Delaware
(State or other jurisdiction of
incorporation or organization)
|
90-0821083
(I.R.S. Employer Identification No.)
|
Large accelerated filer
|
o
|
Accelerated filer
|
o
|
Non-accelerated filer
|
o
|
Smaller reporting company
|
ý
|
(Do not check if a smaller reporting company)
|
TABLE OF CONTENTS
|
Page
|
||
PART 1
|
4 | |
ITEM 1.
|
4 | |
ITEM 1A.
|
9 | |
ITEM 1B
|
18 | |
ITEM 2.
|
18 | |
ITEM 3.
|
19 | |
ITEM 4.
|
20 | |
PART II
|
21 | |
ITEM 5.
|
21 | |
ITEM 6.
|
24 | |
ITEM 7.
|
24 | |
ITEM 7A.
|
30 | |
ITEM 8.
|
30 | |
ITEM 9.
|
30 | |
ITEM 9A.
|
30 | |
ITEM 9B.
|
31 | |
PART III
|
32 | |
ITEM 10.
|
32 | |
ITEM 11.
|
35 | |
ITEM 12.
|
43 | |
ITEM 13.
|
44 | |
ITEM 14.
|
47 | |
PART IV
|
49 | |
ITEM 15.
|
49 | |
54 |
●
|
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.
|
● | Halting of trading by the SEC or FINRA. |
●
|
Announcements by us regarding liquidity, legal proceedings, significant acquisitions, equity investments and divestitures, strategic relationships, addition or loss of significant customers and contracts, capital expenditure commitments, loan, note payable and agreement defaults, loss of our subsidiaries and impairment of assets,
|
●
|
Issuance of convertible or equity securities for general or merger and acquisition purposes,
|
●
|
Issuance or repayment of debt, accounts payable or convertible debt for general or merger and acquisition purposes,
|
●
|
Sale of a significant number of shares of our common stock by shareholders,
|
●
|
General market and economic conditions,
|
●
|
Quarterly variations in our operating results,
|
●
|
Investor relation activities,
|
●
|
Announcements of technological innovations,
|
●
|
New product introductions by us or our competitors,
|
●
|
Competitive activities, and
|
●
|
Additions or departures of key personnel.
|
Period Ended
|
High
|
Low
|
||||||
Year Ending December 31, 2015
|
||||||||
December 31, 2015
|
$ | 0.02 | $ | 0.003 | ||||
September 30, 2015
|
$ | 0.18 | $ | 0.01 | ||||
June 30, 2015
|
$ | 0.06 | $ | 0.01 | ||||
March 31, 2015
|
$ | 0.35 | $ | 0.02 | ||||
Year Ending December 31, 2014
|
||||||||
December 31, 2014
|
$ | 0.36 | $ | 0.01 | ||||
September 30, 2014
|
$ | 0.80 | $ | 0.01 | ||||
June 30, 2014
|
$ | 0.64 | $ | 0.06 | ||||
March 31, 2014
|
$ | 0.78 | $ | 0.16 |
(a)
|
(b)
|
(c)
|
||||||||||
Plan Category
|
Number of securities
to be issued upon |
Weighted-average
exercise price of |
Number of securities
remaining available |
|||||||||
Equity compensation plan
|
||||||||||||
approved by shareholders
|
- | - | - | |||||||||
Equity compensation plans
|
||||||||||||
not approved by shareholders
|
29,020,000 | 0.028 | - | |||||||||
Total
|
29,020,000 | 0.028 | - |
Years Ended December 31,
|
||||||||||||||||
2015
|
2014
|
2013
|
2012
|
|||||||||||||
(Audited)
|
(Audited)
|
(Audited)
|
(Audited)
|
|||||||||||||
STATEMENT OF OPERATIONS DATA:
|
||||||||||||||||
Net revenue
|
$ | 3,500 | $ | 8,538 | $ | 4,859 | $ | 1,451 | ||||||||
Cost of goods sold
|
2,981 | 7,173 | 4,006 | 1,039 | ||||||||||||
Gross profit
|
519 | 1,365 | 853 | 412 | ||||||||||||
General and administrative expenses
|
2,684 | 7,851 | 11,796 | 1,683 | ||||||||||||
Operating (loss)
|
(2,165 | ) | (6,486 | ) | (10,943 | ) | (1,271 | ) | ||||||||
Other expense
|
(3,524 | ) | (80,140 | ) | (10,437 | ) | (915 | ) | ||||||||
Net (loss)
|
$ | (5,689 | ) | $ | (86,626 | ) | $ | (21,380 | ) | $ | (2,186 | ) | ||||
Net (loss) per share
|
$ | (0.01 | ) | $ | (0.10 | ) | $ | (0.04 | ) | $ | (0.01 | ) | ||||
Weighted average number of shares
|
884,348,627 | 834,503,868 | 593,034,693 | 245,420,970 |
Years Ended December 31,
|
||||||||||||||||
2015
|
2014
|
$ Variance
|
% Variance
|
|||||||||||||
$ | 3,500 | $ | 8,538 | $ | (5,038 | ) | -59.0 | % | ||||||||
Cost of goods sold
|
2,981 | 7,173 | (4,192 | ) | 58.4 | % | ||||||||||
519 | 1,365 | (846 | ) | -62.0 | % | |||||||||||
General and administrative expenses
|
2,684 | 7,851 | (5,167 | ) | 65.8 | % | ||||||||||
(2,165 | ) | (6,486 | ) | 4,321 | 66.6 | % | ||||||||||
Other income (expense):
|
||||||||||||||||
Change in fair value of derivative
|
1,679 | (16,253 | ) | 17,932 | 110.3 | % | ||||||||||
Interest expense, net
|
(1,119 | ) | (64,074 | ) | 62,955 | 98.3 | % | |||||||||
Other expense
|
(2,003 | ) | - | (2,003 | ) | -100.0 | % | |||||||||
Realized gain on sale of investment
|
- | 187 | (187 | ) | -100.0 | % | ||||||||||
Loss on class action lawsuit settlements
|
(2,081 | ) | - | (2,081 | ) | -100.0 | % | |||||||||
Total other income (expense)
|
(3,524 | ) | (80,140 | ) | 76,616 | 95.6 | % | |||||||||
Income (loss) before income taxes
|
(5,689 | ) | (86,626 | ) | 80,937 | 93.4 | % | |||||||||
Income taxes - current benefit
|
- | - | - | 0.0 | % | |||||||||||
Net income (loss)
|
$ | (5,689 | ) | $ | (86,626 | ) | $ | 80,937 | 93.4 | % |
Less Than
|
Greater Than
|
|||||||||||||||||||
Contractual Cash Obligations
|
Total
|
1 Year
|
1-3 Years
|
3-5 Years
|
5 Years
|
|||||||||||||||
Operating leases
|
$ | 139,969 | $ | 76,929 | $ | 63,040 | $ | - | $ | - | ||||||||||
Note payable
|
2,886,921 | 2,886,921 | 0 | - | - | |||||||||||||||
Capital expenditures
|
50,000 | 50,000 | - | - | - | |||||||||||||||
$ | 3,076,890 | $ | 3,013,850 | $ | 63,040 | $ | - | $ | - |
Name
|
Age
|
Director/ Executive Officer
|
||
Marco Hegyi
|
58
|
Chairman of the Board, CEO, President and Nominations and Governance Committee Chairman (1)
|
||
Mark E. Scott
|
62
|
Consulting Chief Financial Officer
|
||
Michael E. Fasci
|
57
|
Director, Audit Committee Chairman and Secretary (2)(3)
|
||
Joseph Barnes
|
43
|
Senior Vice President of Business Development
|
Audit
|
Compensation
|
Nominations and Governance
|
||
Michael E. Fasci (Chairman)
|
Michael E. Fasci (Chairman)
|
Marco Hegyi (Chairman)
|
Required
|
Actual
|
|||||||
Transaction
|
File
|
File
|
||||||
Person
|
Filing Type
|
Date
|
Date
|
Date
|
||||
Tara Antal
|
3
|
10/27/2015
|
11/10/2015
|
11/17/2015
|
||||
Brad Fretti
|
3
|
10/27/2015
|
11/10/2015
|
11/17/2015
|
•
|
to attract and retain highly qualified individuals capable of making significant contributions to our long-term success;
|
|
•
|
to motivate and reward named executive officers whose knowledge, skills, and performance are critical to our success;
|
|
•
|
to closely align the interests of our named executive officers and other key employees with those of its shareholders; and
|
|
•
|
to utilize incentive based compensation to reinforce performance objectives and reward superior performance.
|
Non-Equity
|
||||||||||||||||||||||||||||||
Incentive
|
||||||||||||||||||||||||||||||
Stock
|
Plan
|
Option
|
Other
|
|||||||||||||||||||||||||||
Salary
|
Bonus
|
Awards
|
Compensation
|
Awards
|
Compensation
|
Total
|
||||||||||||||||||||||||
Principal Position
|
($)
|
($)
|
($) (1)
|
($)
|
($)
|
($)
|
($)
|
|||||||||||||||||||||||
Marco Hegyi, President and Director (2)
|
12/31/2015
|
$ | 253,000 | $ | - | $ | - | $ | - | $ | - | $ | 8,561 | $ | 261,561 | |||||||||||||||
12/31/2014
|
$ | 156,906 | $ | - | $ | - | $ | - | $ | - | $ | 14,997 | $ | 171,903 | ||||||||||||||||
Mark E. Scott, Consulting Chief Financial Officer (3)
|
12/31/2015
|
$ | 156,250 | $ | - | $ | - | $ | - | $ | 7,312 | $ | - | $ | 163,562 | |||||||||||||||
12/31/2014
|
$ | 86,250 | $ | - | $ | - | $ | - | $ | 292,480 | $ | 15,686 | $ | 394,416 | ||||||||||||||||
Joseph Barnes, Senior Vice President of Business
|
12/31/2015
|
$ | 90,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 90,000 | |||||||||||||||
Development (4)
|
12/31/2014
|
$ | 70,096 | $ | 6,500 | $ | 24,000 | $ | - | $ | 120,648 | $ | 9,119 | $ | 230,363 |
i
|
Two million of the Shares vest immediately upon securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB (not earned);
|
|
ii
|
Two million Shares vest immediately upon the successful approval and effectiveness of the Company’s S-1 (not earned);
|
|
iii
|
Two million Shares will vest immediately upon the Company’s resolution of the class action lawsuits (earned as of August 17, 2015);
|
|
|
||
iv
|
Ten million Shares vest on a monthly basis over a period of three years beginning on the July 1, 2014.
|
i
|
Two million of the Shares will vest immediately;
|
|
iv
|
Six million Shares will vest on a monthly basis over a period of three years beginning on the date of grant.
|
Estimated Future Payouts Under
Non-Equity Incentive PlanAwards
|
Estimated Future Payouts Under
Equity Incentive Plan
Awards
|
All Other
Stock Awards; |
All Other
Option Awards; |
Exercise or
Base Price of Option |
Grant Date
Fair Value of
Stock and
|
|||||||||||||||||||||||||||||||||||||||
Grant
|
Threshold
|
Target
|
Maximum
|
Threshold
|
Target
|
Maximum
|
Units
|
Options
|
Awards
|
Option
|
||||||||||||||||||||||||||||||||||
Name
|
Date
|
($)
|
($)
|
($)
|
(#) | (#) | (#) | (#) | (#) |
($/Sh) (1)
|
Awards
|
|||||||||||||||||||||||||||||||||
Marco Hegyi
|
- | $ | - | - | $ | - | - | - | - | - | - | $ | - | $ | - | |||||||||||||||||||||||||||||
Mark E. Scott (2)
|
- | $ | - | - | $ | - | - | - | - | - | 2,000,000 | $ | 0.010 | $ | 7,312 | |||||||||||||||||||||||||||||
Joseph Barnes
|
- | $ | - | - | $ | - | - | - | - | - | - | $ | - | $ | - |
Option Awards
|
Stock Awards
|
||||||||||||||||||||||||||||||||
Number of
Securities |
Number of
Securities |
Number of
Securities |
Option
Exercise |
Option
Expiration |
Number of
Shares or Units |
Market Value
of Shares or |
Number of
Unearned Shares, |
Market or
Payout Value of |
|||||||||||||||||||||||||
Name
|
(#) | (#) | (#) |
($) (1)
|
Date
|
(#) |
($)
|
(#) |
($)
|
||||||||||||||||||||||||
Marco Hegyi
|
- | - | - | $ | - | - | $ | - | - | $ | - | ||||||||||||||||||||||
Mark E. Scott (2)
|
7,833,333 | 4,166,667 | - | $ | 0.01 |
7/30/2019
|
- | $ | - | - | $ | - | |||||||||||||||||||||
Joseph Barnes (3)
|
4,500,000 | 3,500,000 | - | $ | 0.05 |
10/9/2019
|
- | $ | - | - | $ | - |
i
|
Two million shares vest immediately upon securing a market maker with an approved 15c2-11 resulting in our relisting on OTCBB (earned as of February 18, 2016);
|
|
ii
|
Two million shares vest immediately upon the successful approval and effectiveness of our S-1 (not earned as of December 31, 2015);
|
|
iii
|
Two million shares vest immediately upon our resolution of the class action lawsuits (earned as of August 17, 2015); and,
|
|
iv
|
Ten million shares will vest on a monthly basis over a period of three years beginning on the July 1, 2014.
|
i
|
Two million shares vested immediately;
|
|
iv
|
Six million shares vest on a monthly basis over a period of three years beginning on the date of grant.
|
Executive
Payments Upon |
For Cause
Termination |
Early
or Normal |
Not For Good
Cause |
Change in
Control |
Disability
or Death |
|||||||||||||||
Compensation:
|
||||||||||||||||||||
Base salary (1)
|
$ | - | $ | - | $ | 250,000 | $ | 550,000 | $ | - | ||||||||||
Performance-based incentive
|
||||||||||||||||||||
compensation
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Stock options
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Benefits and Perquisites:
|
||||||||||||||||||||
Health and welfare benefits
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Accrued vacation pay
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Total
|
$ | - | $ | - | $ | 250,000 | $ | 550,000 | $ | - |
(1)
|
Reflects amounts to be paid upon termination without cause and upon termination in a change of control, less any months worked.
|
•
|
each director and nominee for director;
|
|
•
|
each person known by us to own beneficially 5% or more of our common stock;
|
|
•
|
each officer named in the summary compensation table elsewhere in this report; and
|
|
•
|
all directors and executive officers as a group.
|
Shares Beneficially Owned
|
||||||||
Name of Beneficial Owner
|
Number
|
Percentage (1)
|
||||||
Directors and Named Executive Officers-
|
||||||||
Marco Hegyi (2)
|
25,000,000 | 2.7 | % | |||||
Mark E. Scott (3)
|
7,833,333 | * | ||||||
Michael Fasci (4)
|
- | * | ||||||
Tara Antal (5)
|
- | * | ||||||
Brad Fretti (6)
|
- | * | ||||||
Anthony J. Ciabattoni (7)
|
- | * | ||||||
Jeff Giarraputo (8)
|
- | * | ||||||
Joseph Barnes (9)
|
4,800,000 | * | ||||||
Total Directors and Officers (8 in total)
|
37,633,333 | 4.2 | % |
Shares Beneficially Owned
|
||||||||
Name and Address of Beneficial Owner
|
Number
|
Percentage
|
||||||
Greater Than 5% Ownership -
|
||||||||
Sterling C. Scott (1)
|
47,000,518 | 5.2 | % | |||||
2315 Georgia Villa Way
|
||||||||
Silver Springs, MD 20902
|
||||||||
CANX USA LLC (2)
|
||||||||
410 South Rampart Blvd., Suite 350
|
540,000,000 | 37.3 | % | |||||
Las Vegas, NV 89145
|
(Capped at
|
|||||||
4.99 | %) | |||||||
Logic Works LLC (3)
|
145,015,714 | 14.3 | % | |||||
9616 Emeraude Avenue
|
(Capped at
|
|||||||
Las Vegas, NV 89147
|
4.99 | %) |
Year Ended
|
Year Ended
|
|||||||
December 31, 2015
|
December 31, 2014
|
|||||||
Audit fees
|
$ | 67,225 | $ | 70,007 | ||||
Audit related fees
|
26,480 | 30,024 | ||||||
Tax fees
|
- | - | ||||||
All other fees
|
6,050 | 17,542 | ||||||
$ | 99,755 | $ | 117,573 |
Title of Document
|
Page
|
|
F-1
|
||
F-2
|
||
F-3
|
||
F-4
|
||
F-5
|
||
F-6
|
(b)
|
Exhibits
|
Exhibit
No.
|
Description
|
|
3.1
|
Certificate of Incorporation. Filed as an exhibit to the Company’s Form 10-SB General Form for Registration of Securities of Small Business Issuers filed with the SEC on December 7, 2007, and incorporated by reference.
|
|
3.2
|
Second Amended and Restated Bylaws of the Company. Filed as an exhibit to the Company’s Form 8-K filed with the SEC on October 23, 2015, and incorporated by reference.
|
|
4.1
|
GrowLife, Inc. 2011 Stock Incentive Plan filed as an exhibit to the Company’s Registration Statement on Form S-1 filed with the SEC on June 9, 2011, and incorporated by reference.
|
|
10.1
|
Agreement and Plan of Merger dated March 21, 2012, by and between Phototron Holdings, Inc., SGT Merger Corporation, SG Technologies Corp, Sterling C. Scott and W-Net Fund I, L.P. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference.
|
|
10.2
|
Securities Purchase and Exchange Agreement, dated March 16, 2012, by and between Phototron Holdings, Inc., W-Net Fund I, L.P., and Europa International Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference. | |
10.3
|
Security Agreement, dated March 16, 2012, by and between Phototron Holdings, Inc., W-Net Fund I, L.P., Europa International Inc., GrowLife, Inc., and Phototron, Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference. | |
10.4
|
Intellectual Property Security Agreement, dated March 16, 2012, by and between Phototron Holdings, Inc., W-Net Fund I, L.P., Europa International Inc., GrowLife, Inc., and Phototron, Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference. | |
10.5
|
Form of 6% Senior Secured Convertible Note. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference. | |
10.6
|
Form of 7% Convertible Note. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 11, 2013, and hereby incorporated by reference.
|
|
10.7
|
Securities Purchase Agreement dated June 7, 2013, by and between GrowLife, Inc., GrowLife Hydroponics, Inc., Sequoia, LLC, Pressure Drop Holdings, LLC and Sachin Karia. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 7, 2013, and hereby incorporated by reference.
|
|
10.8
|
Revolving Promissory Note dated June 7, 2013 issued by GrowLife, Inc. in favor of W-Net Fund I, L.P. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 7, 2013, and hereby incorporated by reference.
|
|
10.9
|
Form of 12% Senior Secured Convertible Note. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 7, 2013, and hereby incorporated by reference.
|
|
10.1
|
Security Agreement dated June 7, 2013, by and between GrowLife, Inc., Sequoia, LLC, Pressure Drop Holdings, LLC, Sachin Karia and Robert E. Hunt. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 7, 2013, and hereby incorporated by reference.
|
|
10.11
|
Joint Venture Agreement dated November 19, 2013 by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 21, 2013, and hereby incorporated by reference.
|
|
10.12
|
Warrant Agreement by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 21, 2013, and hereby incorporated by reference.
|
|
10.13
|
7% Convertible Note by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 21, 2013, and hereby incorporated by reference.
|
|
10.14
|
Registration Rights Agreement by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 21, 2013, and hereby incorporated by reference.
|
|
10.15
|
Commercial Lease Agreement dated March 8, 2013 by and between Evergreen Garden Center LLC and William C. Rowell Family Limited Partnership for our Portland, Maine store. Filed as an exhibit to the Company’s Form 10-K and filed with the SEC on September 30, 2015, and incorporated by reference.
|
|
10.16
|
Lease dated October 21, 2013 by and between GrowLife Hydroponics, Inc. and Stone Creek Business Center Ltd. for our Avon (Vail), Colorado store. Filed as an exhibit to the Company’s Form 10-K and filed with the SEC on September 30, 2015, and incorporated by reference.
|
|
10.17
|
Retail Lease Agreement dated January 23, 2014 by and between GrowLife Hydroponics, Inc. and W-ADP Meadows VII LLC for our Boulder, Colorado store. Filed as an exhibit to the Company’s Form 10-K and filed with the SEC on September 30, 2015, and incorporated by reference.
|
|
10.18
|
Amended and Restated 6% Senior Secured Convertible Note dated September 10, 2014 by and between GrowLife, Inc. and Andrew J. Gentile. Filed as an exhibit to the Company’s Form 10-K and filed with the SEC on September 30, 2015, and incorporated by reference.
|
|
10.19
|
Amended and Restated 6% Senior Secured Convertible Note dated September 10, 2014 by and between GrowLife, Inc. and Jordan W. Scott. Filed as an exhibit to the Company’s Form 10-K and filed with the SEC on September 30, 2015, and incorporated by reference.
|
|
10.2
|
Warrant related to CANX USA LLC Joint Development Agreement dated November 19, 2013. Filed as an exhibit to the Company’s Form 10-K and filed with the SEC on November 21, 2014, and incorporated by reference.
|
|
|
||
10.21
|
Executive Services Agreement dated June 7, 2013 by and between GrowLife, Inc. and Robert Hunt. Filed as an exhibit to the Company’s Form 8-K/A2 dated June 7, 2013 and filed with the SEC on June 25, 2014, and hereby incorporated by reference.
|
|
10.22
|
NonCompetition, NonSolicitation and NonDisclosure Agreement dated June 7, 2013 with Robert Hunt. Filed as an exhibit to the Company’s Form 8-K/A2 dated June 7, 2013 and filed with the SEC on June 25, 2014, and hereby incorporated by reference.
|
|
10.23
|
Executive Employment Agreement dated November 3, 2013 by and between GrowLife, Inc. and Sterling Scott. Attached as an exhibit to the Company’s Form 8-K dated November 3, 2013 and filed with the SEC on June 25, 2014, and hereby incorporated by reference.
|
|
10.24
|
Executive Employment Agreement dated November 3, 2013 by and between GrowLife, Inc. and John Genesi. Attached as an exhibit to the Company’s Form 8-K dated November 3, 2013 and filed with the SEC on June 25, 2014, and hereby incorporated by reference.
|
|
10.25
|
Employment Agreement for Marco Hegyi dated December 4, 2013. Attached as an exhibit to the Company’s Form 8-K/A dated December 9, 2013 and filed with the SEC on June 20, 2014, and hereby incorporated by reference.
|
|
10.26
|
Amended Employment Agreement for Marco Hegyi dated June 20, 2014. Attached as an exhibit to the Company’s Form 8-K dated June 20, 2014 and filed with the SEC on June 20, 2014, and hereby incorporated by reference.
|
|
10.27
|
Restricted Stock Cancellation Agreement, dated April 25, 2014, by and between the Company and Eric Shevin. Attached as an exhibit to the Company’s Form 8-K dated April 25, 2014 and filed with the SEC on April 30, 2014, and hereby incorporated by reference. | |
10.28
|
Restricted Stock Cancellation Agreement, dated April 25, 2014, by and between the Company and Alan Hammer. Attached as an exhibit to the Company’s Form 8-K dated April 25, 2014 and filed with the SEC on April 30, 2014, and hereby incorporated by reference. | |
10.29
|
Restricted Stock Cancellation Agreement, dated April 25, 2014, by and between the Company and Tony Ciabattoni. Attached as an exhibit to the Company’s Form 8-K dated April 25, 2014 and filed with the SEC on April 30, 2014, and hereby incorporated by reference. | |
10.3
|
Consulting Letter by and between GrowLife, Inc. and Mark Scott Consulting Letter dated July 31, 2014. Filed as an exhibit to the Company’s Form 8-K filed with the SEC on August 6, 2014, and hereby incorporated by reference.
|
|
10.31
|
Waiver and Modification Agreement dated June 25, 2014 by and between GrowLife, Inc. and Logic Works LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference.
|
|
10.32
|
Amended and Restated Joint Venture Agreement dated July 1, 2013 by and between GrowLife, Inc. and CANX USA LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference.
|
|
10.33
|
Secured Credit Facility and Secured Convertible Note dated June 25, 2014 by and between GrowLife, Inc. and Logic Works LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference.
|
|
10.34
|
Closing Certificate dated July 10, 2014 by and between GrowLife, Inc. and CANX USA LLC and Logic Works LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference.
|
|
10.35
|
Form of Warrant by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference.
|
|
10.36
|
Settlement Agreement and Waiver of Default dated June 19, 2014 by and between GrowLife, Inc. and Forglen LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 18, 2014, and hereby incorporated by reference.
|
|
10.37
|
Severance Agreement dated July 15, 2014 by and between GrowLife, Inc. and John Genesi. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 18, 2014, and hereby incorporated by reference.
|
|
10.38
|
Joseph Barnes Promotion Letter dated October 10, 2014. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 14, 2014, and hereby incorporated by reference.
|
|
10.39
|
Settlement Agreement and Release dated October 17, 2014 by and between GrowLife, Inc. and Robert Hunt. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 21, 2014, and hereby incorporated by reference.
|
|
10.4
|
Notice of Settlement Agreement dated February 9, 2015. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on February 12, 2015, and hereby incorporated by reference.
|
|
10.41
|
Amendment 1 to Amended and Restated 6% Senior Secured Convertible Note with Andrew J. Gentile. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 8, 2015, and hereby incorporated by reference.
|
|
10.42
|
Amendment 1 to Amended and Restated 6% Senior Secured Convertible Note with Jordan W. Scott. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 8, 2015, and hereby incorporated by reference.
|
|
10.43 | Stipulation and Agreement of Compromise, Settlement and Release of the Derivative Actions dated April 6, 2015. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 17, 2015, and hereby incorporated by reference. | |
10.44 | Securities Purchase Agreement, dated July 9, 2015, entered into by and between GrowLife, Inc., its subsidiaries and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | |
10.45 | Senior Secured, Convertible, Redeemable Debenture entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | |
10.46 | Form of Security Agreement entered into by and between GrowLife, Inc. and its subsidiaries, respectively, and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | |
|
||
10.47 | Form of Guaranty Agreement entered into by and between GrowLife, Inc.’s subsidiaries, respectively, and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | |
10.48 | Form of Pledge Agreement entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | |
10.49 | Intercreditor Agreement, dated July 9, 2015, entered into by and between GrowLife, Inc., its subsidiaries, Logic Works LLC and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | |
10.50 | Form of Subordination Agreement, dated July 9, 2015, entered into by and between GrowLife, Inc., its subsidiaries, TCA Global Credit Master Fund LP and Jordan Scott and Andrew Gentile, respectively. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | |
10.51 | Form of Amendment No. 2 to 6% Senior Secured Convertible Note, dated July 9, 2015, entered into by and between GrowLife, Inc. and Jordan Scott and Andrew Gentile, respectively. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | |
10.52 | Investment Banking Letter dated August 27, 2014 by and between GrowLife, Inc. and D. Weckstein & Co. Inc. Filed herewith. | |
|
||
10.53
|
Securities Purchase Agreement dated August 6, 2015 and entered into by and between GrowLife, Inc., its subsidiaries and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference.
|
|
10.54
|
Senior Secured Convertible Redeemable Debenture dated August 6, 2015 and entered into by and between GrowLife, Inc., its subsidiaries and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference.
|
|
10.55
|
Committed Equity Facility dated August 6, 2015 entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference.
|
|
10.56
|
Registration Rights Agreement dated August 6, 2015 entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference.
|
|
10.57
|
Authorization Agreement dated August 6, 2015 entered into by and between GrowLife, Inc., its subsidiaries and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference.
|
|
10.58
|
Amendment to Employment Agreement by and between GrowLife Inc. and Marco Hegyi dated January 25, 2016 but effective December 18, 2015.
|
|
14.1
|
Code of Conduct and Ethics dated May 15, 2014. Attached as an exhibit to the Company’s Form 8-K dated June 3, 2014 and filed with the SEC on June 9, 2014, and hereby incorporated by reference.
|
|
21.1
|
Subsidiaries of the Registrant. Filed herewith.
|
|
99.1
|
Amended and Restated Audit Committee Charter dated October 16, 2015. Attached as an exhibit to the Company’s Form 8-K filed with the SEC on October 26, 2015, and hereby incorporated by reference.
|
|
99.2
|
Compensation Committee Charter dated May 15, 2014. Attached as an exhibit to the Company’s Form 8-K dated June 3, 2014 and filed with the SEC on June 9, 2014, and hereby incorporated by reference.
|
|
99.3
|
Amended and Restated Nominations and Governance Charter dated October 16, 2015. Attached as an exhibit to the Company’s Form 8-K filed with the SEC on October 26, 2015, and hereby incorporated by reference.
|
|
99.4
|
Amended and Restated Insider Trading Policy, dated October 16, 2015. Attached as an exhibit to the Company’s Form 8-K filed with the SEC on October 26, 2015, and hereby incorporated by reference.
|
|
101
|
Interactive data files pursuant to Rule 405 of Regulation S-T. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
|
PMB Helin Donovan, LLP
/s/ PMB Helin Donovan, LLP
April 14, 2016
Seattle, WA
|
December 31, 2015
|
December 31, 2014
|
|||||||
ASSETS
|
||||||||
CURRENT ASSETS:
|
||||||||
Cash and cash equivalents
|
$ | 60,362 | $ | 286,238 | ||||
Inventory, net
|
398,439 | 883,350 | ||||||
Prepaid expenses
|
- | 41,791 | ||||||
Deposits
|
16,754 | 33,584 | ||||||
Total current assets
|
475,555 | 1,244,963 | ||||||
EQUIPMENT, NET
|
10,327 | 24,042 | ||||||
OTHER ASSETS
|
||||||||
Intangible assets, net
|
243,604 | 353,752 | ||||||
Goodwill
|
739,000 | 739,000 | ||||||
TOTAL ASSETS
|
$ | 1,468,486 | $ | 2,361,757 | ||||
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
|
||||||||
CURRENT LIABILITIES:
|
||||||||
Accounts payable - trade
|
$ | 1,272,572 | $ | 1,129,130 | ||||
Accounts payable - related parties
|
71,920 | - | ||||||
Accrued expenses
|
121,765 | 276,225 | ||||||
Accrued expenses - related parties
|
53,287 | - | ||||||
Derivative liability
|
1,377,175 | 2,100,915 | ||||||
Current portion of convertible notes payable
|
2,287,868 | 887,272 | ||||||
Deferred revenue
|
25,000 | 108,799 | ||||||
Total current liabilities
|
5,209,587 | 4,502,341 | ||||||
LONG TERM LIABILITIES:
|
||||||||
Convertible notes payable
|
- | 98,333 | ||||||
COMMITMENTS AND CONTINGENCIES
|
2,000,000 | - | ||||||
MEZZANINE EQUITY:
|
||||||||
Contingently redeemable common stock-15,000,000 shares issued and outstanding at 12/31/15 and 12/31/14, respectively
|
300,000 | - | ||||||
STOCKHOLDERS' DEFICIT
|
||||||||
Preferred stock - $0.0001 par value, 10,000,000 shares authorized, no shares
|
||||||||
issued and outstanding
|
- | - | ||||||
Series B Convertible Preferred stock - $0.0001 par value, 150,000 shares authorized,
|
||||||||
150,000 shares issued and outstanding at 12/31/2015 and 12/31/2014, respectively
|
15 | - | ||||||
Series C Convertible Preferred stock - $0.0001 par value, 51 shares authorized,
|
||||||||
51 shares issued and outstanding at 12/31/2015 and 12/31/2014, respectively
|
- | - | ||||||
Common stock - $0.0001 par value, 3,000,000,000 shares authorized, 891,116,496
|
||||||||
and 879,343,771 shares issued and outstanding at 12/31/2015 and 12/31/2014, respectively
|
89,098 | 87,936 | ||||||
Additional paid in capital
|
110,585,434 | 108,699,950 | ||||||
Accumulated deficit
|
(116,715,648 | ) | (111,026,803 | ) | ||||
Total stockholders' deficit
|
(6,041,101 | ) | (2,238,917 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$ | 1,468,486 | $ | 2,361,757 |
Years Ended,
|
||||||||
December 31, 2015
|
December 31, 2014
|
|||||||
NET REVENUE
|
$ | 3,499,642 | $ | 8,537,676 | ||||
COST OF GOODS SOLD
|
2,980,503 | 7,172,376 | ||||||
GROSS PROFIT
|
519,139 | 1,365,300 | ||||||
GENERAL AND ADMINISTRATIVE EXPENSES
|
2,684,107 | 7,851,370 | ||||||
OPERATING LOSS
|
(2,164,968 | ) | (6,486,070 | ) | ||||
OTHER INCOME (EXPENSE):
|
||||||||
Change in fair value of derivative
|
1,678,541 | (16,252,823 | ) | |||||
Interest expense, net
|
(1,118,635 | ) | (64,073,997 | ) | ||||
Other expense, prrimarily related to TCA Global Credit Master Fund LP funding
|
(2,002,533 | ) | - | |||||
Loss on class action lawsuit settlements
|
(2,081,250 | ) | - | |||||
Realized gain on sale of investment
|
- | 186,791 | ||||||
Total other (expense)
|
(3,523,877 | ) | (80,140,029 | ) | ||||
(LOSS) BEFORE INCOME TAXES
|
(5,688,845 | ) | (86,626,099 | ) | ||||
Income taxes - current benefit
|
- | - | ||||||
NET (LOSS)
|
$ | (5,688,845 | ) | $ | (86,626,099 | ) | ||
Basic and diluted (loss) per share
|
$ | (0.01 | ) | $ | (0.10 | ) | ||
Weighted average shares of common stock outstanding- basic and diluted
|
884,348,627 | 834,503,868 | ||||||
Series B Convertible
Preferred Stock |
Series C Convertible
Preferred Stock |
Common Stock
|
Unrealized
Gain on |
Additional Paid in
|
Accumulated
|
Total
Stockholders' |
||||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Party
|
Capital
|
Deficit
|
(Deficit)
|
|||||||||||||||||||||||||||||||
Balance as of December 31, 2013
|
- | $ | - | - | $ | - | 755,694,870 | $ | 75,571 | $ | 1,121,237 | $ | 17,359,932 | $ | (24,400,704 | ) | $ | (5,843,964 | ) | |||||||||||||||||||||
Options exercised for cash
|
- | - | - | - | 2,351,187 | 235 | - | 44,438 | - | 44,673 | ||||||||||||||||||||||||||||||
Cashless exercise of options
|
- | - | - | - | 3,570,455 | 357 | - | (357 | ) | - | - | |||||||||||||||||||||||||||||
Shares issued related to the conversion of principal and interest related to convertible notes payable
|
- | - | - | - | 102,507,839 | 10,251 | - | 1,875,684 | - | 1,885,935 | ||||||||||||||||||||||||||||||
Shares issued for services rendered
|
- | - | - | - | 15,219,420 | 1,522 | - | 2,720,078 | - | 2,721,600 | ||||||||||||||||||||||||||||||
Stock based compensation for stock options
|
- | - | - | - | - | - | - | 724,267 | - | 724,267 | ||||||||||||||||||||||||||||||
Unrealized loss on investment in related party
|
- | - | - | - | - | - | (1,121,237 | ) | - | - | (1,121,237 | ) | ||||||||||||||||||||||||||||
Change in fair value of derivative liability
|
- | - | - | - | - | - | - | 23,475,908 | - | 23,475,908 | ||||||||||||||||||||||||||||||
Value of warrants expensed issued to CANX USA LLC or its assignees
|
- | - | - | - | - | - | - | 62,500,000 | - | 62,500,000 | ||||||||||||||||||||||||||||||
Net loss for the year ended December 31, 2014
|
- | - | - | - | - | - | - | - | (86,626,099 | ) | (86,626,099 | ) | ||||||||||||||||||||||||||||
Balance as of December 31, 2014
|
- | - | - | - | 879,343,771 | 87,936 | - | 108,699,950 | (111,026,803 | ) | (2,238,917 | ) | ||||||||||||||||||||||||||||
Stock based compensation for stock options
|
- | - | - | - | - | - | - | 175,661 | - | 175,661 | ||||||||||||||||||||||||||||||
Shares issued for debt conversion
|
- | - | - | - | 7,772,725 | 777 | - | 170,223 | - | 171,000 | ||||||||||||||||||||||||||||||
Shares issued for services rendered
|
- | - | - | - | 4,000,000 | 400 | 39,600 | - | 40,000 | |||||||||||||||||||||||||||||||
Issuance of Series B Convertible Preferred Stock
|
150,000 | 15 | - | - | - | (15 | ) | - | 1,500,000 | - | 1,500,000 | |||||||||||||||||||||||||||||
Issuance of Series C Convertible Preferred Stock
|
- | - | 51 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Net loss for the year ended December 31, 2015
|
- | - | - | - | - | - | - | - | (5,688,845 | ) | (5,688,845 | ) | ||||||||||||||||||||||||||||
Balance as of December 31, 2015
|
150,000 | $ | 15 | 51 | $ | - | 891,116,496 | $ | 89,098 | $ | - | $ | 110,585,434 | $ | (116,715,648 | ) | $ | (6,041,101 | ) |
Years Ended,
|
||||||||
December 31, 2015
|
December 31, 2014
|
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net loss
|
$ | (5,688,845 | ) | $ | (86,626,099 | ) | ||
Adjustments to reconcile net loss to net cash (used in)
|
||||||||
operating activities
|
||||||||
Depreciation and amortization
|
13,715 | 33,641 | ||||||
Amortization of intangible assets
|
106,548 | 106,548 | ||||||
Change in inventory reserve
|
- | 12,711 | ||||||
Stock based compensation
|
175,661 | 724,267 | ||||||
Preferred shares issued for services
|
300,000 | - | ||||||
Common stock issued for services
|
210,985 | 2,721,600 | ||||||
Amortization of debt discount
|
(158,237 | ) | 1,363,847 | |||||
Change in fair value of derivative liability
|
(723,740 | ) | 16,252,823 | |||||
Expense related to warrant
|
- | 62,500,000 | ||||||
Accrued interest on convertible notes payable
|
310,500 | 183,214 | ||||||
Loss on class action lawsuit settlements
|
2,000,000 | - | ||||||
Issuance of Series B Convertible Preferred Stock
|
1,500,000 | - | ||||||
Write-off of patent expenses
|
3,600 | - | ||||||
Excess and obsolete inventory
|
20,215 | - | ||||||
Realized gain on sale of investment
|
- | (186,791 | ) | |||||
Changes in operating assets and liabilities:
|
||||||||
Restricted Cash
|
- | 46,400 | ||||||
Accounts receivable
|
- | 183,678 | ||||||
Inventory
|
464,696 | 357,660 | ||||||
Prepaid expenses
|
41,791 | (24,790 | ) | |||||
Other receivable
|
- | 3,666 | ||||||
Deposits
|
16,830 | 12,589 | ||||||
Accounts payable
|
215,362 | 33,926 | ||||||
Accrued expenses
|
(209,972 | ) | 209,421 | |||||
Deferred revenue
|
25,000 | (30,888 | ) | |||||
CASH (USED IN) OPERATING ACTIVITIES
|
(1,375,891 | ) | (2,122,577 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Net cash proceeds from shares in Vape Holdings, Inc.
|
- | 187,951 | ||||||
Capital expenditures
|
- | (3,925 | ) | |||||
NET CASH PROVIDED BY INVESTING ACTIVITIES:
|
- | 184,026 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds from the issuance of convertible note
|
1,150,000 | 350,000 | ||||||
Series B Convertible Preferred Stock
|
15 | - | ||||||
Proceeds from options exercised
|
- | 44,673 | ||||||
Payments of notes payable - related party
|
- | (1,160 | ) | |||||
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
1,150,015 | 393,513 | ||||||
NET (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(225,876 | ) | (1,545,038 | ) | ||||
CASH AND CASH EQUIVALENTS, beginning of period
|
286,238 | 1,831,276 | ||||||
CASH AND CASH EQUIVALENTS, end of period
|
$ | 60,362 | $ | 286,238 | ||||
Supplemental disclosures of cash flow information:
|
||||||||
Interest paid
|
$ | 10,500 | $ | - | ||||
Taxes paid
|
$ | - | $ | - | ||||
Non-cash investing and financing activities:
|
||||||||
6% Senior secured convertible notes and interest converted into common stock
|
$ | - | $ | 62,025 | ||||
7% Convertible notes and interest converted into common stock
|
$ | - | $ | 1,384,207 | ||||
12% Senior secured convertible notes and interest converted into common stock
|
$ | - | $ | 439,688 | ||||
Common stock issued for cashless exercise of options
|
$ | - | $ | 357 | ||||
Common stock issued for conversion of accounts payable
|
$ | 171,000 | $ | - |
NOTE 2 –
|
GOING CONCERN
|
Allocation
|
$ | |||
Assets
|
$ | 907,614 | ||
Intangible assets
|
366,000 | |||
Goodwill
|
739,000 | |||
Total
|
2,012,614 | |||
Less fair value of liabilities
|
(387,614 | ) | ||
Purchase price
|
$ | 1,625,000 |
December 31,
2015
|
December 31,
2014
|
|||||||
(Audited)
|
(Audited)
|
|||||||
Finished goods
|
$ | 418,439 | $ | 923,565 | ||||
Inventory reserve
|
(20,000 | ) | (40,215 | ) | ||||
Total
|
$ | 398,439 | $ | 8 |
Intangible Assets:
|
Estimated
Useful Lives |
Cost
|
Accumulated Amortization
|
Net Book Value
|
||||||||||
RMH/EGC acquisition- customer contracts
|
5 years
|
$ | 366,000 | $ | (189,100 | ) | $ | 176,900 | ||||||
Greners acquisition- customer contracts
|
5 years
|
230,000 | (163,296 | ) | 66,704 | |||||||||
Phototron acquisition- customer contracts
|
5 years
|
215,000 | (215,000 | ) | - | |||||||||
Soja, Inc. (Urban Garden Supply) acquisition- customer contracts
|
5 years
|
60,000 | (60,000 | ) | - | |||||||||
Total intangible assets
|
$ | 871,000 | $ | (627,396 | ) | $ | 243,604 |
Fair Value Measurements Using Inputs
|
Carrying
Amount at
September 30,
|
|||||||||||||||
Financial Instruments
|
Level 1
|
Level 2
|
Level 3
|
2015
|
||||||||||||
Liabilities:
|
||||||||||||||||
Derivative Instruments - Warrants
|
$ | - | $ | 1,377,175 | $ | - | $ | 1,377,175 | ||||||||
Total
|
$ | - | $ | 1,377,175 | $ | - | $ | 1,377,175 |
Fair Value Measurements Using Inputs
|
Carrying
Amount atDecember 31,
|
|||||||||||||||
Financial Instruments
|
Level 1
|
Level 2
|
Level 3
|
2014
|
||||||||||||
Liabilities:
|
||||||||||||||||
Derivative Instruments - Warrants
|
$ | - | $ | 2,100,915 | $ | - | $ | 2,100,915 | ||||||||
Total
|
$ | - | $ | 2,100,915 | $ | - | $ | 2,100,915 |
Accrued
|
Debt
|
Balance
As ofDecember 31,
|
||||||||||||||
Principal
|
Interest
|
Discount
|
2015
|
|||||||||||||
6% Senior secured convertible notes (2012)
|
$ | 413,680 | $ | 172,494 | $ | - | $ | 586,174 | ||||||||
6% Secured convertible note (2014)
|
350,000 | 30,641 | (83,924 | ) | 296,717 | |||||||||||
7% Convertible note ($850,000)
|
250,000 | 104,137 | - | 354,137 | ||||||||||||
7% Convertible note ($1,000,000)
|
250,000 | 134,469 | - | 384,469 | ||||||||||||
18% Senior secured redeemable convertible debenture ($1,050,000)
|
1,150,000 | 68,510 | (552,139 | ) | 666,371 | |||||||||||
$ | 2,413,680 | $ | 510,251 | $ | (636,063 | ) | $ | 2,287,868 |
December 31, 2015
|
||||||||
Weighted
|
||||||||
Average
|
||||||||
Exercise
|
||||||||
Shares
|
Price
|
|||||||
Outstanding at beginning of period
|
565,000,000 | $ | 0.032 | |||||
Issued
|
- | - | ||||||
Exercised
|
- | - | ||||||
Forfeited
|
- | - | ||||||
Expired
|
- | - | ||||||
Outstanding at end of period
|
565,000,000 | $ | 0.032 | |||||
Exerciseable at end of period
|
565,000,000 |
December 31, 2015
|
||||||||||||||||||
Number of
|
Weighted
Average |
Weighted
Average |
Shares
|
Weighted
Average |
||||||||||||||
Warrants
|
Life
|
Price
|
Exerciseable
|
Price
|
||||||||||||||
540,000,000 | 3.31 | $ | 0.033 | 540,000,000 | $ | 0.033 | ||||||||||||
25,000,000 | 2.94 | 0.010 | 25,000,000 | 0.010 | ||||||||||||||
565,000,000 | 3.30 | $ | 0.032 | 565,000,000 | $ | 0.032 |
Weighted Average | ||||||||||||
Options
|
Exercise Price
|
$ | ||||||||||
Granted
|
49,720,000 | $ | 0.075 | $ | 3,706,000 | |||||||
Exercised
|
(5,126,187 | ) | (0.133 | ) | (682,922 | ) | ||||||
Forfeitures
|
(44,725,000 | ) | (0.092 | ) | (4,132,751 | ) | ||||||
Outstanding as of December 31, 2014
|
40,720,000 | 0.058 | 2,356,000 | |||||||||
Granted
|
- | - | (960,000 | ) | ||||||||
Exercised
|
- | - | - | |||||||||
Forfeitures
|
(11,700,000 | ) | (0.050 | ) | (585,000 | ) | ||||||
Outstanding as of December 31, 2015
|
29,020,000 | $ | 0.028 | $ | 811,000 |
Range of Exercise
|
Number
|
Weighted
Average |
Weighted
Average |
Number
|
Weighted
Average |
|||||||||||||||||
Prices
|
Outstanding
|
Years
|
Exerciseable
|
Exerciseable
|
Exerciseable
|
|||||||||||||||||
$ | 0.05 | 13,020,000 | 4.00 | $ | 0.050 | 7,120,000 | $ | 0.050 | ||||||||||||||
0.01 | 16,000,000 | 3.77 | 0.010 | 7,833,333 | 0.010 | |||||||||||||||||
29,020,000 | 3.85 | $ | 0.028 | 14,953,333 | $ | 0.043 |
Years Ended December 31,
|
Total
|
|||
2016
|
$ | 76,929 | ||
2017
|
34,675 | |||
2018
|
28,365 | |||
2019
|
0 | |||
2020
|
- | |||
Beyond
|
- | |||
Total
|
$ | 139,969 |
i
|
Two million shares vest immediately upon securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB (earned as of February 18, 2016);
|
|
ii
|
Two million shares vest immediately upon the successful approval and effectiveness of the Company’s S-1 (not earned as of December 31, 2015);
|
|
iii
|
Two million shares vest immediately upon the Company’s resolution of the class action lawsuits (earned as of August 17, 2015); and,
|
|
iv
|
Ten million shares will vest on a monthly basis over a period of three years beginning on the July 1, 2014.
|
i
|
Two million shares vested immediately;
|
|
iv
|
Six million shares vest on a monthly basis over a period of three years beginning on the date of grant.
|
i
|
One million four hundred thousand shares vested immediately;
|
|
iv
|
Three million six hundred thousand shares will vest on a monthly basis over a period of three years beginning on the date of grant.
|
2015
|
2014
|
2013
|
||||||||||
U.S. operations loss carry forward and state at statutory rate of 40%
|
$ | 6,713,538 | $ | 5,038,976 | $ | 3,612,736 | ||||||
Less valuation allowance
|
(6,713,538 | ) | (5,038,976 | ) | (3,612,736 | ) | ||||||
Net deferred tax assets
|
- | - | - | |||||||||
Change in valuation allowance
|
$ | (6,713,538 | ) | $ | (5,038,976 | ) | $ | (3,612,736 | ) |
2015
|
2014
|
|||||||
Federal statutory rate
|
-34.0 | % | -34.0 | % | ||||
State income tax rate
|
-6.0 | % | -6.0 | % | ||||
Change in valuation allowance
|
40.0 | % | 40.0 | % | ||||
Effective tax rate
|
0.0 | % | 0.0 | % |
/s/ Marco Hegyi
|
/s/ Mark E. Scott
|
||
Marco Hegyi
|
Mark E. Scott
|
||
President
|
Chief Financial Officer
|
GROWLIFE, INC.
|
||
Date: April 14, 2016
|
By:
|
/s/ Marco Hegyi
|
Marco Hegyi
|
||
President and Director
(Principal Executive Officer)
|
||
By:
|
/s/ Mark E. Scott
|
|
Mark Scott
|
||
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
|
SIGNATURES
|
TITLE
|
DATE
|
/s/ Marco Hegyi
|
President and Director
|
April 14, 2016
|
Marco Hegyi
|
(Principal Executive Officer)
|
|
/s/ Mark E. Scott
|
Chief Financial Officer and Secretary
|
April 14, 2016
|
Mark E. Scott
|
(Principal Financial/Accounting Officer)
|
|
/s/ Michael E. Fasci
|
Director
|
April 14, 2016
|
Michael E. Fasci
|
||
,@+%$RN"[!L^6S?*N,_;7_!.W]M.']O3]FFR\>+H G?LN_L\>$/ &E;&M?"
M^FQVC2JNW[5-]Z: WGE\(:7I
M=W!I=W<6]O>)!=2+)(S%UDN4=E5PC&&,E"44CZ)\%?L=W7AO5?@W>RZG9)+\
M.YM3U/6(K2)HX-8U#4()A GrowLife, Inc. (GrowLife or the Company)
is incorporated under the laws of the State of Delaware and is headquartered in Seattle, Washington. The Company was founded in
2012 with the Closing of the Agreement and Plan of Merger with SGT Merger Corporation. The Companys goal of becoming the nations largest cultivation
facility service provider for the production of organics, herbs and greens and plant-based medicines has not changed. The Companys
mission is to best serve more cultivators in the design, build-out, expansion and maintenance of their facilities with products
of high quality, exceptional value and competitive price. Through a nationwide network of knowledgeable representatives, regional
centers and its e-commerce website, GrowLife provides essential and hard-to-find goods including media (i.e., farming soil), industry-leading
hydroponics equipment, organic plant nutrients, and thousands more products to specialty grow operations across the United States. The Company primarily sells through its wholly owned subsidiary,
GrowLife Hydroponics, Inc. In addition to the promotion and sales of GrowLife owned brands, GrowLife companies distribute and sell
over 3,000 products through its e-commerce distribution channel, Greners.com, and through our regional retail storefronts. GrowLife
and its business units are organized and directed to operate strictly in accordance with all applicable state and federal laws. Past Merger and Acquisition Transactions On June 7, 2013, GrowLife Hydroponics 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 purchase was June 7, 2013. The Company purchased all of
the assets and liabilities of the RMH and EGC Companies, and their retail hydroponics stores, which are located in Vail and Boulder,
Colorado and Portland, Maine. The Company purchased RMC and EGC from Rob Hunt, who was appointed to the then Companys Board
of Directors and President of GrowLife Hydroponics, Inc. On July 23, 2012, the Company completed the purchase of substantially
all of the assets of Donna Klauenburch and Tao Klauenburch related to the online retail business Greners.com. On October 24, 2012, the Companys wholly owned subsidiary
GrowLife Hydroponics, Inc., a Delaware corporation, completed the purchase of all of the shares of Soja, Inc. dba Urban Garden
Supplies (the Urban Garden) from Richard Melograno, Michael Cook, and Scott Glass (collectively the UG Sellers).
The Company acquired all of the assets and liabilities of Urban Garden which included the inventory of the store located at 22516
Ventura Blvd., Woodland Hills, CA 91364. Agreement and Plan of Merger with SGT Merger Corporation On March 21, 2012, the Company entered into an Agreement and Plan
of Merger with SGT Merger Corporation, a Nevada corporation and the Companys wholly-owned subsidiary, SG Technologies Corp,
a Nevada corporation (SGT), Sterling C. Scott, and W-Net Fund I, L.P., a Delaware limited partnership and current
holder of the Companys common stock. The transaction closed on April 5, 2012. At the Closing, (i) The Merger Corporation
was merged with and into SGT; (ii) SGT became the Companys wholly-owned subsidiary; and (iii) 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. At the Closing, the Company issued to SGTs former stockholders 157,000,000 shares of the Companys
common stock and 3,000,000 shares of Series A Preferred Stock in exchange for the 200 shares of SGTs common stock outstanding
immediately prior to the Merger. Sterling C. Scott was appointed to the then Companys Board of Directors and Chief Executive
Officer. After the Merger, former holders of SGTs 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 SGTs management, SGT is deemed to be the acquiring company and the Company was
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 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. Suspension of Trading of the Companys Securities On April 10, 2014, the Company received notice from the SEC that
trading of the Companys common stock on the OTCBB was to be suspended from April 10, 2014 through 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 us 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. because of concerns regarding the accuracy and adequacy of information
in the marketplace and potentially manipulative transactions in GrowLifes common stock. The Company did not receive
notice from the SEC that it was being formally investigated. The suspension of trading eliminated the Companys market makers,
resulted in our trading on the grey sheets, resulted in legal proceedings and restricted the Companys access to capital.
On April 25, 2014, shares of the Companys common stock resumed trading on the grey sheets and were not formally
quoted or listed on any stock exchange as of December 31, 2015. SEC Charges of Manipulating Our Securities On August 5, 2014, the SEC charged four promoters with ties to the
Pacific Northwest for manipulating the Companys open market and conducted pre-arranged, manipulative matched orders and
wash trades to create the illusion of an active market in these stocks. The promoters then sold their shares in coordination
with aggressive promotional campaigns that urged investors to buy the stocks because the prices were on the verge of rising substantially. On July 9, 2015, the SEC entered into settlements with two of the
promoters. In connection with the settlement of their SEC action, the two men are liable for disgorgement of approximately
$2.1 million and $306,000 in illicit profits, respectively. Earlier this year the two men were also sentenced to five and three
years in prison, respectively, for their participation in the scheme. Resumed Trading of our Common Stock On February 18, 2016, the Companys common stock resumed unsolicited
quotation on the OTC Bulletin Board after receiving clearance from the Financial Industry Regulatory Authority (FINRA)
on our Form 15c2-11. The Company is currently taking the appropriate steps to uplist to the OTCQB Exchange and resume
priced quotations with market makers as soon as it is able. The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course
of business. The Company incurred net losses of $5,688,845 and $86,626,099 for the years ended December 31, 2015 and 2014, respectively.
Our net cash used in operating activities was $1,375,891 and $2,122,577 and the years ended December 31, 2015 and 2014, respectively. The Company anticipates that it will record losses from operations
for the foreseeable future. As of December 31, 2015, our accumulated deficit was $116,715,648. The Company has experienced
recurring operating losses and negative operating cash flows since inception, and has financed its working capital requirements
during this period primarily through the recurring issuance of convertible notes payable and advances from a related party. The
audit report prepared by our independent registered public accounting firm relating to our financial statements for the year ended
December 31, 2015 and filed with the SEC on April 14, 2016 includes an explanatory paragraph expressing the substantial doubt about
our ability to continue as a going concern. Continuation of the Company as a going concern is dependent upon
obtaining additional working capital. The financial statements do not include any adjustments that might be necessary
if we are unable to continue as a going concern. Basis of Presentation - The accompanying unaudited consolidated
financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. The preparation
of these unaudited consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP). Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned and majority-owned subsidiaries. Inter-Company items and transactions
have been eliminated in consolidation. Cash and Cash Equivalents - The Company classifies highly
liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. The Company
maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation
up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk
for cash on deposit. Accounts Receivable and 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, the fee is fixed
and determinable, 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. Inventories - Inventories are recorded on a first in first
out basis. Inventory consists of raw materials, purchased finished goods and components held for resale. Inventory is valued at
the lower of cost or market. The reserve for inventory was $20,000 and $40,215 as of December 31, 2015 and 2014, respectively. Property and Equipment - Property and equipment are stated
at cost. Assets acquired held under capital leases are initially recorded at the lower of the present value of the minimum lease
payments discounted at the implicit interest rate (35% for assets currently held under capital lease) or the fair value of the
asset. Major improvements and betterments are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is computed
using the straight-line method over an estimated useful life of five years. Assets acquired under capital lease are depreciated
over the lesser of the useful life or the lease term. At the time of retirement or other disposition of property and equipment,
the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated
statements of operations. Goodwill and Intangible Assets - The Company evaluates the
carrying value of goodwill, intangible assets, and long-lived assets during the fourth quarter of each year and between annual
evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit
below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors
or in business climate, (2) unanticipated competition, (3) an adverse action or assessment by a regulator, (4) continued losses
from operations, (5) continued negative cash flows from operations, and (6) the suspension of trading of the Companys securities.
When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is
assigned to the reporting units carrying amount, including goodwill. The fair value of the reporting unit is estimated using
a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies
data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured.
The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount.
In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the
other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the
amount assigned to its other assets and liabilities is the implied fair value of goodwill. The Company amortizes the cost of other intangible assets over their
estimated useful lives, which range up to ten years, unless such lives are deemed indefinite. Intangible assets with indefinite
lives are tested in the fourth quarter of each fiscal year for impairment, or more often if indicators warrant. Equity Investments The
Company classifies all highly-liquid investments with stated maturities of greater than three months from the date of purchase
and remaining maturities of less than one year as short-term investments. Investments with maturities beyond one year may be classified
as short-term based on their highly liquid nature and because such investments are viewed as being available to support current
operations. The Company classifies and accounts for short-term investments as available-for-sale and reflect realized gains and
losses using the specific identification method. Changes in market value, if any, excluding other-than-temporary impairments, are
reflected under stockholders deficit as unrealized gain/loss on related party investment. Long Lived Assets The Company reviews its long-lived
assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed
of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount
or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an
impairment loss is recognized in operating results. Fair Value Measurements and Financial Instruments - ASC Topic
820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure
of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon
the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as
follows: Level 1 - Inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets. Level 2 - Inputs to the valuation methodology include quoted
prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument. Level 3 - Inputs to the valuation methodology are unobservable
and significant to the fair value measurement. The carrying value of cash, accounts receivable, investment in a
related party, accounts payables, accrued expenses, due to related party, notes payable, and convertible notes approximates their
fair values due to their short-term maturities. 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 twelve months of the balance sheet date. As of December 31, 2015 and 2014, the Company had outstanding 7%
convertible notes for $500,000 that the Company determined were a derivative liability due to the reset clause associated
with the notes conversion price. The Company valued the derivative liability of these notes at $105,515 and $1,278,878,
respectively, using the Black-Scholes-Merton option pricing model. As of December 31, 2015 and 2014, the Company had outstanding 6%
convertible notes for $350,000 that the Company determined were a derivative liability due to the reset clause associated
with the notes conversion price. The Company valued the derivative liability of these notes at $54,377 and $822,037, respectively
using the Black-Scholes-Merton option pricing model. As of December 31, 2015, the Company had outstanding 18% convertible
notes for $1,150,000 that the Company determined were a derivative liability due to the reset clause associated with
the notes conversion price. The Company valued the derivative liability of these notes at $1,217,283 using the Black-Scholes-Merton
option pricing model. 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, cost of goods sold, and accounts receivable and an increase to inventory.
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, 2015 and 2014, there was no reserve for sales returns, which are minimal based upon our historical experience. Shipping and Handling Fees and Cost - For the years ended
December 31, 2015 and 2014, shipping and handling fees billed to customers totaled $95,455 and $128,351, respectively, and were
included in revenue. Stock Based Compensation - The Company has share-based compensation
plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options and warrants
to purchase shares of Company common stock at the fair market value at the time of grant. Stock-based compensation cost to employees
is measured by the Company at the grant date, based on the fair value of the award, over the requisite service period under ASC
718. For options issued to employees, the Company recognizes stock compensation costs utilizing the fair value methodology over
the related period of benefit. Grants of stock to non-employees and other parties are accounted for in accordance with
the ASC 505. Advertising Costs - Advertising costs are expensed as incurred
and are recorded in general and administrative expenses. For the years ended December 31, 2015 and 2014, advertising costs of $637
and $141,369, respectively, were included in general and administrative expenses. Net (Loss) Per Share - Under the provisions of ASC 260, Earnings
per Share, basic loss per common share is computed by dividing net loss available to common shareholders by the weighted
average number of shares of common stock outstanding for the periods presented. Diluted net loss per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that would then share in the income of the Company, subject to anti-dilution limitations.
The common stock equivalents have not been included as they are anti-dilutive. As of December 31, 2015, there are also (i) stock
option grants outstanding for the purchase of 29.0 million common shares at a $0.028 average strike price; (ii) warrants for the
purchase of 565.0 million common shares at a $0.032 average exercise price; (iii) 243.6 million shares related to convertible debt
that can be converted at 0.007 per share; and (iv) 6.0 million shares that may be issued to a former executive related to a severance
agreement. We issued $2 million in common stock or 115,141,048 shares of our common stock pursuant to the settlement of the Consolidated
Class Action and Derivative Action lawsuits alleging violations of federal securities laws that were filed against the Company
in United States District Court, Central District of California. In addition, we have an unknown number of common shares to be
issued under the TCA financing agreements. As of December 31, 2014, there were stock options outstanding for the purchase of 40,720,000
common shares, warrants for the purchase of 565,000,000 common shares, 209,061,571 shares related to convertible debt and 6,000,000
of shares which we may have to issue under a settlement agreement which could potentially dilute future earnings per share. Dividend Policy - The Company has never paid any cash dividends
and intends, for the foreseeable future, to retain any future earnings for the development of our business. Our future dividend
policy will be determined by the board of directors on the basis of various factors, including our results of operations, financial
condition, capital requirements and investment opportunities. Use of Estimates - In preparing these unaudited interim 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 derivative liability, equity instruments and share based compensation. Reclassifications - Certain amounts in the consolidated financial
statements for 2014 have been reclassified to conform to the 2015 presentation. These reclassifications have no effect on net income,
earnings per share, or stockholders equity as previously reported. Recent Accounting Pronouncements A variety of proposed or otherwise potential accounting standards
are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary
nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material
to our consolidated financial statements. In August 2014, FASB issued ASU 2014-15Presentation of Financial
StatementsGoing Concern (ASC Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to
Continue as a Going Concern. The update requires management to assess a companys ability to continue as a going
concern and to provide related footnote disclosures in certain circumstances. All entities are required to apply the new requirements
in annual periods ending after December 15, 2016, and interim periods thereafter. Early application is permitted. As such, GrowLife,
Inc. is required to adopt these provisions for the annual period ending December 31, 2016. The Company is currently evaluating
the impact of FASB ASU 2014-15 but does not expect the adoption thereof to have a material effect on GrowLifes financial
statements. In May 2014, FASB issued ASU 2014-09Revenue from Contracts
with Customers (Topic 606): Section ASummary and Amendments That Create Revenue from Contracts with Customers,
(Topic 606) and Other Assets and Deferred CostsContracts with Customers (Subtopic 340-40), Section BConforming Amendments
to Other Topics and Subtopics in the Codification and Status Tables, Section CBackground Information and Basis for Conclusions.
The guidance in this update affects any entity that enters into contracts with customers to transfer goods or services and
supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. The update is effective for annual reporting
periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.
As such, GrowLife, Inc. is required to adopt these provisions as of December 31, 2016. The Company is currently evaluating the
impact of FASB ASU 2014-09 but does not expect the adoption thereof to have a material effect on GrowLifes financial statements. In July 2013, FASB issued ASU 2013-11Income Taxes (ASC Topic
740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or
a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The amendments in this update
provide explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward,
a similar tax loss, or a tax credit carryforward exists at the reporting date. The update is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2013. The adoption of FASB ASU 2013-11 did not have a material
effect on GrowLifes financial statements. New Accounting Standards Issued but Not Yet Adopted In February 2015, the FASB issued ASU No. 2015-02, Consolidation
(Topic 810): Amendments to the Consolidation Analysis (ASU 2015-02). ASU 2015-02 affects reporting entities that
are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for us on January 1,
2016, with early adoption permitted. The Company does not believe that this pronouncement will have an impact on the Companys
consolidated financial statements. In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation
of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). The amendments
in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement
guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 is effective for the Company
on January 1, 2016, with early adoption permitted. The Company is currently evaluating the potential changes from this ASU
to the Companys future financial reporting and disclosures. On June 7, 2013, GrowLife Hydroponics 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 purchase was June 7, 2013. The purchase included all of
the assets and liabilities of the RMH and EGC Companies, and their retail hydroponics stores, which are located in Vail and Boulder,
Colorado and Portland, Maine. The Company purchased RMC and EGC from Rob Hunt, who was appointed to the Companys Board of
Directors and was appointed President of GrowLife Hydroponics, Inc. The Company paid the former owners of the RMH and EGC 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 the Companys
common stock. The purchase price was allocated to specific identifiable tangible
and intangible assets at their fair value at the date of the purchase in accordance with Accounting Standards Codification 805,
Business Combinations, as follows: The Company is amortizing the $366,000 of intangible assets at the
rate of $6,100 per month over 5 years, with the Company recording $106,548 of non-cash amortization expense related to these intangible
assets during the years ended December 31, 2015 and 2014. The Company consolidated the results from operations from June 7,
2013. Transactions with CANX, LLC and Logic Works LLC On July 10, 2014, the Company closed a Waiver and Modification Agreement,
Amended and Restated Joint Venture Agreement, Secured Credit Facility and Secured Convertible Note with CANX, and Logic Works LLC,
a lender and shareholder of the Company. The Agreements require the filing of a registration statement on Form S-1 within 10 days
of the filing of the Companys Form 10-Q for the period ended June 30, 2014. Due to the Companys grey sheet trading
status and other issues, the Company did not file the registration statement. Previously, the Company entered into a Joint Venture Agreement with
CANX USA LLC, a Nevada limited liability company. Under the terms of the Joint Venture Agreement, the Company and CANX
formed Organic Growth International, LLC (OGI), a Nevada limited liability company, for the purpose of expanding
the Companys 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 the closing of
the Agreement, CANX agreed to provide a commitment for funding in the amount of $1,300,000 for a GrowLife Infrastructure Funding
Technology program transaction and provided additional funding under a 7% Convertible Note instrument for $1,000,000, including
$500,000 each from Logic Works and China West III Investments LLC, entities that are unaffiliated with CANX and operate as separate
legal entities. The Company initially owned a non-dilutive forty five percent (45%) share of OGI and the Company may acquire a
controlling share of OGI as provided in the Joint Venture Agreement. In accordance with the Joint Venture Agreement, the Company
and CANX entered into a Warrant Agreement whereby the Company delivered to CANX a warrant to purchase 140,000,000 shares of the
Company common stock at a maximum strike price of $0.033 per share. Also in accordance with the Joint Venture Agreement, the Company
issued an additional warrant to purchase 100,000,000 shares of the Companys common stock at a maximum strike price of $0.033
per share on February 7, 2014. On April 10, 2014, as a result of the suspension in the trading of
the Companys securities, the Company went into default on its 7% Convertible Notes Payable for $500,000 each from Logic
Works and China West III. As a result, the Company accrued interest on these notes at the default rate of 24% per annum. Furthermore,
as a result of being in default on these notes, the Holders could have, at their sole discretion, called these notes. Waiver and Modification Agreement The Company entered into a Waiver and Modification Agreement dated
June 25, 2014 with Logic Works LLC whereby the 7% Convertible Note with Logic Works dated December 20, 2013 was modified to provide
for (i) a waiver of the default under the 7% Convertible Note; (ii) a conversion price which is the lesser of (A) $0.025 or (B)
twenty percent (20%) of the average of the three (3) lowest daily VWAPs 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 Note; (iii) the
filing of a registration statement on Form S-1 within 10 days of the filing of the Companys Form 10-Q for the period ended
June 30, 2014; and (iv) continuing interest of 24% per annum. China West III converted its Note into common stock on June 4, 2014.
Due to the Companys grey sheet trading status and other issues, the Company did not file the registration statement. This
20% of the average should be 70% and the Parties are working to resolve this issue. Amended and Restated Joint Venture Agreement The Company entered into an Amended and Restated Joint Venture Agreement
dated July 1, 2014 with CANX whereby the Joint Venture Agreement dated November 19, 2013 was modified to provide for (i) up
to $12,000,000 in conditional financing subject to review by GrowLife and approval by OGI for business growth development opportunities
in the legal cannabis industry for up to nine months, subject to extension; (ii) up to $10,000,000 in working capital loans, with
each loaning requiring approval in advance by CANX; (iii) confirmed that the five year warrants, subject to extension,
at $0.033 per share for the purchase of 140,000,000 and 100,000,000 were fully earned and were not considered compensation for
tax purposes by the Company; (iv) granted CANX five year warrants, subject to extension, to purchase 300,000,000 shares of common
stock at the fair market price of $0.033 per share as determined by an independent appraisal; (v) warrants as defined in the Agreement
related to the achievement of OGI milestones; (vi) a four year term, subject to adjustment and (vi) the filing of a registration
statement on Form S-1 within 10 days of the filing of the Companys Form 10-Q for the period ended June 30, 2014. Due to
the Companys grey sheet trading status and other issues, the Company did not file the registration statement. Secured Convertible Note and Secured Credit Facility The Company entered into a Secured Convertible Note and Secured Credit
Facility dated June 25, 2014 with Logic Works whereby Logic Works agreed to provide up to $500,000 in funding. Each funding requires
approval in advance by Logic Works, provides for interest at 6% with a default interest of 24% per annum and requires repayment
by June 26, 2016. The Note is convertible into common stock of the Company at the lesser of $0.0070 or (B) twenty percent (20%)
of the average of the three (3) lowest daily VWAPs occurring during the twenty (20) consecutive Trading Days immediately preceding
the applicable conversion date on which Logic Works elects to convert all or part of this 6% Convertible Note, subject to adjustment
as provided in the Note. The 6% Convertible Note is collateralized by the assets of the Company. The Company also has
agreed to file a registration statement on Form S-1 within 10 days of the filing of the Companys Form 10-Q for the three
months ended September 30, 2014 and have the registration statement declared effective within ninety days of the filing of the
Companys Form 10-Q for the three months ended June 30, 2014. Due to the Companys grey sheet trading status and other
issues, the Company did not file the registration statement. On July 10, 2014, the Company closed a Waiver and Modification Agreement,
Amended and Restated Joint Venture Agreement, Secured Credit Facility and Secured Convertible Note with CANX, and Logic Works LLC,
a lender and shareholder of the Company. As of December 31, 2014, the Company has borrowed $350,000 under the Secured Convertible
Note and Secured Credit Facility dated June 25, 2014 with Logic Works. OGI was incorporated on January 7, 2014 in the State of Nevada and
had no business activities as of December 31, 2015. Inventory as of December 31, 2015 and December 31, 2014 consists
of the following: December 31, 2015 December 31, 2014 Finished goods inventory relates to product at the Companys
retail stores, which is product purchased from distributors, and in some cases directly from the manufacturer, and resold at our
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. In May 2013, the Company made an investment in the amount of $1,160
in Vape Holdings, Inc., a Nevada corporation, and received 200,428 shares. Sterling C. Scott, the Companys then Chief Executive Officer,
also owned 257,320 shares of Vapes common stock. Furthermore, the former President of GrowLife, Inc., Kyle Tracey, was the
Chief Executive Officer of Vape. As a result, the Company deemed Vape to be a related party and therefore has recorded the Companys
investment in Vape as an Investment in a related party on its balance sheet. The value of the Companys investment in Vape as of December
31, 2013 was $5.60 per share, or $1,122,397. The Company sold 200,428 shares of Vapes common stock during the year ended
December 31, 2014 for net proceeds of $186,791 which was recorded as other income in the statement of operations.
As of December 31, 2014, the Company recorded a $1,122,397 loss in the value of its investment in Vape by decreasing its Investment
in a related party balance sheet account while also recording a corresponding decrease to Unrealized loss on investment
in a related party in the Stockholders deficit section of the Companys balance sheet. Intangible assets as of December 31, 2015 consisted of the following: Estimated Useful Lives The fair value of the assets acquired detailed above, estimated by
using a discounted cash flow approach based on future economic benefits associated with agreements with customers, or through expected
continued business activities with its customers. In summary, the estimate was based on a projected income approach and related
discounted cash flows over five years, with applicable risk factors assigned to assumptions in the forecasted results. In April 2008, the FASB issued a pronouncement that provides guidance
on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed
to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for
derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008.
The adoption of these requirements can affect the accounting for warrants and many convertible instruments with provisions that
protect holders from a decline in the stock price (or down-round provisions). For example, warrants or conversion
features with such provisions are no longer recorded in equity. Down-round provisions reduce the exercise price of a warrant or
convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments
or issues new warrants or convertible instruments that have a lower exercise price. 7% Convertible Notes As of December 31, 2013, the Company had outstanding 7% convertible
notes for $1,850,000 that the Company determined were a derivative liability due to the reset clause associated with
the notes conversion price. The Company had valued the derivative liability of these notes at $9,324,000 using the Black-Scholes-Merton
option pricing model. As of December 31, 2014, the Company had outstanding 7% convertible notes for $500,000 that the Company
determined were a derivative liability due to the reset clause associated with the notes conversion price.
The Company valued the derivative liability of these notes at $1,278,878 using the Black-Scholes-Merton option pricing model, which
approximates the Monte Carlo and other binomial valuation techniques. As of December 31, 2015, the Company had outstanding 7% convertible
notes for $500,000 that the Company determined were a derivative liability due to the reset clause associated with
the notes conversion price. The Company valued the derivative liability of these notes at $105,515 using the Black-Scholes-Merton
option pricing model, which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions (i)
dividend yield of 0%; (ii) expected volatility of 133.2%; (iii) risk free rate of .001%, (iv) stock price of $.005, (v) per share
conversion price of $0.007, and (vi) expected term of .25 years, as the Company estimates that these notes will be converted by
March 31, 2016. 6% Convertible Notes As of December 31, 2014, the Company had outstanding 6% convertible
notes for $350,000 that the Company determined were a derivative liability due to the reset clause associated with
the notes conversion price. The Company valued the derivative liability of these notes at $822,037 using the Black-Scholes-Merton
option pricing model, which approximates the Monte Carlo and other binomial valuation techniques. As of December 31, 2015, the
Company had outstanding unsecured 6% convertible notes for $350,000 that the Company determined were a derivative liability due
to the reset clause associated with the notes conversion price. The Company valued the derivative liability
of these notes at $54,377 using the Black-Scholes-Merton option pricing model. which approximates the Monte Carlo and other
binomial valuation techniques, with the following assumptions (i) dividend yield of 0%; (ii) expected volatility of 133.2%;
(iii) risk free rate of 0.34%, (iv) stock price of $.005, (v) per share conversion price of $0.007, and (vi) expected term of .56
years. Secured Convertible Debenture Transaction with TCA Global Credit
Master Fund LP On July 9, 2015, the Company closed a Securities Purchase Agreement
and related agreements with TCA Global Credit Master Fund LP, an accredited investor, whereby the Company agreed to sell and TCA
agreed to purchase up to $3,000,000 of senior secured convertible redeemable debentures, of which $700,000 was purchased on
July 9, 2015 and up to $2,300,000 may be purchased in additional closings. The closing of the Transaction occurred on July 9, 2015. On July 9, 2015, the Company valued the conversion feature as a derivative
liability of this senior secured convertible redeemable debenture at $888,134 and discounted debt by $700,000 and recorded interest
expense of $188,134. The Company valued the derivative liability of this debenture at $888,134 using the Black-Scholes-Merton option
pricing model. which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions (i)
dividend yield of 0%; (ii) expected volatility of 160.0%; (iii) risk free rate of 0.25%, (iv) stock price of $0.02, (v) per share
conversion price of $0.011, and (vi) expected term of 1.0 years. Committed Equity Facility Transaction with TCA Global Credit Master
Fund LP On August 6, 2015, the Company closed a Securities Purchase Agreement
and related agreements with TCA Global Credit Master Fund LP, whereby the Company agreed to sell and TCA agreed to purchase a $100,000
senior secured convertible redeemable debenture and the Company agreed to issue and sell to TCA, from time to time, and TCA agreed
to purchase from the Company up to $3,000,000 of the Companys common stock pursuant to a Committed Equity Facility. The
closing of the Transaction occurred on August 6, 2015. On August 6 2015, the Company valued the conversion feature as a
derivative liability of this senior secured convertible redeemable debenture at $66,668 and discounted debt by $66,668. The Company
valued the derivative liability of this debenture at $66,668 using the Black-Scholes-Merton option pricing model. which approximates
the Monte Carlo and other binomial valuation techniques, with the following assumptions (i) dividend yield of 0%; (ii) expected
volatility of 160.0%; (iii) risk free rate of 0.25%, (iv) stock price of $0.02, (v) per share conversion price of $0.018, and (vi)
expected term of 1.0 years. Amended and Restated Securities Purchase Agreement with TCA Global
Credit Master Fund LP On October 27, 2015, the Company entered into an Amended and Restated
Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP whereby we agreed to sell, and TCA agreed
to purchase $350,000 of senior secured convertible, redeemable debentures. The Company and TCA previously entered into a Securities
Purchase Agreement dated as of April 30, 2015 and effective as of July 9, 2015 to purchase up to $3,000,000 in Debentures. To date,
the Company has sold $1,050,000 in Debentures to TCA and up to $1,950,000 in Debentures remains for sale by the Company. The
closing of the transaction occurred on October 27, 2015. The Company valued the conversion feature as a derivative liability
at $340,924 and discounted debt by $340,924. The company value the derivative liability of this debenture using the Black-Scholes-Merton
option pricing model which approximates the Monte Carlo and other binomial valuation techniques, with the following assumption
(i) dividend yield of 0%, (ii) expected volatility of 160.0%; (iii) risk free rate of 0.25%, (iv) stock price of $0.007, (v) per
share conversion price of $0.0065, and (vi) expected term of 1.0 years. The risk-free rate of return reflects the interest rate for the United
States Treasury Note with similar time-to-maturity to that of the warrants. Carrying Amount at September 30, For the year ended December 31, 2015, the Company recorded non-cash
income of $723,740 related to the change in fair value of derivative expense related to its 6%, 7% and 18% convertible
notes. Carrying Amount at December 31, Since January 1, 2014, the Company engaged in the following reportable
transactions with our directors, executive officers, holders of more than 5% of our voting securities, and affiliates or immediately
family members of our directors, executive officers and holders of more than 5% of our voting securities. Certain Relationships Please see the transactions with CANX, LLC and Logic Works LLC in
Note 5 and TCA Global Credit Master Fund LP as discussed in Note 11 and 12. Transaction with Marco Hegyi Mr. Hegyi warrant to purchase up to twenty five million shares of
the Companys common stock at an exercise price of $0.08 per share was reduced to $0.01 per share on December 18, 2015. The
reduction in exercise price resulted in no additional compensation expense at December 31, 2015. Transaction with an Entity Controlled by Mark E. Scott An entity controlled by Mr. Scott received an option to purchase
sixteen million shares of the Companys common stock at an exercise price of $0.07 per share was reduced to $0.01 per share
on December 18, 2015. The reduction in exercise price resulted in no additional compensation expense at December 31, 2015. Two
million shares vested on August 17, 2015 with the Companys resolution of the class action lawsuits. Loans and Advances from Sterling C. Scott Sterling Scott, our former CEO, advanced various amounts to us. As
of December 31, 2011, the amount due the former CEO was $183,103, and additional advances of $98,897 were made to us through April
5, 2012. On April 5, 2012, Mr. Scott converted $282,000 of these advances into a 6% senior convertible note. Mr. Scott made further
advances during the year ended December 31, 2012 which were converted into the 6% senior convertible note. As of December 31, 2013,
total amount owed to Mr. Scott was $453,932, which consisted of $413,680 in principal and $40,252 in accrued interest. As of September
10, 2014, the outstanding principal balance on Mr. Scotts 6% convertible note was $413,680 and accrued interest were sold
to two parties not related to us. Investment in Vape Holdings, Inc. Please see the transactions with Vape Holding, Inc. as discussed
in Note 7. Convertible notes payable as of December 31, 2015 consists of the
following: Balance As of December 31, 6% Senior Secured Convertible Notes Payable (2012) On September 28, 2012, the Company entered into an Amendment and
Exchange Agreement (Exchange Agreement) with investors, including Sterling Scott, our then CEO. The Exchange Agreement
provided for the issuance of new 6% Senior Secured Convertible Notes that replaced the 6% Senior Secured Convertible Notes that
were previously issued during 2012. The 6% Notes accrued interest at the rate of 6% per annum and had a maturity date of April
15, 2015. No cash payments were required; however, accrued interest is due at maturity. In the event of a default the investors
may declare the entire principal and accrued interest to be due and payable. Default interest accrued at the rate of 12% per annum.
The 6% Notes were secured by substantially all of the assets of the Company and are convertible into common stock at the rate of
$0.007 per share. The Company determined that the conversion feature was a beneficial conversion feature. As of September 10, 2014, the outstanding principal balance on Mr.
Scotts 6% convertible note was $413,680 and accrued interest were sold to two parties not related to us. On April 27, 2015,
the Company entered into Amendment One of the Amended and Restated 6% Senior Secured Convertible Note, which increased the interest
rate to 12% effective April 8, 2014 and extended the maturity to September 15, 2015. On July 9, 2015, the two investors each entered into Amendment Two
of the Amended and Restated 6% Senior Secured Convertible Note which provide for an increase in the interest rate from 6% to 10%
and the default interest rate from 12% to 20% on the 6% Senior Secured Convertible Notes for so long as the Company remains in
technical default on said notes due to its delisting from its Primary Trading Market April 2014. The Company further
agreed that said 20% default interest will be applied to the date of default on April 10, 2014 and continuing through the present. During the year ended December 31, 2014, the Company recorded interest
expense of $66,568 and $81,609 of non-cash interest expense related to the amortization of the debt discount associated with these
6% convertible notes, respectively. As of December 31, 2014, the outstanding principal on these 6% convertible notes was $413,680,
accrued interest was $71,669, and unamortized debt discount was $20,486, which results in a net amount of $464,683. The Company
accrued interest on these notes at the default rate of 12% from April 10, 2014 to July 10, 2014. During the year ended December 31, 2015, the Company recorded interest
expense of $100,825 and $20,486 of non-cash interest expense related to the amortization of the debt discount associated with these
6% convertible notes, respectively. As of December 31, 2015, the outstanding principal on these 6% convertible notes was $413,680,
accrued interest was $172,494, and unamortized debt discount was $0, which results in a net amount of $586,174. 6% Secured Convertible Note and Secured Credit Facility (2014) The Company entered into a Secured Convertible Note and Secured Credit
Facility dated June 25, 2014 with Logic Works whereby Logic Works agreed to provide up to $500,000 in funding. Each funding requires
approval in advance by Logic Works, provides for interest at 6% with a default interest of 24% per annum and requires repayment
by June 26, 2016. The Note is convertible into common stock of the Company at the lesser of $0.0070 or (B) twenty percent (20%)
of the average of the three (3) lowest daily VWAPs occurring during the twenty (20) consecutive Trading Days immediately preceding
the applicable conversion date on which Logic Works elects to convert all or part of this 6% Convertible Note, subject to adjustment
as provided in the Note. The 6% Convertible Note is collateralized by the assets of the Company. The Company also has
agreed to file a registration statement on Form S-1 within 10 days of the filing of the Companys Form 10-Q for the three
months ended June 30, 2014 and have the registration statement declared effective within ninety days of the filing of the Companys
Form 10-Q for the three months ended June 30, 2014. Due to the Companys grey sheet trading status and other issues, the
Company did not file the registration statement. On July 10, 2014, the Company closed a Waiver and Modification Agreement,
Amended and Restated Joint Venture Agreement, Secured Credit Facility and Secured Convertible Note with CANX, and Logic Works LLC,
a lender and shareholder of the Company. As of December 31, 2014, the Company has borrowed $350,000 under the Secured Convertible
Note and Secured Credit Facility, accrued interest was $9,641 and the unamortized debt discount was $261,308, which results in
a net amount of $98,333. During the year ended December 31, 2015, the Company recorded interest
expense of $21,000 and $177,384 of non-cash interest expense related to the amortization of the debt discount associated with these
6% convertible notes, respectively. As of December 31, 2015, the Company has borrowed $350,000 under the Secured Convertible Note
and Secured Credit Facility, accrued interest was $30,641 and the unamortized debt discount was $83,924, which results in a net
amount of $296,717. 7% Convertible Notes Payable On October 11, 2013, the Company issued 7% Convertible Notes in the
aggregate amount of $850,000 to investors, including Forglen LLC. The principal balance due to Forglen as of December 31, 2014
and 2015 is $250,000 was due September 30, 2015. The current annual rate of interest is 24% per annum. The conversion
price is $0.007 per share. The Company determined that the conversion feature was a beneficial conversion feature. On July 14, 2014, the Board of Directors approved a Settlement
Agreement and Waiver of Default dated June 19, 2014 with Forglen related to the 7% Convertible Note. The Company cancelled the
April 9, 2014 conversion as a result of the SEC suspension in the trading of the Companys securities and Forglen has $250,000
of principal and interest outstanding on its note payable. On December 20, 2013, the Company issued 7% Convertible Notes for
$1,000,000, including $500,000 from Logic Works LLC. The principal balance due to Logic Works as of December 31, 2014 and 2015
is $250,000 was due September 30, 2015. The current annual rate of interest is 24% per annum. The conversion price is
$0.007 per share. The Company determined that the conversion feature was a beneficial conversion feature. During the year ended December 31, 2014, the Company recorded interest
expense of $136,980 and $1,502,260 of non-cash interest expense related to the amortization of the debt discount associated with
these 7% convertible notes, respectively. As of December 31, 2014, the outstanding principal on these 7% convertible notes was
$500,000, accrued interest was $118,441, and unamortized debt discount was $196,032, which results in a net amount of $422,409. During the year ended December 31, 2015, the Company recorded interest
expense of $120,165 and $196,032 of non-cash interest expense related to the amortization of the debt discount associated with
these 7% convertible notes, respectively. As of December 31, 2015, the outstanding principal on these 7% convertible notes was
$500,000, accrued interest was $238,606, and unamortized debt discount was $0, which results in a net amount of $738,606. Secured Convertible Debenture Transaction with TCA Global Credit
Master Fund LP On July 9, 2015, the Company closed a Securities Purchase Agreement
and related agreements with TCA Global Credit Master Fund LP, an accredited investor, whereby the Company agreed to sell and TCA
agreed to purchase up to $3,000,000 of senior secured convertible redeemable debentures, of which $700,000 was purchased on
July 9, 2015 and up to $2,300,000 may be purchased in additional closings. The closing of the Transaction occurred on July 9, 2015. Securities Purchase Agreement As set forth above, the Company entered into the Securities Purchase
Agreement on July 9, 2015 with the Purchaser whereby the Purchaser agreed to purchase up to $3,000,000 of the Debentures of which
$700,000 was purchased at Closing. In connection with the Securities Purchase Agreement, the Company, at the discretion
of Purchaser, may request in writing at any time after the Closing that Purchaser purchase additional Debentures at agreed upon
time periods and amounts. The Securities Purchase Agreement also provides that the Company
shall, within ninety days of Closing, file any and all periodic reports with the SEC required under the Exchange Act to become
current with the Companys reporting requirements under the Securities Exchange Act of 1934 and shall use its best efforts
to obtain approval for the listing and quotation of the Companys common stock on the OTC Bulletin Board, or another Principal
Trading Market more senior and established than the OTC Pink Sheets and approved by Purchaser, and to have such Common Stock trading
in such Principal Trading Market. In consideration for advisory services provided by Purchaser to the
Company prior to the Closing, the Company paid to Purchaser a fee by issuing to Purchaser 10,000,000 shares of Common Stock at
$0.02 per share equal to $200,000. The Advisory Fee Shares were valued at a price equal to the lowest volume weighted average price
for the Common Stock for the five (5) Business Days immediately prior to the Effective Date, as reported by Bloomberg (the VWAP).
The Advisory Fee Shares are subject to adjustment as provided in the Securities Purchase Agreement. If the Advisory
Fee Shares are still in possession of the holder at twelve months the holder may require the Company to redeem that number of shares
for cash, not to exceed $200,000. As the common stock is conditionally redeemable, the Company has recorded the common stock as
mezzanine equity in the accompanying consolidated balance sheet. The Company also paid certain transaction, due diligence and document
review and legal fees to the Purchaser in connection with the Transaction. Senior Secured, Convertible, Redeemable Debenture The Company entered into an initial Debenture dated July 9, 2015
with the Purchaser whereby the Purchaser purchased $700,000 in senior secured, convertible, redeemable debentures in exchange for
$700,000 in immediately available and lawful money of the United States of America. The Company promised to pay Purchaser,
by no later than October 9, 2016 the outstanding principal together with interest on the outstanding principal amount under the
Debenture, at the rate of 18% per annum simple interest. The Company shall make monthly payments of principal and interest
on the Debenture to Purchaser, while this Debenture is outstanding, until the Maturity Date, based on the payment, amortization
and redemption premium schedule attached as Schedule A to the Debenture. The indebtedness evidenced by this Debenture is also secured by a
first priority lien and security interest in all of the assets and property of the Company and various other instruments as set
forth in the Transaction Documents, subject to the terms and conditions of the Intercreditor Agreement described below. At any time while the Debenture is outstanding on or after the Closing,
(i) if mutually agreed upon by the parties or (ii) at the sole option of the Purchaser upon the occurrence of an Event of Default,
the Purchaser may convert all or any portion of the outstanding principal, accrued and unpaid interest redemption premium and any
other sums due and payable hereunder or under any of the other Transaction Documents into shares of Common Stock of the Company
at a price equal to: (i) the Conversion Amount (the numerator); divided by (ii) 90% of the lowest of the average daily volume
weighted average price of the Companys Common Stock during the 5 trading days immediately prior to the Conversion Date (the
denominator). Security Agreement(s) In connection with the Securities Purchase Agreement and Debenture,
the Company entered into a Security Agreement dated July 9, 2015 with the Purchaser whereby the Company agreed to grant to Purchaser
an unconditional and continuing, first priority security interest in all of the assets and property of the Company to secure the
prompt payment, performance and discharge in full of all of Companys obligations under the Debentures, the Purchase Agreement
and the other Transaction Documents, subject to the terms and conditions of the Intercreditor Agreement set forth below. In addition, each of the Companys operating subsidiaries also
agreed to grant to Purchaser an unconditional and continuing, first priority security interest in all of the assets and property
of each of the subsidiaries to further secure the prompt payment, performance and discharge in full of all of Companys obligations
under the Debentures, the Purchase Agreement and the other Transaction Documents. Guaranty Agreement(s) In connection with the Securities Purchase Agreement and Debenture,
each of the Companys operating subsidiaries entered into Guaranty Agreements dated July 9, 2015 with the Purchaser whereby
the subsidiaries agreed to guarantee and become surety to Purchaser for the full, prompt and unconditional payment of the Liabilities
and payment and performance of the Companys obligations and the full, prompt and unconditional performance of each term
and condition to be performed by Company under the Debentures and the other Transaction Documents. Pledge Agreement(s) In connection with the Securities Purchase Agreement and Debenture,
the Company entered into Pledge Agreements dated July 9, 2015 with the Purchaser whereby the Company agreed to pledge to Purchaser
its shares in each of its operating subsidiaries as further security for the payment and performance of the Companys obligations
and the full, prompt and unconditional performance of each term and condition to be performed by Company under the Debentures and
the other Transaction Documents. Intercreditor Agreement and Related Creditor Documentation On July 9, 2015, the Company, each of its subsidiaries, Purchaser
and Logic Works LLC (an existing senior secured creditor) entered into an Intercreditor Agreement whereby Purchaser and Logic Works
agreed that their outstanding senior secured loans to the Company be secured on a pari passu basis with respect to all assets
and property of the Company and its subsidiaries. As a result of the Intercreditor Agreement, all sums secured or owing to Purchaser
and Logic Works shall be held by them on a pari passu and pro-rata basis between them, in proportion to such partys
outstanding principal amount owing under their respective loan documents. In addition, the Company, each of its subsidiaries, Purchaser and
Jordan Scott and Andrew Gentile, respectively, each entered into Subordination Agreements dated July 9, 2015 whereby Scott and
Gentile agreed to subordinate their existing 6% Senior Secured Convertible Notes, dated March 16, 2012, as amended, all of their
indebtedness, obligations and security interests to the Purchasers security interests as more fully set forth in the Transaction
Documents. On July 9, 2015, Jordan Scott and Andrew Gentile each entered into
Amendment Two of the Amended and Restated 6% Senior Secured Convertible Note which provide for an increase in the interest rate
from 6% to 10% and the default interest rate from 12% to 20% on the 6% Senior Secured Convertible Notes for so long as the Company
remains in technical default on said notes due to its delisting from its Primary Trading Market April 2014. The Company
further agreed that said 20% default interest will be applied to the date of default on April 10, 2014 and continuing through the
present. On July 9, 2015, the Company valued the derivative liability of this
senior secured convertible redeemable debenture at $888,134 and reduced debt by $700,000 and recorded interest expense of $188,134. Committed Equity Facility Transaction with TCA Global Credit Master
Fund LP On August 6, 2015, the Company closed a Securities Purchase Agreement
and related agreements with TCA Global Credit Master Fund LP, whereby the Company agreed to sell and TCA agreed to purchase a $100,000
senior secured convertible redeemable debenture and the Company agreed to issue and sell to TCA, from time to time, and TCA agreed
to purchase from the Company up to $3,000,000 of the Companys common stock pursuant to a Committed Equity Facility. The
closing of the Transaction occurred on August 6, 2015. In consideration for advisory services provided by Purchaser to the
Company prior to the, the Company paid to Purchaser a fee by issuing to Purchaser 5,000,000 shares of Common Stock at $0.02 per
share equal to $100,000. The Advisory Fee Shares were valued at price equal to the lowest volume weighted average
price for the Common Stock for the five (5) Business Days immediately prior to the issuance. The Advisory Fee Shares are subject
to adjustment as provided in the Securities Purchase Agreement. If the Advisory Fee Shares are still in possession
of the holder at twelve months, the holder may require the Company to redeem that number of shares for cash, not to exceed $100,000.
As the common stock is conditionally redeemable, the Company has recorded the common stock as mezzanine equity in the accompanying
consolidated balance sheet. The Company also paid certain transaction, due diligence and document review and legal fees in connection
with the Transaction. The Company entered into a Debenture dated August 6, 2015 with the
Purchaser whereby the Purchaser purchased $100,000 in a senior secured, convertible, redeemable debenture from the Company in exchange
for $100,000. The Company promised to pay Purchaser, by no later than August 6, 2016 the outstanding principal together
with interest on the outstanding principal amount under the Debenture, at the rate of 18% per annum simple interest. The Debenture
is convertible only at the option of Purchaser upon an event of default at a conversion price of 90% of the lowest of the average
daily volume weighted average price of the Companys Common Stock during the 5 trading days immediately prior to the conversion
date. In addition, the Company entered into a Committed Equity Facility,
dated August 6, 2015, with the Purchaser in which the Company agreed to issue and sell to the Purchaser, from time to time, and
the Purchaser agreed to purchase from the Company up to $3,000,000 of the Companys common stock. At any time
during the duration of the agreement and after the Company has an effective registration statement outstanding, the Company can
require the Purchaser to purchase shares of its common stock which will be sold by Purchaser with the net proceeds provided to
the Company, subject to the terms and conditions set forth in the Committed Equity Facility. To facilitate the Committed Equity Facility, the Company has granted
the Purchaser certain registration rights pursuant to a Registration Rights Agreement dated August 6, 2015 whereby the Company
filed a registration statement to facilitate the purchase and sale of the common stock under the Committed Equity Facility. The Companys obligation to repay the Debenture disclosed herein
as well as the Debenture entered into by and between the Company and Purchaser on July 9, 2015, are secured by security agreements,
guaranty agreements and pledge agreements previously disclosed on the Companys Current Report on Form 8-K filed July 16,
2015 and incorporated herein by reference. The Company has additionally entered into an Authorization Agreement, dated August 6,
2015, with Purchaser whereby scheduled re-payments to the Purchaser will be debited from the Companys account according
to the payment schedule of both the Debenture disclosed herein and the Debenture previously entered into on July 9, 2015. On August 6, 2015, the Company valued the derivative liability of
this senior secured convertible redeemable debenture at $66,668 and reduced debt by $66,668. Amended and Restated Securities Purchase Agreement with TCA Global
Credit Master Fund LP On October 27, 2015, the Company entered into an Amended and Restated
Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP whereby we agreed to sell, and TCA agreed
to purchase $350,000 of senior secured convertible, redeemable debentures. The Company previously entered into a Securities Purchase
Agreement dated as of April 30, 2015 and effective as of July 9, 2015 to purchase up to $3,000,000 in Debentures. As of October
27, 2015, the Company sold $1,050,000 in Debentures to TCA and up to $1,950,000 in Debentures remains for sale by us. The
closing of the transaction occurred on October 27, 2015. In addition, TCA has advanced the Company an additional $100,000 for a
total of $1,150.000. Also, on October 21, 2015 the Company issued 150,000 Series B Preferred Stock at a stated value equal to $10.00
per share to TCA that is convertible into the Companys common stock. On October 21, 2015, the Company also issued
51 shares of Series C Preferred Stock at $0.0001 par value per share to TCA that is not convertible into the Companys common
stock. In the event of a default under the Amended and Restated TCA Transaction Documents, TCA can exercise voting control over
the Companys common stock with their Series C Preferred Stock voting rights. Amended and Restated Securities Purchase Agreement As set forth above, the Company entered into the Amended and Restated
Securities Purchase Agreement on October 27, 2015 with the Purchaser whereby the Purchaser agreed to purchase $350,000 of the Debentures. In addition, in consideration for advisory services provided by Purchaser
to the Company prior to the closing (the Second Closing Advisory Fee), the Company paid to Purchaser a fee by issuing
to Purchaser 150,000 Series B Preferred Stock valued at $1,500,000 and convertible into common stock of the Company. Purchaser was also granted 51 shares of Series C Preferred Stock
as further security for the Companys completion of post-closing obligations under the Amended and Restated Transaction Documents
as further discussed below. Series B Preferred Stock Designation In connection with the Amended and Restated Securities Purchase Agreement,
the Board of Directors, on October 21, 2015, approved the authorization of a Series B Preferred Stock as provided in the Companys
Certificate of Incorporation, as amended. The Series B Preferred Stock has authorized 150,000 shares with a
stated value equal to $10.00 per share. Dividends payable to other classes of stock are restricted until repayment of the aggregate
value of Series B Preferred Stock. Upon liquidation or dissolution of the Company, Series B Preferred Stock has no priority or
preference with respect to distributions of any assets of the Company. The Series B Preferred Stock is convertible into
common stock by dividing the stated value of the shares being converted by 100% of the average of the five (5) lowest closing bid
prices for the common stock during the ten (10) consecutive trading days immediately preceding the conversion date as quoted by
Bloomberg, LP. The Purchaser was issued 150,000 shares of Series B Preferred Stock. However,
in no event will Purchaser be entitled to hold in excess of 4.99% of the outstanding shares of common stock of the Company. Series C Preferred Stock Designation In connection with the Amended and Restated Securities Purchase Agreement,
the Board of Directors, on October 21, 2015, approved the authorization of a Series C Preferred Stock as provided in the Companys
Certificate of Incorporation, as amended, and the issuance of 51 shares of Series C Preferred Stock. These shares only have voting
rights in the event of a default by the Company under the Amended and Restated Transaction Documents. The Series C Preferred Stock Designation authorizes 51 shares of
Series C Preferred Stock. Series C Preferred Stock is not entitled to dividend or liquidation rights and is not convertible into
common stock of the Company. In the event of a default under the Amended and Restated Transaction
Documents, each share of Series C Preferred Stock shall have voting votes equal to 0.019607 multiplied by the total issued and
outstanding common stock and preferred stock eligible to vote divided by .49 minus the numerator. For example, if the
total issued and outstanding common stock eligible to vote is 5,000,000, the voting rights of one share of Series C Preferred Stock
shall be equal to 102,036 (e.g. ((0.019607 x 5,000,000/0.49) (0.019607 x 5,000,000) = 102,036). Amended and Restated Senior Secured, Convertible, Redeemable
Debenture In connection with the Amended and Restated Securities Purchase Agreement,
the Company, on October 27, 2015, also entered into the Amended and Restated Debenture which was amended to increase the balance
of the original Debenture from $700,000 to $1,050,000 as a result of the additional $350,000 advanced. As of April 14, 2016, the Company is in default on our repayment
obligations in its Agreements with TCA and owes TCA approximately $254,000 in principal and interest payments. The Company
is working to resolve these issues. During the year ended December 31, 2015, the Company recorded interest
expense of $68,510 and $552,139 of non-cash interest expense related to the amortization of the debt discount associated with the
senior secured convertible redeemable debentures, respectively. As of December 31, 2015, the Company has borrowed $1,150,000 under
the senior secured convertible redeemable debentures, accrued interest was $68,510 and the unamortized debt credit was $552,139,
which results in a net amount of $666,371. Authorized Capital Stock The Company has voting common stock of 3,000,000,000 shares at $0.0001
par value and 10,000,000 shares of non-voting preferred stock with a par value of $0.0001 as authorized by the shareholders. In addition, on October 21, 2015 the Company issued 150,000 Series
B Preferred Stock at a stated value equal to $10.00 per share and convertible into our common stock. On October 21,
2015, the Company also issued 51 shares of Series C Preferred Stock at $0.0001 par value per share that have certain voting rights
but are not convertible into our common stock Non-Voting Preferred Stock Under the terms of our articles of incorporation, the Companys
board of directors is authorized to issue shares of non-voting preferred stock in one or more series without stockholder approval.
The Companys board of directors has the discretion to determine the rights, preferences, privileges and restrictions, dividend
rights, conversion rights, redemption privileges and liquidation preferences, of each series of non-voting preferred stock. The purpose of authorizing the Companys board of directors
to issue non-voting preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder
vote on specific issuances. The issuance of non-voting preferred stock, while providing flexibility in connection with possible
acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third party
to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. Other than the
Series B and C Preferred Stock discussed below, there are no shares of non-voting preferred stock presently outstanding and the
Company no present plans to issue any shares of preferred stock. Series B Preferred Stock Designation In connection with the Amended and Restated Securities Purchase Agreement,
the Board of Directors, on October 21, 2015, approved the authorization of a Series B Preferred Stock as provided in our Certificate
of Incorporation, as amended. The Series B Preferred Stock has authorized 150,000 shares with a
stated value equal to $10.00 per share. Dividends payable to other classes of stock are restricted until repayment of the aggregate
value of Series B Preferred Stock. Upon our liquidation or dissolution, Series B Preferred Stock has no priority or preference
with respect to distributions of any assets by us. The Series B Preferred Stock is convertible into common stock by
dividing the stated value of the shares being converted by 100% of the average of the five lowest closing bid prices for the common
stock during the ten consecutive trading days immediately preceding the conversion date as quoted by Bloomberg, LP. TCA was issued 150,000 shares of Series B Preferred Stock. However,
in no event will Purchaser be entitled to hold in excess of 4.99% of the outstanding shares of common stock of the Company. Series C Preferred Stock Designation In connection with the Amended and Restated Securities Purchase Agreement,
the Board of Directors, on October 21, 2015, approved the authorization of a Series C Preferred Stock as provided in our Certificate
of Incorporation, as amended, and the issuance of 51 shares of Series C Preferred Stock. These shares only have voting rights in
the event of a default by us under the Amended and Restated Transaction Documents. The Series C Preferred Stock is cancelled with
the repayment of the TCA debt. The Series C Preferred Stock Designation authorizes 51 shares of
Series C Preferred Stock. Series C Preferred Stock is not entitled to dividend or liquidation rights and is not convertible into
our common stock. In the event of a default under the Amended and Restated Transaction
Documents, each share of Series C Preferred Stock shall have voting votes equal to 0.019607 multiplied by the total issued and
outstanding common stock and preferred stock eligible to vote divided by .49 minus the numerator. For example, if the
total issued and outstanding common stock eligible to vote is 5,000,000, the voting rights of one share of Series C Preferred Stock
shall be equal to 102,036 (e.g. ((0.019607 x 5,000,000/0.49) (0.019607 x 5,000,000) = 102,036). Common Stock Unless otherwise indicated, all of the following sales or issuances
of Company securities were conducted under the exemption from registration as provided under Section 4(2) of the Securities Act
of 1933 (and also qualified for exemption under 4(5), formerly 4(6) of the Securities Act of 1933, except as noted below). All
of the shares issued were issued in transactions not involving a public offering, are considered to be restricted stock as defined
in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that
effect. The Company has compensated consultants and service providers with
restricted common stock during the development of our business and when our capital resources were not adequate to provide payment
in cash. During the year ended December 31, 2015, the Company had had the
following sales of unregistered sales of equity securities: On June 16, 2015, the Company issued 7,772,725 shares of its common
stock to Horwitz + Armstrong LLP pursuant a conversion of debt for $171,000. The shares were valued at the fair market price of
$0.022 per share. On December 18, 2015, the Company issued 2,000,000 shares to two
if its former independent Board Directors. The Company valued the 4,000,000 shares at $0.01 per share or $40,000. During the year ended December 31, 2014, the Company had had the
following sales of unregistered sales of equity securities: On January 3, 2014, the Company issued 4,700,196 shares of its common
stock to Carla Badaracco related to the conversion of $30,000 of principal and $2,901 of accrued interest at a per share conversion
price of $0.007 of the Companys 6% Senior Secured Convertible Notes Payable. On January 31, 2014, the Company issued 12,562,518 shares of its
common stock related to the conversion of $408,000 of principal and $31,688 of accrued interest at a per share conversion price
of $0.035 of the Companys 12% Senior Secured Convertible Notes Payable. On January 31, 2014, the Company issued 2,351,187 shares of its common
stock to Doug Braun related to the exercise of a stock option granted in fiscal year 2011. The Company received $44,673 or $0.019
per share. On February 13, 2014, the Company issued 29,420 shares of its common
stock to Alby Segall, a third party consultant and non-accredited investor, as payment in full for services rendered. The shares
were valued at the fair market price of $0.3399 per share. On February 16, 2014, the Company issued 1,250,000 shares of its
common stock to Integrity Media, Inc. related to a November 16, 2013 Service Agreement for investor relations. The shares were
valued at the fair market price of $0.38 per share. On March 7, 2014, the Company issued 2,000,000 shares of its common
stock to Adam Liebross related to the conversion of $50,000 of principal at a per share conversion price of $0.025 of the Companys
7% Convertible Notes Payable. On March 18, 2014, the Company issued 22,727,668 shares of its common
stock to Adam Liebross (8,300,260 shares), Myli Burger Holdings LLC (4,122,248 shares) and Europa International Inc. (10,304,800
shares) related to the total conversion of $550,000 of principal and $18,192 of accrued and interest at a per share conversion
price of $0.025 of the Companys 7% Convertible Notes Payable. On March 20, 2014, the Company issued 2,775,000 shares of its common
stock to Doug Braun related to the cashless exercise of a stock option granted in fiscal year 2011 to purchase 4,500,000 shares
of the Companys common stock at $0.23 per share. On March 31, 2014, the Company issued 500,000 shares to each of its
four independent Board Directors, The Company valued the 2,000,000 shares at $0.58 per share which was the closing price of the
Companys common stock on March 31, 2014. The Company recorded stock based compensation of $1,160,000 during the three months
ended March 31, 2014. On April 25, 2014, the Company entered into four Restricted Stock Cancellation Agreements with the four independent
members of the Companys Board of Directors, pursuant to which the Directors agreed to each cancel 500,000 shares of the
Companys restricted common stock granted to each Director on March 31, 2014. The Company recorded a reduction in common
stock and an increase in additional paid in capital of $200 during the year ended December 31, 2014 are related to cancellation
of the Restricted Stock Agreements. On April 9, 2014, the Company issued 5,347,032 shares of its common
stock to Forglen LLC related to the conversion of $125,000 of principal and $8,676 of accrued interest at a per share conversion
price of $0.025 of the Companys 7% Convertible Notes Payable. On July 14, 2014, the Board of Directors approved a Settlement
Agreement and Waiver of Default dated June 19, 2014 with Forglen related to the 7% Convertible Note. The Company cancelled the
April 9, 2014 conversion as a result of the SEC suspension in the trading of the Companys securities. On June 4, 2014, the Company issued 20,640,548 shares of the Companys
common stock to China West III Investments LLC related to the conversion of $500,000 of principal and $16,014 of accrued interest
at a per share conversion price of $0.033 of the Companys 7% Convertible Notes Payable. On July 1, 2014, Horwitz and Armstrong LLP converted debt of $100,000
debt into 500,000 shares of the Companys common stock at a per share conversion price of $0.11 and a cash payment of $35,000. On July 3, 2014, Sterling Scott exercised his option on a cashless
basis and was issued 795,455 shares of restricted common stock at $.085 per share. Mr. Scott was awarded a stock option grant on
November 3, 2013 for 12,000,000 shares and had vested 3,500,000 shares as of his resignation on May 19, 2014. The shares were valued
at the fair market price of $0.085 per share. On July 3, 2014, Robert Shapero, a Holder of the Companys
6% Convertible Notes Payable, converted $25,000 of principal and $4,136 of accrued interest into 4,162,623 shares of the Companys
common stock at a per share conversion price of $0.007. On July 15, 2014, the Company entered into a Severance Agreement
with Mr. Genesi whereby Mr. Genesi resigned as Chief Financial Officer and the Parties cancelled the Executive Employment Agreement
dated November 3, 2013. The Company agreed to issue 6,000,000 shares of restricted common stock. The shares were valued at the
fair market price of $0.08 per share. On July 31, 2014, Logic Works, a Holder of the Companys 7%
Convertible Notes Payable, converted $250,000 of principal into 35,714,286 shares of the Companys common stock at a per
share conversion price of $0.007. On August 1, 2014, the Company issued 300,000 shares of its common
stock to Joseph Barnes pursuant to a Manager Services Agreement with Mr. Barnes dated August 1, 2013. The shares were valued at
the fair market price of $0.08 per share. On August 15, 2014, the Company issued 300,000 shares of its common
stock to Dennis Kuznetsov pursuant to an Employment Agreement with Mr. Kuznetsov dated August 15, 2013. The shares were valued
at the fair market price of $0.06 per share. On August 27, 2014, the Company issued 5,000,000 shares of its common
stock to D. Weckstein and Co., Inc. pursuant to an Investment Banking Letter. The shares were valued at the fair market price of
$0.08 per share. On September 15, 2014, the Company issued 80,000 shares of its common
stock to Josh Nash pursuant to an Employment Agreement with Mr. Nash dated September 15, 2013. The shares were valued at the fair
market price of $0.07 per share. On October 1, 2014, the Company issued 100,000 shares of its common
stock to Jeremy Belmont pursuant to an Employment Agreement with Mr. Belmont dated October 1, 2013. The shares were valued at the
fair market price of $0.06 per share. On October 8, 2014, Fifth Avenue Law Group PLLP converted debt of
$68,000 debt into 1,360,000 shares of the Companys common stock at a per share conversion price of $0.05. On October 31, 2014, the Company issued 100,000 shares of its common
stock to Frank Hariton pursuant to a Legal Agreement with Mr. Hariton dated August 14, 2014. The shares were valued at the fair
market price of $0.05 per share. On December 10, 2014, the Company issued 200,000 shares of its common
stock to Velomedia, Inc. pursuant to a debt conversion. The shares were valued at the fair market price of $0.05 per share. Warrants On November 19, 2013, the Company issued a warrant for 140,000,000
common shares to CANX or its assignees in accordance with the Joint Venture Agreement. 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) an expected term of one year. The Company expensed the entire
$5,040,000 at the time of issuance because the warrants vested immediately and were also exercisable immediately. On February 7, 2014, the Company issued a warrant for 100,000,000
common shares to CANX or its assignees in accordance with the Joint Venture Agreement. The warrants have a five-year term with
an original exercise price of $0.033 per share The warrant was earned by CANX upon completion of the Companys increase in
the number of authorized common shares from 1 billion to 3 billion shares. This increase in authorized shares was effective with
the shareholder approval on February 7, 2014. 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 200%; (iii) risk free
rate of 0.78% and (iv) an expected term of five years. The Company expensed the entire $33,700,000 at the time of issuance because
the warrants vested immediately and were also exercisable immediately. The Company entered into an Amended and Restated Joint Venture Agreement
dated July 1, 2014 with CANX and granted on July 10, 2014 CANX five year warrants, subject to extension, to purchase 300,000,000
shares of common stock at the fair market price of $0.033 per share as determined by an independent appraisal; 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 161.0%; (iii) risk free rate of 0.78% and (iv)
an expected term of five years. The Company expensed the entire $28,800,000 at the time of issuance because the warrants vested
immediately and were also exercisable immediately. On December 11, 2013, the Company issued a warrant for 25,000,000
common shares to Hegyi, LLC, an entity controlled by Marco Hegyi, President of the Company. The warrants have a five-year term
with an original exercise price of $0.08 per share. On December 18, 2015, the Company reduced the warrant exercise price to $0.01
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) an expected term of three years. The Company expensed the entire $1,725,000 at the time of issuance
because the warrants vested immediately and were also exercisable immediately. A summary of the warrants issued as of December 31, 2015 were as
follows: A summary of the status of the warrants outstanding as of December
31, 2015 is presented below: Weighted Average Remaining Weighted Average Exercise Weighted Average Exercise Description of Stock Option Plan In fiscal year 2011, the Company authorized a Stock Incentive Plan
whereby a maximum of 18,870,184 shares of the Companys 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 Companys Board of Directors voted to increase to 35,000,000 the maximum allowable shares of the Companys
common stock allocated to the 2011 Stock Incentive Plan. The Company has outstanding unexercised stock option grants totaling 29,020,000
shares as of December 31, 2015. All grants are non-qualified as the plan was not approved by the shareholders within
one year of its adoption. Determining Fair Value under ASC 505 The Company records compensation expense associated with stock options
and other equity-based compensation using the Black-Scholes-Merton option valuation model for estimating fair value of stock options
granted under our plan. The Company amortizes the fair value of stock options on a ratable basis over the requisite service periods,
which are generally the vesting periods. The expected life of awards granted represents the period of time that they are expected
to be outstanding. The Company estimates the volatility of our common stock based on the historical volatility of its
own common stock over the most recent period corresponding with the estimated expected life of the award. The Company bases the
risk-free interest rate used in the Black Scholes-Merton option valuation model on the implied yield currently available on U.S.
Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid
any cash dividends on our common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently,
the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model and adjusts share-based
compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect
of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. Stock Option Activity During the year ended December 31, 2015, the Company had the following
stock option activity: Mr. Adam Edwards resigned July 11, 2015 and an option to purchase
four million five hundred thousand shares of the Companys common stock under the Companys 2011 Stock Incentive Plan
at $0.05 per shares expired on October 10, 2015. Ms. Tina Qunell resigned July 2, 2015 and an option to purchase seven
million shares of the Companys common stock under the Companys 2011 Stock Incentive Plan at $0.05 per share expired
on October 1, 2015. Resigned employees forfeited options to purchase 200,000 shares of
the Companys common stock under the Companys 2011 Stock Incentive Plan at $0.05 per share expired during the year
ended December 31, 2015. On July 31, 2014, the Companys Board of Directors granted
Mr. Scott an option to purchase 16,000,000 shares of the Companys common stock under the Companys 2011 Stock Incentive
Plan at an exercise price of $0.07 per share, the fair market price on July 31, 2014. On December 18, 2015, the Company reduced
the exercise price to $0.01 per share. Two million shares vested immediately upon the Companys resolution of the class action
lawsuits on of August 17, 2015). As of December 31, 2015, there are 29,020,000 options to purchase
common stock at an average exercise price of $0.028 per share outstanding under the 2011 Stock Incentive Plan. The Company recorded
$175,661 and $724,267 of compensation expense, net of related tax effects, relative to stock options for the years ended December
31, 2015 and 2014 in accordance with ASC 505. Net loss per share (basic and diluted) associated with this expense was approximately
($0.00). As of December 31, 2015, there is $244,011 of total unrecognized costs related to employee granted stock options that
are not vested. These costs are expected to be recognized over a period of approximately 3.85 years. Stock option activity for the years ended December 31, 2015 and 2014
is as follows: The following table summarizes information about stock options outstanding
and exercisable at December 31, 2015: Weighted Average Remaining Life In Weighted Average Exercise Price Weighted Average Exercise Price Stock option grants totaling 29,020,000 shares of common stock have
an intrinsic value of $0 as of December 31, 2015. Legal Proceedings The Company is involved in the disputes and legal proceedings described
below. In addition, as a public company, the Company is 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.
The Company accrues any contingent liabilities that are likely. Class Actions Alleging Violations of Federal Securities Laws Beginning on April 18, 2014, three class action lawsuits alleging
violations of federal securities laws were filed against the Company in United States District Court, Central District of California
(the Court). At a hearing held on July 21, 2014, the three class action lawsuits were consolidated into one case
with Lawrence Rosen as the lead plaintiff (the Consolidated Class Action, styled Romero et al. vs. GrowLife et al.).
On May 15, 2014 and August 4, 2014, respectively two shareholder derivative lawsuits were filed against the Company with the Court
(the Derivative Actions). On October 20, 2014, AmTrust North America, the Companys insurer, filed a lawsuit
contesting insurance coverage on the above legal proceedings. The Company made a general appearance in this action. On January
20, 2015, the Court ordered all of the above actions stayed pending completion of mediation of the dispute. The parties then worked diligently to finalize settlement documentation
on the above actions. On April 27, 2015, the Court preliminarily approved the proposed settlement of the Consolidated
Class Action. On June 1, 2015, the Court preliminarily approved the proposed settlement
of the Derivative Actions pursuant to a proposed stipulated settlement agreement. On August 3, 2015, the Court entered a Final Order and Judgment resolving
the Consolidated Class Action litigation in its entirety. The Consolidated Class Action was thereby dismissed in its
entirety with prejudice and without costs. On August 10, 2015, pursuant to a settlement by and between the Company
and AmTrust North America, AmTrusts lawsuit contesting insurance coverage of the Consolidated Class Action and Derivative
Actions was dismissed in its entirety with prejudice pursuant to a Stipulation for Dismissal of Entire Action with Prejudice executed
by and between AmTrust and the Company. On August 17, 2015, the Court entered a Final Order and Judgment
resolving the Derivative Actions in their entirety. The Derivative Actions were thereby dismissed in their entirety
with prejudice. As a result of the foregoing, all litigation discussed herein is
resolved in full at this time. The Company issued $2 million in common stock or 115,141,048 shares
of the Companys common stock on April 6, 2016 pursuant to the settlement of the Consolidated Class Action and Derivative
Action lawsuits alleging violations of federal securities laws that were filed against the Company in United States District Court,
Central District of California. The Company accrued $2,000,000 as loss on class action lawsuits and contingent liabilities during
the year ending December 31, 2015. Sales and Payroll Tax Liabilities As of December 31, 2015, the Company owes approximately $102,000
in sales tax and $20,000 in payroll taxes. The Company is currently negotiating or operating under payment plans on these liabilities. Other Legal Proceedings The Company is in default on our Portland, Maine, Boulder, Colorado
and Plaistow, New Hampshire store leases for non-payment of lease payments and the Company is negotiating with the landlords. The
Company is currently subject to legal actions with various vendors. It is possible that additional lawsuits may be filed and served on
the Company. Operating Leases Current Operating Leases Upon the Companys acquisition of Rocky Mountain Hydroponics,
LLC and Evergreen Garden Center, LLC, the Company assumed the lease for the RMH/EGC retail hydroponics store located in Portland,
Maine. The lease commencement date was May 1, 2013 with an expiration date of April 30, 2016. The monthly rent for year one of
the lease was $4,917, with monthly rent of $5,065 in year two, and monthly rent of $5,217 in year three of the lease. The Company
has an option to extend the lease for two three year terms as long it is not in default under the lease. On October 21, 2013, the Company entered into a lease agreement for
retail space for its hydroponics store in Avon (Vail), Colorado. The lease expires on September 30, 2018. Monthly rent for year
one of the lease is $2,606 and increases 3.5% per year thereafter through the end of the lease. The Company does not have an option
to extend the lease. On June 18, 2014, the Company rented space at 500 Union Street, Suite
810, Seattle, Washington for its corporate office. The Company rents the space on a month to month basis for $1,700 per month. Terminated Operating Leases In May 2011, the Company entered into a lease for our Phototron business
unit to rent a warehouse facility in Gardena, California. The terms of the lease provide for monthly rental expense of $4,065 with
annual rent increases through the expiration of the lease on May 31, 2014. During the last twelve months of the lease the monthly
rent was $4,313. The Company terminated this lease as of May 31, 2014. Upon the Companys acquisition of Rocky Mountain Hydroponics,
LLC and Evergreen Garden Center, the Company assumed the lease for the RMH/EGC retail hydroponics store located in Plaistow, New
Hampshire. The lease commencement date was May 1, 2013 with an expiration date of January 31, 2016. The monthly rent throughout
the term of the lease is $2,105. The Company vacated this store and terminated this lease during 2015. On June 5, 2013, the Company entered into a lease to rent office
space in Woodland Hills, California for the Companys corporate headquarters. The landlord was 20259 Ventura Blvd LP, which
was a previous affiliate of a stockholder of our company. The term was for ninety days and can be renewed, or terminated, by either
party with thirty days written notice. The monthly rent was $6,758. The Company terminated this lease as of June 30, 2014. On May 30, 2013, the Company entered into a lease to rent retail
space in Woodland Hills, California for its Urban Garden Supply (Soja, Inc.) hydroponics store. The term was for ninety days and
can be renewed, or terminated, by either party with ninety days written notice. The monthly rent was $3,257. The Company terminated
this lease as of June 1, 2015. On August 26, 2013, the Company entered into a lease agreement for
warehouse and retail space for its Greners (Business Bloom, Inc.) business unit in Santa Rosa, California. The lease commencement
date was September 1, 2013 with an expiration date of August 31, 2015. The monthly rent is $3,000. The Company terminated this
lease as of November 25, 2014. On September 23, 2013, the Company entered into an Assignment and
Assumption and Amendment of Lease Agreement for the Companys retail hydroponics store in Peabody, Massachusetts. The
original lease between the landlord and Evergreen Garden Center, LLC was assigned from Evergreen Garden Center, LLC to GrowLife
Hydroponics, Inc. In addition, the term of the lease was extended from the original expiration date of October 31, 2013 to October
31, 2014. The monthly rent remained at $4,500 through October 31, 2014. The Companys lease expired on October 31, 2014. On January 23, 2014, the Company entered into a lease agreement for
retail space for its hydroponics store in Boulder, Colorado. The lease commenced on February 1, 2014 and expires on May 31, 2017.
Monthly rent for year one of the lease was $4,051, with monthly rent of $4,173 in year two, $4,298 in year three, and $4,427 for
month 37 through 39. The Company had an option to extend the lease for one three year terms as long it is not in default under
the lease. The Company vacated the retail space as of November 30, 2015. The landlord has filed a collection claim for $179,920
against GrowLife Hydroponics. The Company expects to contest this claim. The Company is in default on our Portland, Maine, Boulder, Colorado
and Plaistow, New Hampshire store leases for non-payment of the lease payments and is negotiating with the landlords. The aggregate future minimum lease payments under operating leases,
to the extent the leases have early cancellation options and excluding escalation charges, are as follows: Employment and Consulting Agreements Employment Agreement with Marco Hegyi On December 4, 2013, the Company entered into an Employment Agreement
with Marco Hegyi pursuant to which the Company engaged Mr. Hegyi as its President from December 4, 2013 through December 4, 2016
to provide consulting and management services. Per the terms of the Hegyi Agreement, Mr. Hegyi established an office in Seattle,
Washington while also maintaining operations in the Southern California area. Mr. Hegyis annual compensation is $150,000
for the first year of the Hegyi Agreement; $250,000 for the second year; and $250,000 for the third year. Mr. Hegyi is also entitled
to receive an annual bonus equal to four percent (4%) of the Companys EBITDA for that year. The annual bonus shall be paid
no later than 31 days (i.e., by January 31st) following the end of each calendar year. Mr. Hegyis first annual bonus will
be calculated based on the Companys EBITDA for calendar year 2014, with such bonus payable on or before January 31, 2015.
If Mr. Hegyis employment is terminated for any reason prior to the expiration of the Term, as applicable, his annual bonus
will be prorated for that year based on the number of days worked in that year. At the commencement of Mr. Hegyis employment,
an entity affiliated with Mr. Hegyi received a Warrant to purchase up to 25,000,000 shares of common stock of the Company at an
exercise price of $0.08 per share. The Hegyi Warrant is exercisable for five years. On June 20, 2014, the Company and Mr. Hegyi
reduced the warrant life from ten to five years. On January 25, 2016, the Company reduced the warrant exercise price to $0.01 per
share effective December 18, 2015. Mr. Hegyi was entitled to participate in all group employment benefits
that are offered by the Company to the Companys senior executives and management employees from time to time, subject to
the terms and conditions of such benefit plans, including any eligibility requirements. In addition, the Company is required to
purchase and maintain during the Term a key manager insurance policy on Mr. Hegyis life in the amount of $4,000,000,
paid as $2,000,000 payable to Mr. Hegyis named heirs or estate as the beneficiary, and $2,000,000 payable to the Company.
The Company and Mr. Hegyi waived this $2,000,000 key manager insurance. If, prior to the expiration of the Term, the Company terminates
Mr. Hegyis employment for Cause, or if Mr. Hegyi voluntarily terminates his employment without Good
Reason, or if Mr. Hegyis employment is terminated by reason of his death, then all of the Companys obligations
hereunder shall cease immediately, and Mr. Hegyi will not be entitled to any further compensation beyond any pro-rated base salary
due and bonus amounts earned through the effective date of termination. Mr. Hegyi will also be reimbursed for any expenses incurred
prior to the date of termination for which he was not previously reimbursed. If the Company terminates Mr. Hegyis employment at any time
prior to the expiration of the Term without Cause, or if Mr. Hegyi terminates his employment at any time for Good Reason
or due to a Disability, Mr. Hegyi will be entitled to receive (i) his base salary amount through the end of the Term;
and (ii) his annual bonus amount for each year during the remainder of the Term, which bonus amount shall be equal to the greater
of (A) the annual bonus amount for the immediately preceding year, or (B) the bonus amount that would have been earned for the
year of termination, absent such termination. If there has been a Change in Control and the Company (or its successor
or the surviving entity) terminates Mr. Hegyis employment without Cause as part of or in connection with such Change in
Control (including any such termination occurring within one (1) month prior to the effective date of such Change in Control),
then in addition to the benefits set forth above, Mr. Hegyi will be entitled to (i) an increase of $300,000 in his annual base
salary amount (or an additional $25,000 per month) through the end of the Term; plus (ii) a gross-up in the annual base salary
amount each year to account for and to offset any tax that may be due by Mr. Hegyi on any payments received or to be received by
Mr. Hegyi under this Agreement that would result in a parachute payment as described in Section 280G of the Internal
Revenue Code of 1986, as amended. If the Company (or its successor or the surviving entity) terminates Mr. Hegyis employment
without Cause within twelve (12) months after the effective date of any Change in Control, or if Mr. Hegyi terminates his employment
for Good Reason within twelve (12) months after the effective date of any Change in Control, then in addition to the benefits set
forth above, Mr. Hegyi will be entitled to (i) an increase of $300,000 in his annual base salary amount (or an additional $25,000
per month), which increased annual base salary amount shall be paid for the remainder of the Term or for two (2) years following
the Change in Control, whichever is longer; (ii) a gross-up in the annual base salary amount each year to account for and to offset
any tax that may be due by Mr. Hegyi on any payments received or to be received by Mr. Hegyi under this Letter Agreement that would
result in a parachute payment as described in Section 280G of the Internal Revenue Code of 1986, as amended; (iii)
payment of Mr. Hegyis annual bonus amount as set forth above for each year during the remainder of the Term or for two (2)
years following the Change in Control, whichever is longer; and (iv) health insurance coverage provided for and paid by the Company
for the remainder of the Term or for two (2) years following the Change in Control, whichever is longer. Consulting Chief Financial Officer Agreement with an Entity Controlled
by Mark E. Scott On July 31, 2014, the Company entered into a Consulting Chief Financial
Officer Letter with an entity controlled by Mark E. Scott pursuant to which the Company engaged Mr. Scott as its Consulting CFO
from July 1, 2014 through September 30, 2014, and continuing thereafter until either party provides sixty day notice to terminate
the Letter or Mr. Scott enters into a full-time employment agreement. Per the terms of the Scott Agreement, Mr. Scotts compensation
is $150,000 on an annual basis for the first year of the Scott Agreement. Mr. Scott is also entitled to receive an annual bonus
equal to two percent of the Companys EBITDA for that year. The Companys Board of Directors granted Mr. Scott an option
to purchase sixteen million shares of the Companys Common Stock under the Companys 2011 Stock Incentive Plan at an
exercise price of $0.07 per share, the fair market price on July 31, 2014. On December 18, 2015, the Company reduced the exercise
price to $0.01 per share. The shares vest as follows: All options will have a five-year life and allow for a cashless exercise.
The stock option grant is subject to the terms and conditions of the Companys Stock Incentive Plan, including vesting requirements.
In the event that Mr. Scotts continuous status as consultant to the Company is terminated by the Company without Cause
or Mr. Scott terminates his employment with the Company for Good Reason as defined in the Scott Agreement, in either case upon
or within twelve months after a Change in Control as defined in the Companys Stock Incentive Plan except for CANX USA, LLC,
then 100% of the total number of shares shall immediately become vested. Mr. Scott will be entitled to participate in all group employment
benefits that are offered by the Company to the Companys senior executives and management employees from time to time, subject
to the terms and conditions of such benefit plans, including any eligibility requirements. In addition, the Company is required
to purchase and maintain an insurance policy on Mr. Scotts life in the amount of $2,000,000 payable to Mr. Scotts
named heirs or estate as the beneficiary. Finally, Mr. Scott is entitled to twenty days of vacation annually and also has certain
insurance and travel employment benefits. If, prior to the expiration of the Term, the Company terminates Mr.
Scotts employment for Cause, or if Mr. Scott voluntarily terminates his employment without Good Reason, or if Mr. Scotts
employment is terminated by reason of his death, then all of the Companys obligations hereunder shall cease immediately,
and Mr. Scott will not be entitled to any further compensation beyond any pro-rated base salary due and bonus amounts earned through
the effective date of termination. Mr. Scott will also be reimbursed for any expenses incurred prior to the date of termination
for which he was not previously reimbursed. Mr. Scott may receive severance benefits and the Companys obligation under a
termination by the Company without Cause or Mr. Scott terminates his employment for Good Reason are discussed above. Promotion Letter with Joseph Barnes On October 10, 2014, the Company entered into a Promotion Letter
with Joseph Barnes which was effective October 1, 2014 pursuant to which the Company engaged Mr. Barnes as its Senior Vice-President
of Business Development from October 1, 2014 on an at will basis. This Promotion Letter supersedes and canceled the Manager Services
Agreement with Mr. Barnes dated August 1, 2013. Per the terms of the Barnes Agreement, Mr. Barness compensation
is $90,000 on an annual basis. Mr. Barnes received a bonus of $6,500 and is also entitled to receive a quarterly bonus based on
growth of the Companys growth margin dollars. No quarterly bonuses were earned under this Promotion Letter. Mr. Barnes was
granted an option to purchase eight million shares of the Companys common stock under the Companys 2011 Stock Incentive
Plan at an exercise price on the date of grant. The shares vest as follows: All options will have a five-year life and allow for a cashless exercise.
The stock option grant is subject to the terms and conditions of the Companys Stock Incentive Plan, including vesting requirements.
In the event that Mr. Barness continuous status as employee to the Company is terminated by the Company without Cause
or Mr. Barnes terminates his employment with the Company for Good Reason as defined in the Barnes Agreement, in either case upon
or within twelve months after a Change in Control as defined in the Companys Stock Incentive, then 100% of the total number
of shares shall immediately become vested. Mr. Barnes was entitled to participate in all group employment benefits
that are offered by the Company to the Companys senior executives and management employees from time to time, subject to
the terms and conditions of such benefit plans, including any eligibility requirements. Finally, Mr. Barnes is entitled to fifteen
days of vacation annually and also has certain insurance and travel employment benefits. Mr. Barnes may receive severance benefits and the Companys
obligation under a termination by the Company without Cause or Mr. Barnes terminates his employment for Good Reason are discussed
above. Agreements with Robert Hunt On June 7, 2013, the Company entered into an Executive Services Agreement
with Robert Hunt, pursuant to which the Company engaged Mr. Hunt, from June 8, 2013 through June 7, 2015 to provide consulting
and management services as the President of GrowLife Hydroponics, Inc. On May 30, 2014, the Company announced the resignation of Robert
Hunt effective May 23, 2014 as Executive Vice President of GrowLife, Inc., President of GrowLife Hydroponics. On June 3, 2014,
the Board of Directors accepted the resignation of Robert Hunt effective June 2, 2014 as a Director of the Company. On October
17, 2014, the Company entered into a Settlement Agreement and Release with Mr. Robert Hunt, whereby the Parties cancelled the Executive
Services Agreement ("ESA") dated June 7, 2013 and his stock option grant for 12,000,000 shares. The Company agreed to
issue 6,000,000 shares of restricted common stock under certain conditions that have not been met (issuance not triggered as of
December 31, 2015), paid cash severance totaling $50,000 monthly over five month starting October 25, 2014 and reimbursed Mr. Hunt
for health insurance benefits and other expenses monthly over five months starting October 25, 2014. The Parties entered into a
release agreement. Promotion Letter with Jeremy Belmont On October 10, 2014, the Company entered into a Promotion Letter
with Jeremy Belmont which was effective October 1, 2014 pursuant to which the Company engaged Mr. Belmont as Vice President of
Sales from October 1, 2014 on an at will basis. This Promotion Letter superseded and canceled the Manager Services Agreement with
Mr. Belmont dated October 1, 2013. Per the terms of the Belmont Agreement, Mr. Belmonts compensation
was $72,000 on an annual basis. Mr. Belmont received a bonus of $6,500 and is also entitled to receive a quarterly bonus based
on growth of the Companys growth margin dollars. No quarterly bonuses were earned under this Promotion Letter. Mr. Barnes
was granted an option to purchase five million shares of the Companys common stock under the Companys 2011 Stock
Incentive Plan at an exercise price on the date of grant. The Shares vest as follows: All options had a five-year life and allow for a cashless exercise.
The stock option grant is subject to the terms and conditions of the Companys Stock Incentive Plan, including vesting requirements.
In the event that Mr. Belmonts continuous status as employee to the Company is terminated by the Company without Cause
or Mr. Belmont terminates his employment with the Company for Good Reason as defined in the Belmont Agreement, in either case upon
or within twelve months after a Change in Control as defined in the Companys Stock Incentive, then 100% of the total number
of Shares shall immediately become vested. Mr. Belmont was entitled to participate in all group employment benefits
that are offered by the Company to the Companys senior executives and management employees from time to time, subject to
the terms and conditions of such benefit plans, including any eligibility requirements. Finally, Mr. Belmont was entitled to fifteen
days of vacation annually and also had certain insurance and travel employment benefits. Mr. Belmont may receive severance benefits and the Companys
obligation under a termination by the Company without Cause or Mr. Belmont terminated his employment for Good Reason are discussed
above. Mr. Belmont resigned January 13, 2016. Promotion Letter with Adam Edwards On October 10, 2014, the Company entered into a Promotion Letter
with Adam Edwards which was effective October 1, 2014 pursuant to which the Company engaged Mr. Edwards as Vice President of Sales
from October 1, 2014 on an at will basis. Per the terms of the Edwards Agreement, Mr. Edwardss compensation
is $72,000 on an annual basis. Mr. Edwards received a bonus of $6,500 and was also entitled to receive a quarterly bonus based
on growth of the Companys growth margin dollars. No quarterly bonuses were earned under this Promotion Letter. Mr. Edwards
was granted an option to purchase four million five hundred thousand shares of the Companys common stock under the Companys
2011 Stock Incentive Plan at an exercise price on the date of grant. The shares vested quarterly over thirty six months. All options had a five-year life and allow for a cashless exercise.
The stock option grant is subject to the terms and conditions of the Companys Stock Incentive Plan, including vesting requirements.
In the event that Mr. Edwardss continuous status as employee to the Company is terminated by the Company without Cause
or Mr. Edwards terminates his employment with the Company for Good Reason as defined in the Edwards Agreement, in either case upon
or within twelve months after a Change in Control as defined in the Companys Stock Incentive, then 100% of the total number
of shares shall immediately become vested. Mr. Edwards was entitled to participate in all group employment benefits
that are offered by the Company to the Companys senior executives and management employees from time to time, subject to
the terms and conditions of such benefit plans, including any eligibility requirements. Finally, Mr. Edwards was entitled to fifteen
days of vacation annually and also has certain insurance and travel employment benefits. Mr. Edwards may receive severance benefits and the Companys
obligation under a termination by the Company without Cause or Mr. Edwards terminated his employment for Good Reason are discussed
above. Mr. Edwards resigned July 11, 2015. Offer Letter with Tina Qunell On November 20, 2014, the Company entered into an Offer Letter with
Tina Qunell which was effective November 24, 2014 pursuant to which the Company engaged Ms. Qunell as Vice President of Marketing
on an at will basis. Per the terms of the Qunell Agreement, Ms. Qunells compensation
was $72,000 on an annual basis. Ms. Qunell was granted an option to purchase seven million shares of the Companys common
stock under the Companys 2011 Stock Incentive Plan at an exercise price on the date of grant. One million of the shares
vested immediately and six million vest quarterly over thirty six months. All options had a five-year life and allow for a cashless exercise.
The stock option grant was subject to the terms and conditions of the Companys Stock Incentive Plan, including vesting requirements.
In the event that Ms. Qunells continuous status as employee to the Company was terminated by the Company without Cause
or Mr. Qunell terminates her employment with the Company for Good Reason as defined in the Qunell Agreement, in either case upon
or within twelve months after a Change in Control as defined in the Companys Stock Incentive, then 100% of the total number
of shares shall immediately become vested. Ms. Qunell was entitled to participate in all group employment benefits
that are offered by the Company to the Companys senior executives and management employees from time to time, subject to
the terms and conditions of such benefit plans, including any eligibility requirements. Finally, Ms. Qunell was entitled to fifteen
days of vacation annually and also has certain insurance and travel employment benefits. Ms. Qunell may receive severance benefits and the Companys
obligation under a termination by the Company without Cause or Ms. Qunell terminated her employment for Good Reason are discussed
above. Ms. Qunell resigned July 2, 2015. Investment Banking Letter with D. Weckstein and Co. Inc. On August 27, 2014, the Company issued 5,000,000 shares of its common
stock to D. Weckstein and Co., Inc. pursuant to an Investment Banking Letter. The shares were valued at the fair market price of
$0.08 per share. The Company has incurred losses since inception, which have generated
net operating loss carryforwards. The net operating loss carryforwards arise from United States sources. Pretax losses arising from United States operations were approximately
$5,700,000 and $87,000,000 and for the years ended December 31, 2015 and 2014, respectively. The Company has net operating loss carryforwards of approximately
$17,000,000, which expire in 2023-2033. Because it is not more likely than not that sufficient tax earnings will be generated to
utilize the net operating loss carryforwards, a corresponding valuation allowance of approximately $6,700,000 was established as
of December 31, 2015. Additionally, under the Tax Reform Act of 1986, the amounts of, and benefits from, net operating losses may
be limited in certain circumstances, including a change in control. Section 382 of the Internal Revenue Code generally imposes an
annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation
has undergone significant changes in its stock ownership. There can be no assurance that the Company will be able to utilize any
net operating loss carryforwards in the future. For the year ended December 31, 2015, the Companys effective
tax rate differs from the federal statutory rate principally due to net operating losses, warrants issued for services, change
in fair value of derivative and debt discount. The principal components of the Companys deferred tax assets
at December 31, 2015 and 2014 are as follows: The Companys tax returns for 2010 to 2014 are open to review
by the Internal Revenue Service. The Company evaluates subsequent events, for the purpose of adjustment
or disclosure, up through the date the financial statements are available. Subsequent to December 31, 2015, the following material transactions
occurred: Resumed Trading of our Common Stock On February 18, 2016, our common stock resumed unsolicited quotation
on the OTC Bulletin Board after receiving clearance from the Financial Industry Regulatory Authority (FINRA) on our
Form 15c2-11. The Company is currently taking the appropriate steps to uplist to the OTCQB Exchange and resume priced
quotations with market makers as soon as it is able. Equity Issuances On January 4, 2016, the Company issued 3,000,000 shares of its common
stock to an entity affiliated with Mark E. Scott, the Companys Chief Financial Officer, pursuant to a conversion of debt
for $30,000. The shares were valued at the fair market price of $0.01 per share. On January 16, 2016, the Company issued 1,400,000 shares of its common
stock to a former consultant pursuant a conversion of debt for $40,000. The shares were valued at the fair market price of $0.01
per share. On January 27, 2016, the Company issued 1,500,000 shares of its common
stock to Michael E. Fasci, a Board Director, pursuant to a service award for $15,000. The shares were valued at the fair market
price of $0.01 per share. During March 2016, Holder of the Companys Convertible Notes
Payables, converted principal and accrued interest of $608,905 into 86,986,437 shares of the Companys common stock at a
per share conversion price of $0.007. The Company issued $2 million in common stock or 115,141,048 shares
of the Companys common stock on April 6, 2016 pursuant to the settlement of the Consolidated Class Action and Derivative
Action lawsuits alleging violations of federal securities laws that were filed against the Company in United States District Court,
Central District of California. The Company accrued $2,000,000 as loss on class action lawsuits and contingent liabilities during
the year ending December 31, 2015. Stock Option Vesting On February 18, 2016, an entity affiliated with Mark E. Scott, the
Companys Chief Financial Officer, had a two million share stock option grant issued at $0.01 per share vest immediately
upon the Company securing a market maker with an approved 15c2-11 resulting in the Companys relisting on OTCBB. Dissolution of Certain Non-Operating Subsidiaries The Company determined that certain wholly-owned subsidiaries were
unnecessary for the ongoing operations of the Companys business and elected to dissolve these entities and/or surrender
their foreign status in certain jurisdictions for the purpose of reducing unnecessary compliance costs. The Company is dissolving SG Technologies Corp., a Nevada corporation,
and is surrendering its qualification to do business in California due to the fact that the Company no longer operates any business
under this wholly-owned subsidiary. The Company is dissolving Phototron, Inc. and GrowLife Productions,
Inc., all California corporations, due to the fact that the Company no longer operates any business under these wholly-owned subsidiaries. The Company is dissolving Business Bloom, Inc., a California corporation,
and is withdrawing its foreign entity status in Colorado due to the fact that the Company no longer operates any business under
this wholly-owned subsidiary. The Company is surrendering its qualification to do business in California
due to the fact that the Company has moved its headquarters to Seattle, Washington and is no longer required to register as a foreign
entity in California. Potential Convertible Note Defaults Several of the Companys convertible promissory notes remain
outstanding beyond their respective maturity dates. This may trigger an event of default under the respective agreements. The Company
is working with these noteholders to convert their notes into common stock and intends to resolve these outstanding issues as soon
as practicable. Enactment of Heightened Corporate Governance Measures Pursuant
to Derivative Action Settlement In connection with the settlement of the Derivative Actions related
to alleged violations of federal securities laws, the Company agreed to expansive corporate governance measures. During 2015 and 2016, the Company has enacted and continues to enact
heightened corporate governance measure pursuant to the Derivative Action Settlement. The Company plans to hold a special
shareholder meeting in the coming months to further implement measures associated with the Derivative Action Settlement. Employment and Consulting Agreements Defaults The Company owes Marco Hegyi approximately $53,287 in payroll and
expenses as of December 31, 2015 and is in default under the Employment Agreement with Mr. Hegyi. The Company owes Mark Scott approximately $71,537 in payroll and
expenses as of December 31, 2015 and is in default under the Consulting Agreement with Mr. Scott. Expiration of Stock Option Grants Mr. Belmont resigned January 13, 2016 and an option to purchase five
million shares of the Companys common stock under the Companys 2011 Stock Incentive Plan expired on April 13, 2016. Entry into Securities Purchase Agreement On April 5, 2016, the Company entered into and closed a Securities
Purchase Agreement and related agreements (the Transaction Documents) with an accredited investor (the Purchaser)
whereby the Company agreed to sell, and the Purchaser agreed to purchase an unsecured convertible promissory note in the original
principal amount of $2,755,000 (the Note) (collectively, the Transaction). In connection with the Transaction, the Company was provided $350,000
in cash as well as a series of twelve Secured Investor Notes for a total Purchase Price of $2,500,000. The Note carries
an Original Issue Discount (OID) of $250,000 and the Company agreed to pay $5,000 to cover Purchasers legal
fees, accounting costs and other transaction expenses. The Secured Investor Notes are payable as follows: 1) $50,000 upon
filing of a Registration Statement on Form S-1 (the Registration Statement), 2) $100,000 upon effectiveness of the
Registration Statement, and 3) up to $200,000 per month over the 10 months following effectiveness at the sole discretion of the
Company, subject to certain conditions. The Company shall file the Registration Statement within forty-five (45) days
of the Closing and will register shares of its common stock for the benefit of Purchaser in exchange for the payments under the
Secured Investor Notes. The Purchaser has the option to convert the Note at 65% of the average
of the three (3) lowest volume weighted average prices in the twenty (20) Trading Days immediately preceding the applicable conversion
(the Conversion Price). However, in no event will the Conversion Price be less than $0.02 or greater than $0.09. In
addition, beginning on the date that is the earlier of six (6) months or five (5) days after the Registration Statement becomes
effective, and on the same day of each month thereafter, the Company will re-pay the Note in monthly installments in cash, or,
subject to certain Equity Conditions, in the Companys common stock at 65% of the average of the three (3) lowest volume
weighted average prices in the twenty (20) Trading Days immediately preceding the applicable conversion (the Installment
Conversion Price). Basis of Presentation - The accompanying unaudited consolidated
financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. The preparation
of these unaudited consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP). Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned and majority-owned subsidiaries. Inter-Company items and transactions
have been eliminated in consolidation. Cash and Cash Equivalents - The Company classifies highly
liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. The Company
maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation
up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk
for cash on deposit. Accounts Receivable and 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, the fee is fixed
and determinable, 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. Inventories - Inventories are recorded on a first in first
out basis. Inventory consists of raw materials, purchased finished goods and components held for resale. Inventory is valued at
the lower of cost or market. The reserve for inventory was $20,000 and $40,215 as of December 31, 2015 and 2014, respectively. Property and Equipment - Property and equipment are stated
at cost. Assets acquired held under capital leases are initially recorded at the lower of the present value of the minimum lease
payments discounted at the implicit interest rate (35% for assets currently held under capital lease) or the fair value of the
asset. Major improvements and betterments are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is computed
using the straight-line method over an estimated useful life of five years. Assets acquired under capital lease are depreciated
over the lesser of the useful life or the lease term. At the time of retirement or other disposition of property and equipment,
the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated
statements of operations. Goodwill and Intangible Assets - The Company evaluates the
carrying value of goodwill, intangible assets, and long-lived assets during the fourth quarter of each year and between annual
evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit
below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors
or in business climate, (2) unanticipated competition, (3) an adverse action or assessment by a regulator, (4) continued losses
from operations, (5) continued negative cash flows from operations, and (6) the suspension of trading of the Companys securities.
When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is
assigned to the reporting units carrying amount, including goodwill. The fair value of the reporting unit is estimated using
a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies
data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured.
The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount.
In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the
other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the
amount assigned to its other assets and liabilities is the implied fair value of goodwill. The Company amortizes the cost of other intangible assets over their
estimated useful lives, which range up to ten years, unless such lives are deemed indefinite. Intangible assets with indefinite
lives are tested in the fourth quarter of each fiscal year for impairment, or more often if indicators warrant. Equity Investments The
Company classifies all highly-liquid investments with stated maturities of greater than three months from the date of purchase
and remaining maturities of less than one year as short-term investments. Investments with maturities beyond one year may be classified
as short-term based on their highly liquid nature and because such investments are viewed as being available to support current
operations. The Company classifies and accounts for short-term investments as available-for-sale and reflect realized gains and
losses using the specific identification method. Changes in market value, if any, excluding other-than-temporary impairments, are
reflected under stockholders deficit as unrealized gain/loss on related party investment. Long Lived Assets The Company reviews its long-lived
assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed
of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount
or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an
impairment loss is recognized in operating results. Fair Value Measurements and Financial Instruments - ASC Topic
820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure
of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon
the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as
follows: Level 1 - Inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets. Level 2 - Inputs to the valuation methodology include quoted
prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument. Level 3 - Inputs to the valuation methodology are unobservable
and significant to the fair value measurement. The carrying value of cash, accounts receivable, investment in a
related party, accounts payables, accrued expenses, due to related party, notes payable, and convertible notes approximates their
fair values due to their short-term maturities. 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 twelve months of the balance sheet date. As of December 31, 2015 and 2014, the Company had outstanding 7%
convertible notes for $500,000 that the Company determined were a derivative liability due to the reset clause associated
with the notes conversion price. The Company valued the derivative liability of these notes at $105,515 and $1,278,878,
respectively, using the Black-Scholes-Merton option pricing model. As of December 31, 2015 and 2014, the Company had outstanding 6%
convertible notes for $350,000 that the Company determined were a derivative liability due to the reset clause associated
with the notes conversion price. The Company valued the derivative liability of these notes at $54,377 and $822,037, respectively
using the Black-Scholes-Merton option pricing model. As of December 31, 2015, the Company had outstanding 18% convertible
notes for $1,150,000 that the Company determined were a derivative liability due to the reset clause associated with
the notes conversion price. The Company valued the derivative liability of these notes at $1,217,283 using the Black-Scholes-Merton
option pricing model. 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, cost of goods sold, and accounts receivable and an increase to inventory.
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, 2015 and 2014, there was no reserve for sales returns, which are minimal based upon our historical experience. Shipping and Handling Fees and Cost - For the years ended
December 31, 2015 and 2014, shipping and handling fees billed to customers totaled $95,455 and $128,351, respectively, and were
included in revenue. Stock Based Compensation - The Company has share-based compensation
plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options and warrants
to purchase shares of Company common stock at the fair market value at the time of grant. Stock-based compensation cost to employees
is measured by the Company at the grant date, based on the fair value of the award, over the requisite service period under ASC
718. For options issued to employees, the Company recognizes stock compensation costs utilizing the fair value methodology over
the related period of benefit. Grants of stock to non-employees and other parties are accounted for in accordance with
the ASC 505. Advertising Costs - Advertising costs are expensed as incurred
and are recorded in general and administrative expenses. For the years ended December 31, 2015 and 2014, advertising costs of $637
and $141,369, respectively, were included in general and administrative expenses. Net (Loss) Per Share - Under the provisions of ASC 260, Earnings
per Share, basic loss per common share is computed by dividing net loss available to common shareholders by the weighted
average number of shares of common stock outstanding for the periods presented. Diluted net loss per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that would then share in the income of the Company, subject to anti-dilution limitations.
The common stock equivalents have not been included as they are anti-dilutive. As of December 31, 2015, there are also (i) stock
option grants outstanding for the purchase of 29.0 million common shares at a $0.028 average strike price; (ii) warrants for the
purchase of 565.0 million common shares at a $0.032 average exercise price; (iii) 243.6 million shares related to convertible debt
that can be converted at 0.007 per share; and (iv) 6.0 million shares that may be issued to a former executive related to a severance
agreement. We issued $2 million in common stock or 115,141,048 shares of our common stock pursuant to the settlement of the Consolidated
Class Action and Derivative Action lawsuits alleging violations of federal securities laws that were filed against the Company
in United States District Court, Central District of California. In addition, we have an unknown number of common shares to be
issued under the TCA financing agreements. As of December 31, 2014, there were stock options outstanding for the purchase of 40,720,000
common shares, warrants for the purchase of 565,000,000 common shares, 209,061,571 shares related to convertible debt and 6,000,000
of shares which we may have to issue under a settlement agreement which could potentially dilute future earnings per share. Dividend Policy - The Company has never paid any cash dividends
and intends, for the foreseeable future, to retain any future earnings for the development of our business. Our future dividend
policy will be determined by the board of directors on the basis of various factors, including our results of operations, financial
condition, capital requirements and investment opportunities. Use of Estimates - In preparing these unaudited interim 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 derivative liability, equity instruments and share based compensation. Reclassifications - Certain amounts in the consolidated financial
statements for 2014 have been reclassified to conform to the 2015 presentation. These reclassifications have no effect on net income,
earnings per share, or stockholders equity as previously reported. A variety of proposed or otherwise potential accounting standards
are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary
nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material
to our consolidated financial statements. In August 2014, FASB issued ASU 2014-15Presentation of Financial
StatementsGoing Concern (ASC Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to
Continue as a Going Concern. The update requires management to assess a companys ability to continue as a going
concern and to provide related footnote disclosures in certain circumstances. All entities are required to apply the new requirements
in annual periods ending after December 15, 2016, and interim periods thereafter. Early application is permitted. As such, GrowLife,
Inc. is required to adopt these provisions for the annual period ending December 31, 2016. The Company is currently evaluating
the impact of FASB ASU 2014-15 but does not expect the adoption thereof to have a material effect on GrowLifes financial
statements. In May 2014, FASB issued ASU 2014-09Revenue from Contracts
with Customers (Topic 606): Section ASummary and Amendments That Create Revenue from Contracts with Customers,
(Topic 606) and Other Assets and Deferred CostsContracts with Customers (Subtopic 340-40), Section BConforming Amendments
to Other Topics and Subtopics in the Codification and Status Tables, Section CBackground Information and Basis for Conclusions.
The guidance in this update affects any entity that enters into contracts with customers to transfer goods or services and
supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. The update is effective for annual reporting
periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.
As such, GrowLife, Inc. is required to adopt these provisions as of December 31, 2016. The Company is currently evaluating the
impact of FASB ASU 2014-09 but does not expect the adoption thereof to have a material effect on GrowLifes financial statements. In July 2013, FASB issued ASU 2013-11Income Taxes (ASC Topic
740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or
a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The amendments in this update
provide explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward,
a similar tax loss, or a tax credit carryforward exists at the reporting date. The update is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2013. The adoption of FASB ASU 2013-11 did not have a material
effect on GrowLifes financial statements. New Accounting Standards Issued but Not Yet Adopted In February 2015, the FASB issued ASU No. 2015-02, Consolidation
(Topic 810): Amendments to the Consolidation Analysis (ASU 2015-02). ASU 2015-02 affects reporting entities that
are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for us on January 1,
2016, with early adoption permitted. The Company does not believe that this pronouncement will have an impact on the Companys
consolidated financial statements. In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation
of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). The amendments
in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement
guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 is effective for the Company
on January 1, 2016, with early adoption permitted. The Company is currently evaluating the potential changes from this ASU
to the Companys future financial reporting and disclosures. December 31, 2015 December 31, 2014 Estimated Useful Lives Carrying Amount at September 30, Carrying Amount at December 31, Balance As of December 31, A summary of the warrants issued as of December 31, 2015 were as
follows: A summary of the status of the warrants outstanding as of December
31, 2015 is presented below: Weighted Average Remaining Weighted Average Exercise Weighted Average Exercise Stock option activity for the years ended December 31, 2015 and 2014
is as follows: The following table summarizes information about stock options outstanding
and exercisable at December 31, 2015: Weighted Average Remaining Life In Weighted Average Exercise Price Weighted Average Exercise Price )^;=YE=7X*8?=
MA7]+9FP9FA^6?ZPH]__X+#LO<6W[JZ"?S([!^F!C*N?::C/L&]63"ZM?SJV^
M SKZ^_NH_:[9F9Z*ECV,@RCL),+!DCH&2>VA_JX*%D+N
M?P]Q& ZVTC%8:2LML\4D4[/7>H5:T Z@L[8:]#Q9M8Z+45A/QZ#GR;IU/(S"
MICH&4W&QP2?UUU=1\1<&8$\=@Z>F4C&"L*6.P=(_U,R!A5'84L=DZ2GAG4N,
MPNHZ)G7?A#=."LOKF.1];[Z)XF)O79.WITK M3$*:^R:-'Y7 L9XL,KN1U5V
ML">&021S1L RNK
M#AE((((X(-?B#_P7"^->L?M;?MT7G@7PO;W6L:7\(](NT:&V&\>
LA+1IJ5[MR\@&?EM;3]X2.0)YACBMS_@X8^&.D_!7]DKX%>$-"
M@^S:/X:NI]-LX^XCBLE123W8XR2>222>36=6;:DNB'%6:/T9_8Z_Y-%^%G_8
MH:3_ .D4-?\ P3U_;Z\+_M[_
M 2M=
VLO%.GQI!XBT+?^^TNYQRRJ22UNYRT 7F&:
MT,*DI:R>T5JW\C['A3@C,,]G*5&T*,/CJ3=H17F^_DCW7_@H%_P6,\/_ ,T
MJ\\-?#F2V\2^-Q=O9SET?[+I;(0'+\ RL3\JJIP?F.X;0&\+_9P_X)4^._VW
M/&G_ L_XTZN;'2/%]H+964Y6\;>,1C!4I"@0(RC+G;A3@Y-?0/_!/[_@C
MMX<_9RGNM>\=IIGC/Q-<,/LK3P^9:V* ALI&^1YFX??.2-HVD9;/V]#;K;1"
M.-=J(, #H*\F.4UL=4^L9IK%;4^B?=]W^!]QC.-\!PUAY97P?K4EI4Q#7O2O
MO&'\L5]YA_#CX=Z3\*O!NGZ!HEG'8Z9I4"6]M!$,+'&@VJ!^%= AW(*:5RO2
MG1_
;"[6WNA WE6,0\S<)
MIF=LS2I&Z$QH3C:&503D^+F6)0_FPK(X4.ZGRV.
M,T ?47QM_9R\-?M!0Z>GB.*ZF73F=H!#+Y>"V,YX/H*D^"7[//AO]GW3;ZU\
M.0W$,>HSBXF\Z7S"S!57T'&%%,T3]J+X:^)?B;+X*T[X@>#+[QC!+-!+H=OK
M-O)J$Z'>ZQI^GPZSI]T444 %%%% !1110 44
M44 -9]K#WKP3QY^T9\1/$WQ8\2>%_A=X0\*:W)X,N(;+6)_$>OS:4!-);0W0
M$ AM;G>HBN(N6V'=O&, ,?>VZU\A?&?4OB?^RS\5OBKK_@3X>:C\1;_XAO%J
M>E/;C_1=-GCTZVM%BN!D,P\RUW':0=L@&C_ *Z=SS:&90GB98:S3CUZ/^OQ
M/JZBBBO2"BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH **** "B
MBB@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH ***
M* "BBB@ HHHH **** "BBB@ HHHH **** /,OB=^R1X%^,GQF\.^-O%&AV^N
M:IX7M)[2QAO5$]FOF-&XE,394R)L8*V./,).2L93TM(U0?*,4ZBLXT81;E%6
M;W\R8PBFVEN%%%%:%!1110 4444 %%%% !1110 4444 %%%% !1110 4444
C%%%% !1110 4444 %%%% !1110 4444 %%%% !1110!__]D!
end
12 Months Ended
Document And Entity Information
Entity Registrant Name
GrowLife, Inc.
Entity Central Index Key
0001161582
Document Type
10-K
Document Period End Date
Dec. 31, 2015
Amendment Flag
false
Current Fiscal Year End Date
--12-31
Is Entity a Well-known Seasoned Issuer?
No
Is Entity a Voluntary Filer?
No
Is Entity's Reporting Status Current?
No
Entity Filer Category
Smaller Reporting Company
Entity Public Float
$ 16,793,431
Entity Common Stock, Shares Outstanding
1,099,143,981
Document Fiscal Period Focus
FY
Document Fiscal Year Focus
2015
Preferred stock, par value
$ 0.0001
$ 0.0001
Preferred Stock, Authorized
10,000,000
10,000,000
Preferred Stock, Issued
0
0
Preferred stock, outstanding shares
0
0
Common Stock par value
$ 0.0001
$ 0.0001
Common Stock, Authorized
3,000,000,000
3,000,000,000
Common Stock, Issued
891,116,496
879,343,771
Common Stock, Outstanding
891,116,496
879,343,771
Series B Preferred Stock
Preferred stock, par value
$ .0001
$ 0.0001
Preferred Stock, Authorized
150,000
150,000
Preferred Stock, Issued
150,000
150,000
Preferred stock, outstanding shares
150,000
150,000
Series C Preferred Stock
Preferred stock, par value
$ 0.0001
$ 0.0001
Preferred Stock, Authorized
51
51
Preferred Stock, Issued
51
51
Preferred stock, outstanding shares
51
51
12 Months Ended
Income Statement [Abstract]
NET REVENUE
$ 3,499,642
$ 8,537,676
COST OF GOODS SOLD
2,980,503
7,172,376
GROSS PROFIT
519,139
1,365,300
GENERAL AND ADMINISTRATIVE EXPENSES
2,684,107
7,851,370
OPERATING LOSS
(2,164,968)
(6,486,070)
OTHER INCOME (EXPENSE):
Change in fair value of derivative
1,678,541
(16,252,823)
Interest expense, net
(1,118,635)
(64,073,997)
Other expense, primarily related to TCA Global Credit Master Fund LP funding
(2,002,533)
0
Loss on class action lawsuit settlements
(2,081,250)
0
Realized gain on sale of investment
0
186,791
Total other (expense)
(3,523,877)
(80,140,029)
(LOSS) BEFORE INCOME TAXES
(5,688,845)
(86,626,099)
Income taxes - current benefit
0
0
NET (LOSS)
$ (5,688,845)
$ (86,626,099)
Basic and diluted (loss) per share
$ (0.01)
$ (0.10)
Weighted average shares of common stock outstanding- basic and diluted
884,348,627
834,503,868
12 Months Ended
Organization, Consolidation and Presentation of Financial Statements [Abstract]
DESCRIPTION OF BUSINESS AND ORGANIZATION
12 Months Ended
Organization, Consolidation and Presentation of Financial Statements [Abstract]
GOING CONCERN
12 Months Ended
Accounting Policies [Abstract]
SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS
12 Months Ended
ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER
PURCHASE - ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER
Allocation
$
Assets
$
907,614
Intangible assets
366,000
Goodwill
739,000
Total
2,012,614
Less fair value of liabilities
(387,614
)
Purchase price
$
1,625,000
12 Months Ended
Notes to Financial Statements
TRANSACTIONS WITH CANX USA, LLC AND LOGIC WORKS LLC
12 Months Ended
Inventory Disclosure [Abstract]
INVENTORY
(Audited)
(Audited)
Finished goods
$
418,439
$
923,565
Inventory reserve
(20,000
)
(40,215
)
Total
$
398,439
$
883,350
12 Months Ended
Notes to Financial Statements
INVESTMENT IN VAPE HOLDINGS, INC.
12 Months Ended
Goodwill and Intangible Assets Disclosure [Abstract]
INTANGIBLE ASSETS
Intangible Assets:
Cost
Accumulated Amortization
Net Book Value
RMH/EGC acquisition- customer contracts
5 years
$
366,000
$
(189,100
)
$
176,900
Greners acquisition- customer contracts
5 years
230,000
(163,296
)
66,704
Phototron acquisition- customer contracts
5 years
215,000
(215,000
)
-
Soja, Inc. (Urban Garden Supply) acquisition- customer contracts
5 years
60,000
(60,000
)
-
Total intangible assets
$
871,000
$
(627,396
)
$
243,604
Total amortization expense was $106,548 for the years ended December 31, 2015 and 2014, respectively.
12 Months Ended
Notes to Financial Statements
DERIVATIVE LIABILITY
Fair Value Measurements Using Inputs
Financial Instruments
Level 1
Level 2
Level 3
2015
Liabilities:
Derivative Instruments - Warrants
$
-
$
1,377,175
$
-
$
1,377,175
Total
$
-
$
1,377,175
$
-
$
1,377,175
Fair Value Measurements Using Inputs
Financial Instruments
Level 1
Level 2
Level 3
2014
Liabilities:
Derivative Instruments - Warrants
$
-
$
2,100,915
$
-
$
2,100,915
Total
$
-
$
2,100,915
$
-
$
2,100,915
For the year ended December 31, 2015, the Company recorded non-cash income of $16,252,823 related to the change in fair
value of derivative expense related to its 6%, 7% and 12% convertible notes.
12 Months Ended
Related Party Transactions [Abstract]
RELATED PARTY TRANSACTIONS AND CERTAIN RELATIONSHIPS
12 Months Ended
Notes to Financial Statements
CONVERTIBLE NOTES PAYABLE, NET
Accrued
Debt
Principal
Interest
Discount
2015
6% Senior secured convertible notes (2012)
$
413,680
$
172,494
$
-
$
586,174
6% Secured convertible note (2014)
350,000
30,641
(83,924
)
296,717
7% Convertible note ($850,000)
250,000
104,137
-
354,137
7% Convertible note ($1,000,000)
250,000
134,469
-
384,469
18% Senior secured redeemable convertible debenture ($1,050,000)
1,150,000
68,510
(552,139
)
666,371
$
2,413,680
$
510,251
$
(636,063
)
$
2,287,868
On April 10, 2014, as a result of the SEC suspension in the trading of our securities, the Company went into default on its 6%
Senior Secured Convertible Notes Payable and 7% Convertible Notes Payable. As a result, the Company accrued interest on these notes
at the default rate of 12% and 24% per annum, respectively. Furthermore, as a result of being in default on these notes, the Holders
could, at their sole discretion, call these notes. Although no such action has been taken by the Holders, the Company classified
these notes as a current liability rather than long-term debt as of June 30, 2014.
12 Months Ended
Equity [Abstract]
EQUITY
December 31, 2015
Weighted
Average
Exercise
Shares
Price
Outstanding at beginning of period
565,000,000
$
0.032
Issued
-
-
Exercised
-
-
Forfeited
-
-
Expired
-
-
Outstanding at end of period
565,000,000
$
0.032
Exerciseable at end of period
565,000,000
December 31, 2015
Number of
Shares
Warrants
Life
Price
Exerciseable
Price
540,000,000
3.31
$
0.033
540,000,000
$
0.033
25,000,000
2.94
0.010
25,000,000
0.010
565,000,000
3.30
$
0.032
565,000,000
$
0.032
Warrants totaling 565,000,000 shares of common stock have an intrinsic value of $0 as of December 31, 2015.
12 Months Ended
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
STOCK OPTIONS
Weighted Average
Options
Exercise Price
$
Granted
49,720,000
$
0.075
$
3,706,000
Exercised
(5,126,187
)
(0.133
)
(682,922
)
Forfeitures
(44,725,000
)
(0.092
)
(4,132,751
)
Outstanding as of December 31, 2014
40,720,000
0.058
2,356,000
Granted
-
-
(960,000
)
Exercised
-
-
-
Forfeitures
(11,700,000
)
(0.050
)
(585,000
)
Outstanding as of December 31, 2015
29,020,000
$
0.028
$
811,000
Range of Exercise
Number
Number
Prices
Outstanding
Years
Exerciseable
Exerciseable
Exerciseable
$
0.05
13,020,000
4.00
$
0.050
7,120,000
$
0.050
0.01
16,000,000
3.77
0.010
7,833,333
0.010
29,020,000
3.85
$
0.028
14,953,333
$
0.043
12 Months Ended
Commitments and Contingencies Disclosure [Abstract]
COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
Years Ended December 31,
Total
2016
$
76,929
2017
34,675
2018
28,365
2019
0
2020
-
Beyond
-
Total
$
139,969
i
Two million shares vest immediately upon securing a market maker with an approved 15c2-11 resulting in the Companys relisting on OTCBB (earned as of February 18, 2016);
ii
Two million shares vest immediately upon the successful approval and effectiveness of the Companys S-1 (not earned as of December 31, 2015);
iii
Two million shares vest immediately upon the Companys resolution of the class action lawsuits (earned as of August 17, 2015); and,
iv
Ten million shares will vest on a monthly basis over a period of three years beginning on the July 1, 2014.
i
Two million shares vested immediately;
iv
Six million shares vest on a monthly basis over a period of three years beginning on the date of grant.
i
One million four hundred thousand shares vested immediately;
iv
Three million six hundred thousand shares will vest on a monthly basis over a period of three years beginning on the date of grant.
12 Months Ended
Income Tax Disclosure [Abstract]
INCOME TAXES
2015
2014
2013
U.S. operations loss carry forward and state at statutory rate of 40%
$
6,713,538
$
5,038,976
$
3,612,736
Less valuation allowance
(6,713,538
)
(5,038,976
)
(3,612,736
)
Net deferred tax assets
-
-
-
Change in valuation allowance
$
(6,713,538
)
$
(5,038,976
)
$
(3,612,736
)
A reconciliation of the United States Federal Statutory rate to the Companys effective tax rate for the years ended December
31, 2015 and 2014 is as follows:
2015
2014
Federal statutory rate
-34.0
%
-34.0
%
State income tax rate
-6.0
%
-6.0
%
Change in valuation allowance
40.0
%
40.0
%
Effective tax rate
0.0
%
0.0
%
12 Months Ended
Subsequent Events [Abstract]
SUBSEQUENT EVENTS
12 Months Ended
Accounting Policies [Abstract]
Basis of Presentation
Principles of Consolidation
Cash and Cash Equivalents
Accounts Receivable and Revenue
Inventories
Property and Equipment
Goodwill and Intangible Assets
Equity Investments
Long Lived Assets
Fair Value Measurements and Financial Instruments
Derivative Financial Instruments
Sales Returns
Shipping and Handling Fees and Cost
Stock Based Compensation
Advertising Costs
Net (Loss) Per Share
Dividend Policy
Use of Estimates
Reclassifications
Recent Accounting Pronouncements
12 Months Ended
ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER
Purchase Price for tangible and intangible Assets
Allocation
$
Assets
$
907,614
Intangible assets
366,000
Goodwill
739,000
Total
2,012,614
Less fair value of liabilities
(387,614
)
Purchase price
$
1,625,000
12 Months Ended
Inventory Disclosure [Abstract]
Schedule of Inventory
(Audited)
(Audited)
Finished goods
$
418,439
$
923,565
Inventory reserve
(20,000
)
(40,215
)
Total
$
398,439
$
883,350
12 Months Ended
Goodwill and Intangible Assets Disclosure [Abstract]
INTANGIBLE ASSETS
Intangible Assets:
Cost
Accumulated Amortization
Net Book Value
RMH/EGC acquisition- customer contracts
5 years
$
366,000
$
(189,100
)
$
176,900
Greners acquisition- customer contracts
5 years
230,000
(163,296
)
66,704
Phototron acquisition- customer contracts
5 years
215,000
(215,000
)
-
Soja, Inc. (Urban Garden Supply) acquisition- customer contracts
5 years
60,000
(60,000
)
-
Total intangible assets
$
871,000
$
(627,396
)
$
243,604
12 Months Ended
Notes to Financial Statements
Fair Value of Derivative Liability
Fair Value Measurements Using Inputs
Financial Instruments
Level 1
Level 2
Level 3
2015
Liabilities:
Derivative Instruments - Warrants
$
-
$
1,377,175
$
-
$
1,377,175
Total
$
-
$
1,377,175
$
-
$
1,377,175
Fair Value Measurements Using Inputs
Financial Instruments
Level 1
Level 2
Level 3
2014
Liabilities:
Derivative Instruments - Warrants
$
-
$
2,100,915
$
-
$
2,100,915
Total
$
-
$
2,100,915
$
-
$
2,100,915
12 Months Ended
Notes to Financial Statements
Convertible notes summarized
Accrued
Debt
Principal
Interest
Discount
2015
6% Senior secured convertible notes (2012)
$
413,680
$
172,494
$
-
$
586,174
6% Secured convertible note (2014)
350,000
30,641
(83,924
)
296,717
7% Convertible note ($850,000)
250,000
104,137
-
354,137
7% Convertible note ($1,000,000)
250,000
134,469
-
384,469
18% Senior secured redeemable convertible debenture ($1,050,000)
1,150,000
68,510
(552,139
)
666,371
$
2,413,680
$
510,251
$
(636,063
)
$
2,287,868
12 Months Ended
Equity [Abstract]
Warrants
December 31, 2015
Weighted
Average
Exercise
Shares
Price
Outstanding at beginning of period
565,000,000
$
0.032
Issued
-
-
Exercised
-
-
Forfeited
-
-
Expired
-
-
Outstanding at end of period
565,000,000
$
0.032
Exerciseable at end of period
565,000,000
December 31, 2015
Number of
Shares
Warrants
Life
Price
Exerciseable
Price
540,000,000
3.31
$
0.033
540,000,000
$
0.033
25,000,000
2.94
0.010
25,000,000
0.010
565,000,000
3.30
$
0.032
565,000,000
$
0.032
Warrants totaling 565,000,000 shares of common stock have an intrinsic value of $0 as of December 31, 2015.
12 Months Ended
Stock Options Tables
Stock options
Weighted Average
Options
Exercise Price
$
Granted
49,720,000
$
0.075
$
3,706,000
Exercised
(5,126,187
)
(0.133
)
(682,922
)
Forfeitures
(44,725,000
)
(0.092
)
(4,132,751
)
Outstanding as of December 31, 2014
40,720,000
0.058
2,356,000
Granted
-
-
(960,000
)
Exercised
-
-
-
Forfeitures
(11,700,000
)
(0.050
)
(585,000
)
Outstanding as of December 31, 2015
29,020,000
$
0.028
$
811,000
Range of Exercise
Number
Number
Prices
Outstanding
Years
Exerciseable
Exerciseable
Exerciseable
$
0.05
13,020,000
4.00
$
0.050
7,120,000
$
0.050
0.01
16,000,000
3.77
0.010
7,833,333
0.010
29,020,000
3.85
$
0.028
14,953,333
$
0.043
12 Months Ended
Commitments and Contingencies Disclosure [Abstract]
Schedule of Future minimum rental payments
Years Ended December 31,
Total
2016
$
76,929
2017
34,675
2018
28,365
2019
0
2020
-
Beyond
-
Total
$
139,969
12 Months Ended
Income Tax Disclosure [Abstract]
Deferred tax assets
2015
2014
2013
U.S. operations loss carry forward and state at statutory rate of 40%
$
6,713,538
$
5,038,976
$
3,612,736
Less valuation allowance
(6,713,538
)
(5,038,976
)
(3,612,736
)
Net deferred tax assets
-
-
-
Change in valuation allowance
$
(6,713,538
)
$
(5,038,976
)
$
(3,612,736
)
Income tax reconciliation
2015
2014
Federal statutory rate
-34.0
%
-34.0
%
State income tax rate
-6.0
%
-6.0
%
Change in valuation allowance
40.0
%
40.0
%
Effective tax rate
0.0
%
0.0
%
12 Months Ended
Accumulated deficit
$ (116,715,648)
$ (111,026,803)
Shipping and handling revenue
95,455
128,351
Advertising costs
637
141,369
Inventory reserve
$ 20,000
$ 40,215
Goodwill
$ 739,000
$ 739,000
ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER
Assets
$ 907,614
Intangible assets
366,000
Goodwill
739,000
Total Assets
2,012,614
Less fair value of liabilities assumed
(387,614)
Purchase price
$ 1,625,000
12 Months Ended
Amortization expense
$ 106,548
$ 106,548
ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER
Amortization period
5 years
Amortization expense
$ 106,548
$ 106,548
Notes to Financial Statements
Finished goods
$ 418,439
$ 923,565
Inventory reserve
(20,000)
(40,215)
Total inventory
$ 398,439
$ 883,350
12 Months Ended
Investment In Vape Holdings Inc. Details Narrative
Loss in the value of its investment
$ 1,122,397
12 Months Ended
Intangible assets, gross
$ 871,000
Accumulated Amortization
(627,396)
Intangible assets, net
243,604
RMH/EGC acquisition - customer contracts
Intangible assets, gross
366,000
Accumulated Amortization
(189,100)
Intangible assets, net
$ 176,900
Estimated Useful Lives
5 years
Greners acquisition - customer contracts
Intangible assets, gross
$ 230,000
Accumulated Amortization
(163,296)
Intangible assets, net
$ 66,704
Estimated Useful Lives
5 years
Phototron acquisition - customer contracts
Intangible assets, gross
$ 215,000
Accumulated Amortization
(215,000)
Intangible assets, net
$ 0
Estimated Useful Lives
5 years
Soja, Inc. (Urban Garden Supply) acquisition - customer contracts
Intangible assets, gross
$ 60,000
Accumulated Amortization
(60,000)
Intangible assets, net
$ 0
Estimated Useful Lives
5 years
12 Months Ended
Intangible Assets Details Narrative
Amortization expense
$ 106,548
$ 106,548
Derivative Instruments - Warrants
$ 1,377,175
$ 2,100,915
Derivative liability
1,377,175
2,100,915
Level 1
Derivative Instruments - Warrants
0
0
Derivative liability
0
0
Level 2
Derivative Instruments - Warrants
1,377,175
2,100,915
Derivative liability
1,377,175
2,100,915
Level 3
Derivative Instruments - Warrants
0
0
Derivative liability
$ 0
$ 0
12 Months Ended
Shares
Outstanding-beginning of year (in shares)
565,000,000
Issued
0
Exercised
0
Forfeited
0
Expired
0
Outstanding at end of year
565,000,000
Exerciseable at end of year
565,000,000
Weighted Average Exercise Price
Outstanding-beginning | $ / shares
$ .032
Issued | $ / shares
0.000
Exercised | $ / shares
0.000
Forfeited | $ / shares
0.000
Expired | $ / shares
0.000
Outstanding at end of year | $ / shares
$ 0.032
12 Months Ended
Price range 1
Outstanding at end of year
540,000,000
Weighted average remaining life
3 years 3 months 22 days
Outstanding at end of year | $ / shares
$ .033
Exerciseable at end of year
540,000,000
Price range 2
Outstanding at end of year
25,000,000
Weighted average remaining life
2 years 11 months 8 days
Outstanding at end of year | $ / shares
$ .010
Exerciseable at end of year
25,000,000
Warrant [Member]
Outstanding at end of year
565,000,000
Weighted average remaining life
3 years 3 months 18 days
Outstanding at end of year | $ / shares
$ 0.032
Exerciseable at end of year
565,000,000
12 Months Ended
Aggregate Intrinsic Value
Exercised
$ (44,673)
Options
Shares
Outstanding-beginning of year (in shares)
40,720,000
40,851,187
Granted
0
49,720,000
Exercised
0
(5,126,187)
Forfeitures
(11,700,000)
(44,725,000)
Outstanding-end of year (in shares)
29,020,000
40,720,000
Weighted Average Exercise Price
Outstanding-beginning
$ 0.058
$ 0.085
Granted
0.000
0.075
Exercised
0.000
(0.133)
Forfeitures
(.050)
(0.092)
Outstanding at end of year
$ .028
$ 0.058
Aggregate Intrinsic Value
Outstanding-beginning of year (in dollars)
$ 2,356,000
$ 3,465,673
Granted
(960,000)
3,706,000
Exercised
0
(682,922)
Forfeitures
(585,000)
(4,132,751)
Outstanding-end of year (in dollars)
$ 811,000
$ 2,356,000
12 Months Ended
Price 0.05
Outstanding-end of year (in shares) | shares
13,020,000
Weighted average remaining life in years
4 years
Outstanding at end of year | $ / shares
$ .050
Exerciseable at end of year | shares
7,120,000
Weighted average exercise price exercisable | $ / shares
$ .050
Price 0.01
Outstanding-end of year (in shares) | shares
16,000,000
Weighted average remaining life in years
3 years 9 months 7 days
Outstanding at end of year | $ / shares
$ .010
Exerciseable at end of year | shares
7,833,333
Weighted average exercise price exercisable | $ / shares
$ .010
Options
Outstanding-end of year (in shares) | shares
29,020,000
Weighted average remaining life in years
3 years 10 months 6 days
Outstanding at end of year | $ / shares
$ .028
Exerciseable at end of year | shares
14,953,333
Weighted average exercise price exercisable | $ / shares
$ .043
Commitments And Contingencies Details
2016
$ 76,929
2017
34,675
2018
28,365
2019
0
2020
0
Beyond
0
Total
$ 139,969
12 Months Ended
Deferred tax assets:
U.S. operations loss carry forward and state at statutory rate of 40%
$ 6,713,538
$ 5,038,976
$ 3,612,736
Less valuation allowance
(6,713,538)
(5,038,976)
(3,612,736)
Net deferred tax asset
0
0
0
Change in valuation allowance
$ (6,713,538)
$ (5,038,976)
$ (3,612,736)
12 Months Ended
Income Tax Details
Federal statutory rate
(34.00%)
(34.00%)
State income tax rate
(6.00%)
(6.00%)
Change in valuation allowance
40.00%
40.00%
Total
0.00%
0.00%
12 Months Ended
Income Taxes Details Narrative
Net operating loss carryforwards
$ 17,000,000
Net operating loss carryforwards expiration
2023-2033
WJ*C29SZKBI__<'\?/L_^+
M2ZD9WP"H 5P:*"LV0&J 'PWTV%/O;.S7;T57K%=-?9ZUIV*8;?70RYLA2!]Y
MUG>F[<=IC-F,([5>_5@KT*OECR'0)PV,F@UI+HIE'YV]!_>*P/./$1@$-EO0)UPQGN@7,OY(S_3IIOEIYX.9_5?X9J7?H3
M-7"O^!]6V\Z%33"JH:$#M\]J?("IA)"P4MR$)ZH&8Y68*1@)^AI')L,XQC=Y
M/M'6"=E$R!;"+@G!HU&(^8-:6A9:CGR[SVP+T6B / C26L;HV
MV7O,?2@C8'*;A7X"JP-LE=%B4=RVD\_:R6,_%G-Y%L%.P'RQ=XN0CV%UA.4D
M2__#3C%KIPC=26?SQ.Y$S.I&=P)LN:2T(._LX(OS-[ #_&3JT/4:;:6Q1]F?
MN$9* U:&W!4):NT+,RTX-,9-[^URUX=ERE+3PL_N^W.3@M9VV3GNG4W
MR-%T:DRTW"S3.W9[#]4D\8I?G3R:=^_)U/R34L_3Q_?U,LVG'F0O5W:R$.[Q
M(A]DWT].+OE/-'W+G K?OY_
R*F7
M;^SR@[H:,DVX8[TPWV!W$I(-