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SUBSEQUENT EVENTS

3 Months Ended

Mar. 31, 2014

NOTE 23 – SUBSEQUENT EVENTS

Closing of Bank Accounts

On March 31, 2014, the Company received notice from one of its primary banking institutions that its bank accounts with that institution were going to be closed. The Company immediately transferred all of its funds held at that bank to its other primary banking institution. On April 7, 2014, the banking institution that the Company had transferred its funds into upon receiving notice on March 31, 2014, informed the Company that it would be closing the Company’s bank accounts effective May 7, 2014. Neither of these banking institutions provided the Company with an explanation as to why they were closing the Company’s bank accounts. Since receiving this second notice of closure on April 7, 2014, the Company has secured bank accounts for each of its six (6) retail hydroponics stores and for Greners. As of the time of this filing the Company is still working to secure bank accounts for both GrowLife, Inc. and Phototron, Inc. At this time, the Company cannot be certain that it will be successful in its search to find bank accounts for GrowLife, Inc. and/or Phototron, Inc., nor can it be certain that the bank accounts that it recently secured will not be closed by the respective banking institutions. These factors could have a material adverse effect on our business, financial condition and results of operations.

Resignation of Eric Shevin

On April 1, 2014, Eric Shevin, an independent member of the Company’s Board of Directors, resigned as a Director. His resignation from the Company’s Board of Directors was voluntary and was due to his desire to lessen the demands of his work schedule.

Resignation of Justin Manns

On April 3, 2014, Justin Manns, the Controller for GrowLife Hydroponics, Inc. and a former Director of the Company and the former Chief Financial Officer of the Company, resigned as Controller of GrowLife Hydroponics, Inc. effective April 3, 2014.

Distribution Agreement with VegaMatrix

On April 7, 2014, the Company announced that it had been selected by Kyle Kushman and his companies to handle national distribution of the VegaMatrix line of nutrients and supplements. The VegaMatrix product line, particularly the organic formulations for which Kyle Kushman is world renowned, have contributed to a remarkable 18 different Cannabis Cup awards over the last several years. Nutrients and supplements for growing legal cannabis are a major part of the Company’s business in its retail and online sales channels. Nutrients and supplements for the legal cannabis industry typically represent approximately 30-40% of the reported $1.6 billion annual sector sales in the U.S. and consistently represent some of the highest gross margin products in hydroponics stores across the country. The Company expects to capture a minimum 3% market share with the VegaMatrix line, focused principally on the premium quality growers, which is already the Company's core market emphasis. The regulatory emphasis in certain states such as Massachusetts on sustainable organic production methods also is expected to provide clear advantages to the VegaMatrix product line, and may on a regional basis allow much higher market share capture.

Conversion of 7% Convertible Note Payable

On April 9, 2014, a Holder of the Company’s 7% Convertible Notes Payable (see “NOTE 18 – 7% CONVERTIBLE NOTES PAYABLE”) converted $125,000 of principal and $8,676 of accrued and unpaid interest into 5,347,032 shares of the Company’s common stock at a per share conversion price of $0.025, which is in accordance with the terms of the note payable. Upon conversion, this Holder had $125,000 of principal outstanding on his note payable.

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Suspension of Trading of the Company’s Securities

On April 10, 2014, the Company received notice from the Securities and Exchange Commission (“SEC”) that trading of the Company’s common stock on the OTCBB was to be suspended for the period from 9:30 A.M. Eastern Standard Time on April 10, 2014 through 11:59 P.M. Eastern Standard Time on April 24, 2014. The SEC issued its order pursuant to Section 12(k) of the Securities Exchange Act of 1934. According to the notice received by the Company from the SEC: “It appears to the Securities and Exchange Commission that the public interest and the protection of investors require a suspension of trading in the securities of GrowLife, Inc. (“GrowLife”) because of concerns regarding the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in GrowLife’s common stock.: As of the time of this filing, the Company has not received notice from the SEC that it is being formally investigated. On April 25, 2014, shares of the Company’s common stock resumed trading on the “grey sheets” and are not formally quoted or listed on any stock exchange at this time.

Termination of R.X.N.B, Inc. and CEN Biotech, Inc. Agreement

On April 10, 2014, the Company received notice from both R.X.N.B., Inc. and CEN Biotech, Inc. (see “NOTE 5 – INTEREST PURCHASE AGREEMENT WITH WISE PHOENIX, LLC AND AJOA HOLDINGS, LLC”) that both companies were rescinding and/or voiding their respective Interest Purchase Agreements with the Company. The notification indicated that both R.X.N.B., Inc. and CEN Biotech, Inc. were rescinding and/or voiding their respective agreements when each company became aware that the U.S. Securities and Exchange Commission suspended the Company’s trading in securities due to potential issues of accuracy and adequacy of information in the marketplace.

Default on Convertible Notes Payable

On April 10, 2014, as a result of the suspension in the trading of the Company’s securities, the Company went into default on its 6% Senior Secured Convertible Notes Payable (see “NOTE 16 – 6% SENIOR SECURED CONVERTIBLE NOTES PAYABLE”) and its 7% Convertible Notes Payable (see “NOTE 18 – 7% CONVERTIBLE NOTES PAYABLE”). As a result, the Company is now accruing interest on these notes at the applicable “default” rate of interest as stipulated in the note agreements. The default rate of interest on the 6% Senior Secured Convertible Notes Payable is 12% per annum while the default rate of interest on the 7% Convertible Notes Payable is 24% per annum. Furthermore, as a result of being in default on these notes, the Holders can, at their sole discretion, call these notes. Although no such action has been taken by the Holders at the time of this filing, the Company has reclassified these notes as a current liability rather than long-term debt. If the Company is not successful in curing the default or negotiating an extension or other modification, it may have to restructure its operations, divest all or a portion of its business, or file for bankruptcy.

Shareholder Support

On April 24, 2014, the Company announced a new shareholder hotline and email communication system to address anticipated increases in shareholder questions. The additional staffing is intended to allow the Company to better provide available information to investors when call volume is expected to increase following the Company's temporary suspension from trading. Shareholders were invited to use the following contacts:

Shareholder Support Hotline: (866) 632-3111

Email: shareholdersupport@growlifeinc.com

The Company also strongly encouraged investors to read recent and future Shareholder Letters at the Company's official website at www.GrowLifeInc.com under the “NEWS” tab.

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Restricted Stock Cancellation Agreements

On April 25, 2014, the Company entered into four (4) separate Restricted Stock Cancellation Agreements (the “Agreements”) with the four (4) independent members of the Company’s Board of Directors (the “Directors”), pursuant to which the Directors agreed to each cancel 500,000 shares of the Company’s restricted common stock granted to each Director in Q1 2014 (the “Restricted Stock”). The Restricted Stock was granted as part of a quarterly independent Director Compensation plan instituted by resolution of the Board of Directors in August 2012. Upon execution of the Agreements, all rights to or under the Restricted Stock by the Directors was terminated and said Restricted stock was cancelled and delivered back to the Company.

GrowLife 2.0

On April 30, 2014, the Company announced an initial component of its GrowLife 2.0 go-forward plan with the creation of stronger governance policies at the Board level, the restructuring of Board compensation, and the creation of guiding principles for the long-term growth of the company. A new compensation plan for independent Directors on the Company’s Board has been proposed to replace the stock award plan originally established in August 2012. The initial step in the implementation of the proposed compensation plan is the agreement by all four independent directors of the Company to cancel their respective 500,000 share stock grants for Q1 2014 issued pursuant to the August 2012 plan. The proposed plan shifts compensation away from historical stock awards, and moves it toward incenting/rewarding independent Directors for overseeing the long-term growth and expansion of the company. Director compensation will become more equitable and in-line with the company's performance. Also fundamental is stronger business acumen shared throughout the company, and compliance policies that ensure the Company’s business practices and investment strategies are in full compliance with regulatory requirements and market dynamics. To provide oversight and clear direction, the Company’s Board of Directors has established four essential committees:

·	Audit Committee to provide greater oversight on all compliance matters;
·	Compensation Committee to review compensation programs, specifically around stock incentive plans;

·	Nominating Committee to identify and screen additional board members who are committed to the long-term growth of the company;
·	Mergers and Acquisitions Committee to guide purchasing and investments by the company

Class Action Lawsuit

On May 2, 2014, the Company was served notice that a Class Action lawsuit had been filed in the United States District Court or the Central District of California on behalf of Randy Romero, individually, and on behalf of all others similarly situated. The complaint named GrowLife, Inc., Sterling Scott, the Company’s Chief Executive Officer and a Director, John Genesi, the Company’s Chief Financial Officer, Marco Hegyi, the Company’s President and a Director, Rob Hunt, the President of GrowLife Hydroponics, Inc. and a Director, Eric Shevin, a former Director, Alan Hammer, a Director, Anthony Ciabattoni, a Director, and Jeff Giarraputo, a Director, as defendants. The lawsuit was filed by The Rosen Law Firm, P.A. and alleges violation of Federal securities laws by the defendants named above.

Resignation of Alan Hammer

On May 6, 2014, Alan Hammer, an independent member of the Company’s Board of Directors, resigned as a Director.