants to purchase an aggregate of 2,418,834 shares of common stock with expiration dates between November 2021 and October 2028 at an exercise price of $3.465 per share; and
● An unknown number of common shares to be issued under the Chicago Venture, Iliad and St. George financing agreements.
 
Voting Common Stock
 
Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. An election of directors by our stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote on the election. On all other matters, the affirmative vote of the holders of a majority of the stock present in person or represented by proxy and entitled to vote is required for approval, unless otherwise provided in our articles of incorporation, bylaws or applicable law. Holders of common stock are entitled to receive proportionately any dividends as may be declared by our board of directors, subject to any preferential dividend rights of outstanding preferred stock.
 
In the event of our liquidation or dissolution, the holders of common stock are entitled to receive proportionately all assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.
 
 
17
 
 
Non-Voting Preferred Stock
 
Under the terms of our articles of incorporation, our board of directors is authorized to issue shares of non-voting preferred stock in one or more series without stockholder approval. Our board of directors has the discretion to determine the rights, preferences, privileges and restrictions, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of non-voting preferred stock.
 
The purpose of authorizing our board of directors to issue non-voting preferred stock and determine our rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of non-voting preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. Other than the Series B and C Preferred Stock discussed below, there are no shares of non-voting preferred stock presently outstanding and we have no present plans to issue any shares of preferred stock.
 
Warrants to Purchase Common Stock
 
As of December 31, 2019, we had warrants to purchase an aggregate of 2,418,834 shares of common stock with expiration dates between November 2021 and October 2028 at an exercise price of $3.465 per share, subject to adjustment..
 
Options to Purchase Common Stock
 
We have 1,333,333 shares available for issuance under the First Amended and Restated 2017 Stock Incentive Plan. We have outstanding unexercised stock option grants totaling 550,000 shares at an average exercise price of $1.491 per share as of December 31, 2019. The Company filed registration statements on Form S-8 to register 1,333,333 shares of our common stock related to the 2017 Stock Incentive Plan and First Amended and Restated 2017 Stock Incentive Plan.
 
Dividend Policy
 
We have not previously paid any cash dividends on our common stock and do not anticipate or contemplate paying dividends on our common stock in the foreseeable future. We currently intend to use all of our available funds to develop our business. We can give no assurances that we will ever have excess funds available to pay dividends.
 
Change in Control Provisions
 
Our articles of incorporation and by-laws provide for a maximum of nine directors, and the size of the Board cannot be increased by more than three directors in any calendar year.  There is no provision for classification or staggered terms for the members of the Board of Directors.
 
Our articles of incorporation also provide that except to the extent the provisions of Delaware General Corporation Law require a greater voting requirement, any action, including the amendment of the Company’s articles or bylaws, the approval of a plan of merger or share exchange, the sale, lease, exchange or other disposition of all or substantially all of the Company’s property other than in the usual and regular course of business, shall be authorized if approved by a simple majority of stockholders, and if a separate voting group is required or entitled to vote thereon, by a simple majority of all the votes entitled to be cast by that voting group.
 
Our bylaws provide that only the Chief Executive Officer or a majority of the Board of Directors may call a special meeting. The bylaws do not permit the stockholders of the Company to call a special meeting of the stockholders for any purpose. 
 
 
18
 
 
Articles of Incorporation and Bylaws Provisions
 
Our articles of incorporation, as amended, and bylaws contain provisions that could have the effect of discouraging potential acquisition proposals or tender offers or delaying or preventing a change in control, including changes a stockholder might consider favorable. In particular, our articles of incorporation and bylaws among other things:
 
● permit our board of directors to alter our bylaws without stockholder approval; and
● provide that vacancies on our board of directors may be filled by a majority of directors in office, although less than a quorum.
 
Such provisions may have the effect of discouraging a third party from acquiring us, even if doing so would be beneficial to our stockholders. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by them, and to discourage some types of transactions that may involve an actual or threatened change in control of our company. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage some tactics that may be used in proxy fights. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure our company outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms.
 
However, these provisions could have the effect of discouraging others from making tender offers for our shares that could result from actual or rumored takeover attempts. These provisions also may have the effect of preventing changes in our management.
 
Market Price of and Dividends on Common Equity and Related Stockholder Matters
 
On October 17, 2017, we were informed by Alpine Securities Corporation (“Alpine”) that Alpine has demonstrated compliance with the Financial Industry Regulatory Authority (“FINRA”) Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of 1934. We filed an amended application with the OTC Markets to list the Company’s common stock on the OTCQB and begin to trade on this market as of March 20, 2018. As of March 4, 2019, we began to trade on the OTC Pink Sheet stocks system because our bid price had closed below $0.01 for more than 30 consecutive calendar days. As of March 17, 2020, we commenced trading on the OTCQB Market ("OTCQB") after successfully up-listing from the OTC Pink Market.
 
The quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions. Consequently, the information provided below was not be indicative of our common stock price under different conditions.

Period Ended
 
 High
 
 
 Low
 
Year Ending December 31, 2020
 
 
 
 
 
 
Through the Current Date
 $0.490 
 $0.140 
 
    
    
Year Ending December 31, 2019
    
    
December 31, 2019
 $1.229 
 $0.315 
September 30, 2019
 $1.110 
 $0.495 
June 30, 2019
 $1.260 
 $0.825 
March 31, 2019
 $1.710 
 $1.050 
 
    
    
Year Ending December 31, 2018
    
    
December 31, 2018
 $3.390 
 $0.945 
September 30, 2018
 $2.775 
 $1.575 
June 30, 2018
 $4.200 
 $2.175 
March 31, 2018
 $7.425 
 $2.085 
 
As of March 27, 2020, the closing price of the company's common stock was $.257 per share. As of April 1, 2020, there were 29,282,602 shares of common stock issued and outstanding. We have 137 stockholders of record. This number does not include over 101,000 beneficial owners whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
 
 
19
 
 
Transfer Agent 
 
The transfer agent for our common stock is Issuer Direct Corporation located 500 Perimeter Park, Suite D, Morrisville NC 27560, and their telephone number is (919) 481-4000. 
 
Recent Sales of Unregistered Securities
 
Unless otherwise indicated, all of the following sales or issuances of Company securities were conducted under the exemption from registration as provided under Section 4(a)(2) of the Securities Act of 1933. All of the shares issued were issued in transactions not involving a public offering, are considered to be restricted stock as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that effect. 
 
We have compensated consultants and service providers with restricted common stock during the development of our business and when our capital resources were not adequate to provide payment in cash.
 
During the three months ended December 31, 2019, we had the following sales of unregistered sales of equity securities.
 
Chicago Venture converted principal and accrued interest of $312,872 into 1,357,262 shares of our common stock at a per share conversion price of $0.231.
 
Forglen LLC converted principal and accrued interest of $305,075 into 1,375,285 shares of our common stock at a per share conversion price of $0.222.
 
We issued 188,335 shares in conjunction with resolving a business matter. We valued the shares at $0.60 per share of $113,000 and such amount was expensed as loss on debt conversions during the twelve months ended December 31, 2019.
 
We issued 35,011 fractional shares as a result of the reverse stock split that was effective at the open of business on November 27, 2019.
 
EQUITY COMPENSATION PLAN INFORMATION
 
The following table provides information as of December 31, 2019 related to the equity compensation plan in effect at that time.
 
 
 
(a)
 
 
(b)
 
 
(c)
 
 
 
 
 
 
 
 
 
Number of securities
 
 
 
 
 
 
 
 
 
remaining available
 
 
 
Number of securities
 
 
Weighted-average
 
 
for future issuance
 
 
 
to be issued upon
 
 
exercise price of
 
 
under equity compensation
 
 
 
exercise of outstanding
 
 
outstanding options,
 
 
plan (excluding securities
 
Plan Category
 
options, warrants and rights
 
 
warrants and rights
 
 
reflected in column (a))
 
Equity compensation plan
 
 
 
 
 
 
 
 
 
approved by shareholders
  550,000 
 $1.491 
  745,441 
Equity compensation plans
    
    
    
not approved by shareholders
    
    
    
Total
  550,000 
 $1.491 
  745,441 
 
 
20
 
 
ITEM 6.    SELECTED FINANCIAL DATA
 
In the following table, we provide you with our selected consolidated historical financial and other data. We have prepared the consolidated selected financial information using our consolidated financial statements for the years ended December 31, 2019 and 2018. When you read this selected consolidated historical financial and other data, it is important that you read along with it the historical financial statements and related notes in our consolidated financial statements included in this report, as well as Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
 
 
Years Ended December 31,
 
 
 
2019
 
 
2018
 
 
2017
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
STATEMENT OF OPERATIONS DATA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenue
 $8,218 
 $4,573 
 $2,452 
 $1,231 
 $3,500 
Cost of goods sold
  5,669 
  4,105 
  2,181 
  1,276 
  2,981 
Gross profit
  2,549 
  468 
  271 
  (45)
  519 
General and administrative expenses
  7,566 
  5,017 
  2,320 
  2,764 
  2,684 
Operating (loss)
  (5,017)
  (4,549)
  (2,049)
  (2,809)
  (2,165)
Other expense
  (2,475)
  (6,924)
  (3,272)
  (4,886)
  (3,524)
Net loss before taxes
 $(7,492)
 $(11,473)
 $(5,321)
 $(7,695)
 $(5,689)
Net loss
 $(7,374)
 $(11,473)
 $(5,321)
 $(7,695)
 $(5,689)
Net loss per share
 $(0.29)
 $(0.58)
 $(0.39)
 $(0.96)
 $(0.96)
Weighted average number of shares
  25,145,036 
  19,858,753 
  13,630,143 
  7,983,773 
  5,895,658 
 
ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 
The Company’s goal of becoming the nation’s largest cultivation facility service provider for the production of organics, herbs and greens and plant-based medicines has not changed. The Company’s mission is to best serve more cultivators in the design, build-out, expansion and maintenance of their facilities with products of high quality, exceptional value and competitive price. Through a nationwide network of knowledgeable representatives, regional centers and its e-commerce website, GrowLife provides essential and hard-to-find goods including media (i.e., farming soil), industry-leading hydroponics equipment, organic plant nutrients, and thousands more products to specialty grow operations across the United States.
 
We sell through our wholly owned subsidiary, GrowLife Hydroponics, Inc. GrowLife companies distribute and sell over 15,000 products through its e-commerce distribution channel, GrowLifeEco.com, and through our regional retail storefronts. GrowLife and its business units are organized and directed to operate strictly in accordance with all applicable state and federal laws.
 
On October 15, 2018, we closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation. EZ-CLONE is the manufacturer of multiple award-winning products specifically designed for the commercial cloning and propagation stage of indoor plant cultivation including cannabis, food, and other hydroponic farming. The total purchase price was $4 million of which $1,500,000 is payable in cash and $2.5 million payable in stock. At closing, we paid 51% of this amount totaling $2,040,000 via a (i) a cash payment of $645,000; and (ii) the issuance of 715,385 restricted shares of our common stock valued $1,395,000.
 
The October 15, 2018 agreement called for the Company, upon delivery of the remaining 49% of EZ Clone stock, to acquire such stock within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of Company’s common stock at a value of $1,105,000. On November 5, 2019, we amended the purchase agreement with one 24.5% owner obligating the Company to purchase the remaining 49% of stock by agreeing to a 20% extension fee ($171,000) of the $855,000 cash payable at the earlier of the closing of $2,000,000 in funding or nine months (July 2020). As of December 31, 2019, the $171,000 extension fee has not been paid and we continue in discussion with the shareholders about paying of the remaining purchase price payable.
 
 
21
 
 
RESULTS OF OPERATIONS
 
The following table presents certain consolidated statement of operations information and presentation of that data as a percentage of change from year-to-year.
 
(dollars in thousands)
 
 
 
Years Ended December 31,
 
 
 
2019
 
 
2018
 
 
$ Variance
 
 
% Variance
 
Net revenue
 $8,218 
 $4,573 
 $3,645 
  79.7%
Cost of goods sold
  5,669 
  4,105 
  1,564 
  -38.1%
Gross profit
  2,549 
  468 
  2,081 
  444.7%
General and administrative expenses
  7,010 
  5,017 
  1,993 
  -39.7%
Restructuring expense- flooring division
  306 
  - 
  306 
  -100.0%
Restructuring expense- retail stores and online sales
  250 
  - 
  250 
  -100.0%
Operating loss
  (5,017)
  (4,549)
  (468)
  -10.3%
Other income (expense):
    
    
    
    
Change in fair value of derivative
  496 
  978 
  (482)
  -49.3%
Interest expense, net
  (1,204)
  (1,321)
  117 
  8.9%
Impairment of acquired assets
  - 
  (62)
  62 
  100.0%
Loss on debt conversions
  (1,767)
  (6,519)
  4,752 
  72.9%
Total other expense, net
  (2,475)
  (6,924)
  4,449 
  64.3%
Loss before income taxes
  (7,492)
  (11,473)
  3,981 
  34.7%
Income taxes - current benefit
  (118)
  - 
  (118)
  -100.0%
Net loss
 $(7,374)
 $(11,473)
 $4,099 
  35.7%
 
YEAR ENDED DECEMBER 31, 2019 COMPARED TO THE YEAR ENDED DECEMBER 31, 2018
 
Net revenue for the year ended December 31, 2019 increased by $3,645,000 to $8,218,000 from $4,573,000 for the year ended December 31, 2018. The increase resulted from increased sales personnel and the acquisition of EZ-CLONE on October 15, 2018. The hydroponics revenue for the year ended December 31, 2019 was $4,487,000 as compared to $3,706,000 for the year ended December 31, 2018. The EZ-CLONE revenue from its line of products for the year ended December 31, 2019 was $3,731,000 as compared to $454,000 for the year ended December 31, 2018.
 
Cost of Goods Sold
 
Cost of sales for the year ended December 31, 2019 increased by $1,564,000 to $5,669,000 from $4,105,000 for the year ended December 31, 2018. The increase resulted from increased sales and from the from the acquisition of EZ-CLONE on October 15, 2018.
 
Gross profit was $2,549,000 for the year ended December 31, 2019 as compared to a gross profit of $468,000 for the year ended December 31, 2018. The gross profit percentage was 31.0% for the year ended December 31, 2019 as compared to 10.2% for the year ended December 31, 2018. The increase was due increased sales, offset by lower cost of sales related to favorable product mix related to the acquisition of the EZ-CLONE line of products on October 15, 2018. EZ-CLONE reported a gross profit percentage of 50.5%.
 
 
22
 
 
General and Administrative Expenses
 
General and administrative expenses for the year ended December 31, 2019 were $7,010,000 as compared to $5,017,000 for the year ended December 31, 2018. The variances were as follows: (i) an increase in EZ-CLONE expenses (primarily payroll and rent) of $1,476,000;(iii) an increase in salaries and taxes of $202,000; (iv) an increase in sales and marketing expenses of $176,000; and (v) an increase in other expenses of $139,000. As part of the general and administrative expenses for the years ended December 31, 2019 and 2018, we recorded public relation, investor relation or business development expenses of $30,000 and $41,000 respectively. The overall increase in general and administrative expenses resulted from increased sales personnel, trade show and travel expenses and resulting from the acquisition of EZ-CLONE on October 15, 2018.
 
Non-cash general and administrative expenses for the year ended December 31, 2019 were $1,398,000 including (i) depreciation of $89,000; (ii) amortization of intangible assets of $838,000; (iii) stock based compensation of $158,000 related to stock option grants and warrants; and (iv) common stock issued for services of $312,000.
 
Non-cash general and administrative expenses for the year ended December 31, 2018 were $682,000 including (i) depreciation and amortization of $223,000; (ii) stock based compensation of $241,000 related to stock option grants and warrants; (iii) common stock issued for services of $218,000.
 
Restructuring Expense
 
We closed retail stores in Portland, Maine, Encino, California and Calgary, Canada and online sales as of September 30, 2019. Also, we closed the sale of the flooring division located in Grand Prairie, Texas. We reduced our losses and cash costs by up to $100,000 per month starting October 1, 2019. During the year ended December 31, 2019, we recorded restructuring expense of $306,000 for the sale of the flooring division and $250,000 for the closure of the retail stores and online sales.
 
Other Expense
 
Other expense for the year ended December 31, 2019 was $2,475,000 as compared to $6,924,000 for the year ended December 31, 2018. The other expense for the year ended December 31, 2019 included (i) benefit from the reduction in derivative liability of $496,000; offset by (ii) interest expense of $1,204,000; and (iii) loss on debt conversions of $1,776,000. The change in derivative liability is the non-cash change in the fair value and relates to our derivative instruments. The non-cash interest related to accrued interest expense on our notes payable. The loss on debt conversions related to the conversion of our notes payable at prices below the market price.
 
The other expense for the year ended December 31, 2018 included (i) benefit from the reduction in derivative liability of $978,000; offset by (ii) interest expense of $1,321,000; (iii) loss on debt conversions of $6,519,000; (iv) and impairment of acquired assets of $62,000. The change in derivative liability is the non-cash change in the fair value and relates to our derivative instruments. The non-cash interest related to the amortization of the debt discount associated with our convertible notes and accrued interest expense related to our notes payable. The loss on debt conversions related to the conversion of our notes payable at prices below the market price. The impairment of acquired assets related to the Encino operation.
 
Net Loss
 
Net loss for the year ended December 31, 2019 was $7,374,000 as compared to $11,473,000 for the for the year ended December 31, 2018 for the reasons discussed above. The Company’s shares of the 2019 and 2018 net loss was $7,285,445 and $11,444,781 after allocating a portion to non-controlling interest.
 
Net loss for the year ended December 31, 2019 included non-cash expenses of $4,160,000 including (iii) depreciation of $89,000; (iv) restructuring reserve- retail stores, on line sales and flooring division of $556,000; (v) amortization of intangible assets of $838,000; (vi) stock based compensation of $158,000 related to stock option grants and warrants; (vii) common stock issued for services of $313,000; (viii) non cash interest and amortization of debt discount of $,933,000; (ix) loss on debt conversions of $1,767,000; and offset by (xi) benefit from the reduction in derivative liability of $(494,000).
 
Net loss for the year ended December 31, 2018 included non-cash expenses of $7,477,000 including (i) depreciation and amortization of $223,000; (ii) stock based compensation of $241,000 related to stock option grants and warrants; (iii) common stock issued for services of $218,000. (iv) accrued interest and amortization of debt discount on convertible notes payable of $1,191,000; (v) loss on debt conversions of $6,519,000; (vi) impairment of acquired assets of $62,000; offset by (vii) benefit from the reduction in derivative liability of $978,000.
 
We expect losses to continue as we implement our business plan.
 
 
23
 
 
LIQUIDITY AND CAPITAL RESOURCES
 
We adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification (“ASC”) Topic 205-40, Presentation of Financial Statements – Going Concern, which requires that management evaluate whether there are relevant conditions and events that, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern and to meet its obligations as they become due within one year after the date that the financial statements are issued.
  
The accompanying financial statements have been prepared assuming that we will continue as a going concern. However, since inception, we have sustained significant operating losses and such losses are expected to continue for the foreseeable future. As of December 31, 2019, we had an accumulated deficit of $148,461,532, cash and cash equivalents of $40,834 and a working capital deficit of $1,815,503, (less derivative liability, convertible debt and right of use liability). Additionally, we used in operating activities $2,910,000, $3,855,000, and $2,082,000 for the years ended December 31, 2019, 2018 and 2017 respectively. We will require additional cash funding to fund operations through June 30, 2020. Accordingly, management has concluded that we do not have sufficient funds to support operations within one year after the date the financial statements are issued and, therefore, we concluded there was substantial doubt about the Company’s ability to continue as a going concern.
 
To fund further operations, we will need to raise additional capital. We may obtain additional financing in the future through the issuance of its common stock, or through other equity or debt financings. Our ability to continue as a going concern or meet the minimum liquidity requirements in the future is dependent on its ability to raise significant additional capital, of which there can be no assurance. If the necessary financing is not obtained or achieved, we will likely be required to reduce its planned expenditures, which could have an adverse impact on the results of operations, financial condition and our ability to achieve its strategic objective. There can be no assurance that financing will be available on acceptable terms, or at all. The financial statements contain no adjustments for the outcome of these uncertainties. These factors raise substantial doubt about our ability to continue as a going concern and have a material adverse effect on our future financial results, financial position and cash flows.
 
Securities Purchase Agreement, Secured Promissory Notes and Security Agreement with Chicago Venture Partners, L.P
 
On January 30, 2020, we executed the following agreements with CVP: (i) Securities Purchase Agreement; (ii) Secured Convertible Promissory Notes (“Notes”); and (iii) Security Agreement (collectively the “CVP Agreements”). We entered into the CVP Agreements with the intent to acquire working capital to grow our businesses.
 
The total amount of funding under the CVP Agreements is $500,000 in various tranches. The Notes carry an original issue discount of $50,000 and a transaction expense amount of $5,000, for total debt of $555,000. We agreed to reserve 53,333 shares of its common stock for issuance upon conversion of the Debt, if that occurs in the future. If not converted sooner, the Debt is due on or before January 29, 2021. The Debt carries an interest rate of ten percent (10%). The Debt is convertible, at CVP’s option, into our common stock at $0.30 per share subject to adjustment as provided for in the Notes As of April 1, 2020, we have received $500,000 under CVP Agreements. Our obligation to pay the Debt, or any portion thereof, is secured by all of our assets.
 
Operating Activities
 
Net cash used in operating activities for the year ended December 31, 2019 was $2,910,000. This amount was primarily related to a net loss of $7,285,000 and (i) net working capital increase of $215,000; and offset by (ii) non-cash expenses of $4,160,000 including (iii) depreciation of $89,000; (iv) restructuring reserve- retail stores, on line sales and flooring division of $556,000; (v) amortization of intangible assets of $838,000; (vi) stock based compensation of $158,000 related to stock option grants and warrants; (vii) common stock issued for services of $313,000; (viii) non cash interest and amortization of debt discount of $933,000; (ix) loss on debt conversions of $1,767,000; and offset by (xi) benefit from reduction in derivative liability of $(494,000).
 
Net cash used in operating activities for the year ended December 31, 2018 was $3,855,000. This amount was primarily related to a net loss of $11,445,000, (i) an increase in inventory of $327,000; (ii) an increase in prepaid expenses and deposits of $31,000; offset by (iii) an increase in accounts payable, accrued expenses and deferred revenue of $429,000; (iv) an increase in accounts receivable of $42,000 and (v) non-cash expenses of $7,477,000 including (vi) depreciation and amortization of $223,000; (vii) stock based compensation of $241,000 related to stock option grants and warrants; (viii) common stock issued for services of $218,000. (ix) accrued interest and amortization of debt discount on convertible notes payable of $1,191,000; (x) loss on debt conversions of $6,519,000; (xi) impairment of acquired assets of $62,000; offset by (xii) change in derivative liability of $978,000.
 
Investment Activities
 
Net cash used in investing activities for the years ended December 31, 2019 and 2018 was $12,000 and $544,000, respectively. The 2019 amount related to the investment in property and equipment. The 2018 amount related to the $250,000 purchase of the remaining 49% of the flooring business on February 16, 2018 and the acquisition of $294,000 of fixed assets related to the 51% acquisition of EZ-Clone on October 15, 2018.
 
 
24
 
 
Financing Activities
 
Net cash provided by financing activities for the year ended December 31, 2019 and 2018 was $629,000 and $6,444,000, respectively. The 2019 amount related to proceeds from note payable of $1,416,000, offset by repayment of convertible notes payable of $779,000 and repayment of capital lease of $8,000. The 2018 amount related to (i) we received $2,533,000 under the Rights Offering; (ii) proceeds from notes payable of $2,825,000 by Chicago Venture and Iliad; (iii) $1,300,000 in the issuance of common stock by St. George; and (iv) a stock option exercise of $6,000.
 
Our contractual cash obligations as of December 31, 2019 are summarized in the table below:
 
 
 
 
 
 
Less Than
 
 
 
 
 
 
 
 
Greater Than
 
Contractual Cash Obligations
 
Total
 
 
1 Year
 
 
1-3 Years
 
 
3-5 Years
 
 
5 Years
 
Operating lease cash payments
 $881,683 
 $213,115 
 $439,092 
 $229,476 
 $- 
Convertible notes payable and accrued interest
  2,905,870 
  2,905,870 
  - 
  - 
  - 
Notes payable and capital leases
  104,144 
  104,144 
  - 
  - 
  - 
Acquisition of 49% of EZ-CLONE Enterprises, Inc.
  1,026,000 
  1,026,000 
  0 
  - 
  - 
Capital expenditures
  - 
  - 
  - 
  - 
  - 
 
 $4,917,696 
 $4,249,128 
 $439,092 
 $229,476 
 $- 
 
OFF-BALANCE SHEET ARRANGEMENTS
 
We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The application of GAAP involves the exercise of varying degrees of judgment. On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies (see summary of significant accounting policies more fully described in Note 3 to Form 10-K for the year ended December 31, 2019), the following policies involve a higher degree of judgment and/or complexity:
 
Cash and Cash Equivalents - We classify highly liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit.  At December 31, 2019, the Company had uninsured deposits in the amount of $0.
 
Accounts Receivable and Revenue – The company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which requires the application of the five-step-principles-based-accounting-model for revenue recognition. These steps include (1) a legally enforceable contract, written or unwritten is identified; (2) performance obligations in the contracts are identified; (3) the transaction price reflecting variable consideration, if any, is identified; (4) the transaction price is allocated to the performance obligations; and (5) revenue is recognized when the control of goods is transferred to the customer at a particular time or over time. Our hydroponic sales are cash or credit card. Our EZ-CLONE sales include credit cash, payments in advance, 3% discount upon receipt and, we extend thirty day terms to select customers. Accounts receivable are reviewed periodically for collectability.
 
Inventories - Inventories are recorded on a first in first out basis Inventory consists of raw materials, work in process and finished goods and components sold by EZ-CLONE to it distribution customers. In addition, finished goods includes products hydroponics, which is product purchased from distributors, and in some cases directly from the manufacturer, and resold to its hydroponics customers. Inventory is valued at the lower of cost or market. The reserve for inventory was $0 and $120,000 as of December 31, 2019 and 2018, respectively.
 
Fair Value Measurements and Financial Instruments  ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value.  The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs).  The hierarchy consists of three levels:
 
Level 1 – Quoted prices in active markets for identical assets and liabilities;
Level 2 – Inputs other than level one inputs that are either directly or indirectly observable; and.  
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
 
 
25
 
 
The recorded value of other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other current assets, and accounts payable and accrued expenses approximate the fair value of the respective assets and liabilities as of December 31, 2019 and 2018 are based upon the short-term nature of the assets and liabilities. 
 
Derivative financial instruments -We evaluate all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
 
Stock Based Compensation – We have share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options to purchase shares of our common stock at the fair market value at the time of grant. Stock-based compensation cost is measured by us at the grant date, based on the fair value of the award, over the requisite service period using an estimated forfeiture rate. For options issued to employees, we recognize stock compensation costs utilizing the fair value methodology over the related period of benefit.  Grants of stock options and stock to non-employees and other parties are accounted for in accordance with the ASC 718.
 
Convertible Securities Based upon ASC 815-15, we have adopted a sequencing approach regarding the application of ASC 815-40 to convertible securities issued subsequent to December 31, 2015. We will evaluate our contracts based upon the earliest issuance date.
 
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As a smaller reporting company, we are not required to provide the information required by this Item. Nevertheless, we have no investments in any market risk sensitive instruments either held for trading purposes or entered into for other than trading purposes.
 
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Reference is made to our consolidated financial statements beginning on page F-1 of this report.
 
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
Dismissal of SD Mayer and Associates, LLP
 
On October 3, 2019, we dismissed SD Mayer and Associates, LLP as our independent registered public accounting firm. The decision to change accountants was approved by the Company’s Audit Committee.
 
The SD Mayer reports on our consolidated financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that the audit report of SD Mayer on the Company’s financial statements for fiscal years 2017 and 2018 contained an explanatory paragraph which noted that there was substantial doubt about the Company’s ability to continue as a going concern.
 
During the Company’s fiscal years ended December 31, 2017 and 2018 and through October 3, 2019, (i) there were no disagreements with SD Mayer on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to SD Mayer’s satisfaction, would have caused SD Mayer to make reference to the subject matter of such disagreements in its reports on the Company’s consolidated financial statements for such years, and (ii) there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
 
Engagement of BPM LLP
 
On October 3, 2019 we, upon the Audit Committee’s approval, engaged the services of BPM LLP and as our new independent registered public accounting firm to audit our consolidated financial statements as of December 31, 2019 and for the year then ended. BPM will be performing reviews of the unaudited consolidated quarterly financial statements to be included in our quarterly reports on Form 10-Q going forward.
 
During each of our two most recent fiscal years and through the date of this report, (a) we have not engaged BPM as either the principal accountant to audit our financial statements, or as an independent accountant to audit a significant subsidiary of the Company and on whom the principal accountant is expected to express reliance in its report; and (b) we or someone on its behalf did not consult with BPM with respect to (i) either: the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our financial statements, or (ii) any other matter that was either the subject of a disagreement or a reportable event as set forth in Items 304(a)(1)(iv) and (v) of Regulation S-K.
 
 
26
 
 
ITEM 9A. CONTROLS AND PROCEDURES
 
a) Evaluation of Disclosure Controls and Procedures
 
We conducted an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive and principal financial officers concluded as of December 31, 2019, that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses in our internal controls over financial reporting discussed immediately below.
 
Identified Material Weakness
 
A material weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.
 
Management identified the following material weakness during its assessment of internal controls over financial reporting:
 
Audit Committee:
 
The current Audit Committee has two independent directors, but the audit committee Chairman is our CEO and Chairman of the Board. We need an independent financial expert to fulfill this role as audit committee chairman for proper governance. We expect to expand this committee during 2020.
 
b) Changes in Internal Control over Financial Reporting
 
During the quarter ended December 31, 2019, there were no changes in our internal controls over financial reporting, which were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that materially affected, or is reasonably likely to have a materially affect, on our internal control over financial reporting.
 
ITEM 9B. OTHER INFORMATION
 
There were no disclosures of any information required to be filed on Form 8-K during the three months ended December 31, 2019 that were not filed.  
 
 
27
 

PART III
 
ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Directors and Executive Officers
 
The following table sets forth certain information about our current directors and executive officers as of December 31, 2019:
 
Name
 
Age
 
Positions and Offices Held
Since
Management Directors
 
 
 
 
 
Marco Hegyi
  62 
Director
December 9, 2013
 
    
Chairman of the Board
April 1, 2016- October 23, 2017 and December 6, 2018
 
    
Chief Executive Officer
April 1, 2016
 
    
President
December 4, 2013
 
    
Interim Audit Committee Chairman
December 6, 2018
Mark E. Scott
  66 
Chief Financial Officer
July 31, 2014
 
    
Secretary
February 14, 2017
 
    
Director
February 14, 2017
Independent Directors
    
 
 
Katherine McLain
  54 
Director
February 14, 2017
 
    
Compensation Committee Chairman
December 6, 2018
Thom Kozik
  59 
Director
October 5, 2017
Other Named Executives
    
 
 
Joseph Barnes
  47 
Executive Vice President of GrowLife Hydroponics, Inc.
August 16, 2017
 
    
Senior Vice President of Business Development
October 10, 2014
 
All directors hold office until their successors are duly appointed or until their earlier resignation or removal.
 
Business Experience Descriptions
 
Set forth below is certain biographical information regarding each of our executive officers and directors.
 
Marco Hegyi  Mr. Hegyi joined GrowLife as its President and a Member of its Board of Directors on December 9, 2013 and was appointed as Chairman of the Nominations and Governance Committee and a member of the Compensation Committee on June 3, 2014.  Mr. Hegyi was appointed as CEO and Chairman of GrowLife effective on April 1, 2016. On October 23, 2017, Mr. Hegyi was appointed as Chairman of GrowLife, Chairman of the Nominations and Governance Committee or a member of the Compensation Committee. Effective December 6, 2018, Mr. Hegyi serves as Chairman of the Board, a Member of the Board of Directors, Chief Executive Officer, President, Interim Audit Committee Chairman and as a Member of the Compensation and Nominations and Governance Committees.
 
 
28
 
 
Mr. Hegyi served as an independent director of Know Labs, Inc., fka Visualant, Inc. from February 14, 2008 and as Chairman of the Board from May 2011 and served at the Chairman of the Audit and Compensation committees until his departure on February 2015. Mr. Hegyi was a principal with the Chasm Group from 2006 to January 2014, where he provided business consulting services.  As a management consultant, Mr. Hegyi applied his extensive technology industry experience to help early-stage companies and has been issued 10 US patents.  
 
Prior to working as a consultant in 2006, Mr. Hegyi served as Senior Director of Global Product Management at Yahoo! Prior to Yahoo!, Mr. Hegyi was at Microsoft from 2001 to 2006 leading program management for Microsoft Windows and Office beta releases aimed at software developers.  While at Microsoft, he formed new software-as-a-service concepts and created operating programs to extend the depth and breadth of the company’s unparalleled developer eco-system, including managing offshore, outsource teams in China and India, and being the named inventor of a filed Microsoft patent for a business process in service delivery.
 
During Mr. Hegyi’s career, he has served as President and CEO of private and public companies, Chairman and director of boards, finance, compensation and audit committee chair, chief operating officer, vice-president of sales and marketing, senior director of product management, and he began his career as a systems software engineer.  
 
Mr. Hegyi earned a Bachelor of Science degree in Information and Computer Sciences from the University of California, Irvine, and has completed advanced studies in innovation marketing, advanced management, and strategy at Harvard Business School, Stanford University, UCLA Anderson Graduate School of Management, and MIT Sloan School of Management. 
 
Mr. Hegyi’s prior experience as Chairman and Chief Executive Officer of public companies, combined with his advanced studies in business management and strategy, were the primary factors in the decision to add Mr. Hegyi to the Company’s Board of Directors.
 
Mark E. Scott – Mr. Mark E. Scott was re-appointed to the Board of Directors and Secretary of GrowLife, Inc. on February 14, 2017. Mr. Scott was previously a member of the Board of Directors and Secretary of GrowLife, Inc. from May 2014 until his resignation on October 18, 2015. Mr. Scott was appointed our Consulting Chief Financial Officer on August 31, 2014 and Chief Financial Officer on November 1, 2017.
 
Mr. Scott served as Chief Financial Officer, Secretary and Treasurer of Know Labs, Inc., from May 2010 to August 31, 2016.. Mr. Scott provides consulting services to other entities from time to time. Mr. Scott has significant financial, capital market and relations experience in public and private microcap companies.   Mr. Scott is a certified public accountant and received a Bachelor of Arts in Accounting from the University of Washington.
 
Mr. Scott was appointed to the Board of Directors based on his financial, SEC and governance skills.
 
Katherine McLain-  Katherine McLain, Esq. joined GrowLife as a Member of its Board of Directors on February 14, 2017 and was appointed Chairman of the Nominations & Governance and Compensation Committees and serves on the Audit Committee as of December 6, 2018. Ms. McLain has served as Assistant General Counsel for Intuit, Inc. (known for TurboTax & QuickBooks) since November 2017. Previously, Ms. McLain was legal counsel for Stripe, Inc., a financial payments company from 2015-2017. From 2010 to 2015, Ms. McLain was Senior Counsel of Silicon Valley Bank. Ms. McLain has held legal and compliance roles ranging in both public and private companies including Silicon Valley Bank, Wells Fargo Bank, and Obopay.  Ms. McLain has over 30 years of experience as a revenue focused attorney and regulatory professional helping grow new business lines as well as ground up start-up ventures.  She is a graduate of the University of California, Berkeley and the Santa Clara University School of Law and lives in Castro Valley, CA.
 
Ms. McLain was appointed to the Board of Directors based on her legal and regulatory skills.
 
Thom Kozik- Thom Kozik joined GrowLife as a Member of its Board of Directors on October 5, 2017 and was appointed a member of the Audit Committee on October 23, 2017. Mr. Kozik was appointed to the Nominations & Governance and Compensation Committees and serves on the Audit Committee as of December 6, 2018. From 2013 through 2014, Mr. Kozik served as Chief Operating Office of Omnia Media in Los Angeles, a leading YouTube Multichannel Network delivering over 1 billion monthly video views, and almost 70 million global Millennial subscribers. Thom assisted the company’s CEO/founder in building the team, refining product strategy, and securing additional funding. In December 2014, Mr. Kozik took on the role of VP, Global Marketing/Loyalty for Marriott International, having been recruited to fundamentally transform the hospitality industry’s longest-running loyalty program. Thom also led the merging of two of the industry’s most powerful programs with Marriott’s acquisition of Starwood Hotels & Resorts in 2016. From March 1, 2018 to January 2020, Mr. Kozik served as Chief Commercial Officer of Loyyal Corporation, a technology firm providing services to enterprise clients in the Travel & Hospitality sector. In his decades of experience with corporations such as Marriott International, Microsoft, Yahoo, and Atari, along with several startups, he has held executive roles in marketing, business development, and product development. Over the past decade Kozik’s core focus has been the behavioral economics of online consumers and communities, and methods to maximize their lifetime value, and leveraging technology to reduce acquisition costs while increasing retention.  
 
Mr. Kozik was appointed to the Board of Directors based on his marketing and product brand skills.
 
 
29
 
 
Joseph Barnes- Mr. Barnes was appointed President of GrowLife Hydroponics, Inc. on August 16, 2017 and was appointed Senior Vice President of Business Development for GrowLife, Inc. on October 10, 2014. Mr. Barnes works, Colorado. Mr. Barnes joined GrowLife in 2010 and is responsible for all GrowLife Hydroponics operations. He led the sales team that recorded sales in 2014 of more than $8 million, a 100% increase from the previous year. 
 
Mr. Barnes made the progressive and entrepreneurial decision to work with GrowLife after seeing the agricultural benefits of indoor growing. He is deeply passionate about clean and sustainable grows and has deep relationships with many trusted cultivators. He holds extensive knowledge of indoor growing methods with concentrating on maximizing the yields for clean and healthy crops. 
 
Barnes was a highly regarded snowboard instructor in Vail, Colorado prior to joining GrowLife. He worked with many top snowboard professionals and received a Level 1 certification from American Association Snowboard Instructors (AASI). Before his days on the slopes, Barnes was also a recruiting manager focusing on placing senior executives with international pharmaceutical/biotech companies. He also owned and operated Chrome Night Life Arena, a 20,000 square foot indoor/outdoor venue based in Philadelphia with more than 65 employees. 
 
Certain Significant Employees
 
There are no significant employees required to be disclosed under Item 401(c) of Regulation S-K.
 
Family Relationships
 
There are no family relationships among our directors and executive officers. We employee a sales administrator and Vice President of Administration/ corporate controller that are related to executive officers. The two employees to not report directly to the executive officers.
 
Involvement in Certain Legal Proceedings
 
None of our current directors or executive officers has, to the best of our knowledge, during the past ten years:
 
● Had any petition under the federal bankruptcy laws or any state insolvency law filed by or against, or had a receiver, fiscal agent, or similar officer appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time hereof, or any corporation or business association of which he was an executive officer at or within two years before the time hereof;
● Been convicted in a criminal proceeding or a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);
● Been the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:
● Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
● Engaging in any type of business practice; or
● Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;
● Been the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any federal or state authority barring, suspending, or otherwise limiting for more than 60 days the right of such person to engage in any activity described in (i) above, or to be associated with persons engaged in any such activity;
● Been found by a court of competent jurisdiction in a civil action or by the SEC to have violated any federal or state securities law, where the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated; or
● Been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, where the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended, or vacated.
 
 
30
 
 
Committees of the Board of Directors
 
The Board has three standing committees to facilitate and assist the Board in the execution of its responsibilities. The committees are currently the Audit Committee, the Nominations and Governance Committee, and the Compensation Committee. The Committees were formed on June 3, 2014 by the current board of directors. The Audit Committee, Compensation and Nominations and Governance Committees each have one management directors and two independent directors.  The table below shows current membership for each of the standing Board committees.
 
Audit
 
Compensation
 
Nominations and Governance
Marco Hegyi (Interim Chairman)
Katherine McLain (Chairman)
 
Katherine McLain (Chairman)
Thom Kozik
 
Marco Hegyi
 
Marco Hegyi
Katherine McLain
 
Thom Kozik
 
Thom Kozik
 
Compensation Committee Interlocks and Insider Participation
 
None of our executive officers serves as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our board of directors or our compensation committee.
 
Code of Conduct and Ethics 
 
We have adopted conduct and ethics standards titled the code of ethics, which is available at www.growlifeinc.com. These standards were adopted by our board of directors to promote transparency and integrity. The standards apply to our board of directors, executives and employees. Waivers of the requirements of our code of ethics or associated polices with respect to members of our board of directors or executive officers are subject to approval of the full board.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Our executive officers, directors and 10% stockholders are required under Section 16(a) of the Exchange Act to file reports of ownership and changes in ownership with the SEC. Copies of these reports must also be furnished to us.
 
Based solely on a review of copies of reports furnished to us, as of December 31, 2019 our executive officers, directors and 10% holders complied with all filing requirements.
 
ITEM 11. EXECUTIVE COMPENSATION
 
Compensation Discussion and Analysis
 
Overview of Compensation Program
 
This Compensation Discussion and Analysis describes the material elements of compensation awarded to, earned by or paid to each of our executive officers named in the Compensation Table on page __ under “Remuneration of Executive Officers” (the “Named Executive Officers”) who served during the year ended December 31, 2019. This compensation discussion primarily focuses on the information contained in the following tables and related footnotes and narrative for the last completed fiscal year. We also describe compensation actions taken after the last completed fiscal year to the extent that it enhances the understanding of our executive compensation disclosure. The principles and guidelines discussed herein would also apply to any additional executive officers that the Company may hire in the future.
 
The Compensation Committee of the Board has responsibility for overseeing, reviewing and approving executive compensation and benefit programs in accordance with the Compensation Committee’s charter.  The members of the Compensation Committee are Marco Hegyi, Thom Kozik and Katherine McLain. We expect to appoint one independent Directors to serve on the Compensation Committee during 2019.
 
 
31
 
 
Compensation Philosophy and Objectives
 
The major compensation objectives for the Company’s executive officers are as follows:
 
 
to attract and retain highly qualified individuals capable of making significant contributions to our long-term success;
 
to motivate and reward named executive officers whose knowledge, skills, and performance are critical to our success;
 
to closely align the interests of our named executive officers and other key employees with those of its shareholders; and
 
to utilize incentive based compensation to reinforce performance objectives and reward superior performance.
 
Role of Chief Executive Officer in Compensation Decisions
 
The Board approves all compensation for the chief executive officer. The Compensation Committee makes recommendations on the compensation for the chief executive officer and approves all compensation decisions, including equity awards, for our executive officers. Our chief executive officer makes recommendations regarding the base salary and non-equity compensation of other executive officers that are approved by the Compensation Committee in its discretion.
 
Setting Executive Compensation
 
The Compensation Committee believes that compensation for the Company’s executive officers must be managed to what we can afford and in a way that allows for us to meet our goals for overall performance. During 2019 and 2018, the Compensation Committee and the Board compensated its Chief Executive Officers, President and Chief Financial Officer at the salaries indicated in the compensation table. This compensation reflected our financial condition. The Compensation Committee does not use a peer group of publicly traded and privately-held companies in structuring the compensation packages.
 
Executive Compensation Components for the Year Ended December 31, 2019
 
The Compensation Committee did not use a formula for allocating compensation among the elements of total compensation during the year that ended December 31, 2019. The Compensation Committee believes that in order to attract and retain highly effective people it must maintain a flexible compensation structure. For the year that ended December 31, 2019, the principal components of compensation for named executive officers were base salary.
 
Base Salary
 
Base salary is intended to ensure that our employees are fairly and equitably compensated. Generally, base salary is used to appropriately recognize and reward the experience and skills that employees bring to the Company and provides motivation for career development and enhancement. Base salary ensures that all employees continue to receive a basic level of compensation that reflects any acquired skills which are competently demonstrated and are consistently used at work.
 
Base salaries for the Company’s named executive officers are initially established based on their prior experience, the scope of their responsibilities and the applicable competitive market compensation paid by other companies for similar positions. Mr. Hegyi, Mr. Scott and Mr. Barnes were compensated as described above based on the financial condition of the Company.
 
Performance-Based Incentive Compensation
 
The Compensation Committee believes incentive compensation reinforces performance objectives, rewards superior performance and is consistent with the enhancement of stockholder value. All of the Company’s Named Executive Officers are eligible to receive performance-based incentive compensation. The Compensation Committee did not recommend or approve payment of any performance-based incentive compensation to the Named Executive Officers during the year ended December 31, 2018 based on our financial condition.
 
 
32
 
 
Ownership Guidelines
 
The Compensation Committee does not require our executive officers to hold a minimum number of our shares. However, to directly align the interests of executive officers with the interests of the stockholders, the Compensation Committee encourages each executive officer to maintain an ownership interest in the Company.
 
Stock Option Program
 
Stock options are an integral part of our executive compensation program. They are intended to encourage ownership and retention of the Company’s common stock by named executive officers and employees, as well as non-employee members of the Board. Through stock options, the objective of aligning employees’ long-term interest with those of stockholders may be met by providing employees with the opportunity to build a meaningful stake in the Company.
 
The Stock Option Program assists us by:
 
- enhancing the link between the creation of stockholder value and long-term executive incentive compensation;
 
- providing an opportunity for increased equity ownership by executive officers; and
 
- maintaining competitive levels of total compensation.
 
Stock option award levels are determined by the Compensation Committee and vary among participants’ positions within the Company. Newly hired executive officers or promoted executive officers are generally awarded stock options, at the discretion of the Compensation Committee, at the next regularly scheduled Compensation Committee meeting on or following their hire or promotion date. In addition, such executives are eligible to receive additional stock options on a discretionary basis after performance criteria are achieved.
 
Options are awarded at the closing price of our common stock on the date of the grant or last trading day prior to the date of the grant. The Compensation Committee’s policy is not to grant options with an exercise price that is less than the closing price of our common stock on the grant date.
 
Generally, the majority of the options granted by the Compensation Committee vest quarterly over two to three years of the 5-10-year option term. Vesting and exercise rights cease upon termination of employment and/or service, except in the case of death (subject to a one year limitation), disability or retirement. Stock options vest immediately upon termination of employment without cause or an involuntary termination following a change of control. Prior to the exercise of an option, the holder has no rights as a stockholder with respect to the shares subject to such option, including voting rights and the right to receive dividends or dividend equivalents.
 
The Named Executive Officers received stock option grants and warrants during the year ended December 31, 2019 as outlined below.
 
Retirement and Other Benefits
 
We have no other retirement, savings, long-term stock award or other type of plans for the Named Executive Officers.
 
Perquisites and Other Personal Benefits
 
During the year ended December 31, 2019, we provided the Named Executive Officers with medical insurance and nominal health club benefits. The Company paid $10,273 in life insurance for Mr. Hegyi and $27,357 in insurance for Mr. Scott. No other perquisites or other personal benefits were provided to Named Executive Officers. The committee expects to review the levels of perquisites and other personal benefits provided to Named Executive Officers annually.
 
Employment and consulting agreements are discussed below.
 
 
33
 
 
Tax and Accounting Implications
 
Deductibility of Executive Compensation
 
Subject to certain exceptions, Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") generally denies a deduction to any publicly held corporation for compensation paid to its chief executive officer and its three other highest paid executive officers (other than the principal financial officer) to the extent that any such individual's compensation exceeds $1 million. “Performance-based compensation” (as defined for purposes of Section 162(m)) is not taken into account for purposes of calculating the $1 million compensation limit, provided certain disclosure, shareholder approval and other requirements are met. We periodically review the potential consequences of Section 162(m) and may structure the performance-based portion of our executive compensation to comply with certain exceptions to Section 162(m). However, we may authorize compensation payments that do not comply with the exceptions to Section 162(m) when we believe that such payments are appropriate and in the best interests of the stockholders, after taking into consideration changing business conditions or the officer's performance
 
Accounting for Stock-Based Compensation
 
We account for stock-based payments including its Stock Option Program in accordance with the requirements of ASC 718, “Compensation-Stock Compensation.”
 
COMPENSATION COMMITTEE REPORT
 
The Compensation Committee, sets and administers policies that govern the Company's executive compensation programs, and incentive and stock programs. The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for year ended December 31, 2019.
 
THE COMPENSATION COMMITTEE
 
Katherine McLain (Chairman)
Marco Hegyi
Thom Kozik
 
 
34
 
 
EXECUTIVE COMPENSATION
 
REMUNERATION OF EXECUTIVE OFFICERS
 
The following table provides information concerning remuneration of the chief executive officer, the chief financial officer and another named executive officer for the years ended December 31, 2019 and 2018:
 
Summary Compensation Table
 
  
 
 
 
 
 
 
 
 
 
 
 
Non-Equity
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
Incentive
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
Stock
 
 
Plan
 
 
Option
 
 
Other
 
 
 
 
  
 
 
Salary
 
 
Bonus
 
 
Awards
 
 
Compensation
 
 
Awards
 
 
Compensation
 
 
Total
 
Principal Position 
 
 
($)
 
 
($)
 
 
($) (1)
 
 
($)
 
 
($)
 
 
($)
 
 
($)
 
Marco Hegyi, Chief Excutive Officer, Chairman of the Board and Director (2)
  12/31/19
 $275,000 
 $20,227 
 $- 
 $- 
 $- 
 $106,273 
 $401,500 

  12/31/18
 $255,234 
 $20,000 
 $- 
 $- 
 $- 
 $285,023 
 $560,257 

 
    
    
    
    
    
    
    
Mark E. Scott, Chief Financial Officer and Director (3)  12/31/19
  12/31/19
 $165,000 
 $20,227 
 $- 
 $- 
 $- 
 $27,357 
 $212,584 

  12/31/18
 $147,140 
 $20,000 
 $- 
 $- 
 $40,000 
 $27,018 
 $234,158 

 
    
    
    
    
    
    
    
Joseph Barnes,President of GrowLife Hydroponics, Inc. (4)  12/31/19
  12/31/19
 $165,000 
 $20,227 
 $- 
 $- 
 $- 
 $- 
 $185,227 

  12/31/18
 $152,515 
 $20,000 
 $- 
 $- 
 $36,000 
 $- 
 $208,515 
 
(1) These amounts reflect the grant date market value as required by Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC Topic 718.
 
Mr. Hegyi was paid a salary of $275,000 during the period October 15, 2018 to December 31, 2019 and a salary of $250,000 during the period January 1, 2018 to October 14, 2018. Mr. Hegyi received a discretionary bonus of $20,227 and $20,000 during the years ended December 31, 2019 and 2018, respectively. We paid life insurance of $10,273 for Mr. Hegyi during the years ended December 31, 2019 and 2018, respectively. On October 21, 2018, a 5 year Warrant for Mr. Hegyi to purchase up to 66,666 shares of our common stock at an exercise price of $1.50 per share vested. On October 15, 2018, Mr. Hegyi received Warrants to purchase up to 320,000 shares of our common stock at an exercise price of $1.80 per share and which vest on October 15, 2018, 2019 and 2020. The Warrants are exercisable for 5 years. The warrants were valued at $192,000. The Company recorded compensation expense of $96,000 and $18,000 respectively for the years ended December 31, 2019 and 2018. In 2018, we also recorded stock compensation expense of $178,750 related the vesting of a warrant originally issued in 2016.
 
(3) Mr. Scott was paid a salary of $165,000 during the period October 15, 2018 to December 31, 2019 and a salary of $150,000 during the period January 1, 2018 to October 14, 2018. Mr. Scott received a discretionary bonus of $20,227 and $20,000 during the years ended December 31, 2019 and 2018, respectively. Mr. Scott was reimbursed $20,357 and $27,018 for insurance expenses during the years ended December 31, 2019 and 2018, respectively. On October 15, 2018, an entity controlled by Mr. Scott was granted an option to purchase 133,333 shares of common stock at an exercise price of $1.80 per share. The stock option grant vests quarterly over three years and are exercisable for 5 years. The stock option grant was valued at $40,000. We recorded $13,333 and $2,833 as compensation expense for the years ended December 31, 2019 and 2018, respectively.
 
(4) Mr. Barnes was paid a salary of $165,000 during the period October 15, 2018 to December 31, 2019 and a salary of $150,000 during the period January 1, 2018 to October 14, 2018. Mr. Barnes received a discretionary bonus of $20,227 and $20,000 during the years ended December 31, 2019 and 2018, respectively. On October 15, 2018, Mr. Barnes was granted an option to purchase 120,000 shares of common stock at an exercise price of $1.80 per share. The stock option grant vests quarterly over three years and are exercisable for 5 years. The stock option grant was valued at $36,000. We recorded $12,000 and $2,550 as compensation expense for the years ended December 31, 2019 and 2018, respectively.
 
Grants of Stock Based Awards during the year ended December 31, 2019
 
The Compensation Committee did not grant any stock based awards or performance-based incentive compensation to the Named Executive Officers for the year ended December 31, 2019.
 
 
35
 
 
Outstanding Equity Awards as of December 31, 2019
 
The Named Executive Officers had the following outstanding equity awards as of December 31, 2019:
 
 
 
Option Awards
 
 
Stock Awards
 
 
 
Number of
 
 
Number of
 
 
Number of
 
 
 
 
 
 
 
 
 
 
 
 
Number of
 
 
Market or
 
 
 
Securities
 
 
Securities
 
 
Securities
 
 
 
 
 
 
Number of
 
 
Market Value
 
 
Unearned Shares,
 
 
Payout Value of
 
 
 
Underlying
 
 
Underlying
 
 
Underlying
 
 
 
 
 
 
Shares or Units
 
 
of Shares or
 
 
Units or Other
 
 
Unearned Shares,
 
 
 
Unexercised
 
 
Unexercised
 
 
Unexercised
 
 
 Option
 
 
 
of Stock
 
 
Units of
 
 
Rights That
 
 
Units, or Other
 
 
 
Options
 
 
Options
 
 
Unearned
 
 
 Exercise
 
Option
 
That Have Not
 
 
Stock That
 
 
Have Not
 
 
Rights That Have
 
 
 
Exercisable
 
 
Unexerciseable
 
 
Options
 
 
 Price
 
Expiration
 
Vested
 
 
Have Not Vested
 
 
Vested
 
 
Not Vested
 
Name
  (#) 
  (#) 
  (#) 
 
 ($) (1)
 
Date
  (#) 
 
($)
 
  (#) 
 
($)
 
Marco Hegyi (2)
  - 
  - 
  - 
 $- 
 
  - 
 $- 
  - 
 $- 
 
    
    
    
    
 
    
    
    
    
Mark E. Scott (3)
  26,667 
  - 
  - 
 $1.500 
07/01/22
  - 
 $- 
  - 
 $- 
 
  60,000 
  20,000 
  - 
 $0.900 
10/15/22
  - 
 $- 
  - 
 $- 
 
  55,556 
  77,778 
  - 
 $1.800 
10/23/23
  - 
 $- 
  - 
 $- 
 
    
    
    
    
 
    
    
    
    
Joseph Barnes (4)
  53,333 
  - 
  - 
 $1.500 
10/10/22
  - 
 $- 
  - 
 $- 
 
  50,000 
  16,667 
  - 
 $1.050 
10/25/22
  - 
 $- 
  - 
 $- 
 
  50,000 
  70,000 
  - 
 $1.800 
10/23/23
  - 
 $- 
  - 
 $- 
 
(1) These amounts reflect the grant date market value as required by Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC Topic 718.
 
(2) On October 15, 2018, an entity controlled by Mr. Scott was granted an option to purchase 133,333 shares of common stock at an exercise price of $1.80 per share. The stock option grant vests quarterly over three years and is exercisable for 5 years. The stock option grants were valued at $40,000. We recorded $13,333 and $2,833 as compensation expense for the years ended December 31, 2019 and 2018, respectively.
 
(3) On October 15, 2018, Mr. Barnes was granted an option to purchase 120,000 shares of common stock at an exercise price of $1.80 per share. The stock option grant vests quarterly over three years and is exercisable for 5 years. The stock option grant was valued at $36,000. We recorded $12,000 and $2,550 as compensation expense for the years ended December 31, 2019 and 2018, respectively.
 
Option Exercises for the year ended December 31, 2019
 
Mr. Hegyi, Scott and Barnes did not have any option exercised during the year ended December 31, 2019.
 
Pension Benefits
 
We do not provide any pension benefits. 
 
Nonqualified Deferred Compensation
 
We do not have a nonqualified deferral program. 
 
 
36
 
 
Employment Agreements
 
Employment Agreement with Marco Hegyi
 
On October 15, 2018, the Board of Directors approved an Employment Agreement with Marco Hegyi pursuant to which we engaged Mr. Hegyi as its Chief Executive Officer through October 15, 2021.
 
Mr. Hegyi’s annual compensation is $275,000. Mr. Hegyi is also entitled to receive an annual bonus equal to four percent (4%) of the Company’s EBITDA for that year. The annual bonus shall be paid no later than 31 days following the end of each calendar year.
 
Mr. Hegyi received 320,000 warrants in October 2018 as follows: (i) Warrant to purchase up to 106,667 shares of our common stock at an exercise price of $1.80 per share which vested immediately: and (ii) two Warrants to purchase up to 106,667 shares of our common stock at an exercise price of $1.80 per share. One warrant for 106,667 shares of our common stock vested on October 15, 2019. Additional warrants for 106,667 shares of our common stock vest on October 15, 2020 and 2021, respectively. The Warrants are exercisable for 5 years.
 
Mr. Hegyi is entitled to participate in all group employment benefits that are offered by us to its senior executives and management employees from time to time, subject to the terms and conditions of such benefit plans, including any eligibility requirements. In addition, we will purchase and maintain during the Term an insurance policy on Mr. Hegyi’s life in the amount of $2,000,000 payable to Mr. Hegyi’s named heirs or estate as the beneficiary.
 
If we terminate Mr. Hegyi’s employment at any time prior to the expiration of the Term without Cause, as defined in the Employment Agreement, or if Mr. Hegyi terminates his employment at any time for “Good Reason” or due to a “Disability”, Mr. Hegyi will be entitled to receive (i) his Base Salary amount through the end of the Term; and (ii) his Annual Bonus amount for each year during the remainder of the Term.
 
Employment Agreement with Mark E. Scott
 
On October 15, 2018, the Compensation Committee approved an Employment Agreement with Mark E. Scott pursuant to which we engaged Mr. Scott as its Chief Financial Officer through October 15, 2021. Mr. Scott’s previous Agreement was cancelled.
 
Mr. Scott’s annual compensation is $165,000. Mr. Scott is also entitled to receive an annual bonus equal to two percent (2%) of the Company’s EBITDA for that year. The annual bonus shall be paid no later than 31 days following the end of each calendar year.
 
Mr. Hegyi received 320,000 warrants in October 2018 as follows: (i) Warrant to purchase up to 106,667 shares of our common stock at an exercise price of $1.80 per share which vested immediately: and (ii) two Warrants to purchase up to 106,667 shares of our common stock at an exercise price of $1.80 per share. One warrant for 106,667 shares of our common stock vested on October 15, 2019. Additional warrants for 106,667 shares of our common stock vest on October 15,2020 and 2021, respectively. The Warrants are exercisable for 5 years.
 
Mr. Scott is entitled to participate in all group employment benefits that are offered by us to our senior executives and management employees from time to time, subject to the terms and conditions of such benefit plans, including any eligibility requirements. In addition, the Company is required purchase and maintain an insurance policy on Mr. Scott’s life in the amount of $2,000,000 payable to Mr. Scott’s named heirs or estate as the beneficiary. Finally, Mr. Scott is entitled to twenty days of vacation annually and also has certain insurance and travel employment benefits.
 
If we terminate Mr. Scott’s employment at any time prior to the expiration of the Term without Cause, as defined in the Employment Agreement, or if Mr. Scott terminates his employment at any time for “Good Reason” or due to a “Disability”, Mr. Scott will be entitled to receive (i) his Base Salary amount for ninety days; and (ii) his Annual Bonus amount for each year during the remainder of the Term. 
 
 
37
 
 
Employment Agreement with Joseph Barnes
 
On October 15, 2018, the Compensation Committee approved an Employment Agreement with Joseph Barnes pursuant to which we engaged Mr. Barnes as President of the GrowLife Hydroponics Company through October 15, 2021. Mr. Barnes’s previous Agreement was cancelled.
 
Mr. Barnes’s annual compensation is $165,000. Mr. Barnes is also entitled to receive an annual bonus equal to two percent (2%) of the Company’s EBITDA for that year. The annual bonus shall be paid no later than 31 days following the end of each calendar year.
 
The Board of Directors granted Mr. Barnes an option to purchase 120,000 shares of our Common Stock under the Company’s 2017 Amended and Restated Stock Incentive Plan at an exercise price of $1.80 per share. The Shares vest quarterly over three years. All options will have a five-year life and allow for a cashless exercise. The stock option grant is subject to the terms and conditions of our Amended and Restated Stock Incentive Plan, including vesting requirements.  In the event that Mr. Barnes’s continuous status as employee to us is terminated by us without Cause or Mr. Barnes terminates his employment with us for Good Reason as defined in the Barnes Agreement, in either case upon or within twelve months after a Change in Control as defined in our Amended and Restated Stock Incentive, then 100% of the total number of Shares shall immediately become vested.
 
Mr. Barnes is entitled to participate in all group employment benefits that are offered by us to our senior executives and management employees from time to time, subject to the terms and conditions of such benefit plans, including any eligibility requirements. In addition, the Company is required purchase and maintain an insurance policy on Mr. Barnes’s life in the amount of $2,000,000 payable to Mr. Barnes’s named heirs or estate as the beneficiary. Finally, Mr. Barnes is entitled to twenty days of vacation annually and also has certain insurance and travel employment benefits.
 
If we terminate Mr. Barnes’s employment at any time prior to the expiration of the Term without Cause, as defined in the Employment Agreement, or if Mr. Barnes terminates his employment at any time for “Good Reason” or due to a “Disability”, Mr. Barnes will be entitled to receive (i) his Base Salary amount for ninety days; and (ii) his Annual Bonus amount for each year during the remainder of the Term. 
 
Potential Payments upon Termination or Change in Control 
 
The Company’s Employment Agreement with Marco Hegyi has provisions providing for severance payments as detailed below.
 
 
 
 
 
 
Early
 
 
Not For Good
 
 
Change in
 
 
 
 
Executive
 
For Cause
 
 
or Normal
 
 
Cause
 
 
Control
 
 
Disability
 
Payments Upon
 
Termination
 
 
Retirement
 
 
Termination
 
 
Termination
 
 
or Death
 
Separation
 
on 12/31/19
 
 
on 12/31/19
 
 
on 12/31/19
 
 
on 12/31/19
 
 
on 12/31/19
 
Compensation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Base salary (1)
 $- 
 $- 
 $575,000 
 $575,000 
 $- 
Performance-based incentive
    
    
    
    
    
    compensation
 $- 
 $- 
 $- 
 $- 
 $- 
Stock options
 $- 
 $- 
 $- 
 $- 
 $- 
 
    
    
    
    
    
Benefits and Perquisites:
    
    
    
    
    
Health and welfare benefits
 $- 
 $- 
 $- 
 $- 
 $- 
Accrued vacation pay
 $- 
 $- 
 $- 
 $- 
 $- 
 
    
    
    
    
    
Total
 $- 
 $- 
 $575,000 
 $575,000 
 $- 
 
(1)
Reflects amounts to be paid upon termination without cause and upon termination in a change of control, less any months worked. All outstanding warrants fully vest under certain conditions.
 
 
38
 
 
The Company’s Employment Agreement with Mark E. Scott has provisions providing for severance payments as detailed below.
 
 
 
 
 
 
Early
 
 
Not For Good
 
 
Change in
 
 
 
 
Executive
 
For Cause
 
 
or Normal
 
 
Cause
 
 
Control
 
 
Disability
 
Payments Upon
 
Termination
 
 
Retirement
 
 
Termination
 
 
Termination
 
 
or Death
 
Separation
 
on 12/31/19
 
 
on 12/31/19
 
 
on 12/31/19
 
 
on 12/31/19
 
 
on 12/31/19
 
Compensation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Base salary (1)
 $- 
 $- 
 $41,250 
 $41,250 
 $- 
Performance-based incentive
    
    
    
    
    
    compensation
 $- 
 $- 
 $- 
 $- 
 $- 
Stock options
 $- 
 $- 
 $- 
 $- 
 $- 
 
    
    
    
    
    
Benefits and Perquisites:
    
    
    
    
    
Health and welfare benefits
 $- 
 $- 
 $- 
 $- 
 $- 
Accrued vacation pay
 $- 
 $- 
 $- 
 $- 
 $- 
 
    
    
    
    
    
Total
 $- 
 $- 
 $41,250 
 $41,250 
 $- 
 
(1)
Reflects amounts to be paid upon termination without cause and upon termination in a change of control. All outstanding stock options vests fully vest under certain conditions.
 
The Company’s Employment Agreement with Joe Barnes has provisions providing for severance payments as detailed below.
 
 
 
 
 
 
Early
 
 
Not For Good
 
 
Change in
 
 
 
 
Executive
 
For Cause
 
 
or Normal
 
 
Cause
 
 
Control
 
 
Disability
 
Payments Upon
 
Termination
 
 
Retirement
 
 
Termination
 
 
Termination
 
 
or Death
 
Separation
 
on 12/31/19
 
 
on 12/31/19
 
 
on 12/31/19
 
 
on 12/31/19
 
 
on 12/31/19
 
Compensation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Base salary (1)
 $- 
 $- 
 $41,250 
 $41,250 
 $- 
Performance-based incentive
    
    
    
    
    
    compensation
 $- 
 $- 
 $- 
 $- 
 $- 
Stock options
 $- 
 $- 
 $- 
 $- 
 $- 
 
    
    
    
    
    
Benefits and Perquisites:
    
    
    
    
    
Health and welfare benefits
 $- 
 $- 
 $- 
 $- 
 $- 
Accrued vacation pay
 $- 
 $- 
 $- 
 $- 
 $- 
 
    
    
    
    
    
Total
 $- 
 $- 
 $41,250 
 $41,250 
 $- 
 
(1)
Reflects amounts to be paid upon termination without cause and upon termination in a change of control. There outstanding stock options vests fully vest under certain conditions.
 
 
39
 
 
DIRECTOR COMPENSATION
 
We primarily use stock grants to incentive compensation to attract and retain qualified candidates to serve on the Board. This compensation reflected the financial condition of the Company. In setting director compensation, we consider the significant amount of time that Directors expend in fulfilling their duties to the Company as well as the skill-level required by our members of the Board. On February 1, 2018, a director compensation program was implemented. The directors are compensated at $60,000 annually and the annual share award is based on the close price on January 31 of that year.
 
During year ended December 31, 2019, Marco Hegyi and Mr. Scott did not receive any compensation for their service as directors. The compensation disclosed in the Summary Compensation Table on page __ represents the total compensation.
 
Director Summary Compensation
 
 
 
 
 
 
 
 
 
 
 
 
Non-Equity
 
 
Non-Qualified
 
 
 
 
 
 
 
 
 
Fees Earned
 
 
 
 
 
 
 
 
Incentive
 
 
Deferred
 
 
 
 
 
 
 
 
 
or Paid in
 
 
 
 
 
 
 
 
Plan
 
 
Compensation
 
 
Other
 
 
 
 
 
 
Cash
 
 
Stock
 
 
Option
 
 
Compensation
 
 
Earnings
 
 
Compensation
 
 
 
 
Name
 
$
 
 
Awards (1)
 
 
Awards
 
 
($)
 
 
$
 
 
($)
 
 
Total
 
Katherine McLean (2)
  - 
 $60,000 
  - 
  - 
  - 
  - 
 $60,000 
 
    
    
    
    
    
    
    
Thom Kozik (3)
  - 
  60,000 
  - 
  - 
  - 
  - 
  60,000 
 
    
    
    
    
    
    
    
 
 $- 
 $120,000 
 $- 
 $- 
 $- 
 $- 
 $120,000 
 
(1)            
These amounts reflect the grant date market value as required by Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC Topic 718.
 
(2) On February 22, 2019, we issued 54,054 shares of our common stock to Katherine McLain that was valued at $1.11 per share or $60,000.
 
(3) On February 22, 2019, we issued 54,054 shares of our common stock to Thom Kozik that was valued at $1.11 per share or $60,000.
 
Compensation Paid to Board Members
 
Our independent non-employee directors are not compensated in cash.  The only compensation has been in the form of stock awards. There is a stock compensation plan for independent non-employee directors.
 
 
40
 
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The following table sets forth certain information regarding the ownership of our common stock as of December 31, 2019 by:
 
 
each director and nominee for director;
 
 
 
 
each person known by us to own beneficially 5% or more of our common stock;
 
 
 
 
each officer named in the summary compensation table elsewhere in this report; and
 
 
 
 
all directors and executive officers as a group.
 
The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership within 60 days. Under these rules more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.
 
Unless otherwise indicated below, each beneficial owner named in the table has sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. The address of each beneficial owner is 5400 Carillon Point, Kirkland, WA 98033 and the address of more than 5% of common stock is detailed below.
 
 
 
 Shares Beneficially Owned
 
Name of Beneficial Owner
 
 Number
 
 
Percentage (1)
 
Directors and Named Executive Officers-
 
 
 
 
 
 
Marco Hegyi (2)
  413,334 
  1.4%
Mark E. Scott (3)
  228,889 
  * 
Katherine McLain (4)
  86,675 
  * 
Thom Kozik (5)
  73,908 
  * 
Joseph Barnes (6)
  155,333 
  * 
Total Directors and Officers (5 in total)
  958,139 
  3.3%
 
* Less than 1%.
 
(1)
Based on 28,677,147 shares of common stock outstanding as of December 31, 2019.
(2)
  Reflects the shares beneficially owned by Marco Hegyi, including warrants to purchase 396,667 shares of our common stock.
(3)
Reflects the shares beneficially owned by Mark E. Scott, including stock option grants totaling 142,222 shares that Mr. Scott has the right to acquire in sixty days. 
(4)
Reflects the shares beneficially owned by Katherine McLain. 
(5)
Reflects the shares beneficially owned by Thom Kozik. 
(6)
Reflects the shares beneficially owned by Joseph Barnes, including stock option grants totaling 153,333 shares that Mr. Barnes has the right to acquire in sixty days. 

There were no person known by us who owns beneficially 5% or more of our common stock as of December 31, 2019.
 
 
41
 
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE