STOCKHOLDERS' EQUITY/ DEFICIT

12 Months Ended

Dec. 31, 2013

Equity [Abstract]

SHAREHOLDERS EQUITY

NOTE 23 - STOCKHOLDERS’ DEFICIT

Preferred Stock

On April 5, 2012, we issued to SGT’s former stockholders 3,000,000 shares of Series A Preferred Stock in connection with the Merger (the “Series A Shares”). Pursuant to the Certificate of Designation, each share of Series A Preferred Stock will convert into 23 shares of our common stock on the earlier of (a) the date agreed to by the holders of a majority of the shares of Series A Preferred Stock and the Investor Representative and (b) the 18-month anniversary of the Closing.

On March 19, 2013, pursuant to the terms and conditions of the Merger Agreement, the Company cancelled all of the 3,000,000 shares of its Series A Preferred Stock that were issued and outstanding. Per the terms of the Merger Agreement, the Company was required to attain specified net revenue and gross profit milestones by May 1, 2013 in order for the shares to vest and be distributed to the former shareholders of SGT. On March 19, 2013, applicable parties agreed that the milestones would not be met so the Series A Preferred Stock was returned to the Company and subsequently cancelled.

Common Stock

During the year 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 year 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.

During the year 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 year 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 year 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 October 14, 2013 cashless exercise by Gemini Master Fund of the warrants issued to them in May 2013.

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.

During the year 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.

Stock options

At December 31, 2012, the Company had 12,851,187 stock options outstanding. During the twelve-month period ended December 31, 2013, the Company confirmed the cancellation of 6,000,000 of those stock option grants due to the failure of the Grantees to exercise their options in accordance with the terms specified in their Stock Option Agreement. The Company had originally cancelled 10,500,000 of the 12,851,187 during the first nine months of fiscal year 2013 but subsequently determined that one option in the amount of 4,500,000 shares originally granted in May 2011 was still valid.

In November 2013, the Company’s Board of Directors granted Sterling Scott, the Company’s Chief Executive Officer, a stock option via the Company’s 2011 Stock Incentive Plan to purchase 12,000,000 shares of the Company’s common stock at an exercise price of $0.085 per share, which represents the fair value of one share of the Company’s common stock on the date of grant. Per the terms of the stock option agreement, the shares were to vest in twenty-four (24) equal monthly installments on the last day of each month commencing from and after October 31, 2013, they could be exercised at any time on or after the grant date, the term was ten years, and the options could be exercised on a cashless basis. The Company valued the options at $537,600 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 82.77%; (iii) risk free rate of 0.02%, (iv) expected term of 3 years, and a per share market price of $0.085, which was the closing price of the Company’s shares on November 1, 2013. Beginning in November 2013 and ending October 2015, the Company will expense the $537,600 at the rate of $22,400 per month over the 24-month vesting term of the option.

In November 2013, the Company’s Board of Directors granted John Genesi, the Company’s Chief Financial Officer, a stock option via the Company’s 2011 Stock Incentive Plan to purchase 10,000,000 shares of the Company’s common stock at an exercise price of $0.085 per share, which represents the fair value of one share of the Company’s common stock on the date of grant. Per the terms of the stock option agreement, the shares were to vest in twenty-four (24) equal monthly installments on the last day of each month commencing from and after October 31, 2013, they could be exercised at any time on or after the grant date, the term was ten years, and the options could be exercised on a cashless basis. The Company valued the options at $448,000 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 82.77%; (iii) risk free rate of 0.02%, (iv) expected term of 3 years, and a per share market price of $0.085, which was the closing price of the Company’s shares on November 1, 2013. Beginning in November 2013 and ending October 2015, the Company will expense the $448,000 at the rate of $18,667 per month over the 24-month vesting term of the option.

In November 2013, the Company’s Board of Directors approved a stock option grant to Rob Hunt, a Director and President of GrowLife Hydroponics, Inc., via the Company’s 2011 Stock Incentive Plan to purchase 12,000,000 shares of the Company’s common stock at an exercise price of $0.043 per share, which represents the fair value of one share of the Company’s common stock on June 7, 2013. The option grant was made retro-active to June 8, 2013, the date on which Mr. Hunt became a Director of the Company and the President of GrowLife Hydroponics, Inc. Per the terms of the stock option agreement, the shares were to vest in twenty-four (24) equal monthly installments on the last day of each month commencing from and after June 7, 2013, they could be exercised at any time on or after the grant date, the term was ten years, and the options could be exercised on a cashless basis. The Company valued the options at $228,000 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 82.77%; (iii) risk free rate of 0.04%, (iv) expected term of 2 years, and a per share market price of $0.043, which was the closing price of the Company’s shares on June 7, 2013. Beginning in June 2013 and ending May 2015, the Company will expense the $228,000 at the rate of $9,500 per month over the 24-month vesting term of the option.

The following is a summary of the Company’s outstanding stock options as of December 31, 2013.

	Options			Weighted Average Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding December 31, 2012		12,851,187		$	0.090		8.2	$	-
Forfeited		(6,000,000	)		-		-		-
Issued		34,000,000		$	0.070		-	$	1,064,967
Outstanding December 31, 2013		40,851,187		$	0.085		9.1	$	1,064,967

Note that the above mentioned 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.

Warrants

At December 31, 2012, the Company had no warrants outstanding. On May 1, 2013, the Company issued warrants to Gemini Master Fund (“GMF”) entitling GMF to purchase, at their discretion, 5,000,000 shares of the Company’s common stock. The warrants have a five-year term with an original exercise price of $0.05 per share. The warrants vest immediately and are exercisable in whole, or in part, at any time and from time to time on or after the issue date and on or before the termination date. Per the terms of the Common Stock Purchase Warrant (the “Warrant Agreement”) between the Company and GMF, the exercise price was reset on June 4, 2013 to $0.035 per share due to the Company’s sale/issuance of shares at $0.035 per share under its Subscription Agreement. On September 5, 2013, the exercise price was reset again to $0.02156 per share as a result of the Company issuing shares of its common stock at said per share price in relation to a debt conversion related to the Company’s 7% Convertible Notes (see ”NOTE 19 – 7% CONVERTIBLE NOTE”).

The Company originally valued the warrants at $250,000 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 240%; (iii) risk free rate of 0.04% and (iv) expected term of 5 years. The Company fully expensed the entire $250,000 as a non-cash charge to “warrants issued expense” during the year ended December 31, 2013.

On September 30, 2013, the Company valued the warrants at $312,500 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 230%; (iii) risk free rate of 0.02% and (iv) expected term of 4.5 years. The Company fully expensed the $62,500 increase in the value of the warrants as a non-cash charge to “change in fair value of derivative”.

On October 11, 2013, Gemini Master Fund exercised the 5,000,000 warrants via a cashless exercise. At the time of exercise the Company revalued the derivative liability using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 230%; (iii) risk free rate of 0.02% and (iv) expected term of 4.5 years (the same criteria used when valued at September 31, 2013), and determined that there had been no change in the fair value of the derivative liability since September 30, 2013. Accordingly, the Company reclassified the $312,500 derivative liability to additional paid-in capital on October 11, 2013. As of December 31, 2013, the Company no longer had a derivative liability related to these warrants.

On November 19, 2013, the Company issued 140,000,000 warrants to CANX USA, LLC (“CANX”) (see “ITEM 1. BUSINESS”) in accordance with the Joint Venture Agreement between the Company and CANX. The warrants have a five-year term with an original exercise price of $0.033 per share. The warrants vest immediately and are exercisable in whole, or in part, at any time and from time to time on or after the issue date and on or before the termination date. The Company valued the warrants at the time of issuance using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 24.82%; (iii) risk free rate of 0.05% and (iv) expected term of 1 year, which resulted in a value of $5,040,000. The Company expensed the entire $5,040,000 at the time of issuance because the warrants vested immediately and were also exercisable immediately. This resulted in a $5,040,000 non-cash warrant expense.

On December 11, 2013, the Company issued 25,000,000 warrants to Hegyi, LLC (“Hegyi”), an entity controlled by Marco Hegyi, who was hired as President of the Company in December 2013. The warrants have a ten-year term with an original exercise price of $0.08 per share. The warrants vest immediately and are exercisable in whole, or in part, at any time and from time to time on or after the issue date and on or before the termination date. The Company valued the warrants at the time of issuance using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 88.81%; (iii) risk free rate of 0.02% and (iv) expected term of 3 years, which resulted in a value of $1,725,000. The Company expensed the entire $1,725,000 at the time of issuance because the warrants vested immediately and were also exercisable immediately. This resulted in a $1,725,000 non-cash warrant expense.

For the year ended December 31, 2013, the Company recorded total non-cash warrant expense of $7,015,000, of which $250,000 was related to the GMF warrants, $5,040,000 was related to the CANX warrants, and $1,725,000 was related to the Hegyi warrants.

The following table summarizes warrant activity for our company during the years ended December 31, 2013 and 2012:

	Warrants			Weighted  Average Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding December 31, 2012		-		$	-		-	$	-
Issued		170,000,000			0.040
Exercised		(5,000,000	)		0.022
Outstanding December 31, 2013		165,000,000		$	0.040		5.6	$	-