STOCKHOLDERS' DEFICIT

3 Months Ended

Mar. 31, 2014

Equity [Abstract]

STOCKHOLDERS' DEFICIT

NOTE 19 – CONVERTIBLE NOTES PAYABLE

The following table summarizes the Company’s long-term convertible notes payable as of March 31, 2014:

	Principal		Accrued Interest		Debt Discount			As of March 31, 2014
6% Senior secured convertible notes	$	438,680	$	49,800	$	(77,643	)	$	410,837
7% Senior secured convertible note ($850,000)		250,000		8,244		(187,497	)		70,747
7% Senior secured convertible note ($1,000,000)		1,000,000		19,563		(818,185	)		201,378
	$	1,688,680	$	77,607	$	(1,083,325	)	$	682,962

NOTE 20 – STOCKHOLDERS’ DEFICIT

Common Stock

During the three month period ended March 31, 2014, the Company issued 50,395,989 shares of its common stock, valued at $2,780,454, as detailed below:

	Shares		Value
Conversion of principal and interest - 6% convertible notes		4,700,196	$	32,901
Conversion of principal and interest - 7% convertible notes		24,727,668		618,192
Conversion of principal and interest - 12% convertible notes		12,562,518		439,688
Shares issued for services rendered		1,279,420		485,000
Shares issued for Board compensation		2,000,000		1,160,000
Options exercised for cash		2,351,187		44,673
Options exercised on a cashless basis		2,775,000		-
		50,395,989	$	2,780,454

On January 3, 2014, the Company issued 4,700,196 shares of its common stock to one (1) Holder of its 6% senior secured convertible notes payable (see “NOTE 16 – 6% SENIOR SECURED CONVERTIBLE NOTES PAYABLE”) upon the conversion of $30,000 of principal and $2,901 of accrued and unpaid interest at a per share conversion price of $0.007. Upon conversion this Holder’s note was satisfied in full.

On January 31, 2014, the Company issued 12,562,518 shares of its common stock to Rob Hunt, a member of the Company’s Board of Directors, President of GrowLife Hydroponics, Inc., a former owner of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC, and the last Holder of the Company’s 12% Senior Secured Convertible Notes Payable (see “NOTE 17 – 12% SENIOR SECURED CONVERTIBLE NOTES PAYABLE”). The shares were issued upon the conversion of $408,000 of principal and $31,688 of accrued and unpaid interest at a per share conversion price of $0.035. Upon conversion Mr. Hunt’s note was satisfied in full.

On January 31, 2014, the Company issued 2,351,187 shares of its common stock for cash proceeds of $44,673. The shares were issued upon the exercise of a stock option granted in fiscal year 2011, with the Holder entitled to purchase 2,351,187 shares of the Company’s common stock at an exercise price of $0.019 per share with proceeds totaling $44,673.

On February 13, 2014, the Company issued 29,420 shares of its common stock to a third party consultant as payment in full for services rendered. The shares were priced at $0.3399 per share, which was the average closing price of the Company’s common stock during the ten (10) trading days prior to February 13, 2014, which was the date of the agreement.

On February 16, 2014, the Company issued 1,250,000 shares of its common stock to Integrity Media, Inc. (“Integrity”) and valued these shares at a per share price of $0.38, which was the closing price of the Company’s common stock on February 14, 2014, the last trading day prior to issuance. The shares were the second installment owed to Integrity per the terms of its November 16, 2013 agreement with the Company. Upon the issuance of these shares, the Company owes Integrity an additional 1,500,000 shares of its common stock.

On March 7, 2014, the Company issued 2,000,000 shares of its common stock to one (1) Holder of the Company’s 7% convertible notes payable (see “NOTE 18 – 7% CONVERTIBLE NOTES PAYABLE”) upon the conversion of $50,000 of principal at a per share conversion price of $0.025.

On March 18, 2014, the Company issued 22,727,668 shares of its common stock to three (3) Holders of the Company’s 7% convertible notes payable (see “NOTE 18 – 7% CONVERTIBLE NOTES PAYABLE”) upon the conversion of $550,000 of principal and $18,192 of accrued and unpaid interest at a per share conversion price of $0.025. Upon conversion the notes of these three Holders had been satisfied in full.

On March 20, 2014, the Holder of a stock option granted in fiscal year 2011 to purchase 4,500,000 shares of the Company’s common stock at $0.23 per share exercised his option on a cashless basis. Per the terms of the Stock Option Agreement, the net shares issued to the Holder were 2,775,000.

On March 31, 2014, the Company issued 500,000 shares to each of its four (4) independent Board Directors, 2,000,000 shares in the aggregate, pursuant to the Company’s Board grant in August 2012. Per the terms of the August 2012 Board grant, each independent Director is to receive 500,000 with the Company valuing those shares at $0.02 per share, which was the closing price of the Company’s common stock on the date of grant. Upon the issuance of these shares on March 31, 2014, the Company valued the shares at $0.58 per share, which was the closing price of the Company’s common stock on March 31, 2014. The Company valued them at $0.58 per share rather than $0.02 per share due to the age of the original Board grant, which the Company’s Board of Directors viewed as outdated and in need of review. On April 25, 2014, the four (4) independent Board Directors entered into four (4) separate Restricted Stock Cancellation Agreements that effectively cancelled the issuance of the 500,000 shares of the Company’s common stock that each received as compensation for Board service for the three month period ended March 31, 2014 and returned their shares to the Company (see “NOTE 23 – SUBSEQUENT EVENTS”).

Preferred Stock

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.

Stock options

In fiscal year 2011, the Company authorized a Stock Incentive Plan (“2011 Stock Incentive Plan”) whereby a maximum of 18,870,184 shares of the Company’s common stock could be granted in the form of Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, and Other Stock-Based Awards. On April 18, 2013, the Company’s Board of Directors voted to increase to 35,000,000 the maximum allowable shares of the Company’s common stock allocated to the 2011 Stock Incentive Plan. As of this filing, the Company has outstanding unexercised stock option grants totaling 34,000,000 shares and has had an additional 22,076,809 shares exercised via previously granted stock options.

On April 5, 2012, the date of the Merger, Phototron had certain stock options outstanding that had been granted to its employees, officers and directors. The terms of these stock options remained unchanged as a result of the Merger.

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 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.

On January 31, 2014, the Holder of a stock option granted during fiscal year 2011 exercised his option to purchase 2,351,187 shares of the Company’s common stock at a per share exercise price of $0.019 per share, which generated cash proceeds of $44,673 for the Company.

On March 20, 2014, the Holder of a stock option granted in fiscal year 2011 to purchase 4,500,000 shares of the Company’s common stock at $0.23 per share exercised his option on a cashless basis. Per the terms of the Stock Option Agreement, the net number of shares of the Company’s common stock issued to the Holder was 2,775,000.

During the three month period ended March 31, 2014, the Company recorded $151,701 of non-cash “stock options expense” related to the options issued/granted in November 2013. There was no such expense in the same period during fiscal year 2013.

The following is a summary of the Company’s outstanding stock options as of March 31, 2014:

	Options			Weighted Average Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding December 31, 2012		12,851,187		$	0.090		8.2	$	-
Exercised		(6,000,000	)		-		-		-
Issued		34,000,000		$	0.070		-		-
Outstanding December 31, 2013		40,851,187		$	0.085		9.1	$	1,064,967
Exercised		(6,851,187	)	$	0.158
Outstanding March 31, 2014		34,000,000		$	0.070		9.4	$	913,267

Warrants

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 had a five-year term with an original exercise price of $0.05 per share. The warrants vested immediately and were 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 18 – 7% CONVERTIBLE NOTES PAYABLE”). On October 11, 2013, Gemini Master Fund exercised the 5,000,000 warrants via a cashless exercise.

On November 19, 2013, the Company issued 140,000,000 warrants to CANX USA, LLC (“CANX”) (see “NOTE 4 – JOINT VENTURE AGREEMENT WITH CANX USA, LLC”) 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. As of this filing CANX had not exercised any of its warrants.

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. As of this filing Hegyi had not exercised any of its warrants.

The table below summarizes the Company’s warrant activity during the three month period ended March 31, 2014:

	Warrants			Weighted Average Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding December 31, 2012		-		$	-		-	$	-
Issued		170,000,000			0.04		-		-
Exercised		(5,000,000	)		0.02		-		-
Outstanding December 31, 2013		165,000,000		$	0.04		5.6	$	-
Issued		-			-		-		-
Exercised		-			-		-		-
Outstanding March 31, 2014		165,000,000		$	0.04		5.3	$	-