10-K 1 growlife10k12312013.htm ANNUAL REPORT growlife10k12312013.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2013

[]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

Commission file number 000-50385
GrowLife, Inc. 
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
90-0821083
(I.R.S. Employer Identification No.)
 
20301 Ventura Blvd., Suite 126, Woodland Hills, CA  91364
(Address of principal executive offices and zip code)
 
(800) 977-5255
(Registrant’s telephone number, including area code)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  No [X]

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 [X] No []
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 [X]    No []
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer []
Accelerated filer []
Non-accelerated filer []
Smaller reporting company [X]
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes [] No [X]
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed fiscal quarter, was approximately $98,575,109.

As of March 31, 2014 there were 806,090,859 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.
 
 
 

 
 
GrowLife, Inc.
 
Table of Contents to Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2013
 
  Page  
PART I
   
     
ITEM 1. BUSINESS
5
 
     
ITEM 1A. RISK FACTORS
12
 
     
ITEM 1B. UNRESOLVED STAFF COMMENTS
14
 
     
ITEM 2. PROPERTIES
15
 
     
ITEM 3. LEGAL PROCEEDINGS
15
 
     
ITEM 4. MINE SAFETY DISCLOSURES
15
 
     
PART II
   
     
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
16
 
     
ITEM 6. SELECTED FINANCIAL DATA
18
 
     
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
18
 
     
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
28
 
     
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
28
 
     
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
74
 
     
ITEM 9A. CONTROLS AND PROCEDURES
74
 
     
ITEM 9B. OTHER INFORMATION
74
 
     
PART III
   
     
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
75
 
     
ITEM 11. EXECUTIVE COMPENSATION
85
 
     
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
90
 
     
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
93
 
     
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
95
 
     
PART IV
   
     
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
96
 
 
 
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PART I

ITEM 1. BUSINESS.

CORPORATE HISTORY

GrowLife, Inc. (formerly Phototron Holdings, Inc.) (“GrowLife”, “Company”, “we”, “us”, “our”, “our company”) was incorporated in the State of Delaware on March 7, 2001 under the name Wentworth III, Inc. On August 27, 2003, we completed the reverse acquisition of Whitco Company, L.P., a company engaged in the manufacture and sale of area lighting poles to distributors throughout the United States. On March 15, 2006, Whitco voluntarily filed for protection under Chapter 11 of the U.S. bankruptcy laws. On April 25, 2006, the bankruptcy court approved a sale of Whitco’s assets (other than cash and accounts receivable) used in its area lighting pole business. The assets were sold free and clear of any liens and encumbrances to a third party purchaser pursuant to Section 363 of the U.S. Bankruptcy Code. The purchaser issued a common stock purchase warrant to acquire shares of the purchaser’s common stock as consideration for the assets purchased (the “Purchase Warrant”).

On May 16, 2006, Whitco filed a motion to convert its bankruptcy case to a Chapter 7 liquidation proceeding. This motion was granted by the bankruptcy court on July 13, 2006. In connection with the liquidation, the Purchase Warrant and Whitco’s cash and accounts receivable were assigned and distributed to Whitco’s secured creditor. As part of the Chapter 7 bankruptcy proceedings, no assets were available for distribution to unsecured creditors and, accordingly, these unsatisfied obligations were relieved as part of the liquidation in accordance with the provisions of Chapter 7 of U.S. Bankruptcy Code.

Following Whitco’s liquidation in bankruptcy, we had nominal assets and nominal business operations and our business strategy had been to investigate and, if such investigation warranted, acquire a target company or business seeking the perceived advantages of being a publicly held corporation. In furtherance of this business strategy, on July 25, 2006, we voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code. We subsequently determined to withdraw from bankruptcy court protection and, on motion made by the U.S. trustee, the bankruptcy court ordered the case dismissed on January 9, 2007. Since the dismissal of our bankruptcy case, we have settled our outstanding liabilities with creditors. In addition, effective February 22, 2007, we experienced a change in control and our management changed, pursuant to a Securities Purchase Agreement by and between our company and KIG Investors I, LLC. As part of KIG Investors’ liquidation and dissolution, on January 9, 2009, KIG Investors distributed all 2,562,015 shares of our common stock held by it to its members, Lionsridge Capital, LLC and Keating Investments, LLC, pro rata based on their respective membership interests in KIG Investors.

On January 15, 2010, Lionsridge, Keating Investments, Kevin R. Keating, Laurus Master Fund, Ltd., Garisch Financial, Inc. and Woodman Management Corporation entered into a Stock Purchase Agreement pursuant to which (1) Lionsridge, Keating Investments, Keating, Laurus and GFI (collectively, the “Sellers”) would sell to Woodman, and Woodman would purchase from the Sellers, an aggregate of 3,861,721 shares of our common stock (the “Shares”), which Shares represent 89.1% of the issued and outstanding shares of our common stock, (2) the Sellers would assign to Woodman the Sellers’ registration rights under existing agreements with our company, (3) each Seller and our company would release each other from all existing claims (other than claims by Keating for statutory or other rights to indemnification as a result of his service as an officer and director of our company) and (4) Keating Investments would indemnify Woodman and our company from liabilities arising out of any breach of any representation, warranty, covenant or obligation of Keating Investments, Keating and Lionsridge, for a period of six months from the closing of the transactions under the Purchase Agreement, up to a maximum amount of $50,000. The aggregate purchase price for the Shares was $210,130, or approximately $0.05441 per share. In connection with the Purchase Agreement, Woodman also agreed to assume, and to pay at the closing of the transactions under the Purchase Agreement, certain obligations of our company in an aggregate amount of $30,000 (including $15,000 owed to Keating Investments as a consulting fee for services rendered to us in connection with the transactions contemplated under the Purchase Agreement). The closing of the transactions under the Purchase Agreement occurred on February 3, 2010. Woodman paid the aggregate purchase price for the Shares with personal funds. On April 12, 2010, Woodman transferred the Shares to W-Net Fund I, L.P.
 
 
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On February 14, 2011, we entered into an Agreement and Plan of Merger (“PHI Merger Agreement”) with PHI Merger Corporation, a California corporation and our wholly-owned subsidiary (“PHI MergerCo”), and Phototron, Inc., a California corporation (“Phototron”). The closing (the “PHI Closing”) of the transactions contemplated by the PHI Merger Agreement (the “PHI Merger”) occurred on March 9, 2011. At the PHI Closing, (a) PHI MergerCo was merged with and into Phototron; (b) Phototron became our wholly-owned subsidiary; (c) all of Phototron’s shares and options outstanding prior to the PHI Merger were exchanged (or assumed, in the case of options) for comparable securities of our company; and (d) 95% of our fully-diluted shares were owned by Phototron’s former shareholders and option holders. At the PHI Closing, we issued a total of 130,621,421 shares of our common stock to Phototron’s former shareholders, in exchange for the 1,666,666 shares of Phototron’s common stock outstanding prior to the PHI Merger. Upon the effectiveness of the PHI Merger, 8,662,262 shares of our common stock were maintained by our existing stockholders. In connection with the PHI Merger on March 9, 2011, we changed our name from Catalyst Lighting Group, Inc. to Phototron Holdings, Inc.

Since former holders of Phototron’s common stock and options to purchase common stock owned, after the PHI Merger, approximately 95% of our fully-diluted shares of common stock, and as a result of certain other factors, including that all members of our executive management were members of Phototron’s management, Phototron was deemed to be the acquiring company and we were deemed to be the legal acquirer for accounting purposes, and the PHI Merger was accounted for as a reverse merger and a recapitalization in accordance with generally accepted accounting principles in the United States (“GAAP”).

On March 21, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SGT Merger Corporation, a Nevada corporation and our wholly-owned subsidiary (“MergerCo”), SG Technologies Corp, a Nevada corporation (“SGT”), Sterling C. Scott (the “SGT Representative”), and W-Net Fund I, L.P., a Delaware limited partnership and current holder of our common stock (the “Investor Representative”). The closing (the “Closing”) of the transactions contemplated by the Merger Agreement (the “Merger”) occurred on April 5, 2012. At the Closing, (a) MergerCo was merged with and into SGT; (b) SGT became our wholly-owned subsidiary; and (c) all SGT shares of common stock were exchanged for shares of our common stock and shares of a new series of our preferred stock, which was designated Series A Preferred Stock (the “Series A Preferred Stock”), and has the rights, preferences, privileges and restrictions set forth in the Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock, which was filed with the Delaware Secretary of State on April 5, 2012. At the Closing, we issued to SGT’s former stockholders, in exchange for the 200 shares of SGT’s common stock outstanding immediately prior to the Merger, 157,000,000 shares of our common stock and 3,000,000 shares of Series A Preferred Stock.

Since after the Merger former holders of SGT’s common stock owned in excess of 50% of our fully-diluted shares of common stock, and as a result of certain other factors, including that all members of our executive management are members of SGT’s management, SGT was deemed to be the acquiring company and we are deemed to be the legal acquirer for accounting purposes, and the Merger was accounted for as a reverse merger and a recapitalization in accordance with GAAP.

The accompanying consolidated financial statements of GrowLife and its subsidiaries reflect the historical activity of SGT, and the historical stockholders’ equity of SGT has been retroactively restated for the equivalent number of shares received in the exchange after giving effect to the differences in par value offset to additional paid-in capital. In connection with the Merger Agreement, we are deemed to have issued an additional 152,343,383 shares of common stock to our stockholders existing prior to the Merger. Net liabilities of $542,716 have been assumed as part of the purchase price.

On July 23, 2012, we completed the purchase of substantially all of the assets (the “Assets”) of Donna Klauenburch and Tao Klauenburch, general partners doing business as Greners.com (collectively, “Greners”), related to the online retail business currently operated by Greners, pursuant to the terms of an Asset Purchase Agreement entered into by the parties on July 23, 2012. The Assets included equipment, finished goods, materials and supplies, contract rights, domain names and implemented and operational components of software. In addition, the Company assumed certain of Greners’ liabilities which included Greners’ liabilities and obligations under its contracts and all express and implied warranties related to any materials supplied by Greners prior to the closing date.

In consideration for the Assets, the Company agreed to pay to Greners an aggregate of $450,000. Of the purchase price, $250,000 was paid in cash on the closing date and the remaining portion of the purchase price was paid in the form of a Secured Promissory Note issued by the Company to Greners in the original principal amount of $200,000.

On August 6, 2012, GrowLife, Inc., a Delaware corporation and our wholly-owned subsidiary, merged with and into our company pursuant to the Certificate of Ownership and Merger filed with the Delaware Secretary of State on July 25, 2012 and effective on August 6, 2012. As a result of the merger, on August 6, 2012, our corporate named changed from Phototron Holdings, Inc. to GrowLife, Inc.
 
 
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On October 22, 2012, our wholly owned subsidiary GrowLife Hydroponics, Inc., a Delaware corporation (“GH”), completed the purchase of all of the shares (the “UG Shares”) of Soja, Inc. dba Urban Garden Supplies (the “Urban Garden”) from Richard Melograno, Michael Cook, and Scott Glass (collectively, the “UG Sellers”). The effective date of the Stock Purchase Agreement was October 24, 2012 (“UG Agreement”). The UG Agreement included all of the assets and liabilities of Urban Garden which includes the inventory of the store located at 22516 Ventura Blvd., Woodland Hills, CA 91364 and various other assets. GH also assumed the liabilities of Urban Garden which were valued at $70,370. GrowLife’s CEO Sterling Scott personally guaranteed this liability. In consideration for the UG Shares, GrowLife agreed to pay to the UG Sellers an aggregate of 3,906,250 shares of the Company’s common stock valued at $156,641.

On June 7, 2013, GH completed the purchase of Rocky Mountain Hydroponics, LLC., a Colorado limited liability company (“RMC”), and Evergreen Garden Center, LLC, a Maine limited liability company (“EGC”). The effective date of the RMH/EGC Agreement was June 7, 2013. The RMH/EGC Agreement included all of the assets and liabilities of the RMH Companies, and in specific, their 4 retail hydroponics stores, which are located in Vail and Boulder, Colorado, Peabody, Massachusetts, and Portland, Maine. Per the terms of the RMH/EGC Agreement, GrowLife, Inc. paid the former owners of the RMH Companies $550,000 in cash, $800,000 in 12% Secured Convertible Notes, and $275,000 (7,857,141 shares at $0.035/share) in shares of GrowLife, Inc.’s common stock.

On November 19, 2013, GrowLife, Inc. (the “Company”) entered into a Joint Venture Agreement (the “Agreement”) with CANX USA LLC (“CANX”), a Nevada limited liability company.  Under the terms of the Agreement, the Company and CANX will form Organic Growth International, LLC (“OGI”), a Nevada limited liability company, for the purpose of expanding the Company’s operations in its current retail hydroponic businesses and in other synergistic business verticals and facilitating additional funding for commercially financeable transactions of up to $40,000,000.  In connection with closing of the Agreement, CANX will provide funding in the amount of $1,300,000 for a GrowLife Infrastructure Funding Technology program transaction and will provide additional funding under a 7% Convertible Note instrument. The Company will initially own a non-dilutive forty five percent (45%) share of OGI and the Company may acquire a control share of OGI as provided in the Agreement.

In accordance with the Agreement, the Company and CANX entered into a Warrant Agreement whereby the Company delivered CANX 140,000,000 freely transferable, unrestricted warrants to purchase 140,000,000 shares of the Company's common stock, at a maximum strike price of $0.033 per share, par value $0.0001 share. As of the close of business November 19, 2013, shares of the Company’s common stock closed at $0.069 per share per Bloomberg.

Subject to the terms of the Agreement, the Company may issue an additional 100,000,000 freely transferable, unrestricted warrants to purchase 100,000,000 shares of the Company's common stock, par value $0.0001 per share, at a maximum strike price of $0.033 per share and twenty (20) blocks of warrants in the Company, with each block consisting of 10,000,000 freely transferable, unrestricted warrants to purchase 10,000,000 shares of the Company's common stock, at a maximum strike price of $0.033 per share, par value $0.0001.

In accordance with the Agreement, the Company also issued a 7% Note to CANX (the “Note”) in exchange for the principal amount of $1,000,000.  Per the terms of the Note, the maturity date is September 30, 2015, and the annual rate of interest is seven percent (7%), which increases to twenty-four percent (24%) per annum, or the maximum rate permitted under any applicable law, in the event of default. Subject to certain limitations, CANX can, at its sole discretion, convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common stock. The conversion price for the period of time from the date of the Note through and including September 30, 2014 is the lesser of (a) $0.025 per share and (b) seventy percent (70%) of the average of the three (3) lowest daily volume weighted average closing prices occurring during the twenty (20) consecutive trading days immediately preceding the applicable conversion date on which CANX elects to convert all or part of the Note, subject to adjustment as provided in the Note. The conversion price is $0.025 per share for the period of October 1, 2014 through the maturity date of September 30, 2015, subject to adjustment as provided in the Note. The Company is required to reserve, at all times, the full number of shares of common stock issuable upon conversion of all outstanding amounts under this Note. At any time after the 12-month period immediately following the date of the Note, the Company has the option to pre-pay the entire outstanding principal amount of the Note by paying to CANX an amount equal to one hundred and fifty percent (150%) of the principal and interest then outstanding.  The Company’s obligations under the Note will accelerate upon a bankruptcy event with respect to the Company or any subsidiary, any default in the Company’s payment obligations under the Note, the Company’s failure to issue shares of its common stock in connection with a conversion of any of the Note, the Company’s or any subsidiary’s breach of any provision of any agreement providing for indebtedness of the Company or such subsidiary in an amount exceeding $100,000, the common stock of the Company being suspended or delisted from trading on the Over the Counter Bulletin Board (the “Primary Market”) market and the OTCQB, the Company losing its status as “DTC Eligible” or the Company becoming late or delinquent in its filing requirements with the Securities and Exchange Commission. Upon any such acceleration of the Note, the Company shall be obligated to pay an amount equal to the greater of (i) one hundred and twenty percent (120%) of the outstanding principal of the Note (plus all accrued but unpaid interest) and (ii) the product of (a) the highest closing price for the Company’s common stock for the five (5) days on which the Primary Market is open for business immediately preceding such acceleration and (b) a fraction, the numerator of which is the outstanding principal of the Note, and the denominator of which is the applicable conversion price as of the date of determination.
 
 
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    In accordance with the Agreement, the Company also entered into a Registration Rights Agreement with CANX whereby CANX has the right to demand that the Company prepare and file a Registration Statement on Form S-1 (or, if Form S-1 is not then available to the Company, on such form of registration statement as is then available to effect a registration for resale of securities) covering the resale of warrants issued pursuant to the Warrant Agreement.
 
BUSINESS

General
 
    We believe that 2013 was a year of transformation for our company, with renewed and expanded focus by GrowLife operating companies on providing legal products to the specialty urban gardening market in retail, in business to business transactions, and direct to consumers. As and to the extent the state and federal regulatory landscape changes, we will continue opportunistic expansion of our  business in regional and state-by-state markets of legal medical marijuana across the United States. The GrowLife family of companies now includes the online distribution hub Greners, the pioneering and expanding Stealth Grow product line, and retail stores that can service customers from coast to coast.
 
    GrowLife companies manufacture and supply branded equipment and expendables, with expendables being products such as nutrients and soils that are consumed as part of the cultivation process and therefore needing to be replenished on a continual basis, that promote and enhance the characteristics of quality and quantity of indoor and outdoor urban gardening. GrowLife also controls premier industry portal www.cannabis.org, which we believe will serve as another widely recognized and authoritative social channel for branded product promotion, sales, and information as and to the extent the regulatory landscape changes.
 
    With regard to the products sold at our retail hydroponics stores in our business to business relationships, and directly, the Company typically purchases its products from the actual manufacturer or a wholesale distributor and resells the products. Most of our vendors provide payment terms ranging from seven (7) days to thirty (30) days while some require payment at the time we purchase them. The Company also more directly manages supply chains in which GrowLife company branded products are produced, principally under the Stealth Grow brand, or under a co-brand shared by GrowLife, Stealth Grow, and the brands of our business to business partners. With regard to our Phototron units, the Company purchases the required materials and then assembles the actual working unit at our Gardena, CA facility, with the finished, and working, Phototron unit then being shipped directly to our customers.
 
    We have focused on the urban gardening industry in the United States and have targeted legal growers of medical marijuana and general gardening enthusiasts. The majority of the products that we sell are primarily used in the cultivation, in a legal and law abiding manner, of cannabis but can also be used to cultivate most any flowers and/or vegetables. GrowLife and its business units are organized, and aim to operate, in accordance with applicable state and federal laws. Accordingly, if and to the extent that state and federal laws permit the nationwide legal use of marijuana and/or medical marijuana, we expect to commercialize our products in that market.
 
    From time to time, the Company may make modest investments in public or even privately held companies in our industry segment in order to facilitate business opportunities of the Company.  The first such investment by the Company occurred in May 2013, when the Company made an investment in the amount of $1,160 in Vape Holdings, Inc. (“Vape”), a Nevada corporation.  Following a series of transactions that are detailed in “NOTE 9 – INVESTMENT IN A RELATED PARTY”, VAPE Holding, Inc. became a public company.  Through its investment, GrowLife received and still owns as of the time of this filing 200,428 shares in VAPE Holdings, Inc (OTCQB:  VAPE).
 
Sterling Scott, the Company’s Chief Executive Officer and Chairman of the Board, has a personal investment in Vape as well. As of the time of this filing, Mr. Scott holds 269,541 shares of Vape’s common stock. As a result of Mr. Scott’s ownership of Vape common stock, the Company has deemed Vape to be a related party and therefore has recorded its investment in Vape as an “Investment in a related party” on its balance sheet. It should also be noted that the current Chief Executive Officer of Vape is the former President of GrowLife, Inc.
 
 
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Our revenue from net sales has steadily increased from $1,450,745 during the fiscal year ended December 31, 2012 to $4,858,976 in the fiscal year ended December 31, 2013. This represents an increase of $3,408,231, or 235%, on a year-to-year basis. Our fiscal year revenue is derived from our various brands as follow:

Revenue By Brand
       
             
   
FY 2013
   
FY 2012
 
GrowLife Hydroponics, Inc. (1) (2)
  $ 2,753,761     $ 118,522  
Greners.com (3)
    1,791,802       828,311  
Phototron & SG Technologies Corp (4)
    313,413       503,912  
    $ 4,858,976     $ 1,450,745  
 
(1) Includes Soja, Inc. (dba Urban Garden Supply), Rocky Mountain
      Hydroponics, LLC, and Evergreen Garden Center, LLC.
(2) Rocky Mountain Hydroponics, LLC, and Evergreen Garden Center, LLC were acquired in June
      2013 and Soja, Inc. was acquired in October 2012, with the above revenue results only
      representing the post-acquisition periods.
(3) Greners.com was acquired in July 2012, with FY 2012 revenue representing the post-acquisition
      period.
(4) SG Technologies Corp was acquired in April 2012 with FY 2012 revenue representing the
      post-acquisition period.

Our revenue from net sales in the fiscal quarters ended December 31, 2013 and 2012 were $1,912,311 and $674,620, respectively, which represents an increase of $1,237,691, or 183%.

Expansion and growth, our driving theme for GrowLife in 2013, remains our goal for 2014. GrowLife is actively engaged in improving and expanding its lineup of branded products through organic development, business alliances and acquisition.

Through its wholly owned subsidiaries and divisions, GrowLife is positioning for rapid expansion of the scope of its business operations in the event of a substantive relaxation of state and federal laws related to cultivation, distribution and sale of cannabis related products, including industrial hemp. The pace of regulatory reform on a state and federal level from a prohibition stance to a tax and regulate approach, which are inherently uncertain future events, will largely determine the pace and the precise scope of expansion for GrowLife divisions and subsidiaries into portions of the business of cannabis in the United States in which GrowLife does not currently participate.

Brands:

PHOTOTRON Ò is a 25 year old USA manufacturer of plant growing systems complete with its own self-contained attractive cabinet with a full line of accessories including nutrients, media, timers and controls.

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

Rocky Mountain Hydroponics & OrganicsÒ and 58HYDROÒ are GrowLife company brands for retail stores, and an online store respectively.

 
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Channels:

GRENERS.COM is a Sonoma County, California based online supplier of a full range of hydroponic equipment for shipment worldwide. Started as a family business, its core strengths lie in its extensive and continuously updated product offerings, its knowledgeable staff and their commitment to informative product reviews for customers, and next day shipping across the country. Greners joined the GrowLife family of companies in July 2012. With the added resources of GrowLife, Greners is set to expand its business in 2013 through volume growth in supply of end user customers, increased commitment to unique opportunities for wholesale distribution and retail sales of GrowLife company brands.

GROWLIFE HYDROPONICS owns and operates seven specialty hydroponics stores, with two in California, two in Colorado, one in Maine, one in Massachusetts, and one in New Hampshire. Our stores strive to provide realistic, hands on product demonstrations of core technology in a one stop shopping environment with well-informed full service sales and technical staff. Our core brands are first and foremost technology products that flourish where they can be demonstrated.

CANNABIS.ORG is an information portal for the medical marijuana industry that is in development by GrowLife with the objective of establishing the premier informational portal for the industry worldwide that , in the event of regulatory change, can also be a major revenue driver for expansion of GrowLife brands, a platform for establishing additional partnering and revenue share relationships and direct revenue generation through a myriad of ad revenue opportunities.

Other:

GROWLIFE PRODUCTIONS is a wholly owned business unit dedicated to promotion of GrowLife’s core brands through co-production and co-sponsorship of entertainment, lifestyle, music and film events across the country. GrowLife Productions aims to foster a growing community around GrowLife brands. Our GrowLife Productions business unit is no longer actively engaged in discussions or collaboration with Strategic Global Investments, Inc.

Competition

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

Competition in the retail hydroponics industry is significant, as competing stores continually open. With regard to competition in the California market, there are numerous retail hydroponics stores within a relatively short distance from the Company’s store in Woodland Hills, CA.

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

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

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

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

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

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

Intellectual Property and Proprietary Rights

Our intellectual property consists of brands and their related trademarks and websites, customer lists and affiliations, product know-how and technology, and marketing intangibles.

Our other intellectual property is primarily in the form of trademarks and domain names. We also hold rights to more than 30 website addresses related to our business including websites that are actively used in our day-to-day business such as www.growlifeinc.com, www.stealthgrow.com, www.phototron.com, www.greners.com, www.cannabis.org, and www.urbangardensupplies.com.

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

Government Regulation

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

Employees

As of March 31, 2014, we had 45 employees. Since inception, we have never had a work stoppage, and our employees are not represented by a labor union. We consider our relationship with our employees to be positive.

 
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ITEM 1A. RISK FACTORS.

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this annual report on Form 10-K before purchasing shares of our common stock. If any of the following risks occur, our business, consolidated financial condition and/or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

Risks Related to Our Business

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 twenty states plus the District of Columbia that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. 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.

We may be unable to continue as a going concern if we do not successfully raise additional capital. If we are unable to successfully raise the capital we need we may need to reduce the scope of our business to fully satisfy our future short-term liquidity requirements. If we cannot raise additional capital or reduce the scope of our business, we may be otherwise unable to achieve our goals or continue our operations. As discussed in Note 2 in the Notes to the Consolidated Financial Statements, we have incurred losses from operations in the prior two years and have a lack of liquidity. These factors raise substantial doubt about our ability to continue as a going concern. In addition, our auditors have included in their report on our audited consolidated financial statements at December 31, 2013 and 2012 an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. While we believe that we will be able to raise the capital we need to continue our operations, there can be no assurances that we will be successful in these efforts or will be able to resolve our liquidity issues or eliminate our operating losses.

We will continue to need additional financing to carry out our business plan. Such funds may not be available to us, which lack of availability could reduce our operating income, product development activities and future business prospects. We need thereafter to obtain significant additional funding to successfully continue our business. We currently have no committed sources of additional capital, and there can be no assurance that any financing arrangements will be available in amounts or on terms acceptable to us, if at all. Furthermore, the sale of additional equity or convertible debt securities may result in additional dilution to existing stockholders. If adequate additional funds are not available, we may be required to delay, reduce the scope of or eliminate material parts of the implementation of our business strategy. This limitation would impede our growth and could result in a contraction of our operations, which would reduce our operating income, product development activities and future business prospects.

We have a history of operating losses and there can be no assurance that we can again achieve or maintain profitability. We did not achieve an operating profit for the year ended December 31, 2013. We have a history of operating losses and may not again achieve or maintain profitability. We cannot guarantee that we will become profitable. Even if we again achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability and our failure to do so would adversely affect our business, including our ability to raise additional funds.

Our inability 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 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:
 
 
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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 inability or failure to manage our growth and expansion effectively could harm our business and materially and adversely affect our operating results and financial condition.

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.

As a result of fluctuations in our revenue and operating expenses that may occur, management believes that period-to-period comparisons of our results of operations are unlikely to provide a good indication of our future performance.

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.

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. 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.

 
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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. Litigation, complaints, and enforcement actions involving us and our distributors 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 technology. 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, 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.

Intellectual property litigation would be costly and could adversely impact our business operations. We may have to take legal action in the future to protect our technology or to assert our intellectual property rights against others. Any legal action could be costly and time consuming to us, and no assurances can be made that any action will be successful. The invalidation of any intellectual property rights that we may own, or an unsuccessful outcome in lawsuits to protect our technology, could have a material adverse affect on our business, financial position, or results of operations.

Intellectual property litigation can be expensive, complex, and protracted. Because of such complexity, and the vagaries of the jury system, intellectual property litigation may result in significant damage awards and/or injunctions that could prevent the manufacture, use, distribution, importation, exportation, and sale of products or require us to pay significant royalties in order to continue to manufacture, use, distribute, import, export, or sell products. Furthermore, in the event that our right to license or to market our technology is successfully challenged, and if we fail to obtain a required license or are unable to design around a patent held by a third party, our business, financial condition, or results of operations could be materially adversely affected.

 
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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, who 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.
 
We will be required to attract and retain top quality talent to compete in the marketplace. We believe our future growth and success will depend in part on our ability to attract and retain highly skilled managerial, product development, sales and marketing, and finance personnel. There can be no assurance of success in attracting and retaining such personnel. Shortages in qualified personnel could limit our ability to increase sales of existing products and services and launch new product and service offerings.

Our forecasts are highly speculative in nature and we cannot predict results with a high degree of accuracy. Any financial projections, especially those based on ventures with minimal operating history, are inherently subject to a high degree of uncertainty, and their ultimate achievement depends on the timing and occurrence of a complex series of future events, both internal and external to the enterprise. There can be no assurance that potential revenues or expenses we project will, in fact, be received or incurred.

We will be subject to evolving and expensive corporate governance regulations and requirements. Our failure to adequately adhere to these requirements or the failure or circumvention of our controls and procedures could seriously harm our business. As a publicly traded company, we are subject to various federal, state and other rules and regulations, including applicable requirements of the Sarbanes-Oxley Act of 2002. Compliance with these evolving regulations is costly and requires a significant diversion of management time and attention, particularly with regard to our disclosure controls and procedures and our internal control over financial reporting. Our internal controls and procedures may not be able to prevent errors or fraud in the future. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures, may make it difficult for us to ensure that the objectives of the control system are met. A failure of our controls and procedures to detect other than inconsequential errors or fraud could seriously harm our business and results of operations.

Our limited senior management team size may hamper our ability to effectively manage a publicly traded company while developing our products and harm our business. Our management team has experience in the management of publicly traded companies and complying with federal securities laws, including compliance with recently adopted disclosure requirements on a timely basis. They realize it will take significant resources to meet these requirements while simultaneously working on developing and protecting our intellectual property. Our management will be required to design and implement appropriate programs and policies in responding to increased legal, regulatory compliance and reporting requirements, and any failure to do so could lead to the imposition of fines and penalties and harm our business.

Risks Related to our Common Stock

The limited trading market for our common stock results in limited liquidity for shares of our common stock and significant volatility in our stock price. Our shares of common stock are quoted on the OTCBB and OTCQB, but no assurance can be given that an active public trading market can be sustained. The OTCBB and OTCQB are generally regarded as a less efficient and less prestigious trading market than other national markets. We can provide no assurance regarding if or when our common stock will be quoted on another more prestigious exchange or market. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. The absence of an active trading market reduces the liquidity of our common stock.

The market price of our stock is likely to be highly volatile because for some time there will likely be a thin trading market for the stock, which causes trades of small blocks of stock to have a significant impact on our stock price. As a result of the lack of trading activity, the quoted price for our common stock on the OTCBB and OTCQB are not necessarily a reliable indicator of its fair market value. Further, if we cease to be quoted, holders of our common stock would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock, and the market value of our common stock would likely decline.

 
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Trading in our common stock will be subject to regulatory restrictions since our common stock is considered a “penny stock.” Our common stock is currently, and in the near future will likely continue to be, considered a “penny stock.” The Securities and Exchange Commission (“SEC”) has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those 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. These disclosure and other requirements may adversely affect the trading activity in the secondary market for our common stock.
 
We do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation on the value of our common stock. While we declared and paid a dividend to holders of record of our common stock as of February 28, 2011, we do not anticipate paying dividends in the foreseeable future and currently intend to retain any future earnings to support the development and expansion of our business. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including without limitation, our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. To the extent we do not pay dividends, our stock may be less valuable because a return on investment will only occur if and to the extent our stock price appreciates, which may never occur. In addition, investors must rely on sales of their common stock after price appreciation as the only way to realize their investment, and if the price of our stock does not appreciate, then there will be no return on investment. Investors seeking cash dividends should not purchase our common stock.

Our officers, directors and principal stockholders can exert significant influence over us and may make decisions that are not in the best interests of all stockholders. Our officers, directors and principal stockholders (greater than 5% stockholders) collectively beneficially own approximately 18.5% of our common stock. As a result of such ownership these stockholders will be able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration of ownership of our common stock could have the effect of delaying or preventing a change of control of our company or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of our company. This, in turn, could have a negative affect on the market price of our common stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock. Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider.

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.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

 
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ITEM 2. PROPERTIES.

Our principal executive offices are located at 20301 Ventura Blvd, Suite 126, Woodland Hills, CA 91364. In addition, we rent warehouse and office space at the locations listed below. The locations combined are approximately 33,000 square feet of office, retail, and warehouse space. The leases require minimum monthly payments of, in the aggregate, $35,507 and have remaining terms ranging from three months to 58 months. We believe our facilities are adequate to meet our current and near-term needs and that suitable additional spaces are available to accommodate any expansion needs.

     
Monthly Rent
   
Square Footage
   
Remaining Term (Months)
 
Corporate office
20301 Ventura Blvd, Woodland Hills, CA
  $ 6,758       3,218       3  
Retail store
22516 Ventura Blvd, Woodland Hills, CA
  $ 3,257       1,200       3  
Retail store/Warehouse
3285 Santa Rosa Ave, Santa Rosa, CA
  $ 3,000       4,600       22  
Retail store
40800 Highway 6, Avon, CO
  $ 2,606       2,502       58  
Retail store
301 Forest Ave, Portland, ME
  $ 4,917       4,000       28  
Retail store
216 Newbury St, Unit A, Peabody, MA
  $ 4,500       4,500       9  
Retail store
13 Plaistow Road, Plaistow, NH
  $ 2,105       2,105       21  
Retail store
4880 Baseline Road, Building E, Suite 106, Boulder, CO
  $ 4,051       3,241       36  
Warehouse
717 E. Gardena Blvd., Gardena, CA
  $ 4,313       7,670       5  
      $ 35,507       33,036          

ITEM 3. LEGAL PROCEEDINGS.
 
The Company discloses the following pending legal actions to which we are a party or of which our property is the subject that may have a material adverse affect on our business and operations:

On March 20, 2014, Wise Phoenix, LLC (“WP”) and AJOA Holdings, LLC (“AJOA”), collectively referred to as the “Sellers,” and R.X.N.B., Inc., a Nevada Corporation (“RXNB”) initiated a lawsuit against the Company and OGI, the Company’s Joint Venture, in Clark County, Nevada in its Business Court division in regards to a Sellers Interest Purchase Agreement (“RXNB Agreement”) with the Company and OGI.  The Sellers and RXNB claim that the Company must effect registration of Company shares issuable to Seller in connection with the RXNB Agreement since it had complied with the provisions set forth in the RXNB Agreement and delivered documents and instruments to the Company.  The Company contends that the Sellers and RXNB have not met the requirements established by the RXNB Agreement and therefore the Company is not obligated to register or issue the shares.

On March 24, 2014, Sellers, RXNB, OGI and the Company agreed to extend the closing date of the RXNB Agreement to April 4, 2014.  Additionally, Sellers and RXNB agreed to withdraw their lawsuit against the Company and OGI without prejudice.

The Company has from time to time been involved in disputes and proceedings arising in the ordinary course of business. 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 affect on our business, results of operations or financial condition.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.
 
 
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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.

Market Information

Our common stock is currently quoted on the OTCBB and OTCQB under the trading symbol “PHOT.” The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

   
High
   
Low
 
Year ended December 31, 2012
           
First Quarter
  $ 0.140     $ 0.050  
Second Quarter
  $ 0.110     $ 0.025  
Third Quarter
  $ 0.054     $ 0.011  
Fourth Quarter
  $ 0.065     $ 0.010  
                 
                 
Year ended December 31, 2013
               
First Quarter
  $ 0.120     $ 0.035  
Second Quarter
  $ 0.061     $ 0.004  
Third Quarter
  $ 0.064     $ 0.030  
Fourth Quarter
  $ 0.158     $ 0.050  

On March 28, 2014, the closing sales price of our common stock as reported on the OTCQB was $0.559 per share. As of March 28, 2014, there were approximately 110 record holders of our common stock.

Dividends

The declaration and payment of dividends is subject to the discretion of our board of directors and to certain limitations imposed under Delaware statutes. The timing, amount and form of dividends, if any, will depend upon, among other things, our results of operation, financial condition, cash requirements, and other factors deemed relevant by our board of directors. We intend to retain any future earnings for use in our business.

Sales of Unregistered Securities

During the twelve month period ended December 31, 2013, the Company issued 262,595,733 shares of its common stock related to the conversion of notes payable and convertible notes. The shares were valued at $3,041,000 and consisted of both principal and unpaid and accrued interest

During the twelve month period ended December 31, 2013, the Company issued 36,981,862 shares of its common stock for cash. The shares were sold at a price of $0.035 per share and generated proceeds to the Company in the amount of $1,294,365. These shares were sold as part of a private placement that was originally set at a maximum of 50,000,000 shares of the Company’s common stock but was subsequently increased to a maximum of 65,000,000 shares during fiscal year 2013. This private placement was closed as of December 31, 2013.

 
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During the twelve month period ended December 31, 2013, the Company issued 44,150,110 shares of its common stock for services rendered and wages to its employees. These shares were valued at $1,428,636 and are detailed as follows:

Shares for Services
 
Wages paid to Company employees
  $ 369,875  
Consulting
    551,333  
Cannabis.org expenses
    29,334  
GrowLife Productions expenses
    65,000  
Public/Investor relations
    321,700  
Product/inventory acquired
    18,172  
Board Member compensation
    73,222  
    $ 1,428,636  

During the twelve month period ended December 31, 2013, the Company issued 1,254,249 shares of its common stock as payment for the Company’s June through November 2013 monthly rent for its office in Woodland Hills, California. These shares were valued at $40,548 by the Company.

During the twelve month period ended December 31, 2013, the Company issued 12,680,773 shares of its common stock in relation to the cashless exercise of stock options. These shares were valued at zero by the Company. Included in the 12,680,773 shares was the cashless exercise by Gemini Master Fund of the warrants issued to them in May 2013 (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”).

During the twelve month period ended December 31, 2013, the Company issued 470,237 shares of its common stock in relation to the exercise of stock options by Eric Shevin, who joined the Company’s Board of Directors in April 2013. These shares generated proceeds to the Company in the amount of $9,000.

During the twelve month period ended December 31, 2013, the Company issued 7,857,141 shares of its common stock in relation to its purchase of RMH/EGC (see “NOTE 6 – PURCHASE – ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER”). These shares were valued at $275,000 and were issued to the former owners of RMH/EGC.

Please see “Part II – OTHER INFORMATION” at the end of this filing for additional information.

In connection with the above transactions, we did not pay any underwriting discounts or commissions.  None of the sales of securities described or referred to above was registered under the Securities Act of 1933, as amended (the “Securities Act”). Each of the purchasers was an accredited investor with whom we or one of our affiliates had a prior business relationship, and no general solicitation or advertising was used in connection with the sales.  In making the sales without registration under the Securities Act, we relied upon the exemption from registration contained in Section 4(2) of the Securities Act.

 
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ITEM 6. SELECTED FINANCIAL DATA.
 
FINANCIAL HIGHLIGHTS
 
 
 
   
For the Three-Month Periods Ended
       
   
March 31, 2013
   
June 30, 2013
   
September 30, 2013
   
December 31, 2013
   
Full Year 2013
 
                                         
Revenue
 
$
760,709
   
$
872,557
   
$
1,313,399
   
$
1,912,311
   
$
4,858,976
 
                                         
Cost of goods sold
   
511,583
     
684,693
     
1,051,776
     
1,757,811
     
4,005,863
 
                                         
Gross profit
   
249,126
     
187,864
     
261,623
     
154,500
     
853,113
 
                                         
General and administrative
   
(556,993)
     
(630,710)
     
(902,813)
     
(1,072,491)
     
(3,163,007)
 
Share based compensation
   
(179,125)
     
(648,349)
     
(386,821)
     
(254,889)
     
(1,469,184)
 
Stock option expense
   
-
     
-
     
-
     
(148,633)
     
(148,633)
 
Warrant expense
   
-
     
(250,000)
     
-
     
(6,765,000)
     
(7,015,000)
 
                                         
Loss from operations
   
(486,992
)
   
(1,341,195
)
   
(1,028,011
)
   
(8,086,513
)
   
(10,942,711
)
                                         
Other income (expense)
                                       
   Impairment of goodwill
   
-
     
-
     
-
     
(279,515
)
   
(279,515
)
   Impairment of intangible assets
   
-
     
-
     
-
     
(262,604
)
   
(262,604
)
   Loss on extinguishment of debt
   
(2,750
)
   
-
     
(750,000
)
   
(208,000
)
   
(960,750
)
   Change in fair value of derivative
   
(169,753
)
   
-
     
67,130
     
(3,598,455
)
   
(3,701,078
)
   Other income
   
-
     
-
     
35,865
     
6,404
     
42,269
 
   Interest expense, net
   
(523,467
)
   
(275,772
)
   
(129,697
)
   
(4,346,813
)
   
(5,275,749
)
                                         
Net loss
 
$
(1,182,962
)
 
$
(1,616,967
)
 
$
(1,804,713
)
 
$
(16,775,496
)
 
$
(21,380,138
)
                                         
Net loss per share (basic and diluted)
 
$
(0.00
)
 
$
(0.00
)
 
$
(0.00
)
 
$
(0.02
)
 
$
(0.04
)
                                         
Weighted average shares outstanding (basic and diluted)
   
443,605,824
     
556,633,753
     
644,706,947
     
722,820,898
     
593,034,653
 

 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This discussion summarizes the significant factors affecting our operating results, financial condition and liquidity and cash flows for the periods ended December 31, 2013 and 2012. The discussion and analysis that follows should be read together with the consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this report. Management’s Discussion and Analysis of Financial Condition and Results Of Operations is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Consolidated Operations are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. Our actual results could differ materially from the results anticipated in any forward-looking statements as a result of a variety of factors, including those discussed in Section 1A above – “Risk Factors.”
 
 
- 18 -

 
 
Overview
 
GrowLife is a holding company with multiple operating businesses that manufacture and supply branded equipment and expendables in the USA for urban gardening, inclusive of equipment and expendables for gardening of medical marijuana. Wholly owned GrowLife companies include SG Technologies, Corp, Phototron, Greners, Soja, Inc. (dba Urban Garden Supply), GrowLife Hydroponics, Inc., and GrowLife Productions, Inc. In addition to promotion and sales of GrowLife owned brands, GrowLife companies distribute and sell over 3,000 products through its on-line distribution channels, Greners.com, our on-line superstore, and through our seven retail storefronts. GrowLife’s www.cannabis.org is expected to provide GrowLife with another widely recognized and authoritative channel for branded product promotion and sales. GrowLife and its business units are organized and directed to operate strictly in accordance with all applicable state and federal laws. The following organizational chart details our corporate structure:
 


GrowLife is actively engaged in improving and expanding its lineup of branded products through organic development, business alliances and acquisition. Consistent with this strategy, GrowLife is actively engaged in developing other business alliances and evaluating branded products for acquisition. GrowLife is also actively engaged in building upon its direct to customers sales business by expansion and promotion of Greners.com, StealthGrow.com, Phototron.com and other unique online channels of distribution. Finally, GrowLife is actively engaged in pursuing acquisitions that will allow its GrowLife Hydroponics retail sales division business to expand regionally in the United States.

 
- 19 -

 
 
Operating expenses consist primarily of payroll and related costs and corporate infrastructure costs. We expect that our operating expenses will increase as we hire additional staff and continue executing our business plan. We anticipate incurring approximately $350,000 in added annual costs related to operating as a public company, consisting of accounting and audit-related fees, legal fees, director and officer insurance premiums and filing and other miscellaneous fees.

Historically, we have funded our working capital needs primarily through the sale of our products, the issuance of short and long term promissory notes, and the sale of shares of our capital stock.

Results of Operations

The Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

Revenue and cost of revenue

For the year ended December 31, 2013, our revenue was $4,858,976 compared to $1,450,745 in the same period last year, an increase of $3,408,231, or approximately 2.35 times fiscal year 2012 revenue. The increase is primarily due to (i) $2,101,399 of revenue related to the acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC (see “NOTE 6 - PURCHASE – ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER”) that was not present during fiscal year 2012, and (ii) the fact that both Greners and Urban Garden Supply (see “NOTE 4 – ASSET PURCHASE – GRENERS.COM and NOTE 5 – PURCHASE – URBAN GARDEN”) had a full twelve months of revenue included in fiscal year 2013 and only 5.5 and 2.5 months, respectively, during fiscal year 2012.

For the year ended December 31, 2013, our gross profit was $853,113, or 17.6% of revenue, compared to $411,974, or 28.4%, of revenue in the same period last year. The decrease in gross profit percentage reflects the increased competition experienced by our retail hydroponics stores.

General and administrative costs

Expenses

Total general and administrative expenses for the year ended December 31, 2013 were $3,163,007, an increase of $1,839,271 from the $1,323,736 incurred during the fiscal year 2012. A significant factor in the increase in general and administrative expenses on a year-to-year basis is the acquisition of four retail hydroponics stores through the Company’s acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC (“RMH/EGC”) on June 7, 2013. As a direct result of this acquisition, fiscal year 2013 includes $778,501 of general and administrative expenses related to RMH/EGC while fiscal year 2012 has zero. In addition, fiscal year 2013 has a full twelve months of general and administrative expenses related to both Greners and Urban Garden Supply, while fiscal year 2012 has approximately 5.5 months of Greners and approximately 2.5 months of Urban Garden Supply general and administrative expenses.

During the year ended December 31, 2013, the Company recorded $1,469,184 of general and administrative expenses that were non-cash, as the Company paid these expenses via the issuance of shares of its common stock. In fiscal year 2012, the Company recorded similar non-cash general and administrative expenses totaling $332,750. These expenses consisted of wages, rents, and professional/consulting services.

In fiscal year 2013, the Company granted stock options to three (3) members of its executive management team (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”) granting these individuals the option to purchase 34,000,000 shares of the Company’s common stock, in the aggregate. These stock option grants were recorded in accordance with Financial Accounting Standards Board (FASB) ASC Topic 718, “Compensation – Stock Compensation”. The Company measured, and recorded, the fair value of the option grant as of the date of grant and is amortizing the computed value of the option grant over the related vesting period. During the year ended December 31, 2013, the Company recorded $148,633 of non-cash expense related to these stock options. During the twelve-months ended December 31, 2012, the Company recorded $26,563 of expense related to stock options.

In fiscal year 2013, the Company also recorded $7,015,000 of non-cash warrant expense (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”) related to the issuance of 170,000,000 warrants, of which 165,000,000 are still unexercised as of December 31, 2013. The outstanding warrants as of December 31, 2013 were valued at $6,765,000 in the aggregate as of the date of issuance and were fully expensed at the time of issuance because they vested immediately and were also exercisable immediately. In addition to the $6,765,000, the Company recorded $250,000 of non-cash warrant expense in relation to the warrants issued to Gemini Master Fund. The Company did not issue any warrants during fiscal year 2012 and therefore had no warrant expense.
 
 
- 20 -

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

Consulting expenses totaled $699,133 during fiscal year 2013. This consisted primarily of $433,000 in non-cash expense paid to a third-party firm by the issuance of 5,700,000 shares of the Company’s common stock and a $100,000 cash payment to a consulting company where services were rendered by Marco Hegyi, shortly before he joined GrowLife as the Company’s President. These firms were retained by the Company to assist in fundraising endeavors, help promote the GrowLife name/brand, and to provide operational/business management expertise. During fiscal year 2012, the Company incurred consulting expenses totaling $135,602.

Accounting, tax preparation, and audit fees during fiscal year 2013 were $233,574, which consisted of $135,386 to our independent outside auditors, $14,539 for tax preparation, and $83,649 to other third-party consultants. One of these third party consultants, whose contract with the Company was terminated as of June 30, 2013, was paid $30,000 in cash and $53,333 by the issuance of 5,333,334 shares of the Company’s common stock during the six months ended June 30, 2013. During fiscal year 2012, the Company recorded $129,671 of accounting, tax preparation, and audit fees.

Advertising expense during the year ended December 31, 2013 was $220,514, while fiscal year 2012 advertising expense was $203,470. The Company recorded fiscal year 2013 advertising expense of $118,693 for Phototron, $65,411 for Greners, and $36,410 to promote the GrowLife name/brand and its retail stores.

Rents, repairs, and security totaled $378,714 during fiscal year 2013, an increase of $267,597 from the $111,117 incurred during fiscal year 2012. Rents, repairs, and security for RMH/EGC totaled $178,031 during fiscal year 2013 versus zero during fiscal year 2012. In addition, as previously mentioned, fiscal year 2013 includes twelve months of rents, repairs, and security expenses for both Greners and Urban Garden Supply while fiscal year 2012 includes approximately six months for Greners and approximately three months for Urban Garden Supply.

During the year ended December 31, 2013, the Company incurred expenses of $192,549 in relation to new business development. This consisted of $88,759 for the Company’s Cannabis.org website/joint venture, $27,976 in relation to GrowLife Productions, Inc., $15,000 in relation to the STVB joint venture, and $60,814 relating to other potential joint ventures. No such expenses were recorded during fiscal year 2012.

The Company recorded investor relations/public relations expense of $565,049 during the year ended December 31, 2013. Of this, $401,700 was non-cash and was paid via the issuance of 8,870,000 shares of the Company’s common stock. During the twelve months ended December 31, 2012, the Company recorded $106,867 of investor relations/public relations expense. As a publicly traded company, the Company frequently issues press releases and other promotional information, all of which comes at a cost to the Company. These press releases and other promotional materials are considered necessary by the Company as a way to keep the investment community apprised of both the Company’s operations and strategic vision.

Legal expenses totaled $92,319 during the year ended December 31, 2013 as compared to $136,817 during fiscal year 2012. Being a publicly traded company requires filings with the Securities and Exchange Commission (“SEC”), which often requires the Company to retain independent outside legal counsel to review these, and other, critical filings and documents.

The Company incurred $167,380 of expense related to video production and website maintenance/design during fiscal year 2013. Of the $167,380, the Company spent $108,548 in relation to the redesign of its Phototron website and television marketing campaign. The Phototron website is substantially all new in terms of graphics/design and has a significantly improved, and more efficient, online ordering system. The Company also incurred $24,392 of expense related to its Grener.com website and $34,440 related to the maintenance/improvement of its other websites. The Company incurred similar expenses in fiscal year 2012 totaling $67,319.

During the year ended December 31, 2013, the Company recorded a $62,882 non-cash general and administrative expense related to inventory impairment. This charge relates to slow-moving and/or obsolete inventory at the Company’s retail stores. The Company reviews its inventory on a periodic basis to identify products that are slow moving and/or obsolete, and if such products are identified, the Company records the appropriate inventory impairment charge at such time.
 
 
- 21 -

 
 
Other Expenses

During the year ended December 31, 2013, the Company incurred net other expenses totaling $10,437,427 versus net other expenses of $915,229 during the same period in fiscal year 2012. Included in the $10,437,427 for the year ending December 31, 2013 was $5,106,073 of non-cash expense related to the beneficial conversion features (BCF) of the Company’s various convertible notes payable, $3,701,078 of non-cash expense related to the change in fair value of the Company’s derivative liabilities, $960,750 of non-cash expense related to the extinguishment of debt, $279,515 of non-cash expense related to the impairment of goodwill, $262,604 of non-cash expense related to the impairment of intangible assets, and $169,676 (of which $161,587 was non-cash) of interest expense. These expenses were partially offset by the $42,269 of other income related to rent owed the Company by a subtenant at its Boulder, Colorado facility.

For the year ended December 31, 2012, the Company’s net other expenses were $915,229, which consisted of $634,128 of non-cash expense related to the impairment of goodwill, $428,467 of non-cash expense related to the extinguishment of debt, and $378,253 of interest expense. These expenses were partially offset by the $525,619 non-cash gain in the fair value of the Company’s derivative liabilities.

Note that $10,471,607, or 99%, of the $10,479,696 of fiscal year 2013 other expense (excludes the $42,269 of other income) is non-cash, which means it does not have an adverse affect on the Company’s cash flows.

Loss

The net loss for the year ended December 31, 2013 was $21,380,138 with the same period in fiscal 2012 generating a loss of $2,186,304. As noted above in “Other Expenses”, a significant portion of the Company’s net loss for fiscal year 2013 is related to non-cash expenses. The following is a brief summary of the non-cash expenses incurred by the Company during the year ended December 31, 2013:

   
Year Ended December 31, 2013
 
 Net loss - GAAP basis
 
$
(21,380,138
 Less non-cash expenses:
       
    Non-cash interest expense
   
5,267,660
 
    Non-cash warrant expense
   
7,015,000
 
    Non-cash stock option expense
   
148,633
 
    Change in fair value of derivative
   
3,701,078
 
    Amortization of intangible assets
   
151,696
 
    Gain (loss) on extinguishment of debt
   
960,750
 
    Depreciation of plant & equipment
   
22,229
 
    Impairment of goodwill
   
279,515
 
    Impairment of intangible assets
   
262,604
 
    Impairment of inventory
   
62,882
 
    Services rendered for common stock
   
1,469,184
 
 Total non-cash expenses
   
19,341,231
 
         
 Net loss excluding non-cash items - Non-GAAP basis
 
$
(2,038,907
 
 
 
- 22 -

 
 
Liquidity and Capital Resources

As of December 31, 2013, we had a working capital deficiency of $7,244,940 compared to a working capital deficiency of $67,202 at December 31, 2012. We have relied on funds generated through operations, through loans and through selling shares of our common stock in a series of private placements.

During the year ended December 31, 2013, cash used in operations was $1,791,074 compared to cash used of $1,073,301 during the same period in the prior year. These expenses include wages, rents, cost of goods sold, professional fees for legal, accounting, and consultants, insurance, utilities, and sales and marketing.
 
During the year ended December 31, 2013, cash used in investing activities was $558,058, which consisted primarily of $550,000 for the purchase of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC. Also included in the $558,058 was $5,500 used for improvements to our retail stores and $1,160 used for the Company’s investment in Vape Holdings, Inc. (see “NOTE 9 – INVESTMENT IN A RELATED PARTY”). During the year ended December 31, 2012, cash used in investing activities was $240,175, which was due primarily to the $250,000 for the purchase of Greners’ assets.

During the year ended December 31, 2013, cash provided by financing activities was $4,143,806. In fiscal year 2012, cash provided by financing activities was $1,325,641. The following is a summary of cash provided by financing activities:
 
   
For the Year Ended December 31,
 
   
2013
   
2012
 
                 
Proceeds from the issuance of common stock
  $ 1,294,365     $ 15,250  
Proceeds from the issuance of 10% convertible note
    156,000       -  
Proceeds from the issuance of convertible notes
    1,850,000       1,141,092  
Proceeds from options exercised
    9,000       -  
Proceeds from notes payable
    1,130,000       -  
Proceeds from additional contributed capital
    -       120,402  
Payments on notes payable and accrued interest
    (296,719)       (50,000)  
Proceeds from related party
    1,160       98,897  
    $ 4,143,806     $ 1,325,641  

 
- 23 -

 

During the year ended December 31, 2013, the Company issued 36,981,862 shares of its common stock for cash via its December 2011 Subscription Agreement. The shares were sold at a price of $0.035 per share and generated proceeds to the Company in the amount of $1,294,365. As of December 31, 2013, the Company had closed its Subscription Agreement.

During the year ended December 31, 2013, the Company issued 470,237 shares of its common stock in relation to the exercise of stock options by Eric Shevin, who joined the Company’s Board of Directors in April 2013. These shares generated proceeds to the Company in the amount of $9,000.

On January 8, 2013, the Company issued a 10% convertible note (the “10% Convertible Note) to Black Mountain Equities, Inc (“BME”). The rate of interest on the convertible note is 10%, and BME, at its sole discretion, can convert both the principal and accrued interest into shares of the Company’s common stock. The conversion price was the lesser of (a) $0.04 per share or (b) 70% of the average of the 3 lowest daily volume weighted average closing prices occurring during the 20 consecutive trading days immediately preceding the applicable conversion date on which BME elects to convert all or part of the note. During the three month period ended March 31, 2013, BME converted all of the principal and accrued interest into 6,270,413 shares of the Company’s common stock. As of December 31, 2013, this note and all related interest had been paid in full.

On March 14, 2013, an employee of the Company loaned us $25,000 via a note payable. Per the terms of the note, the principal accrues interest at the rate of 6% per year with a term of 90 days. The note does not require any principal and/or interest payments during the 90-day term, but the Company can make, at its sole discretion, principal and/or interest payments in any amount it chooses during the 90 day term. At the conclusion of the note’s 90-day term the Company is required to pay, in full, any and all unpaid principal and/or interest. On June 26, 2013, the Company signed a revised agreement with this related party that extends the term through September 30, 2013. All of the other terms and conditions remained unchanged from the original agreement. On September 6, 2013, the Company issued 1,224,918 shares of its common stock at a per share price of $0.021 as payment in full for the $25,000 principal and $723 of accrued and unpaid interest. As of September 30, 2013, this related party had voluntarily terminated his employment with the Company to pursue other business opportunities and the Company had satisfied this obligation in full as of December 31, 2013.

On May 1, 2013, the Company entered into a Securities Purchase Agreement with a certain “accredited investor” (“Investor”), for the sale and purchase of a $280,000 original issue discount secured 0% nonconvertible promissory note due October 31, 2013 (the “OID Note”). The OID Note is secured by obligations of the Company. The Company and each of its subsidiaries has granted and pledged to the OID Note Purchaser a continuing security interest in all personal property of the Company and its subsidiaries. Except for the original issue discount, the OID Note does not carry interest unless and until there is an Event of Default, in which case the outstanding balance would carry interest at 18% per annum. The Company can prepay the OID Note, in whole or in part, at any time without penalty. At closing, the Company received gross proceeds of $250,000 for such private placement, with the remaining $30,000 retained by the OID Note Purchaser as prepaid interest. The Company originally recorded the $30,000 as prepaid interest and subsequently expensed the entire $30,000 as interest expense during the year ended December 31, 2013. On October 11, 2013, the Holder of the $280,000 OID Note converted the entire $280,000 into 8,000,000 shares of the Company’s common stock at a per share conversion price of $0.035.
 
 
- 24 -

 
 
During the year ended December 31, 2013, the Company was advanced, in the aggregate, $850,000 on its revolving promissory note (see “NOTE 15 – REVOLVING PROMISSORY NOTE”). Per the terms of the Revolving Note, the Holder agrees to make advances to the Company from time to time during the 14 month Revolving Note term, at its sole discretion, in an aggregate principal amount at any one time outstanding which does not exceed $550,000 (the “Revolving Credit Commitment”). During the term of the Revolving Note, the Company may use the Revolving Credit Commitment by borrowing, prepaying any advances under the Revolving Note in whole or in part, and re-borrowing, all in accordance with the terms and conditions of the Revolving Note. As set forth in the terms of the Revolving Note, the term is for a period of fourteen months, with the expiration date being July 31, 2014. Interest accrues from the date of any advances on any principal amount withdrawn, and on accrued and unpaid interest thereon, at the rate of 7% per annum (calculated on the basis of a 365 day year for the actual number of days elapsed), compounded annually. The Company was also obligated to pay the Holder a $5,000 transaction fee, which was deducted from the initial advance of funds and recorded as a general and administrative expense by the Company. On August 29, 2013, $750,000 was converted into a 7% Convertible Note (see “NOTE 19 – 7% CONVERTIBLE NOTE”), leaving an outstanding principal balance of $100,000. On October 16, 2013, the Company repaid this note in full, in cash, with the total payment equaling $100,518, of which $100,000 was principal and $518 was interest.

On October 11, 2013, the Company issued an additional $850,000 of 7% convertible notes to four Holders. Per the terms of these 7% Notes, the original principal balance is $850,000 and is not secured by any collateral or any assets pledged to the Holder. The maturity date is September 30, 2015, and the annual rate of interest is seven percent (7%), which increases to twenty-four percent (24%) per annum, or the maximum rate permitted under any applicable law, in the event of default.  Subject to certain limitations, the Holder can, at its sole discretion, convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common stock. The conversion price for the period of time from the date of this 7% Note through and including September 30, 2014 is the lesser of (a) $0.025 per share and (b) seventy percent (70%) of the average of the three (3) lowest daily volume weighted average closing prices occurring during the twenty (20) consecutive trading days immediately preceding the applicable conversion date on which the Holder elects to convert all or part of this 7% Note, subject to adjustment as provided in this 7% Note. The conversion price is $0.025 per share for the period of October 1, 2014 through the maturity date of September 30, 2015, subject to adjustment as provided in this 7% Note. At any time after the 12-month period immediately following the date of this 7% Note, the Company has the option to pre-pay the entire outstanding principal amount of this 7% Note by paying to the Holder an amount equal to one hundred and fifty percent (150%) of the principal and interest then outstanding.  The Company’s obligations under this 7% Note will accelerate upon a bankruptcy event with respect to the Company or any subsidiary, any default in the Company’s payment obligations under this 7% Note, the Company’s failure to issue shares of its common stock in connection with a conversion of this 7% Note, the Company’s or any subsidiary’s breach of any provision of any agreement providing for indebtedness of the Company or such subsidiary in an amount exceeding $100,000, the common stock of the Company being suspended or delisted from trading on the Over the Counter Bulletin Board (the “Primary Market”) market and the OTCQB, the Company losing its status as “DTC Eligible” or the Company becoming late or delinquent in its filing requirements with the Securities and Exchange Commission.  Upon any such acceleration of this 7% Note, the Company shall be obligated to pay an amount equal to the greater of (i) one hundred and twenty percent (120%) of the outstanding principal of this 7% Note (plus all accrued but unpaid interest) and (ii) the product of (a) the highest closing price for the Company’s common stock for the five (5) days on which the Primary Market is open for business immediately preceding such acceleration and (b) a fraction, the numerator of which is the outstanding principal of this 7% Note, and the denominator of which is the applicable conversion price as of the date of determination.

On December 20, 2013, the Company issued an additional $1,000,000 of 7% convertible notes to two Holders. Per the terms of these 7% Notes, the original principal balance is $1,000,000 and is not secured by any collateral or any assets pledged to the Holder. The maturity date is September 30, 2015, and the annual rate of interest is seven percent (7%), which increases to twenty-four percent (24%) per annum, or the maximum rate permitted under any applicable law, in the event of default.  Subject to certain limitations, the Holder can, at its sole discretion, convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common stock. The conversion price for the period of time from the date of this 7% Note through and including September 30, 2014 is the lesser of (a) $0.025 per share and (b) seventy percent (70%) of the average of the three (3) lowest daily volume weighted average closing prices occurring during the twenty (20) consecutive trading days immediately preceding the applicable conversion date on which the Holder elects to convert all or part of this 7% Note, subject to adjustment as provided in this 7% Note. The conversion price is $0.025 per share for the period of October 1, 2014 through the maturity date of September 30, 2015, subject to adjustment as provided in this 7% Note. At any time after the 12-month period immediately following the date of this 7% Note, the Company has the option to pre-pay the entire outstanding principal amount of this 7% Note by paying to the Holder an amount equal to one hundred and fifty percent (150%) of the principal and interest then outstanding.  The Company’s obligations under this 7% Note will accelerate upon a bankruptcy event with respect to the Company or any subsidiary, any default in the Company’s payment obligations under this 7% Note, the Company’s failure to issue shares of its common stock in connection with a conversion of this 7% Note, the Company’s or any subsidiary’s breach of any provision of any agreement providing for indebtedness of the Company or such subsidiary in an amount exceeding $100,000, the common stock of the Company being suspended or delisted from trading on the Over the Counter Bulletin Board (the “Primary Market”) market and the OTCQB, the Company losing its status as “DTC Eligible” or the Company becoming late or delinquent in its filing requirements with the Securities and Exchange Commission.  Upon any such acceleration of this 7% Note, the Company shall be obligated to pay an amount equal to the greater of (i) one hundred and twenty percent (120%) of the outstanding principal of this 7% Note (plus all accrued but unpaid interest) and (ii) the product of (a) the highest closing price for the Company’s common stock for the five (5) days on which the Primary Market is open for business immediately preceding such acceleration and (b) a fraction, the numerator of which is the outstanding principal of this 7% Note, and the denominator of which is the applicable conversion price as of the date of determination.

 
- 25 -

 
 
Unless our operations generate significant revenues and cash flows from operating activities, our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing, other collaborative agreements and strategic alliances. Our management is actively engaged in seeking additional capital to fund our operations in the short to medium term. We have relied on funds generated from operations, issuance of debt, and on the sale of our common stock to fund operations. We believe the cash on hand and the forecasted cash flow from operations will be sufficient to continue operations through the first half of 2014.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements.

Critical Accounting Policies

In December 2001, the SEC requested that all registrants discuss their most “critical accounting policies” in management’s discussion and analysis of financial condition and results of operations. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of the company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Reverse Merger Accounting

On April 5, 2012, the Company completed its merger with SG Technologies Corp (“SGT”), which was accounted for as a reverse-merger and recapitalization in accordance with accounting principles generally accepted in the United States of America (“GAAP”). SGT was the acquirer for financial reporting purposes and the Company was the acquired company. Consequently, the assets and liabilities and the operations that are reflected in the historical financial statements prior to the Merger will be those of SGT and will be recorded at the historical cost basis of the Company. The consolidated financial statements after completion of the Merger include the assets and liabilities of the Company and SGT, historical operations of SGT and operations of the Company from the closing date of the Merger. Common stock and the corresponding capital amounts of the Company pre-merger have been retroactively restated as capital stock shares reflecting the exchange ratio in the Merger. In conjunction with the Merger, SGT received no cash and assumed no liabilities from the Company. All members of the Company’s executive management are from SGT.

Principles of Consolidation

The consolidated balance sheets include the accounts of the Company and its subsidiaries. The consolidated statements of operations include the Company’s accounts and the accounts of its subsidiaries from the date of acquisition. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

In preparing these consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions included in our consolidated financial statements relate to the valuation of long-lived assets, estimates of sales returns, inventory reserves and accruals for potential liabilities, and valuation assumptions related to equity instruments and share based compensation.

Revenue

Revenue is recognized on the sale of a product when the product is shipped, which is when the risk of loss transfers to our customers, and collection of the sale is reasonably assured. A product is not shipped without an order from the customer and the completion of credit acceptance procedures. The majority of our sales are cash or credit card; however, we occasionally extend terms to our customers. Accounts receivable are reviewed periodically for collectability. As of December 31, 2013 and 2012, we did not maintain a reserve for bad debt, which are minimal based upon our historical experience.

 
- 26 -

 
 
Sales Returns

We allow customers to return defective products when they meet certain established criteria as outlined in our sales terms and conditions. It is our practice to regularly review and revise, when deemed necessary, our estimates of sales returns, which are based primarily on actual historical return rates. We record estimated sales returns as reductions to sales and accounts receivable. Returned products which are recorded as inventory are valued based upon the amount we expect to realize upon its subsequent disposition. As of December 31, 2013 and 2012, there was no reserve for sales returns, which are minimal based upon our historical experience.

Derivative Financial Instruments

The Company evaluates 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 weighted average 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 12 months of the balance sheet date. As of December 31, 2013, the Company had recorded a derivative liability in the amount of $9,324,000 (see “NOTE – 21 – DERIVATIVE LIABILITY”).

Stock Based Compensation

We periodically issue stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We account for stock option and warrant grants issued and vesting to employees based on Financial Accounting Standards Board (FASB) ASC Topic 718, “Compensation – Stock Compensation”, whereas the award is measured at its fair value at the date of grant and is amortized ratably over the vesting period. We account for stock option and warrant grants issued and vesting to non-employees in accordance with ASC Topic 505, “Equity”, whereas the value of the stock compensation is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary performance to earn the equity instruments is complete.

Recently Issued Accounting Standards

Effective January 2012, the Company adopted ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 represents the converged guidance of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) on fair value measurement. A variety of measures are included in the update intended to either clarify existing fair value measurement requirements, change particular principles requirements for measuring fair value or for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend to change the application of existing requirements under Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements. ASU 2011-04 was effective for interim and annual periods beginning after December 15, 2011. The adoption of this update did not have a material impact on the consolidated financial statements and related disclosures.

Effective January 2012, the Company adopted ASU No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 is intended to increase the prominence of items reported in other comprehensive income and to facilitate convergence of accounting guidance in this area with that of the IASB. The amendments require that all nonowner changes in shareholders’ equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). ASU 2011-12 defers the provisions of ASU 2011-05 that require the presentation of reclassification adjustments on the face of both the statement of income and statement of other comprehensive income. Amendments under ASU 2011-05 that were not deferred under ASU 2011-12 will be applied retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this update did not have a material impact on the consolidated financial statements and related disclosures and related disclosures.

 
- 27 -

 
 
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The amendments in ASU 2011-11 require the disclosure of information on offsetting and related arrangements for financial and derivative instruments to enable users of its financial statements to understand the effect of those arrangements on its financial position. Amendments under ASU 2011-11 will be applied retrospectively for fiscal years, and interim periods within those years, beginning after January 1, 2013. The Company is evaluating the effect, if any, the adoption of ASU 2011-11 will have on its consolidated financial statements and related disclosures.

In July 2012, the FASB issued guidance on testing for indefinite-lived intangible assets for impairment. The new guidance provides an entity to simplify the testing for a drop in value of intangible assets such as trademarks, patents, and distribution rights. The amended standard reduces the cost of accounting for indefinite-lived intangible assets, especially in cases where the likelihood of impairment is low. The changes permit businesses and other organizations to first use subjective criteria to determine if an intangible asset has lost value. The amendments to U.S. GAAP are effective for fiscal years starting after September 15, 2012. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements and related disclosures.

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive (ASU 2013-02). This guidance is the culmination of the FASB’s deliberation on reporting reclassification adjustments from accumulated other comprehensive income (AOCI). The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income. However, the amendments require disclosure of amounts reclassified out of AOCI in its entirety, by component, on the face of the statement of operations or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. This standard is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. The Company is evaluating the effect, if any, the adoption of ASU 2013-02 will have on its consolidated financial statements and related disclosures.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on our present or future consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
     
Report of Independent Registered Public Accounting Firm
 
29
     
Consolidated Balance Sheets at December 31, 2013 and 2012
 
30
     
Consolidated Statements of Operations for the years ended December 31, 2013 and 2012
 
31
     
Consolidated Statements of Stockholders’ Deficit for the years ended  December 31, 2013 and 2012
 
32
     
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
 
33
     
Notes to Consolidated Financial Statements
 
34

 
- 28 -

 
 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Stockholders’ of
GrowLife, Inc. and Subsidiaries:


We have audited the accompanying consolidated balance sheets of GrowLife, Inc. and Subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that we considered appropriate under the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of GrowLife, Inc. and Subsidiaries as of December 31, 2013 and 2012 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has experienced recurring operating losses and negative cash flow since inception and has financed its working capital requirements through issuance of notes payable, common stock, and advances from related parties. These conditions, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Anton & Chia, LLP

Newport Beach, California
March 31, 2014

 
- 29 -

 
 
 
GrowLife, Inc. and Subsidiaries (formerly Phototron Holdings, Inc.)
 
Consolidated Balance Sheets
 
             
   
December 31, 2013
   
December 31, 2012
 
             
ASSETS
           
Current assets
           
   Cash
  $ 1,831,276     $ 36,602  
   Restricted cash
    46,400       46,400  
   Accounts receivable, net
    183,678       15,036  
   Inventory, net
    1,253,721       357,976  
   Prepaid expenses
    17,001       -  
   Other receivable
    3,666       -  
   Deposits
    46,173       15,990  
Total current assets
    3,381,915       472,004  
                 
Investment in a related party
    1,122,397       -  
Property and equipment, net
    53,758       19,372  
Intangibles
    460,300       508,600  
Goodwill
    739,000       279,515  
                 
Total Assets
  $ 5,757,370     $ 1,279,491  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities
               
   Accounts payable
  $ 1,095,204     $ 293,020  
   Accrued expenses
    175,603       19,368  
   Deferred revenue
    30,888       33,638  
   Derivative liability
    9,324,000       -  
   Related party note payable
    1,160       -  
   Note payable & accrued interest
    -       193,180  
Total current liabilities
    10,626,855       539,206  
                 
Long-term convertible notes payable
    974,479       1,077,640  
                 
Total liabilities
    11,601,334       1,616,846  
                 
Stockholders' Deficit
               
   Preferred stock, $0.0001 par value, 3,000,000 shares
               
      authorized; zero and 3,000,000 issued and 
      outstanding, respectively
    -       300  
   Common stock, $0.0001 par value, 1,000,000,000
               
      shares authorized, 755,694,870 and 389,704,765
               
      shares issued and outstanding, respectively
    75,571       38,970  
   Additional paid-in-capital
   
17,359,932
      2,643,941  
   Unrealized gain on investment in a related party
    1,121,237       -  
   Accumulated deficit
   
(24,400,704
)     (3,020,566 )
   Total stockholders' deficit
    (5,843,964 )     (337,355 )
                 
Total liabilities and stockholders' deficit
  $ 5,757,370     $ 1,279,491  
                 
                 
See accompanying notes to consolidated financial statements
 

The December 31, 2012 capital accounts of the Company have been retroactively restated to reflect the equivalent number of common shares based on the exchange ratio of the merger transaction. See Note 2.

 
- 30 -

 
 
GrowLife, Inc. and Subsidiaries (formerly Phototron Holdings, Inc.)
 
Consolidated Statement of Operations
 
             
             
   
For the Years Ended
 
   
December 31,
 
   
2013
   
2012
 
             
Net revenue
 
$
4,858,976
   
$
1,450,745
 
                 
Cost of goods sold
   
4,005,863
     
1,038,771
 
                 
Gross profit
   
853,113
     
411,974
 
                 
General and administrative
   
(3,163,007)
     
(1,323,736)
 
Shares issued for services rendered
   
(1,469,184)
     
(332,750)
 
Stock options expense
   
(148,633)
     
(26,563)
 
Warrant expense
   
(7,015,000)
     
-
 
                 
Loss from operations
   
(10,942,711
)
   
(1,271,075
)
                 
Other income (expense)
               
     Impairment of goodwill
   
(279,515
)
   
(634,128
)
     Impairment of intangible assets
   
(262,604
)
   
-
 
     Loss on extinguishment of debt
   
(960,750
)
   
(428,467
)
     Change in fair value of derivative
   
(3,701,078
)
   
525,619
 
     Other income
   
42,269
     
-
 
     Interest expense, net
   
(5,275,749
)
   
(378,253
)
                 
Net loss
 
$
(21,380,138
)
 
$
(2,186,304
)
                 
Net loss per share - (basic and diluted)
 
$
(0.04
)
 
$
(0.01
)
                 
Weighted average shares outstanding (2) - (basic and diluted)
   
593,034,653
     
245,420,970
 
                 
See accompanying notes to consolidated financial statements
 
 
The capital accounts of the Company have been retroactively restated to reflect the equivalent number of common shares based on the exchange ratio of the merger transaction in determining the basic and diluted weighted average shares. See Note 2.
 
 
- 31 -

 
 
GrowLife, Inc. and Subsidiaries (formerly Phototron Holdings, Inc.)
Consolidated Statements of Stockholders’ Deficit
For the Years Ended December 31, 2013 and 2012
 
                             Unrealized                    
                           
 Gain on
Investment
     Additional              
   
Preferred Stock
   
Common Stock
      in Related       Paid In      Accumulated        
   
Shares
   
Amount
   
Shares
   
Amount
   
  Party
   
 Capital
   
 Deficit
   
Total
 
Balance as of December 31, 2011
    3,000,000     $ 300       157,000,000     $ 15,700     $ -     $ (16,000 )   $ (379,262 )   $ (379,262 )
                                                                 
Shares issued to acquire Phototron
    -       -       152,343,383       15,234       -       284,766       -       300,000  
                                                                 
Capital contributions
    -       -       -       -       -       120,402       -       120,402  
                                                                 
Imputed interest on non-interest bearing note payable
    -       -       -       -       -       2,500       -       2,500  
                                                                 
Shares of common stock retired
    -       -       (1,884,796 )     (188 )     -       188       -       -  
                                                                 
Fair value of option vested
    -       -       -       -       -       26,563       -       26,563  
                                                                 
435,715 shares purchased @ $0.035 per share
    -       -       435,715       44       -       15,206       -       15,250  
                                                                 
Shares issued for services rendered
    -       -       23,608,333       2,361       -       330,389       -       332,750  
                                                                 
Stock dividends
    -       -       9,100,000       910       -       454,090       (455,000 )     -  
                                                                 
Shares issued to acquire Urban Garden
    -       -       3,906,252       391       -       155,859       -       156,250  
                                                                 
Shares issued for cashless exercise of options
    -       -       4,053,012       405       -       (405 )     -       -  
                                                                 
Conversion of notes
    -       -       41,142,857       4,113       -       283,887       -       288,000  
                                                                 
To record beneficial conversion feature of new debt
    -       -       -       -       -       986,496       -       986,496  
                                                                 
Net loss
    -       -       -       -       -       -       (2,186,304 )     (2,186,304 )
                                                                 
Balance as of December 31, 2012
    3,000,000     $ 300       389,704,765     $ 38,970     $ -     $ 2,643,941     $ (3,020,566 )   $ (337,355 )
                                                                 
Cancellation of all 3,000,000 shares of Preferred Stock
    (3,000,000 )     (300 )     -       -       -       300       -       -  
                                                                 
Options exercised for cash
    -       -       470,237       47       -       8,953       -       9,000  
                                                                 
Cashless exercise of options
    -       -       3,680,773       368       -       (368 )     -       -  
                                                                 
Cashless exercise of Gemini Master Fund Warrants
    -       -       9,000,000       900       -       (900 )     -       -  
                                                                 
Value of beneficial conversion feature of 6% Convertible Notes converted into common stock
    -       -       -       -       -       328,498       -       328,498  
 
                                                               
Value of beneficial conversion feature of 7% Convertible Notes converted into common stock
    -       -       -       -       -       676,900       -       676,900  
                                                                 
Value of beneficial conversion feature related to the exchange of $750,000 Revolving Promissory Note for $750,000 7% Convertible Note
    -       -       -       -       -       109,926       -       109,926  
                                                                 
Value of beneficial conversion feature related to the cashless exercise of the 5,000,000 Gemini Master Fund warrants
    -       -       -       -       -       312,500       -       312,500  
 
                                                               
Value of beneficial conversion feature related to the conversion of the $280,000 Gemini Master Fund note payable into 8,000,000 shares of common stock
    -       -       -       -       -       208,000       -       208,000  
 
                                                               
Value of beneficial conversion feature related to the issuance of 12% Convertible Notes related to RMH/EGC acquisition
    -       -       -       -       -       114,286       -       114,286  
                                                                 
Shares issued related to the conversion of principal and interest related to the Company's convertible notes payable
    -       -       262,595,733       26,261       -       3,014,739       -       3,041,000  
 
                                                               
Shares issued related to the acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC
    -       -       7,857,141       786       -       274,214       -       275,000  
 
                                                               
Shares issued in relation to the sale of common stock per the Company's Subscription Agreement
    -       -       36,981,862       3,698       -       1,290,667       -       1,294,365  
 
                                                               
Shares issued for services rendered and rent
    -       -       45,404,359       4,541       -       1,464,643       -       1,469,184  
                                                                 
Value of warrants expensed (issued to CANX and Hegyi, LLC)
    -       -       -       -       -      
6,765,000
      -      
6,765,000
 
                                                                 
Value of stock options expensed
    -       -       -       -       -       148,633       -       148,633  
                                                                 
Unrealized gain on investment in related party
    -       -       -       -       1,121,237       -       -       1,121,237  
                                                                 
Net loss for the twelve months ended December 31, 2013
    -       -       -       -       -       -       (21,380,138 )     (21,380,138 )
                                                                 
Balance as of December 31, 2013
    -     $ -       755,694,870     $ 75,571     $ 1,121,237     $
17,359,932
    $ (24,400,704 )   $ (5,843,964 )
 
See accompanying notes to consolidated financial statements
 

The December 31, 2012 capital accounts of the Company have been retroactively restated to reflect the equivalent number of common shares based on the exchange ratio of the merger transaction. See Note 2.

 
- 32 -

 

 
GrowLife, Inc. and Subsidiaries (formerly Phototron Holdings, Inc.)
 
Consolidated Statements of Cash Flows
 
             
   
For the Years Ended December 31,
 
   
2013
   
2012
 
Operating Activities
           
   Net loss
  $ (21,380,138 )   $ (2,186,304 )
   Adjustments to reconcile net loss to net cash used by
               
   operating activities
               
       Depreciation and amortization
    22,229       8,528  
       Reserve for inventories
    62,882       27,843  
       Amortization of debt discount
    5,106,072       97,172  
       Stock options expense
    148,633       26,563  
       Common stock issued for services rendered
    1,469,184       332,750  
       Loss on extinguishment of debt
    960,750       428,467  
       Change in fair value of derivative liability
    3,701,078       (525,619 )
       Fair value of warrants issued
   
7,015,000
      -  
       Amortization of intangible assets
    151,696       -  
       Accrued interest on convertible notes payable
    161,587       -  
       Impairment of goodwill
    279,515       634,128  
       Impairment of intangible assets
    262,604       -  
       Imputed interest on related party notes payable
    -       2,500  
   Changes in operating assets and liabilities
               
       Changes in restricted cash
    -       (46,400 )
       Accounts receivable
    (127,129 )     (556 )
       Inventory
    (210,383 )     (28,031 )
       Prepaid expenses
    18,071       15,004  
       Other receivable
    (3,666 )     -  
       Deposits
    2,883       145  
       Other assets
    -       (3,600 )
       Accounts payable
    468,517       170,412  
       Accrued expenses
    102,291       (59,941 )
       Deferred revenue
    (2,750 )     33,638  
                 
Net cash used in operating activities
    (1,791,074 )     (1,073,301 )
                 
Investing Activities
               
   Cash paid to acquire shares in Vape Holdings, Inc.
    (1,160 )     -  
   Cash paid to acquire Rocky Mountain Hydroponics
    (550,000 )     -  
   Cash paid to acquire Greners.com, Inc.
    -       (250,000 )
   Cash acquired upon acquisition of Rocky Mountain Hydroponics
    (1,398 )     -  
   Cash acquired upon acquisition of Phototron Holdings, Inc.
    -       9,825  
   Cash paid for store improvements
    (5,500 )     -  
                 
Net cash used by investing activities
    (558,058 )     (240,175 )
                 
Financing Activities
               
   Proceeds from the issuance of common stock
    1,294,365       15,250  
   Proceeds from the issuance of 10% convertible note
    156,000       -  
   Proceeds from the issuance of convertible notes
    1,850,000       1,141,092  
   Proceeds from options exercised
    9,000       -  
   Proceeds from notes payable
    1,130,000       -  
   Proceeds from additional contributed capital
    -       120,402  
   Payments on notes payable and accrued interest
    (296,719 )     (50,000 )
   Advances from related party
    1,160       98,897  
                 
Net cash provided by financing activities
    4,143,806       1,325,641  
                 
Net increase in cash
    1,794,674       12,165