Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes []☒ No ~~[X]~~

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the ~~Securities~~ Exchange Act ~~of 1934~~ during the ~~preceding~~past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ~~[X]~~☐ No []

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate ~~Website,~~Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ~~(§232.405 of this chapter)~~ during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ~~[X]~~☐ No []

Indicate by check mark if disclosure of delinquent filers ~~pursuant~~in response to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[] ☐

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

Large accelerated filer []	☐	Accelerated filer []	☐	Non-accelerated filer []	☐	Smaller reporting company ~~[X]~~	☒
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined byin Rule 12b-2 of the Exchange Act). ☐ Yes []☒ No ~~[X]~~

~~The~~As of June 30, 2016 (the last business day of our most recently completed second fiscal quarter), based upon the last reported trade on that date, the aggregate market value of the voting and non-voting common equity held by non-affiliates ~~computed~~(for this purpose, all outstanding and issued common stock minus stock held by ~~reference to~~ the ~~price at which the common equity was last sold, as~~officers, directors and known holders of 10% or more of the ~~last business day of the registrant’s most recently completed fiscal quarter,~~Company’s common stock) was ~~approximately~~ $17,064,082~~98,575,109.~~.

As of March 31, ~~2014~~2017 there were ~~806,090,859~~1,944,843,172 shares of the issuer’s common stock, $0.0001 par value per share, ~~outstanding.~~issued and outstanding,

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

The following discussion, in addition to the other information contained in this report, should be considered carefully in evaluating us and our prospects. This report (including without limitation the following factors that may affect operating results) contains forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act") regarding us and our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. Additionally, statements concerning future matters such as revenue projections, projected profitability, growth strategies, development of new products, enhancements or technologies, possible changes in legislation and other statements regarding matters that are not historical are forward-looking statements.

Forward-looking statements in this report reflect the good faith judgment of our management and the statements are based on facts and factors as we currently know them. Forward-looking statements are subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, but are not limited to, those discussed below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those discussed elsewhere in this report. Readers are urged not to place undue reliance on these forward-looking statements which speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report.

~~GrowLife, Inc.~~

~~Table of Contents to Annual Report on Form 10-K~~

~~For the Fiscal Year Ended December 31, 2013~~

TABLE OF CONTENTS

	~~Page~~	Page
PART I1

ITEM 1. ~~BUSINESS~~	5Description of Business	2

ITEM 1A. ~~RISK FACTORS~~	12Risk Factors	7

ITEM ~~1B. UNRESOLVED STAFF COMMENTS~~1B	14Unresolved Staff Comments	16

ITEM 2. ~~PROPERTIES~~	15Properties	16

ITEM 3. ~~LEGAL PROCEEDINGS~~	15Legal Proceedings	17

ITEM 4. ~~MINE SAFETY DISCLOSURES~~	15Mine Safety Disclosures	17

PART II

ITEM 5. ~~MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES~~	16Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18

ITEM 6. ~~SELECTED FINANCIAL DATA~~	18Selected Financial Data	21

ITEM 7. ~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~	18Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

ITEM 7A. ~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~	28Quantitative and Qualitative Disclosures About Market Risk	29

ITEM 8. ~~FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA~~	28Financial Statements and Supplementary Data	29

ITEM 9. ~~CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE~~	74Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	29

ITEM 9A. ~~CONTROLS AND PROCEDURES~~	74Controls and Procedures	29

ITEM 9B. ~~OTHER INFORMATION~~	74Other Information	30

PART III

ITEM 10. ~~DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE~~	75Directors, Executive Officers and Corporate Governance	31

ITEM 11. ~~EXECUTIVE COMPENSATION~~	85Executive Compensation	34

ITEM 12. ~~SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS~~	90Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	41

ITEM 13. ~~CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE~~	93Certain Relationships and Related Transactions, and Director Independence	42

ITEM 14. ~~PRINCIPAL ACCOUNTANT FEES AND SERVICES~~	95Principal Accounting Fees and Services	44

PART IV

ITEM 15. ~~EXHIBITS, FINANCIAL STATEMENT SCHEDULES~~	96Exhibits, Financial Statement Schedules	45

	SIGNATURES	50

~~- 2 -~~

~~PART I~~

~~ITEM 1. BUSINESS.~~

~~CORPORATE HISTORY~~

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

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

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

On January 15, 2010, Lionsridge, Keating Investments, Kevin R. Keating, Laurus Master Fund, Ltd., Garisch Financial, Inc. and Woodman Management Corporation entered into a Stock Purchase Agreement pursuant to which (1) Lionsridge, Keating Investments, Keating, Laurus and GFI (collectively, the “Sellers”) would sell to Woodman, and Woodman would purchase from the Sellers, an aggregate of 3,861,721 shares of our common stock (the “Shares”), which Shares represent 89.1% of the issued and outstanding shares of our common stock, (2) the Sellers would assign to Woodman the Sellers’ registration rights under existing agreements with our company, (3) each Seller and our company would release each other from all existing claims (other than claims by Keating for statutory or other rights to indemnification as a result of his service as an officer and director of our company) and (4) Keating Investments would indemnify Woodman and our company from liabilities arising out of any breach of any representation, warranty, covenant or obligation of Keating Investments, Keating and Lionsridge, for a period of six months from the closing of the transactions under the Purchase Agreement, up to a maximum amount of $50,000. The aggregate purchase price for the Shares was $210,130, or approximately $0.05441 per share. In connection with the Purchase Agreement, Woodman also agreed to assume, and to pay at the closing of the transactions under the Purchase Agreement, certain obligations of our company in an aggregate amount of $30,000 (including $15,000 owed to Keating Investments as a consulting fee for services rendered to us in connection with the transactions contemplated under the Purchase Agreement). The closing of the transactions under the Purchase Agreement occurred on February 3, 2010. Woodman paid the aggregate purchase price for the Shares with personal funds. On April 12, 2010, Woodman transferred the Shares to W-Net Fund I, L.P.

~~- 3 -~~1

PART I

~~On February 14, 2011, we entered into an~~

ITEM 1. DESCRIPTION OF BUSINESS

THE COMPANY AND OUR BUSINESS

GrowLife, Inc. (“GrowLife” or the “Company”) is incorporated under the laws of the State of Delaware and is headquartered in Kirkland, Washington. We were founded in 2012 with the Closing of the Agreement and Plan of Merger (“PHI Merger Agreement”) with PHI Merger Corporation, a California corporation and our wholly-owned subsidiary (“PHI MergerCo”), and Phototron, Inc., a California corporation (“Phototron”). The closing (the “PHI Closing”) of the transactions contemplated by the PHI Merger Agreement (the “PHI Merger”) occurred on March 9, 2011. At the PHI Closing, (a) PHI MergerCo was merged with and into Phototron; (b) Phototron became our wholly-owned subsidiary; (c) all of Phototron’s shares and options outstanding prior to the PHI Merger were exchanged (or assumed, in the case of options) for comparable securities of our company; and (d) 95% of our fully-diluted shares were owned by Phototron’s former shareholders and option holders. At the PHI Closing, we issued a total of 130,621,421 shares of our common stock to Phototron’s former shareholders, in exchange for the 1,666,666 shares of Phototron’s common stock outstanding prior to the PHI Merger. Upon the effectiveness of the PHI Merger, 8,662,262 shares of our common stock were maintained by our existing stockholders. In connection with the PHI Merger on March 9, 2011, we changed our name from Catalyst Lighting Group, Inc. to Phototron Holdings, Inc.

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

~~On March 21, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”)~~ with SGT Merger ~~Corporation, a Nevada corporation~~Corporation.

Our goal of becoming the nation’s largest cultivation facility service provider for the production of organics, herbs and greens and plant-based medicines continues to guide our wholly-owned subsidiary (“MergerCo”), SG Technologies Corp, a Nevada corporation (“SGT”), Sterling C. Scott (the “SGT Representative”), and W-Net Fund I, L.P., a Delaware limited partnership and current holder of our common stock (the “Investor Representative”). The closing (the “Closing”) of the transactions contemplated by the Merger Agreement (the “Merger”) occurred on April 5, 2012. At the Closing, (a) MergerCo was merged with and into SGT; (b) SGT became our wholly-owned subsidiary; and (c) all SGT shares of common stock were exchanged for shares of our common stock and shares of a new series of our preferred stock, which was designated Series A Preferred Stock (the “Series A Preferred Stock”), and has the rights, preferences, privileges and restrictions set forthdecisions. Our mission is to best serve more cultivators in the ~~Certificate~~design, build-out, expansion and maintenance of ~~Designation~~their facilities with products of ~~Preferences, Rights~~high quality, exceptional value and Limitations of Series A Preferred Stock, which was filed with the Delaware Secretary of State on April 5, 2012. At the Closing, we issued to SGT’s former stockholders, in exchange for the 200 shares of SGT’s common stock outstanding immediately prior to the Merger, 157,000,000 shares of our common stock and 3,000,000 shares of Series A Preferred Stock.

~~The accompanying consolidated financial statements of GrowLife~~competitive price. Through knowledgeable representatives, regional centers and its ~~subsidiaries reflect~~e-commerce website, GrowLife provides essential and hard-to-find goods including growing media, industry-leading hydroponics equipment, organic plant nutrients, and thousands more products to specialty grow operations across the historical activity of SGT, and the historical stockholders’ equity of SGT has been retroactively restated for the equivalent number of shares received in the exchange after giving effect to the differences in par value offset to additional paid-in capital. In connection with the Merger Agreement, we are deemed to have issued an additional 152,343,383 shares of common stock to our stockholders existing prior to the Merger. Net liabilities of $542,716 have been assumed as part of the purchase price.

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

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

On August 6, 2012, GrowLife, Inc., a Delaware corporation and our wholly-owned subsidiary, merged with and into our company pursuant to the Certificate of Ownership and Merger filed with the Delaware Secretary of State on July 25, 2012 and effective on August 6, 2012. As a result of the merger, on August 6, 2012, our corporate named changed from Phototron Holdings, Inc. to GrowLife, Inc.United States.

~~- 4 -~~

~~On October 22, 2012,~~We primarily sell through our wholly owned subsidiary, GrowLife Hydroponics, Inc., a Delaware corporation (“GH”), completed the purchase of all of the shares (the “UG Shares”) of Soja, Inc. dba Urban Garden Supplies (the “Urban Garden”) from Richard Melograno, Michael Cook, and Scott Glass (collectively, the “UG Sellers”). The effective date of the Stock Purchase Agreement was October 24, 2012 (“UG Agreement”). The UG Agreement included all of the assets and liabilities of Urban Garden which includes the inventory of the store located at 22516 Ventura Blvd., Woodland Hills, CA 91364 and various other assets. GH also assumed the liabilities of Urban Garden which were valued at $70,370. GrowLife’s CEO Sterling Scott personally guaranteed this liability. In consideration for the UG Shares, GrowLife agreed to pay to the UG Sellers an aggregate of 3,906,250 shares of the Company’s common stock valued at $156,641.

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

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

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

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

In accordance with the Agreement, the Company also issued a 7% Note to CANX (the “Note”) in exchange for the principal amount of $1,000,000. Per the terms of the Note, the maturity date is September 30, 2015, and the annual rate of interest is seven percent (7%), which increases to twenty-four percent (24%) per annum, or the maximum rate permitted under any applicable law, in the event of default. Subject to certain limitations, CANX can, at its sole discretion, convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common stock. The conversion price for the period of time from the date of the Note through and including September 30, 2014 is the lesser of (a) $0.025 per share and (b) seventy percent (70%) of the average of the three (3) lowest daily volume weighted average closing prices occurring during the twenty (20) consecutive trading days immediately preceding the applicable conversion date on which CANX elects to convert all or part of the Note, subject to adjustment as provided in the Note. The conversion price is $0.025 per share for the period of October 1, 2014 through the maturity date of September 30, 2015, subject to adjustment as provided in the Note. The Company is required to reserve, at all times, the full number of shares of common stock issuable upon conversion of all outstanding amounts under this Note. At any time after the 12-month period immediately following the date of the Note, the Company has the option to pre-pay the entire outstanding principal amount of the Note by paying to CANX an amount equal to one hundred and fifty percent (150%) of the principal and interest then outstanding. The Company’s obligations under the Note will accelerate upon a bankruptcy event with respect to the Company or any subsidiary, any default in the Company’s payment obligations under the Note, the Company’s failure to issue shares of its common stock in connection with a conversion of any of the Note, the Company’s or any subsidiary’s breach of any provision of any agreement providing for indebtedness of the Company or such subsidiary in an amount exceeding $100,000, the common stock of the Company being suspended or delisted from trading on the Over the Counter Bulletin Board (the “Primary Market”) market and the OTCQB, the Company losing its status as “DTC Eligible” or the Company becoming late or delinquent in its filing requirements with the Securities and Exchange Commission. Upon any such acceleration of the Note, the Company shall be obligated to pay an amount equal to the greater of (i) one hundred and twenty percent (120%) of the outstanding principal of the Note (plus all accrued but unpaid interest) and (ii) the product of (a) the highest closing price for the Company’s common stock for the five (5) days on which the Primary Market is open for business immediately preceding such acceleration and (b) a fraction, the numerator of which is the outstanding principal of the Note, and the denominator of which is the applicable conversion price as of the date of determination.

~~- 5 -~~

In accordance with the Agreement, the Company also entered into a Registration Rights Agreement with CANX whereby CANX has the right to demand that the Company prepare and file a Registration Statement on Form S-1 (or, if Form S-1 is not then available to the Company, on such form of registration statement as is then available to effect a registration for resale of securities) covering the resale of warrants issued pursuant to the Warrant Agreement.

~~BUSINESS~~

~~General~~

We believe that 2013 was a year of transformation for our company, with renewed and expanded focus by GrowLife operating companies on providing legal products to the specialty urban gardening market in retail, in business to business transactions, and direct to consumers. As and to the extent the state and federal regulatory landscape changes, we will continue opportunistic expansion of our business in regional and state-by-state markets of legal medical marijuana across the United States. The GrowLife family of companies now includes the online distribution hub Greners, the pioneering and expanding Stealth Grow product line, and retail stores that can service customers from coast to coast.

GrowLife companies ~~manufacture~~distribute and ~~supply branded equipment~~sell over 15,000 products through its e-commerce distribution channel, GrowLifeEco.com, and expendables, with expendables being products such as nutrients and soils that are consumed as part of the cultivation process and therefore needing to be replenished on a continual basis, that promote and enhance the characteristics of quality and quantity of indoor and outdoor urban gardening. GrowLife also controls premier industry portal www.cannabis.org, which we believe will serve as another widely recognized and authoritative social channel for branded product promotion, sales, and information as and to the extent the regulatory landscape changes.

~~With regard to the products sold at~~through our regional retail hydroponics stores in our business to business relationships, and directly, the Company typically purchases its products from the actual manufacturer or a wholesale distributor and resells the products. Most of our vendors provide payment terms ranging from seven (7) days to thirty (30) days while some require payment at the time we purchase them. The Company also more directly manages supply chains in which GrowLife company branded products are produced, principally under the Stealth Grow brand, or under a co-brand shared by GrowLife, Stealth Grow, and the brands of our business to business partners. With regard to our Phototron units, the Company purchases the required materials and then assembles the actual working unit at our Gardena, CA facility, with the finished, and working, Phototron unit then being shipped directly to our customers.

We have focused on the urban gardening industry in the United States and have targeted legal growers of medical marijuana and general gardening enthusiasts. The majority of the products that we sell are primarily used in the cultivation, in a legal and law abiding manner, of cannabis but can also be used to cultivate most any flowers and/or vegetables.storefronts. GrowLife and its business units are organized and ~~aim~~directed to operate strictly in accordance with all applicable state and federal laws. ~~Accordingly, if~~

We are focusing on future success. In that regard, we believe that the hydroponics supply industry will experience significant growth and, as a result, operating in this industry has become highly competitive, cash intensive and customer centric. However, we have plans to address these challenges.

First, the opportunity to sell both infrastructure equipment and recurring supplies to the ~~extent that state~~indoor cultivation industry is constantly increasing as demand for indoor cultivation grows across the United States. GrowLife believes the demand will continue to grow and ~~federal laws permit~~more and more states and municipalities, including California enact rules and regulations allowing for more indoor cultivation activities. GrowLife continues with its multi-faceted distribution strategy, which we believe serves customers in the ~~nationwide legal use~~following manner: Direct sales to large commercial customers, retail in some markets for local convenience, and e-commerce via GrowLifeEco.com to fulfill orders across the nation from customers of ~~marijuana and/or medical marijuana, we expect to commercialize our products in that market.~~all sizes.

~~From time to time, the Company may make modest investments in public or even privately held companies in our industry segment in order to facilitate business opportunities~~Second, serving what GrowLife sees as an increasing number of cultivators has become cash intensive because of the ~~Company. The first such investment~~need for large inventory levels at retail, extensive e-commerce online marketing, and supporting payment terms to large accounts. Currently, GrowLifeEco.com offers over 15,000 products, far beyond the 3,000 found in Greners.com, its former online store. This on-line website was expanded by the ~~Company occurred~~fall of 2016.

Third, GrowLife’s customers come in ~~May 2013, when~~different stages from caregiver cultivators to 80,000+ square foot commercial operations. With the ~~Company made an investment~~use of e-commerce, GrowLife endeavors to reach as many customers as possible in areas where we do not have stores or a direct sales presence. Last year GrowLife built GrowLifeEco.com, our new e-commerce website, that is optimized for mobile devices. GrowLife put web marketing in place to increase awareness, traffic and conversions.

GrowLife started the expansion of sales and store personnel and marketing efforts with the new funding vehicle with Chicago Venture Partners, L.P. Chicago Venture is supportive in the amount of $1,160 in Vape Holdings, Inc. (“Vape”), a Nevada corporation. Following a series of transactions that are detailed in “NOTE 9 – INVESTMENT IN A RELATED PARTY”, VAPE Holding, Inc. became a public company. Through its investment, GrowLife received and still owns asexpansion of the ~~time~~sales and marketing teams in a growing market. GrowLife is expecting growth in several markets, including California. GrowLife receives funding twice a month for such costs. As the personnel were hired late in the December 2016 quarter, the impact is expected to start in the March 2017 quarter.

GrowLife also considered the lack of capital access since 2014 and the new funding vehicles with Chicago Venture Partners, L.P. Operations were significantly impacted during 2014- 2016 as a result of the lack of access to capital. GrowLife did not have cash to ship orders. With the addition of GrowLife’s new partners, we have access to capital and are growing our sales again.

Also, we recognize demand is increasing from small, aspiring cultivation consumers across the country seeking to learn and use a complete indoor growing solution. To address this ~~filing 200,428 shares~~demand, we packaged GrowLife Cube, an entry-level offering for consumers to get hands-on experience with indoor growing. Although many still buy the components separately, we are working on developing videos and supplier tools to attract them to this one-stop shop program. Given the election results in ~~VAPE Holdings, Inc (OTCQB: VAPE).~~California GrowLife Cube is expected to provide greater value and specialty services.

Sterling Scott, the Company’s Chief Executive Officer and Chairman of the Board, has a personal investment in Vape as well. As of the time of this filing, Mr. Scott holds 269,541 shares of Vape’s common stock. As a result of Mr. Scott’s ownership of Vape common stock, the Company has deemed Vape to be a related party and therefore has recorded its investment in Vape as an “Investment in a related party” on its balance sheet. It should also be noted that the current Chief Executive Officer of Vape is the former President of GrowLife, Inc.2

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. We are currently taking the appropriate steps to uplist to the OTCQB Exchange and resume priced quotations with market makers as soon as it is able.

Market Size and Growth

While there is a great deal of purchasing of indoor cultivation equipment for non-Cannabis cultivation, many of our investors have a high-interest in the direction of the Cannabis industry as it may directly affect GrowLife’s growth. Therefore, the following market information is provided.

Twenty eight states and the District of Columbia currently have laws legalizing marijuana in some form. Three other states will soon join them after recently passing measures permitting use of medical marijuana.

Seven states and the District of Columbia have adopted more expansive laws legalizing marijuana for recreational use. Most recently, California, Massachusetts, Maine and Nevada all passed measures in November legalizing recreational marijuana. California’s Prop. 64 measure allows adults 21 and older to possess up to one ounce of marijuana and grow up to six plants in their homes. Other tax and licensing provisions of the law will not take effect until January 2018.

Several legislatures in states recently passing legalization measures are debating regulatory proposals around the use and sale of marijuana. Massachusetts lawmakers are weighing bills that would lower the amount that residents can legally possess or place restrictions on retails stores. In Nevada, one proposal calls for businesses to obtain permits allowing for the public use of marijuana.

A number of states have also decriminalized the possession of small amounts of marijuana. Other states have passed medical marijuana laws allowing for limited use of cannabis. Some medical marijuana laws are broader than others, with types of medical conditions that allow for treatment varying from state to state. Others states (not shown on the map below) have passed laws allowing residents to possess cannabis oil if they suffer from certain medical illnesses.

Our map shows current state laws and recently-approved ballot measures legalizing marijuana for medical or recreational purposes. Medical marijuana laws recently passing in Arkansas, Florida and North Dakota have yet to become effective.

Information is current as of January 30, 2017.

Source: www.governing.com/gov-data/state-marijuana-laws-map-medical-recreational.html

GrowLife serves a new, yet sophisticated community of commercial and urban cultivators growing specialty crops including organics, greens and plant-based medicines. Unlike the traditional agricultural industry, these cultivators use innovative indoor growing techniques to produce specialty crops in highly controlled environments. This enables them to produce crops at higher yields without having to compromise quality - regardless of the season or weather and drought conditions.

Indoor growing is commonly used for plant-based medicines because they often require high-degree of regulation and controls including government compliance, security, and crop consistency. This makes indoor growing a preferred method. Cultivators of plant-based medicines often make a significant investment to design and build-out their facilities. They look to work with companies such as GrowLife who understand their specific needs, and can help mitigate risks that could jeopardize their crops.

Indoor growing techniques, however, are not limited to plant-based medicines. Vertical farms producing organic fruits and vegetables are beginning to emerge in the market due to a rising shortage of farmland, and environmental vulnerabilities including drought, other severe weather conditions and insect pests. Indoor growing techniques enables cultivators to grow crops all-year-round in urban areas, and take up less ground while minimizing environmental risks. Indoor growing techniques typically require a more significant upfront investment to design and build-out these facilities, than traditional farmlands. If new innovations lower the costs for indoor growing, and the costs to operate traditional farmlands continue to rise, then indoor growing techniques may be a compelling alternative for the broader agricultural industry.

~~- 6 -~~3

State	Year Passed How Passed (Yes Vote) Possession Limit
1.Alaska	1998 Ballot Measure 8 (58%) 1 oz usable; 6 plants (3 mature, 3 immature)
2.Arizona	2010 Proposition 203 (50.13%) 2.5 oz usable; 12 plants
3.Arkansas	2016 Ballot Measure Issue 6 (53.2%) 3 oz usable per 14-day period
4.California	1996 Proposition 215 (56%) 8 oz usable; 6 mature or 12 immature plants
5.Colorado	2000 Ballot Amendment 20 (54%) 2 oz usable; 6 plants (3 mature, 3 immature)
6.Connecticut	2012 House Bill 5389 (96-51 H, 21-13 S) 2.5 oz usable
7.Delaware	2011 Senate Bill 17 (27-14 H, 17-4 S) 6 oz usable
8.Florida	2016Ballot Amendment 2 (71.3%) Amount to be determined
9.Hawaii	2000 Senate Bill 862 (32-18 H; 13-12 S) 4 oz usable; 7 plants
10.Illinois	2013 House Bill 1 (61-57 H; 35-21 S) 2.5 ounces of usable cannabis during a period of 14 days
11.Maine	1999 Ballot Question 2 (61%) 2.5 oz usable; 6 plants
12.Maryland	2014 House Bill 881 (125-11 H; 44-2 S) 30-day supply, amount to be determined
13.Massachusetts	2012 Ballot Question 3 (63%) 60-day supply for personal medical use (10 oz)
14.Michigan	2008 Proposal 1 (63%) 2.5 oz usable; 12 plants
15.Minnesota	2014 Senate Bill 2470 (46-16 S; 89-40 H) 30-day supply of non-smokable marijuana
16.Montana	2004 Initiative 148 (62%) 1 oz usable; 4 plants (mature); 12 seedlings
17.Nevada	2000 Ballot Question 9 (65%) 2.5 oz usable; 12 plants
18.New Hampshire	2013 House Bill 573 (284-66 H; 18-6 S) Two ounces of usable cannabis during a 10-day period
19.New Jersey	2010 Senate Bill 119 (48-14 H; 25-13 S) 2 oz usable
20.New Mexico	2007 Senate Bill 523 (36-31 H; 32-3 S) 6 oz usable; 16 plants (4 mature, 12 immature)
21.New York	2014 Assembly Bill 6357 (117-13 A; 49-10 S) 30-day supply non-smokable marijuana
22.North Dakota	2016 Ballot Measure 5 (63.7%) 3 oz per 14-day period
23.Ohio	2016 House Bill 523 (71-26 H; 18-15 S) Maximum of a 90-day supply, amount to be determined
24.Oregon	1998 Ballot Measure 67 (55%) 24 oz usable; 24 plants (6 mature, 18 immature)
25.Pennsylvania	2016 Senate Bill 3 (149-46 H; 42-7 S) 30-day supply
26.Rhode Island	2006 Senate Bill 0710 (52-10 H; 33-1 S) 2.5 oz usable; 12 plants
27.Vermont	2004 Senate Bill 76 (22-7) HB 645 (82-59) 2 oz usable; 9 plants (2 mature, 7 immature)
28.Washington	1998 Initiative 692 (59%) 8 oz usable; 6 plants
Washington, DC	2010 Amendment Act B18-622 (13-0 vote) 2 oz dried; limits on other forms to be determined
Source: Marijuana State Laws – Summary Chart from ProCon.org

Strategy

Our long-term strategy revolves around three premises: First, the indoor growing market for fruits, vegetables and medical plants is here to stay. We see an opportunity for it to double for several years, especially after last year’s election raising the number of states that support Cannabis; Second, GrowLife will continue to establish itself as a national brand to provide the much-needed advisory services and sell lighting, nutrients, mediums and other equipment, supplies and services to cultivators across the country; And third, the demand for more healthy, safer and economical ways to run indoor growing operations will dramatically increase and require innovative products to intelligently drive down costs without compromising quality. These are critical premises for the Company’s growth.

Our growth plan consists of adding more knowledgeable, talented and committed people, creating greater access to equipment and supplies, and offering more and better choices. We must sequence our steps in a timely and deliberate manner.

Our Base business provides GrowLife with a solid high-growth foundation, especially as we see interest increase for the GrowLife Retail License Program that was announced at the end of 2016. This License Program creates financial and operating efficiencies for GrowLife. We are shifting our retail store business from a fixed to variable cost structure, which allows us to apply our indoor cultivation competency to other retail partners, and reach more cultivators in markets across the US faster. The License Program offerings range from a Store-within-the-store, such as the one in place in Philadelphia at Fairmount Hardware, an Ace Hardware franchisee, located at 2011 Fairmount Ave, Philadelphia, PA, to partnering with retail investors who seek to set up new GrowLife-licensed hydroponic stores. We are pleased with the initial response and lessons learned from the License Program, which have helped refine our offerings, customer engagement and operating process.

The other two channels for our Base business, Online e-commerce and Direct Sales, continue to be refined as we apply more talent to them. We plan to serve the Base business with these channels by helping those price-sensitive customers drive down their equipment and supply costs. While this puts great price pressure on our manufacturers, we closely watch metrics move to the lowest cost per gram. One of the largest cultivators recently shifted their lights from a popular 1,000W to 315W where the electricity savings alone drove down their production cost by 35% and production increased by 20%.

In addition, our Expansion business efforts are equally capable of revenue growth. However, Expansion investments come with great risk not too different than building a start-up. Our Expansion efforts are intended to be game-changers.

The Cannabis industry itself is a game-changer. Many people are discovering great benefits with the plant that are far beyond its commercial growth. Even with all the government challenges we believe that both business and consumer will persevere because the demand and benefit of the plant are genuine based on scientific research conducted throughout the world. Consistent safety measures and standards are on their way. Therefore, we see the greatest opportunities and challenges to be in helping to address the mainstream acceptance and management of the plant…the game-changers.

GrowLife will therefore be pursuing such game-changers to help propel the industry forward on several fronts. Acquisitions may range from ~~net sales~~innovations that significantly drive down the operating costs for commercial cultivators to the desperately needed cloud-based tools for the government to extensively coordinate its policies with the industry in a safe and responsible manner. We expect to see some of these Expansion game-changers come to market in 2017. The caveat is that there are many moving parts and these game-changers may or may not come to pass.

GrowLife’s greatest growth may come from a business that is not a significant contributor today. We see three key areas that may be game-changers for us in 2017: Mergers & Acquisitions and Partnerships (MAP); Consumer with GrowLife Cube; and plant-related services. Each of these areas will require us to add the right people at the right time. Many talented individuals are ready to join GrowLife.

MAP in our Base business with Retail Licensing Program has ~~steadily increased~~quickly taught us to invest in new procedures and people. Growth from ~~$1,450,745 during~~M&A is the ~~fiscal~~most obvious expansion move. Over the last year ~~ended December 31, 2012 to $4,858,976~~we explored a half-a-dozen acquisition opportunities. However, we found that they were all over-priced. Even after factoring in the ~~fiscal year ended December 31, 2013. This represents an increase of $3,408,231, or 235%, on a year-to-year basis. Our fiscal year revenue is derived from our various brands as follow:~~

Revenue By Brand

FY 2013 FY 2012
GrowLife Hydroponics, Inc. (1) (2) $ 2,753,761 $ 118,522
Greners.com (3) 1,791,802 828,311
Phototron & SG Technologies Corp (4) 313,413 503,912
$ 4,858,976 $ 1,450,745
possible valuation lift to the PHOT share price, the risk/reward did not make sense.

~~(1) Includes Soja, Inc. (dba Urban Garden Supply), Rocky Mountain~~

~~Hydroponics, LLC,~~

The most visible example was Go Green Hydroponics, where we had entered into a non-binding letter of intent last year. We recently announced in an SEC 8-K/A filing that the non-binding letter of intent had expired and ~~Evergreen Garden Center, LLC.~~

~~(2) Rocky Mountain Hydroponics, LLC, and Evergreen Garden Center, LLC were acquired in June~~

~~2013 and Soja, Inc. was acquired in October 2012, with the above revenue results only~~

~~representing the post-acquisition periods.~~

~~(3) Greners.com was acquired in July 2012, with FY 2012 revenue representing the post-acquisition~~

~~period.~~

~~(4) SG Technologies Corp was acquired in April 2012 with FY 2012 revenue representing the~~

~~post-acquisition period.~~

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

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

Through its wholly owned subsidiaries and divisions, GrowLife is positioning for rapid expansion of the scope of its business operations in the event of a substantive relaxation of state and federal laws related to cultivation, distribution and sale of cannabis related products, including industrial hemp. The pace of regulatory reform on a state and federal level from a prohibition stance to a tax and regulate approach, which are inherently uncertain future events, will largely determine the pace and the precise scope of expansion for GrowLife divisions and subsidiaries into portions of the business of cannabis in the United States in which GrowLife does not ~~currently participate.~~expect to close the acquisition of Go Green Hydroponics. We will therefore not be pursuing this acquisition since our retail strategy has shifted to the GrowLife Retail Licensing Program.

~~Brands:~~Another area we are continuing to develop is demand from new consumers entering the industry, where they seek to learn how to build indoor operations. We have tested GrowLife Cube

, an entry-level growing package that provides the basic set-up for an indoor farming operation. GrowLife provides all the necessary growing equipment and supplies. We have determined that there are many consumers without growing experience, knowledge and local access to hydroponic equipment and supplies. Therefore, we are tuning ~~PHOTOTRON~~ ÒGrowLife Cube ~~is a 25 year old USA manufacturer of plant growing systems complete with its own self-contained attractive cabinet with a full line of accessories including nutrients, media, timers~~to more effectively reach and ~~controls.~~satisfy these new consumers.

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

~~Rocky Mountain Hydroponics & Organics~~Ò ~~and 58HYDRO~~Ò ~~are GrowLife company brands for retail stores, and an online store respectively.~~

~~- 7 -~~5

~~Channels:~~

Finally, in January we spent a few days at the Seed to Sale Show in Denver to explore the plant and seed business. Our conclusion is that it is an attractive business that needs to be further explored but in an indirect manner. GrowLife is not ready to directly touch the plant due to Federal interstate laws. We are instead considering how to legally support it through state based-partners.

~~GRENERS.COM~~

We see the indoor cultivation industry as growing faster than other industries due to increasing demand for and legalization of non-toxic pain relief medicines. For years GrowLife has built its brand through experience with leading commercial cultivators. We continue to assemble the best team in the industry to create a great opportunity. Our investors and shareholders have shown strong loyalty and support even through difficult times.

Overall, GrowLife is in a ~~Sonoma County, California based online supplier~~stronger position than it has been for some time. With continued work and support, we are encouraged with the prospect of abringing growth back to the company and increase shareholder value.

Key Market Priorities

Our goal of becoming the nation’s largest cultivation facility service provider for the production of organics, herbs and greens and plant-based medicines requires GrowLife to (i) expand our nationwide, multi-channel sales network presence, (ii) offer the best terms for the full range of ~~hydroponic~~build-out equipment and consumable supplies, and (iii) deliver superior, innovative products.

First, we provide distribution through retail, e-commerce and direct sales to have national coverage and serve cultivators of all sizes. Each channel offers varying pricing for ~~shipment worldwide. Started as~~differing benefits. Retail sells at list price by offering inventory convenience, e-commerce provides lower prices without requiring local inventory, and direct sales delivers the best bid price for high-volume purchasers. Additional points of service may be added through existing distribution locations and services. This may be done in several manners and programs that may incorporate cultivator-centric locations with other retailer store owners.

Second, we serve the needs of all size cultivators and each one’s unique formulation, or ‘recipe’. We provide thousands of varieties of supplies from dozens of vendors and distributors. More importantly is our experience of knowing which products to recommend under each customer’s circumstance.

And third, our experience with hundreds of customers allows us to determine specific product needs and sources to test new designs. Lights, pesticides, nutrients, extraction and growing systems are some examples of products that GrowLife can provide. Popular name branded products are seeking to be part of the GrowLife company in many forms. In exchange, we can market their products in a family business, its core strengths lie in its extensive and continuously updated product offerings, its knowledgeable staff and their commitment to informative product reviews for customers, and next day shipping acrossunique manner over generic products.

Our company can expand with these strategies until it serves more indoor cultivators throughout the country. ~~Greners joined~~Once a customer is engaged, we can gradually expand their purchasing market share by providing greater economic benefit to the customers who buy more products from GrowLife ~~family~~than from other suppliers.

Employees

As of ~~companies~~December 31, 2016, we had one full-time employee and one consultant at our Seattle, Washington office. Marco Hegyi, our Chief Executive Officer, is based in ~~July 2012. With~~Kirkland, Washington. Mark E. Scott, our consulting CFO, is based primarily in Seattle, Washington. In addition, we have 10 employees located throughout the added resources of GrowLife, Greners is set to expand its business in 2013 through volume growth in supply of end user customers, increased commitment to unique opportunities for wholesale distributionUnited States who operate our e-commerce, direct sales and retail ~~sales of GrowLife company brands.~~

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

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

~~Other:~~

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

~~Competition~~

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

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

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

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

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

~~With regard to our company’s size relative to its competition, that is difficult to gauge as most~~businesses. None of our ~~competition~~employees is ~~privately held and does not publicly report their earnings.~~subject to a collective bargaining agreement or represented by a trade or labor union. We do know of several competitors who own and operate more retail hydroponics stores than we currently do, but they are privately held and, therefore, we are unable to determine their size in terms of annual revenue.

~~- 8 -~~

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

~~While our management believes~~believe that we have ~~the opportunity~~a good relationship with our employees.

Key Partners

Our key customers vary by state and are expected to be ~~successful in~~more defined as the ~~urban agriculture~~company moves from its retail walk-in purchasing sales strategy to serving cultivation facilities directly and under predictable purchasing contracts.

Our key suppliers include distributors such as HydroFarm, Urban Horticultural Supply and Sunlight Supply to product-specific suppliers. All the products purchased and resold are applicable to indoor growing for organics, greens, and plant-based medicines.

Competition

Certain large commercial cultivators have found themselves willing to assume their own equipment support by buying large volume purchased directly from certain suppliers and distributors such as Sunlight Supplies and HydroFarm. Other key competitors on the retail side consist of local and regional hydroponic resellers of indoor growing equipment. On the e-commerce business, GrowersHouse.com, Hydrobuilder.com, HorticultureSource.com and smaller online resellers using Amazon and eBay e-commerce market there can be no assurance that we will be successful in accomplishing our business initiatives, or that we will be able to maintain significant levels of revenues, or recognize net income, from the sale of our products and services.systems.

Intellectual Property and Proprietary Rights

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

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

www.greners.com.

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

Government Regulation

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

All this being said, many reports show that the majority of the American public is in favor of making medical cannabis available as a controlled substance to those patients who need it. The need and consumption will then require cultivators to continue to provide safe and compliant crops to consumers. The cultivators will then need to build facilities and use consumable products, which GrowLife provides.

~~Employees~~

THE COMPANY’S COMMON STOCK

Our common stock traded on the grey market under the symbol “PHOT” through February 17, 2016. While the company was without a market maker, its stock does trade directly between buyers and sellers on the grey sheets. The quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions. Consequently, the information provided below was not be indicative of ~~March 31, 2014,~~our common stock price under different conditions.

PRIMARY RISKS AND UNCERTAINTIES

We are exposed to various risks related to legal proceedings, our need for additional financing, the sale of significant numbers of our shares, the potential adjustment in the exercise price of our convertible debentures and a volatile market price for our common stock. These risks and uncertainties are discussed in more detail below in Part II, Item 1A.

WEBSITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION REPORTS

We file annual and quarterly reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any document we ~~had 45 employees. Since inception,~~file at the SEC's Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information concerning filers. We also maintain a web site at http://www.growlifeinc.com that provides additional information about our Company and links to documents we file with the SEC. The Company's charters for the Audit Committee, the Compensation Committee, and the Nominating Committee; and the Code of Conduct & Ethics are also available on our website. The information on our website is not part of this Form 10-K.

ITEM 1A. RISK FACTORS

There are certain inherent risks which will have ~~never had~~an effect on the Company’s development in the future and the most significant risks and uncertainties known and identified by our management are described below.

Risks Related to Our Business

Risks Associated with Securities Purchase Agreement with Chicago Venture

The Securities Purchase Agreement with Chicago Venture will terminate if we file protection from its creditors, a ~~work stoppage,~~Registration Statement on Form S-1 is not effective, and our ~~employees are~~market capitalization or the trading volume of our common stock does not ~~represented by a labor union. We consider~~reach certain levels. If terminated, we will be unable to draw down all or substantially all of our ~~relationship with our employees to be positive.~~

$2,500,000 Chicago Venture Note.

~~- 9 -~~7

~~ITEM 1A. RISK FACTORS.~~

~~Investing in~~Our ability to require Chicago Venture to fund the Chicago Venture Note is at our discretion, subject to certain limitations. Chicago Venture is obligated to fund if each of the following conditions are met; (i) the average and median daily dollar volumes of our common stock ~~involves~~for the twenty (20) and sixty (60) trading days immediately preceding the funding date are greater than $100,000; (ii) our market capitalization on the funding date is greater than $17,000,000; (iii) we are not in default with respect to share delivery obligations under the note as of the funding date; and (iv) we are current in its reporting obligations.

If we not able to draw down all $2,500,000 available under the Securities Purchase Agreement or if the Securities Purchase Agreement is terminated, we may be forced to curtail the scope of our operations or alter our business plan if other financing is not available to us.

Risks Associated from TCA Global Credit Master Fund, LP (“TCA”) Funding Transactions.

We have entered into various funding transactions with TCA. On January 10, 2017, Chicago Venture, at our instruction, remitted funds of $1,495,901 to TCA in order to satisfy all debts to TCA. On or around January 11, 2017, we were notified by TCA that $13,540 were due to TCA in order for TCA to release its security interest in the Company’s assets. On February 1, 2017, TCA notified the Company that all funds were received and TCA would release its security interest our assets. TCA has confirmed that it is paid in full and we are not aware of any other obligations that the we have as to TCA. The funds received under the Chicago Venture Agreements and previous Chicago Venture Agreements were used to pay-off TCA.

Failure to operate in accordance with the Agreements with TCA could result in the cancellation of these agreements, result in foreclosure on our assets in event of default and would have a ~~high degree~~material adverse effect on our business, results of ~~risk. You should carefully consider~~operations or financial condition.

Suspension of trading of the ~~following risk factors~~Company’s securities.

On April 10, 2014, we received notice from the SEC that trading of our 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 GrowLife’s common stock.” To date, we have not received notice from the SEC that it is being formally investigated.

The suspension of trading eliminated our market makers, resulted in our trading on the grey sheets, resulted in legal proceedings and restricted our access to capital. This action had a material adverse effect on our business, financial condition and results of operations. If we are unable to obtain additional financing when it is needed, we will need to restructure our operations, and divest all ~~other information contained~~or a portion of our business.

SEC charged outsiders with manipulating our securities.

On August 5, 2014, the SEC charged four promoters with ties to the Pacific Northwest for manipulating our securities. The SEC alleged that the four promoters bought inexpensive shares of thinly traded penny stock companies on the open market and conducted pre-arranged, manipulative matched orders and wash trades to create the illusion of an active market in these stocks. They then sold their shares in coordination with aggressive third party promotional campaigns that urged investors to buy the stocks because the prices were on the verge of rising substantially. This action has had a material adverse effect on our business, financial condition and results of operations. If we are unable to obtain additional financing when it is needed, we will need to restructure our operations, and divest all or a portion of our business.

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.

We are involved in Legal Proceedings.

We are involved in the disputes and legal proceedings as discussed in this annual ~~report~~report. In addition, as a public company, we are also potentially susceptible to litigation, such as claims asserting violations of securities laws. Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. There can be no assurance that an adverse result in any future proceeding would not have a potentially material adverse on ~~Form 10-K before purchasing~~our business, results of operations or financial condition.

Our Joint Venture Agreement with CANX USA, LLC is important to our operations.

On November 19, 2013, we entered into a Joint Venture Agreement with CANX, 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 our 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.

We initially owned a non-dilutive 45% share of OGI and the Company could 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 we delivered to CANX a warrant to purchase 140,000,000 shares of our common ~~stock. If any~~stock that is convertible at $0.033 per share, subject to adjustment as provided in the warrant. The five-year warrant expires November 18, 2018. Also in accordance with the Joint Venture Agreement, on February 7, 2014, the Company issued an additional warrant to purchase 100,000,000 shares of our common stock that is convertible at $0.033 per share, subject to adjustment as provided in the warrant. The five-year warrant expires February 6, 2019.

GrowLife received the $1 million as a convertible note in December 2013, received the $1.3 million commitment but not executed and by January 2014 OGI had Letters of Intent with four investment and acquisition transactions valued at $96 million. Before the deals could close, the SEC put a trading halt on our stock on April 10, 2014, which resulted in the withdrawal of all transactions. The business disruption from the trading halt and the resulting class action and derivative lawsuits ceased further investments with the OGI joint venture. The Convertible Note was converted into our common stock as of the ~~following risks occur,~~year ended December 31, 2016.

On July 10, 2014, we 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 Amended and Restated Joint Venture Agreement with CANX modified the Joint Venture Agreement dated November 19, 2013 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 adjustment, 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 adjustment, 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; and (vi) a four year term, subject to adjustment.

We 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 required approval in advance by Logic Works, provides for interest at 6% with a default interest of 24% per annum and required 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. As of March 31, 2017, the outstanding balance on the Convertible Note was $39,251.

Failure to operate in accordance with the Agreements with CANX could result in the cancellation of these agreements, result in foreclosure on our assets in event of default and would have a material adverse effect on our business, ~~consolidated~~results of operations or financial condition.

Our proposed business is dependent on laws pertaining to the marijuana industry.

Continued development of the marijuana industry is dependent upon continued legislative authorization of the use and cultivation of marijuana at the state level. Any number of factors could slow or halt progress in this area. Further, progress, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of marijuana, which would negatively impact our proposed business.

As of December 31, 2016, twenty eight states and the District of Columbia allow its citizens to use medical marijuana. Additionally, seven states have legalized cannabis for adult use. The state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. The Obama administration previously effectively stated that it is not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana. The Trump administration position is unknown. However, there is no guarantee that the Trump administration will not change current policy regarding the low-priority enforcement of federal laws. Additionally, any new administration that follows could change this policy and decide to enforce the federal laws strongly. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us and its shareholders.

Further, while we do not harvest, distribute or sell marijuana, by supplying products to growers of marijuana, we could be deemed to be participating in marijuana cultivation, which remains illegal under federal law, and exposes us to potential criminal liability, with the additional risk that our business could be subject to civil forfeiture proceedings.

The marijuana industry faces strong opposition.

It is believed by many that large, well-funded businesses may have a strong economic opposition to the marijuana industry. We believe that the pharmaceutical industry clearly does not want to cede control of any product that could generate significant revenue. For example, medical marijuana will likely adversely impact the existing market for the current “marijuana pill” sold by mainstream pharmaceutical companies. Further, the medical marijuana industry could face a material threat from the pharmaceutical industry, should marijuana displace other drugs or encroach upon the pharmaceutical industry’s products. The pharmaceutical industry is well funded with a strong and experienced lobby that eclipses the funding of the medical marijuana movement. Any inroads the pharmaceutical industry could make in halting or impeding the marijuana industry harm our business, prospects, results of operation and financial condition.

Marijuana remains illegal under Federal law.

Marijuana is a Schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal law. Since federal law criminalizing the use of marijuana preempts state laws that legalize its use, strict enforcement of federal law regarding marijuana would harm our business, prospects, results of operation and financial condition.

Raising additional capital to implement our business plan and pay our debts will cause dilution to our existing stockholders, require us to restructure our operations, and divest all or a portion of our business.

We need additional financing to implement our business plan and to service our ongoing operations and pay our current debts. There can be no assurance that we will be able to secure any needed funding, or that if such funding is available, the terms or conditions would be acceptable to us.

If we raise additional capital through borrowing or other debt financing, we may incur substantial interest expense. Sales of additional equity securities will dilute on a pro rata basis the percentage ownership of all holders of common stock. When we raise more equity capital in the future, it will result in substantial dilution to our current stockholders.

If we are unable to obtain additional financing when it is needed, we will need to restructure our operations, and divest all or a portion of our business.

Potential Convertible Note Defaults.

Several of the Company’s 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. Any default could have a significant adverse effect on our cash flows and should we be unsuccessful in negotiating an extension or other modification, we may have to restructure our operations, divest all or a portion of its business, or file for bankruptcy.

Closing of bank accounts could have a material adverse effect on our business, financial condition and/or results of ~~operations could be materially and adversely affected. In that case,~~operations.

As a result of the ~~trading price~~regulatory environment, we have experienced the closing of several of our ~~common stock~~bank accounts since March 2014. We have been able to open other bank accounts. However, we may have other banking accounts closed. These factors impact management and could ~~decline, and you may lose some~~ have a material adverse effect on our business, financial condition and/or ~~all~~results of ~~your investment.~~operations.

~~Risks Related to Our Business~~

Federal regulation and enforcement may adversely affect the implementation of medical marijuana laws and regulations may negatively impact our revenues and profits.

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

~~We may be unable~~Our history of net losses has raised substantial doubt regarding our ability to continue as a going ~~concern if~~concern. If we do not ~~successfully raise additional capital.~~ ~~If we are unable to successfully raise the capital we need we may need to reduce the scope~~continue as a going concern, investors could lose their entire investment.

Our history of our business to fully satisfy our future short-term liquidity requirements. If we cannot raise additional capital or reduce the scope of our business, we may be otherwise unable to achieve our goals or continue our operations. As discussed in Note 2 in the Notes to the Consolidated Financial Statements, we have incurrednet losses ~~from operations in the prior two years and have a lack of liquidity. These factors raise~~has raised substantial doubt about our ability to continue as a going ~~concern. In addition,~~concern, and as a result, our ~~auditors have~~independent registered public accounting firm included an explanatory paragraph in ~~their~~its report on our ~~audited consolidated~~ financial statements atas of and for the year ended December 31, ~~2013~~2016 and ~~2012 an explanatory paragraph expressing substantial doubt about~~2015 with respect to this uncertainty. Accordingly, our ability to continue as a going ~~concern. While we believe that we~~concern will ~~be able~~require us to seek alternative financing to fund our operations. This going concern opinion could materially limit our ability to raise additional funds through the ~~capital we need~~issuance of new debt or equity securities or otherwise. Future reports on our financial statements may include an explanatory paragraph with respect to our ability to continue ~~our operations, there can be no assurances that we will be successful in these efforts or will be able to resolve our liquidity issues or eliminate our operating losses.~~as a going concern.

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

We have a history of operating losses and there can be no assurance that we can again achieve or maintain ~~profitability~~. profitability.

We ~~did~~have experienced net losses since inception. As of December 31, 2016, we had an accumulated deficit of $124.4 million. There can be no assurance that we will achieve or maintain profitability.

We are subject to corporate governance and internal control reporting requirements, and our costs related to compliance with, or our failure to comply with existing and future requirements, could adversely affect our business.

We must comply with corporate governance requirements under the Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, as well as additional rules and regulations currently in place and that may be subsequently adopted by the SEC and the Public Company Accounting Oversight Board. These laws, rules, and regulations continue to evolve and may become increasingly stringent in the future. We are required to include management’s report on internal controls as part of our annual report pursuant to Section 404 of the Sarbanes-Oxley Act. We strive to continuously evaluate and improve our control structure to help ensure that we comply with Section 404 of the Sarbanes-Oxley Act. The financial cost of compliance with these laws, rules, and regulations is expected to remain substantial.

We cannot assure you that we will be able to fully comply with these laws, rules, and regulations that address corporate governance, internal control reporting, and similar matters. Failure to comply with these laws, rules and regulations could materially adversely affect our reputation, financial condition, and the value of our securities.

Our management has concluded that we have material weaknesses in our internal controls over financial reporting and that our disclosure controls and procedures are not ~~achieve an operating profit~~effective.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting. During the review of our financial statements for the year ended December 31, ~~2013. We have a history~~2016, our management identified material weaknesses in our internal control over financial reporting. If these weaknesses continue, investors could lose confidence in the accuracy and completeness of ~~operating losses~~our financial reports and may not again achieve or maintain profitability. We cannot guarantee that we will become profitable. Even if we again achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability and our failure to do so would adversely affect our business, including our ability to raise additional funds.other disclosures.

Our inability to effectively manage our growth could harm our business and materially and adversely affect our operating results and financial ~~condition~~. condition.

Our strategy envisions growing our business. We plan to expand our product, sales, administrative and marketing organizations. Any growth in or expansion of our business is likely to continue to place a strain on our management and administrative resources, infrastructure and systems. As with other growing businesses, we expect that we will need to further refine and expand our business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise and manage new and retain contributing employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. We cannot assure you that we will be able to:

~~- 10 -~~

	●	expand our products effectively or efficiently or in a timely manner;
	●	allocate our human resources optimally;
	●	meet our capital needs;
	●	identify and hire qualified employees or retain valued employees; or
	●	incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth.

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

Our operating results may fluctuate significantly based on customer acceptance of our products. As a result, period-to-period comparisons of our results of operations are unlikely to provide a good indication of our future ~~performance~~.performance. Management expects that we will experience substantial variations in our net sales and operating results from quarter to quarter due to customer acceptance of our products. If customers don’t accept our products, our sales and revenues will decline, resulting in a reduction in our operating income.

Customer interest for our products could also be impacted by the timing of our introduction of new products. If our competitors introduce new products around the same time that we issue new products, and if such competing products are superior to our own, customers’ desire for our products could decrease, resulting in a decrease in our sales and revenues. To the extent that we introduce new products and customers decide not to migrate to our new products from our older products, our revenues could be negatively impacted due to the loss of revenue from those customers. In the event that our newer products do not sell as well as our older products, we could also experience a reduction in our revenues and operating income.

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

If we do not successfully generate additional products and services, or if such products and services are developed but not successfully commercialized, we could lose revenue ~~opportunities~~. opportunities.

Our future success depends, in part, on our ability to expand our product and service offerings. To that end we have engaged in the process of identifying new product opportunities to provide additional products and related services to our customers. The process of identifying and commercializing new products is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed. We may have to commit significant resources to commercializing new products before knowing whether our investments will result in products the market will accept. Furthermore, we may not execute successfully on commercializing those products because of errors in product planning or timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors providing those solutions before we do and a reduction in net sales and earnings.

The success of new products depends on several factors, including proper new product definition, timely completion and introduction of these products, differentiation of new products from those of our competitors, and market acceptance of these products. There can be no assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.

Our future success depends on our ability to grow and expand our customer base. Our failure to achieve such growth or expansion could materially harm our ~~business~~. business.

To date, our revenue growth has been derived primarily from the sale of our ~~products.~~products and through the purchase of existing businesses. Our success and the planned growth and expansion of our business depend on us achieving greater and broader acceptance of our products and expanding our customer base. There can be no assurance that customers will purchase our products or that we will continue to expand our customer base. If we are unable to effectively market or expand our product offerings, we will be unable to grow and expand our business or implement our business strategy. This could materially impair our ability to increase sales and revenue and materially and adversely affect our margins, which could harm our business and cause our stock price to decline.

~~- 11 -~~

If we incur substantial liability from litigation, complaints, or enforcement actions resulting from misconduct by our distributors, our financial condition could ~~suffer~~.suffer. We will require that our distributors comply with applicable law and with our policies and procedures. Although we will use various means to address misconduct by our distributors, including maintaining these policies and procedures to govern the conduct of our distributors and conducting training seminars, it will still be difficult to detect and correct all instances of misconduct. Violations of applicable law or our policies and procedures by our distributors could lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or foreign regulatory authorities against us and/or our distributors. Litigation, complaints, and enforcement actions involving us and our distributors could consume considerable amounts of financial and other corporate resources, which could have a negative impact on our sales, revenue, profitability and growth prospects. As we are currently in the process of implementing our direct sales distributor program, we have not been, and are not currently, subject to any material litigation, complaint or enforcement action regarding distributor misconduct by any federal, state or foreign regulatory authority.

Our future manufacturers could fail to fulfill our orders for products, which would disrupt our business, increase our costs, harm our reputation and potentially cause us to lose our ~~market~~. market.

We may depend on contract manufacturers in the future to produce our products. These manufacturers could fail to produce products to our specifications or in a workmanlike manner and may not deliver the units on a timely basis. Our manufacturers may also have to obtain inventories of the necessary parts and tools for production. Any change in manufacturers to resolve production issues could disrupt our ability to fulfill orders. Any change in manufacturers to resolve production issues could also disrupt our business due to delays in finding new manufacturers, providing specifications and testing initial production. Such disruptions in our business and/or delays in fulfilling orders would harm our reputation and would potentially cause us to lose our market.

Our inability to effectively protect our intellectual property would adversely affect our ability to compete effectively, our revenue, our financial condition and our results of ~~operations~~. operations.

We may be unable to obtain intellectual property rights to effectively protect our ~~technology.~~business. Our ability to compete effectively may be affected by the nature and breadth of our intellectual property rights. While we intend to defend against any threats to our intellectual property rights, there can be no assurance that any such actions will adequately protect our interests. If we are unable to secure intellectual property rights to effectively protect our technology, our revenue and earnings, financial condition, and/or results of operations would be adversely affected.

We may also rely on nondisclosure and non-competition agreements to protect portions of our technology. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, that third parties will not otherwise gain access to our trade secrets or proprietary knowledge, or that third parties will not independently develop the technology.

We do not warrant any opinion as to non-infringement of any patent, trademark, or copyright by us or any of our affiliates, providers, or distributors. Nor do we warrant any opinion as to invalidity of any third-party patent or unpatentability of any third-party pending patent application.

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

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

~~- 12 -~~

Our industry is highly competitive and we have less capital and resources than many of our competitors, which may give them an advantage in developing and marketing products similar to ours or make our products ~~obsolete~~. obsolete.

We are involved in a highly competitive industry where we may compete with numerous other companies who offer alternative methods or approaches, ~~who~~ may have far greater resources, more experience, and personnel perhaps more qualified than we do. Such resources may give our competitors an advantage in developing and marketing products similar to ours or products that make our products obsolete. There can be no assurance that we will be able to successfully compete against these other entities.

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

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

~~We will be subject to evolving and expensive corporate governance regulations and requirements. Our failure to adequately adhere to these requirements or the failure or circumvention~~Transfers of our ~~controls and procedures could seriously harm our business. As a publicly traded company, we are subject to various federal,~~securities may be restricted by virtue of state ~~and other rules and regulations, including applicable requirements of the Sarbanes-Oxley Act of 2002. Compliance~~securities “blue sky” laws, which prohibit trading absent compliance with these evolving regulations is costly and requires a significant diversion of management time and attention, particularly with regard to our disclosure controls and procedures and our internal control over financial reporting. Our internal controls and procedures may not be able to prevent errors or fraud in the future. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures,individual state laws. These restrictions may make it difficult ~~for us~~or impossible to ~~ensure that the objectives of the control system are met. A failure~~sell shares in those states.

Transfers of our ~~controls~~common stock may be restricted under the securities or securities regulations laws promulgated by various states and ~~procedures~~foreign jurisdictions, commonly referred to ~~detect~~as "blue sky" laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because the securities held by many of our stockholders have not been registered for resale under the blue sky laws of any state, the holders of such shares and persons who desire to purchase them should be aware that there may be significant state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions may prohibit the secondary trading of our common stock. Investors should consider the secondary market for our securities to be a limited one.

We are dependent on key personnel and we are default under Employment and Consulting Agreements

Our success depends to a significant degree upon the continued contributions of key management and other ~~than inconsequential errors or fraud~~personnel, some of whom could ~~seriously harm~~be difficult to replace. We do not maintain key man life insurance covering our officers. Our success will depend on the performance of our officers and key management and other personnel, our ability to retain and motivate our officers, our ability to integrate new officers and key management and other personnel into our operations, and the ability of all personnel to work together effectively as a team. Our failure to retain and recruit officers and other key personnel could have a material adverse effect on our business, financial condition and results of operations.

~~Our~~We have limited ~~senior management team size may hamper our ability to effectively manage~~insurance.

We have no directors’ and officers’ liability insurance and limited commercial liability insurance policies. Any significant claims would have a ~~publicly traded company while developing our products and harm~~material adverse effect on our business,~~. Our management team has experience in the management~~ financial condition and results of publicly traded companies and complying with federal securities laws, including compliance with recently adopted disclosure requirements on a timely basis. They realize it will take significant resources to meet these requirements while simultaneously working on developing and protecting our intellectual property. Our management will be required to design and implement appropriate programs and policies in responding to increased legal, regulatory compliance and reporting requirements, and any failure to do so could lead to the imposition of fines and penalties and harm our business.operations.

Risks Related to our Common Stock

~~The limited trading market~~CANX and Logic Works and TCA could have significant influence over matters submitted to stockholders for ~~our common stock results~~approval.

CANX and Logic Works

As of December 31, 2016, CANX and Logic Works in ~~limited liquidity for~~the aggregate hold shares representing approximately 29.9% of our common stock on a fully-converted basis and ~~significant volatility in our stock price. Our shares~~could be considered a control group for purposes of ~~common stock are quoted on~~SEC rules. However, their agreements limit their ownership to 4.99% individually and each of the ~~OTCBB and OTCQB, but no assurance can be given that an active public trading market can be sustained. The OTCBB and OTCQB are generally regarded~~parties disclaims its status as a ~~less efficient~~control group or a beneficial owner due to the fact that their beneficial ownership is limited to 4.99% per their agreements. Beneficial ownership includes shares over which an individual or entity has investment or voting power and ~~less prestigious trading market than other national markets. We can provide no assurance regarding if or when our common stock will~~includes shares that could be ~~quoted on another more prestigious exchange or market. Active trading markets generally result in lower price volatility~~issued upon the exercise of options and ~~more efficient execution~~warrants within 60 days after the date of ~~buy~~determination.

TCA and ~~sell orders. The absence of an active trading market reduces the liquidity of our common stock.~~Chicago Venture

The market price of our stock is likely to be highly volatile because for some time there will likely be a thin trading market for the stock, which causes trades of small blocks of stock to have a significant impact on our stock price. As a result of funding from TCA and Chicago Venture as previously detailed, they exercise significant control over us.

If these persons were to choose to act together, they would be able to significantly influence all matters submitted to our stockholders for approval, as well as our officers, directors, management and affairs. For example, these persons, if they choose to act together, could significantly influence the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of us on terms that other stockholders may desire.

Trading in our stock is limited by the lack of market makers and the SEC’s penny stock regulations.

On April 10, 2014, as a result of the SEC suspension in the trading ~~activity, the quoted price for~~of our ~~common stock~~securities, we lost all market makers and traded on the ~~OTCBB~~grey market of OTCBB. Until we complied with FINRA Rule 15c2-11, we traded on the grey market, which has limited quotations and ~~OTCQB are not necessarily a reliable indicator~~marketability of ~~its fair market value. Further, if we cease to be quoted, holders~~securities. Holders of our common stock ~~would find~~found it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock, and the market value of our common stock ~~would likely decline.~~

~~- 13 -~~

declined.

~~Trading in~~On February 18, 2016, our common stock ~~will be subject~~resumed unsolicited quotation on the OTC Bulletin Board after receiving clearance from the Financial Industry Regulatory Authority (“FINRA”) on our Form 15c2-11. We are currently taking the appropriate steps to ~~regulatory restrictions since our common~~uplist to the OTCQB Exchange and resume priced quotations with market makers as soon as it is able.

Our stock is ~~considered~~categorized as a ~~“penny stock.”~~ ~~Our common~~penny stock ~~is currently, and in the near future will likely continue~~The SEC has adopted Rule 15g-9 which generally defines "penny stock" to be ~~considered~~any equity security that has a “penny stock.” The Securities and Exchange Commission (“SEC”) has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with amarket price (as defined) less than US$ 5.00 per share or an exercise price of less than ~~$5.00 (other~~US$ 5.00 per share, subject to certain exclusions (e.g., net tangible assets in excess of $2,000,000 or average revenue of at least $6,000,000 for the last three years). The penny stock rules impose additional sales practice requirements on broker-dealers who sell to persons other than ~~securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price~~established customers and ~~volume information with respect to transactions in such securities is provided by the exchange or system).~~accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from ~~those~~the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which ~~specifies~~provides information about penny stocks and the nature and ~~significance~~level of risks ofin the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and ~~any~~its salesperson in the transaction, and monthly account statements ~~indicating~~showing the market value of each penny stock held in the ~~customer’s~~customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from ~~those~~these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the ~~purchaser’s~~purchaser's written agreement to the transaction. Finally, broker-dealers may not handle penny stocks under $0.10 per share.

These disclosure ~~and other~~ requirements ~~may adversely affect~~reduce the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules would affect the ability of broker-dealers to trade our securities if we become subject to them in the future. The penny stock rules also could discourage investor interest in and limit the marketability of our common stock to future investors, resulting in limited ability for investors to sell their shares.

FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

The market price of our common stock may be volatile.

The market price of our common stock has been and is likely in the future to be volatile. Our common stock price may fluctuate in response to factors such as:

●	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.

These broad market and industry factors may have a material adverse effect on the market price of our common stock, regardless of our actual operating performance. These factors could have a material adverse effect on our business, financial condition, and/or results of operations.

The sale of a significant number of our shares of common stock could depress the price of our common stock.

Sales or issuances of a large number of shares of common stock in the public market or the perception that sales may occur could cause the market price of our common stock to decline. As of December 31, 2016, there were approximately 1.645 billion shares of our common stock issued and outstanding. In addition, as of December 31, 2016, there are also (i) stock option grants outstanding for the purchase of 12 million common shares at a $0.010 average exercise price; (ii) warrants for the purchase of 595 million common shares at a $0.031 average exercise price; and (iii) 207.8 million shares related to convertible debt that can be converted at 0.0036 per share. Subsequent to December 31, 2016, (i) Brighton Capital LLC converted debt of $127,148 into 15,893,500 shares of our common stock at a per share conversion price of $0.008; (ii) During the three months ended March 31, 2017, Chicago Venture converted principal and interest of $1,253,000 into 190,189,197 shares of our common stock at a per share conversion price of $0.007; and (iii) Logic Works converted principal and interest of $291,044 into 82,640,392 shares of our common stock at a per share conversion price of $.004.

~~We do not expect~~In addition, we have an unknown number of common shares to ~~pay dividends for~~be issued under the ~~foreseeable future,~~TCA and ~~any return on investment may be limited~~Chicago Venture financing agreements because the number of shares ultimately issued to ~~potential future appreciation~~TCA depends on the ~~value~~price at which TCA converts its debt to shares. The lower the conversion price, the more shares that will be issued to TCA or Chicago Venture upon the conversion of debt to shares. We won’t know the exact number of shares of stock issued to TCA or Chicago Venture until the debt is actually converted to equity. If all stock option grant, warrant and contingent shares are issued, approximately 2.471 billion of our currently authorized 3 billion shares of common stock~~. While~~ will be issued and outstanding. For purposes of estimating the number of shares issuable upon the exercise/conversion of all stock options, warrants and contingent shares, we ~~declared~~assumed the number of shares and ~~paid a dividend~~average share prices detailed above.

These stock option grant, warrant and contingent shares could result in further dilution to common stock holders and may affect the market price of ~~record~~the common stock.

Significant shares of common stock are held by our principal shareholders, other Company insiders and other large shareholders. As affiliates as defined under Rule 144 of the Securities Act or Rule 144 of the Company, our principal shareholders, other Company insiders and other large shareholders may only sell their shares of common stock in the public market pursuant to an effective registration statement or in compliance with Rule 144.

Some of the present shareholders have acquired shares at prices as low as $0.007 per share, whereas other shareholders have purchased their shares at prices ranging from $0.0036 to $0.78 per share.

These stock option grant, warrant and contingent shares could result in further dilution to common stock holders and may affect the market price of the common stock.

Some of our convertible debentures may require adjustment in the conversion price.

Our 7% Convertible Notes Payable and our 6% Convertible Secured Convertible Notes may require an adjustment in the current conversion price of $0.0036 per share if we issue common stock, ~~as of February 28, 2011, we do not anticipate paying dividends~~warrants or equity below the price that is reflected in the foreseeable future and currently intend to retain any future earnings to support the development and expansion of our business. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including without limitation, our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. To the extent we do not pay dividends, our stock may be less valuable because a return on investment will only occur if and to the extent our stock price appreciates, which may never occur. In addition, investors must rely on sales of their common stock after price appreciation as the only way to realize their investment, and if theconvertible notes payable. The conversion price of ~~our stock does not appreciate, then there~~the convertible notes will ~~be no return on investment. Investors seeking cash dividends should not purchase our common stock.~~

~~Our officers, directors and principal stockholders can exert significant influence over us and may make decisions that are not in the best interests of all stockholders~~. Our officers, directors and principal stockholders (greater than 5% stockholders) collectively beneficially own approximately 18.5% of our common stock. As a result of such ownership these stockholders will be able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration of ownership of our common stock could have the effect of delaying or preventing a change of control of our company or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of our company. This, in turn, could have a negative affectan impact on the market price of our common stock. ~~It could also prevent our stockholders from realizing a premium over~~Specifically, if under the terms of the convertible notes the conversion price goes down, then the market ~~prices~~price, and ultimately the trading price, of our common stock will go down. If under the terms of the convertible notes the conversion price goes up, then the market price, and ultimately the trading price, of our common stock will likely go up. In other words, as the conversion price goes down, so does the market price of our stock. As the conversion price goes up, so presumably does the market price of our stock. The more the conversion price goes down, the more shares are issued upon conversion of the debt which ultimately means the more stock that might flood into the market, potentially causing a further depression of our stock.

We do not anticipate paying any cash dividends on our capital stock in the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business, and we do not anticipate paying any cash dividends on our capital stock in the foreseeable future. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for ~~their shares of common stock. Moreover,~~ the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider.foreseeable future.

Anti-takeover provisions may limit the ability of another party to acquire our company, which could cause our stock price to ~~decline~~. decline.

Our certificate of incorporation, as amended, our bylaws and Delaware law contain provisions that could discourage, delay or prevent a third party from acquiring our company, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our common stock.

We may issue preferred stock that could have rights that are preferential to the rights of common stock that could discourage potentially beneficially transactions to our common shareholders.

An issuance of additional shares of preferred stock could result in a class of outstanding securities that would have preferences with respect to voting rights and dividends and in liquidation over our common stock and could, upon conversion or otherwise, have all of the rights of our common stock. Our Board of Directors' authority to issue preferred stock could discourage potential takeover attempts or could delay or prevent a change in control through merger, tender offer, proxy contest or otherwise by making these attempts more difficult or costly to achieve. The issuance of preferred stock could impair the voting, dividend and liquidation rights of common stockholders without their approval.

If the company were to dissolve or wind-up, holders of our common stock may not receive a liquidation preference.

If we were too wind-up or dissolve the Company and liquidate and distribute our assets, our shareholders would share ratably in our assets only after we satisfy any amounts we owe to our creditors. If our liquidation or dissolution were attributable to our inability to profitably operate our business, then it is likely that we would have material liabilities at the time of liquidation or dissolution. Accordingly, we cannot give you any assurance that sufficient assets will remain available after the payment of our creditors to enable you to receive any liquidation distribution with respect to any shares you may hold.

ITEM 1B. UNRESOLVED STAFF ~~COMMENTS.~~COMMENTS

None.

ITEM 2. PROPERTIES

Operating Leases

On December 7, 2016, we entered into entered into a Consent to Judgement and Settlement Agreement related to our retail hydroponics store located in Portland, Maine. This Agreement provides for a monthly lease payment of $4,668 through May 2, 2017. If we are in compliance with the Settlement Agreement, we can extend the lease from May 2, 2017 to May 1, 2020 at the monthly lease payment of $5,373. We also agreed to a repayment schedule for past due rent of $70,013. We do not have an option to extend the lease after May 1, 2020.

On October 21, 2013, we entered into a lease agreement for retail space for our retail 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. We do not have an option to extend the lease.

~~- 14 -~~16

~~ITEM 2. PROPERTIES.~~

~~Our principal executive offices are located at 20301 Ventura Blvd, Suite 126, Woodland Hills, CA 91364. In addition, we rent warehouse and office~~On May 31, 2016, the Company rented space at ~~the locations listed below.~~5400 Carillon Point, Kirkland, Washington 98033 for $1,539 per month for its corporate office. The ~~locations combined are approximately 33,000 square feet of office, retail,~~Company’s agreement expires May 31, 2017 and warehouse space. The leases require minimum monthly payments of, in the aggregate, $35,507 and have remaining terms ranging from three months to 58 months. We believe our facilities are adequate to meet our current and near-term needs and that suitable additional spaces are available to accommodate any expansion needs.can be extended.

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

ITEM 3. LEGAL ~~PROCEEDINGS.~~PROCEEDINGS

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

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

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

~~The Company has from time to time been involved in~~ disputes and legal proceedings ~~arising in the ordinary course of business.~~described below. In addition, as a public company, we are also potentially susceptible to litigation, such as claims asserting violations of securities laws. Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. ~~There can~~We accrue 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”). 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, our insurer, filed a lawsuit contesting insurance coverage on the above legal proceedings. We accrued $2,000,000 as settlement of the Consolidated Class Action and Derivative Action lawsuits alleging violations of federal securities laws that were filed against the Company during the year ending December 31, 2015. We issued $2 million in common stock or 115,141,048 shares of our 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 us in United States District Court, Central District of California.

Sales, Payroll and Other Tax Liabilities

As of December 31, 2016, we owe approximately $129,000 in sales tax.

Potential Convertible Note Defaults

Several of our convertible promissory notes remain outstanding beyond their respective maturity dates. This may trigger an event of default under the respective agreements. We are working with these noteholders to convert their notes into common stock and intends to resolve these outstanding issues as soon as practicable.

Other Legal Proceedings

We have been sued for non-payment of lease payments at closed stores in Boulder, Colorado and Plaistow, New Hampshire. We are currently subject to legal actions with various vendors.

It is possible that additional lawsuits may be ~~no assurance that an adverse result in any future proceeding would not have a potentially material adverse affect~~filed and served on ~~our business, results of operations or financial condition.~~us.

ITEM 4. MINE SAFETY ~~DISCLOSURES.~~DISCLOSURES

Not applicable.

~~- 15 -~~17

PART II

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

~~SECURITIES.~~

General

The following description of our capital stock and provisions of our articles of incorporation and bylaws are summaries and are qualified by reference to our articles of incorporation and the bylaws. We have filed copies of these documents with the SEC as exhibits to our Form 10-K.

Authorized Capital Stock

We have authorized 3,010,000,000 shares of capital stock, of which 3,000,000,000 are shares of voting common stock, par value $0.0001 per share, and 10,000,000 are shares of preferred stock, par value $0.0001 per share.

Capital Stock Issued and Outstanding

As of December 31, 2016, we have issued and outstanding securities on a fully diluted basis, consisting of:

● 1,656,120,083 shares of common stock;

● Stock option grants for the purchase of 12,010,000 shares of common stock at average exercise price of $0.010;

● Warrants to purchase an aggregate of 595,000,000 shares of common stock with expiration dates between November 2018 and October 2013 at an exercise price of $0.031 per share;

● 207,812,222 shares of common stock to be issued for the conversion of Convertible Notes Payables at a conversion price of $0.0036 per share; and

● An unknown number of common shares to be issued under the TCA Global Credit Master Fund LP and Chicago Venture Partners, L.P. financing agreements.

Voting Common Stock

Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. An election of directors by our stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote on the election. On all other matters, the affirmative vote of the holders of a majority of the stock present in person or represented by proxy and entitled to vote is required for approval, unless otherwise provided in our articles of incorporation, bylaws or applicable law. Holders of common stock are entitled to receive proportionately any dividends as may be declared by our board of directors, subject to any preferential dividend rights of outstanding preferred stock.

In the event of our liquidation or dissolution, the holders of common stock are entitled to receive proportionately all assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.

Non-Voting Preferred Stock

Under the terms of our articles of incorporation, our board of directors is authorized to issue shares of non-voting preferred stock in one or more series without stockholder approval. Our 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 our board of directors to issue non-voting preferred stock and determine our 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 we have 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.

In connection with the First Amendment to Amended and Restated Securities Purchase Agreement, TCA surrendered the Series B Preferred Stock.

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). In the event of a default under the Amended and Restated TCA Transaction Documents, TCA can exercise voting control over our common stock.

On February 1, 2017, GrowLife, Inc., a Delaware corporation (the “Company”), closed the transactions described below with Chicago Venture Partners, L.P. (“Chicago Venture”).

In connection with the closing of the Chicago Venture transactions which closed on February 1, 2017, TCA surrendered the Series C Preferred Stock.

Warrants to Purchase Common Stock

As of December 31, 2016, we had warrants to purchase 595,000,000 shares of common stock with expiration dates between November 2018 and October 2013 at an exercise price of $0.031 per share.

Options to Purchase Common Stock

In fiscal year 2011, we authorized a Stock Incentive Plan whereby a maximum of 18,870,184 shares of the Company’s common stock could be granted in the form of Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, and Other Stock-Based Awards. On April 18, 2013, the Company’s Board of Directors voted to increase to 35,000,000 the maximum allowable shares of the Company’s common stock allocated to the 2011 Stock Incentive Plan. After the exercise of stock option grants, we have 27,522,626 shares available for issuance. We have outstanding unexercised stock option grants totaling 12,010,000 shares at an average exercise price of $0.010 per share as of December 31, 2016. All grants are considered non-qualified until the increase is approved by the shareholders.

Dividend Policy

We have not previously paid any cash dividends on our common stock and do not anticipate or contemplate paying dividends on our common stock in the foreseeable future. We currently intend to use all of our available funds to develop our business. We can give no assurances that we will ever have excess funds available to pay dividends.

Change in Control Provisions

Our articles of incorporation and by-laws provide for a maximum of nine directors, and the size of the Board cannot be increased by more than three directors in any calendar year. There is no provision for classification or staggered terms for the members of the Board of Directors.

Our articles of incorporation also provide that except to the extent the provisions of Delaware General Corporation Law require a greater voting requirement, any action, including the amendment of the Company’s articles or bylaws, the approval of a plan of merger or share exchange, the sale, lease, exchange or other disposition of all or substantially all of the Company’s property other than in the usual and regular course of business, shall be authorized if approved by a simple majority of stockholders, and if a separate voting group is required or entitled to vote thereon, by a simple majority of all the votes entitled to be cast by that voting group.

Our bylaws provide that only the Chief Executive Officer or a majority of the Board of Directors may call a special meeting. The bylaws do not permit the stockholders of the Company to call a special meeting of the stockholders for any purpose.

Articles of Incorporation and Bylaws Provisions

Our articles of incorporation, as amended, and bylaws contain provisions that could have the effect of discouraging potential acquisition proposals or tender offers or delaying or preventing a change in control, including changes a stockholder might consider favorable. In particular, our articles of incorporation and bylaws among other things:

● permit our board of directors to alter our bylaws without stockholder approval; and

● provide that vacancies on our board of directors may be filled by a majority of directors in office, although less than a quorum.

Such provisions may have the effect of discouraging a third party from acquiring us, even if doing so would be beneficial to our stockholders. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by them, and to discourage some types of transactions that may involve an actual or threatened change in control of our company. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage some tactics that may be used in proxy fights. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure our company outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms.

However, these provisions could have the effect of discouraging others from making tender offers for our shares that could result from actual or rumored takeover attempts. These provisions also may have the effect of preventing changes in our management.

Market ~~Information~~Price of and Dividends on Common Equity and Related Stockholder Matters

Our common stock ~~is currently quoted~~traded on the ~~OTCBB and OTCQB~~grey market under the ~~trading~~ symbol ~~“PHOT.”~~“PHOT” through February 17, 2016. While the company was without a market maker, its stock does trade directly between buyers and sellers on the grey sheets. The ~~following~~ quotations reflect inter-dealer prices, without retail ~~mark-up, mark-down~~markup, markdown or commission, and may not represent actual transactions.

High Low
Year ended December 31, 2012
First Quarter $ 0.140 $ 0.050
Second Quarter $ 0.110 $ 0.025
Third Quarter $ 0.054 $ 0.011
Fourth Quarter $ 0.065 $ 0.010

Year ended December 31, 2013
First Quarter $ 0.120 $ 0.035
Second Quarter $ 0.061 $ 0.004
Third Quarter $ 0.064 $ 0.030
Fourth Quarter $ 0.158 $ 0.050

~~On March 28, 2014,~~ Consequently, the ~~closing sales price~~information provided below was not be indicative of our common stock ~~as reported~~price under different conditions.

Period Ended	High	Low
Year Ending December 31, 2016
December 31, 2016	$0.021	$0.007
September 30, 2016	$0.020	$0.006
June 30, 2016	$0.027	$0.015
March 31, 2016	$0.058	$0.003

Year Ending December 31, 2015
December 31, 2015	$0.020	$0.003
September 30, 2015	$0.180	$0.010
June 30, 2015	$0.060	$0.010
March 31, 2015	$0.350	$0.020

As of March 27, 2017, the closing price of the company's common stock was ~~$0.559~~$0.010 per share. As of March ~~28, 2014,~~31, 2017, there were 1,944,843,172 shares of common stock issued and outstanding. We have approximately ~~110 record holders~~112 stockholders of record. This number does not include up to approximately 15,000-80,000 beneficial owners whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.

Transfer Agent

The transfer agent for our common stock is Issuer Direct Corporation located 500 Perimeter Park, Suite D, Morrisville NC 27560, and their telephone number is (919) 481-4000.

Dividends

We have not previously paid any cash dividends on our common stock and do not anticipate or contemplate paying dividends on our common stock in the foreseeable future. We currently intend to use all of our ~~common stock.~~available funds to develop our business. We can give no assurances that we will ever have excess funds available to pay dividends.

~~Dividends~~

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

Recent Sales of Unregistered Securities

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

During the twelve month period ended December 31, 2013, the Company issued 36,981,862 shares of its common stock for cash. The shares were sold at a price of $0.035 per share and generated proceeds to the Company in the amount of $1,294,365. These shares were sold as part of a private placement that was originally set at a maximum of 50,000,000 sharesUnless otherwise indicated, all of the ~~Company’s common stock but was subsequently increased~~following sales or issuances of Company securities were conducted under the exemption from registration as provided under Section 4(a)(2) of the Securities Act of 1933. All of the shares issued were issued in transactions not involving a public offering, are considered to ~~a maximum of 65,000,000 shares during fiscal year 2013. This private placement was closed as of December 31, 2013.~~

~~- 16 -~~

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

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

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

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

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

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

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

~~In connection with the above transactions, we did not pay any underwriting discounts or commissions. None of the sales of securities described or referred to above was registered~~Rule 144 promulgated under the Securities Act of 1933 ~~as amended (the “Securities Act”). Each of~~and stock certificates issued with respect thereto bear legends to that effect.

We have compensated consultants and service providers with restricted common stock during the ~~purchasers was an accredited investor with whom we or one~~development of our ~~affiliates~~business and when our capital resources were not adequate to provide payment in cash.

During the three months ended December 31, 2016, we had the following sales of unregistered sales of equity securities.

On October 21, 2016, an entity affiliated with Mr. Scott, our Chief Financial Officer, converted $40,000 in accrued consulting fees and expenses into 4,000,000 shares of our common stock at $0.01 per share. The price per share was based on the thirty-day trailing average. On October 21, 2016, an entity affiliated with Mr. Scott was granted 6,000,000 shares of our common stock at $0.01 per share. The price per share was based on the thirty-day trailing average. On October 21, 2016, an entity affiliated with Mr. Scott cancelled stock option grants totaling 12,000,000 shares of our common stock at $0.01 per share.

On October 12, 2016, we issued 4,000,000 shares of its common stock to an entity affiliated with Marco Hegyi, Chief Executive Officer pursuant to a ~~prior business relationship,~~conversion of debt for $40,000. The shares were valued at the fair market price of $0.01 per share.

On October 21, 2016, we issued 5,020,000 shares to two former directors and ~~no general solicitation~~a supplier (unaccredited) for services provided. We valued the 5,020,000 shares at $0.01 per share or ~~advertising was used~~$50,200.

During the three months ended December 31, 2016, we issued 5,000,000 shares of its common stock to a service provider pursuant to conversions of $50,000. The shares were valued at the fair market price of $0.010 per share.

During the three months ended December 31, 2016, Holders of our Convertible Notes Payables, converted principal and accrued interest of $235,682 into 65,467,127 shares of our common stock at a per share conversion price of $0.004.

During the three months ended December 31, 2016, Old Main converted principal and accrued interest of $44,208 into 12,365,872 shares of our common stock at a per share conversion price of $0.004.

During the three months ended December 31, 2016, Chicago Venture converted principal and accrued interest of $1,275,599 into 242,300,607 shares of our common stock at a per share conversion price of $0.0053.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information as of December 31, 2016 related to the equity compensation plan in ~~connection with the sales. In making the sales without registration under the Securities Act, we relied upon the exemption from registration contained in Section 4(2) of the Securities Act.~~effect at that time.

	(a)	(b)	(c)
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a))
Equity compensation plan
approved by shareholders	-	-	-
Equity compensation plans
not approved by shareholders	12,010,000	0.010	-
Total	12,010,000	0.010	-

~~- 17 -~~

ITEM 6. SELECTED FINANCIAL ~~DATA.~~DATA

~~FINANCIAL HIGHLIGHTS~~In the following table, we provide you with our selected consolidated historical financial and other data. We have prepared the consolidated selected financial information using our consolidated financial statements for the years ended December 31, 2016 and 2015. When you read this selected consolidated historical financial and other data, it is important that you read along with it the historical financial statements and related notes in our consolidated financial statements included in this report, as well as Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

For the Three-Month Periods Ended
March 31, 2013 June 30, 2013 September 30, 2013 December 31, 2013 Full Year 2013

Revenue

$
760,709

$
872,557

$
1,313,399

$
1,912,311

$
4,858,976

Cost of goods sold

511,583

684,693

1,051,776

1,757,811

4,005,863

Gross profit

249,126

187,864

261,623

154,500

853,113

General and administrative

(556,993)

(630,710)

(902,813)

(1,072,491)

(3,163,007)

Share based compensation

(179,125)

(648,349)

(386,821)

(254,889)

(1,469,184)

Stock option expense

-

-

-

(148,633)

(148,633)

Warrant expense

-

(250,000)

-

(6,765,000)

(7,015,000)

Loss from operations

(486,992
)

(1,341,195
)

(1,028,011
)

(8,086,513
)

(10,942,711
)

Other income (expense)

   Impairment of goodwill

-

-

-

(279,515
)

(279,515
)
   Impairment of intangible assets

-

-

-

(262,604
)

(262,604
)
   Loss on extinguishment of debt

(2,750
)

-

(750,000
)

(208,000
)

(960,750
)
   Change in fair value of derivative

(169,753
)

-

67,130

(3,598,455
)

(3,701,078
)
   Other income

-

-

35,865

6,404

42,269

   Interest expense, net

(523,467
)

(275,772
)

(129,697
)

(4,346,813
)

(5,275,749
)

Net loss

$
(1,182,962
)

$
(1,616,967
)

$
(1,804,713
)

$
(16,775,496
)

$
(21,380,138
)

Net loss per share (basic and diluted)

$
(0.00
)

$
(0.00
)

$
(0.00
)

$
(0.02
)

$
(0.04
)

Weighted average shares outstanding (basic and diluted)

443,605,824

556,633,753

644,706,947

722,820,898

593,034,653

	Years Ended December 31,
	2016	2015	2014	2013	2012
	(Audited)	(Audited)	(Audited)	(Audited)	(Audited)
STATEMENT OF OPERATIONS DATA:
Net revenue	$1,231	$3,500	$8,538	$4,859	$1,451
Cost of goods sold	1,276	2,981	7,173	4,006	1,039
Gross profit	(45)	519	1,365	853	412
General and administrative expenses	2,764	2,684	7,851	11,796	1,683
Operating (loss)	(2,809)	(2,165)	(6,486)	(10,943)	(1,271)
Other expense	(4,886)	(3,524)	(80,140)	(10,437)	(915)
Net (loss)	$(7,695)	$(5,689)	$(86,626)	$(21,380)	$(2,186)
Net (loss) per share	$(0.01)	$(0.01)	$(0.10)	$(0.04)	$(0.01)
Weighted average number of shares	1,197,565,907	884,348,627	834,503,868	593,034,693	245,420,970

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

~~This discussion summarizes~~Our goal of becoming the ~~significant factors affecting our operating results, financial condition and liquidity and cash flows~~nation’s largest cultivation facility service provider for the ~~periods ended December 31, 2013~~production of organics, herbs and ~~2012. The discussion~~greens and ~~analysis that follows should be read together~~plant-based medicines continues to guide our decisions. Our 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 knowledgeable representatives, regional centers and its e-commerce website, GrowLife provides essential and hard-to-find goods including growing media, industry-leading hydroponics equipment, organic plant nutrients, and thousands more products to specialty grow operations across the consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this report. Management’s Discussion and Analysis of Financial Condition and Results Of Operations is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Consolidated Operations are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. Our actual results could differ materially from the results anticipated in any forward-looking statements as a result of a variety of factors, including those discussed in Section 1A above – “Risk Factors.”United States.

~~- 18 -~~

~~Overview~~

GrowLife is a holding company with multiple operating businesses that manufacture and supply branded equipment and expendables in the USA for urban gardening, inclusive of equipment and expendables for gardening of medical marijuana. WhollyWe primarily sell through our wholly owned ~~GrowLife companies include SG Technologies, Corp, Phototron, Greners, Soja, Inc. (dba Urban Garden Supply),~~subsidiary, GrowLife Hydroponics, Inc.~~, and GrowLife Productions, Inc. In addition to promotion and sales of GrowLife owned brands,~~ GrowLife companies distribute and sell over ~~3,000~~15,000 products through its ~~on-line~~e-commerce distribution ~~channels, Greners.com, our on-line superstore,~~channel, GrowLifeEco.com, and through our ~~seven~~regional retail storefronts. ~~GrowLife’s www.cannabis.org is expected to provide GrowLife with another widely recognized and authoritative channel for branded product promotion and sales.~~ GrowLife and its business units are organized and directed to operate strictly in accordance with all applicable state and federal laws. ~~The following organizational chart details our corporate structure:~~

~~GrowLife~~First, the opportunity to sell both infrastructure equipment and recurring supplies to the indoor cultivation industry is ~~actively engaged in improving~~constantly increasing as demand for indoor cultivation grows across the United States. We believe the demand will continue to grow and ~~expanding its lineup of branded products through organic development, business alliances~~more and ~~acquisition. Consistent~~more states and municipalities enact rules and regulations allowing for more indoor cultivation activities. We plan to continue with ~~this~~our multi-faceted distribution strategy, ~~GrowLife is actively engaged in developing other business alliances and evaluating branded products for acquisition. GrowLife is also actively engaged in building upon its direct to~~which we believe serves customers sales business by expansion and promotion of Greners.com, StealthGrow.com, Phototron.com and other unique online channels of distribution. Finally, GrowLife is actively engaged in pursuing acquisitions that will allow its GrowLife Hydroponics retail sales division business to expand regionally in the ~~United States.~~

following manner: Direct sales to large commercial customers, retail in some markets for local convenience, and e-commerce via GrowLifeEco.com to fulfill orders across the nation from customers of all sizes.

Second, serving what we see as an increasing number of cultivators has become cash intensive because of the need for large inventory levels at retail, extensive e-commerce online marketing, and supporting payment terms to large accounts. We need to arrange for financing support to be competitive. We have learned that retail success is about having the right products on hand, knowledgeable and experienced talent, accessible advisory services and superior turn-over ratios. Currently, GrowLifeEco.com offers over 15,000 products, far beyond the 3,000 found in Greners.com, its former online store.

Third, our customers come in different stages from caregiver cultivators to 80,000 square foot commercial operations. With the use of e-commerce, we endeavor to reach as many customers as possible in areas where we do not have stores or a direct sales presence. Earlier this year GrowLife built GrowLifeEco.com, our new e-commerce website, that is optimized for mobile devices. Our next step is to put web marketing in place to increase awareness, traffic and conversions.

Also, we recognize demand is increasing from small, aspiring cultivation consumers across the country seeking to learn and use a complete indoor growing solution. To address this demand, we packaged GrowLife Cube, a development-stage annual subscription service, for consumers to get hands-on experience with indoor growing. Although many still buy the components separately, we are working on developing videos and supplier tools to attract them to this one-stop shop subscription program. Given the election results in California the GrowLife Cube subscription service will evolve with greater value and specialty services to be announced in the fourth quarter.

Resumed Trading of our Common Stock

~~- 19 -~~22

~~Operating expenses consist primarily~~

RESULTS OF OPERATIONS

The following table presents certain consolidated statement of ~~payroll~~operations information and ~~related costs and corporate infrastructure costs. We expect~~presentation of that ~~our operating expenses will increase as we hire additional staff and continue executing our business plan. We anticipate incurring approximately $350,000 in added annual costs related to operating~~data as a ~~public company, consisting~~percentage of ~~accounting and audit-related fees, legal fees, director and officer insurance premiums and filing and other miscellaneous fees.~~change from year-to-year.

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

~~Results of Operations~~

	Year Ended December 31,
	2016	2015	$ Variance	% Variance
Net revenue	$1,231	$3,500	$(2,269)	-64.8%
Cost of goods sold	1,276	2,981	(1,705)	57.2%
Gross profit	(45)	519	(564)	-108.7%
General and administrative expenses	2,764	2,684	80	-3.0%
Operating loss	(2,809)	(2,165)	(644)	-29.7%
Other income (expense):
Change in fair value of derivative	(1,324)	1,679	(3,003)	-178.9%
Interest expense, net	(817)	(1,119)	302	27.0%
Other income (expense), primarily related to TCA funding	145	(2,003)	2,148	107.2%
Loss on debt conversions	(2,890)	-	(2,890)	-100.0%
Loss on class action lawsuit settlements	-	(2,081)	2,081	100.0%
Total other (expense) income	(4,886)	(3,524)	(1,362)	38.6%
(Loss) before income taxes	(7,695)	(5,689)	(2,006)	-35.3%
Income taxes - current benefit	-	-	-	0.0%
Net (loss)	$(7,695)	$(5,689)	$(2,006)	-35.3%

~~The Year Ended December~~YEAR ENDED DECEMBER 31, ~~2013 Compared to the Year Ended December~~2016 COMPARED TO THE YEAR ENDED DECEMBER 31, ~~2012~~2015

Revenue ~~and cost of~~

Net revenue

~~For~~ for the year ended December 31, ~~2013, our revenue was $4,858,976~~2016 decreased $2,269,000 to $1,231,000 as compared to ~~$1,450,745 in~~$3,500,000 for the ~~same period last~~ year ~~an increase of $3,408,231, or approximately 2.35 times fiscal year 2012 revenue.~~ended December 31, 2015. The ~~increase is primarily~~decrease was due to (i) ~~$2,101,399 of~~lower revenue ~~related to~~from the retail stores acquired by GrowLife Hydroponics’ acquisition of Rocky Mountain Hydroponics ~~LLC~~ and Evergreen Garden Center ~~LLC (see “NOTE 6 - PURCHASE – ROCKY MOUNTAIN HYDROPONICS~~on September 7, 2013; (ii) closure of the unprofitable Peabody, Massachusetts, Woodland Hills, California and ~~EVERGREEN GARDEN CENTER”) that was not present during fiscal year 2012,~~Plaistow, New Hampshire stores; and ~~(ii) the fact that both Greners and Urban Garden Supply (see “NOTE 4 – ASSET PURCHASE – GRENERS.COM and NOTE 5 – PURCHASE – URBAN GARDEN”) had a full twelve months~~(iii) lack of ~~revenue included in fiscal year 2013 and only 5.5 and 2.5 months, respectively, during fiscal year 2012.~~

~~For~~liquidity. During the year ended December 31, ~~2013, our gross~~2016, we transitioned funding from TCA funding to Chicago Venture. During the transition, we experienced difficulties in purchasing product and lost or canceled sales.

Cost of Goods Sold

Cost of sales for the year ended December 31, 2016 decreased $1,705,000 to $1,276,000 as compared to $2,981,000 for the year ended December 31, 2015. The decrease was due to (i) lower revenue from the retail stores acquired by GrowLife Hydroponics’ acquisition of Rocky Mountain Hydroponics and Evergreen Garden Center on September 7, 2013; (ii) closure of the unprofitable Peabody, Massachusetts, Woodland Hills, California and Plaistow, New Hampshire stores; and (iii) lack of liquidity. During the year ended December 31, 2016, we transitioned funding from TCA funding to Chicago Venture. During the transition, we experienced difficulties in purchasing product and ordered product at higher costs and lost or canceled sales.

Gross profit was ~~$853,113, or 17.6% of revenue,~~($45,000) for the year ended December 31, 2016 as compared to ~~$411,974,~~$519,000 for the year ended December 31, 2015. The gross margin was (3.6%) for the year ended December 31, 2016 as compared to 14.8% for the year ended December 31, 2015. During the year ended December 31, 2016, we transitioned funding from TCA funding to Chicago Venture. During the transition, we experienced difficulties in purchasing product and ordered product at higher costs and lost or ~~28.4%, of revenue in the same period last year. The decrease in gross profit percentage reflects the increased competition experienced by our retail hydroponics stores.~~canceled sales.

General and Administrative Expenses

General and administrative ~~costs~~

~~Expenses~~

~~Total~~expenses for the year ended December 31, 2016 increased $80,000 to $2,764,000 as compared to $2,684,000 for the year ended December 31, 2015. The increase was due to (i) the impairment of GrowLife Hydro, Inc. long-lived assets of $876,000; (ii) and an increase in sales and marketing of $76,000; offset by (iii) reduced legal expense of $48,000; (iv) reduced wages of $260,000; (v) reduced insurance expense of $188,000; (vi) reduced consulting expenses of $143,000; (vii) reduced rent of $78,000; and (viii) reduced other general expenses of $243,000. As part of the general and administrative expenses for the year ended December 31, ~~2013 were $3,163,007, an increase of $1,839,271 from the $1,323,736 incurred during the fiscal year 2012. A significant factor in the increase in~~2016, we did not record any public relation, investor relation or business development expenses.

Non-cash general and administrative expenses on a year-to-year basis is the acquisition of four retail hydroponics stores through the Company’s acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC (“RMH/EGC”) on June 7, 2013. As a direct result of this acquisition, fiscal year 2013 includes $778,501 of general and administrative expenses related to RMH/EGC while fiscal year 2012 has zero. In addition, fiscal year 2013 has a full twelve months of general and administrative expenses related to both Greners and Urban Garden Supply, while fiscal year 2012 has approximately 5.5 months of Greners and approximately 2.5 months of Urban Garden Supply general and administrative expenses.

~~During~~for the year ended December 31, ~~2013,~~2016 were $1,422,000 including (i) depreciation and amortization of $115,000; (ii) stock based compensation of $146,000 related to stock option grants; (iii) common stock issued for services of $285,000; and (iv) the ~~Company recorded $1,469,184~~impairment of GrowLife Hydro, Inc. long-lived assets of $876,000.

Non-cash general and administrative expenses ~~that were non-cash, as~~for the ~~Company paid these expenses via the issuance~~year ended December 31, 2015 was $531,000, with (i) depreciation and amortization of ~~shares~~$120,000; (ii) stock based compensation of its common stock. In fiscal year 2012, the Company recorded similar non-cash general and administrative expenses totaling $332,750. These expenses consisted of wages, rents, and professional/consulting services.

~~In fiscal year 2013, the Company granted~~$176,000 related to stock ~~options to three (3) members of its executive management team (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”) granting these individuals the~~ option ~~to purchase 34,000,000 shares of the Company’s~~grants; (iii) common stock ~~in the aggregate. These stock option grants were recorded in accordance with Financial Accounting Standards Board (FASB) ASC Topic 718, “Compensation – Stock Compensation”. The Company measured,~~issued for services of $211,000; and ~~recorded, the fair value~~(iii) other of ~~the option grant as of the date of grant and is amortizing the computed value of the option grant over the related vesting period. During~~$24,000.

Other Income/ Expense

Other expense for the year ended December 31, 2013, the Company recorded $148,633 of non-cash expense related to these stock options. During the twelve-months ended December 31, 2012, the Company recorded $26,563 of expense related to stock options.

In fiscal year 2013, the Company also recorded $7,015,000 of non-cash warrant expense (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”) related to the issuance of 170,000,000 warrants, of which 165,000,000 are still unexercised2016 was $4,886,000 as of December 31, 2013. The outstanding warrants as of December 31, 2013 were valued at $6,765,000 in the aggregate as of the date of issuance and were fully expensed at the time of issuance because they vested immediately and were also exercisable immediately. In addition to the $6,765,000, the Company recorded $250,000 of non-cash warrant expense in relation to the warrants issued to Gemini Master Fund. The Company did not issue any warrants during fiscal year 2012 and therefore had no warrant expense.

~~- 20 -~~

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

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

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

~~Advertising expense during~~$3,524,000 for the year ended December 31, ~~2013 was $220,514, while fiscal year 2012 advertising~~2015. The other expense ~~was $203,470. The Company recorded fiscal year 2013 advertising expense of $118,693~~ for ~~Phototron, $65,411 for Greners, and $36,410 to promote the GrowLife name/brand and its retail stores.~~

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

~~During~~ the year ended December 31, ~~2013,~~2016 included (i) interest expense of $817,000; (ii) loss on debt conversions of $2,890,000; (iii) change in derivative liability of $1,324,000; offset by (iv) and other income of $145,000. The change in derivative liability is the ~~Company incurred expenses of $192,549~~non-cash change in ~~relation~~the fair value and relates to ~~new business development. This consisted of $88,759 for the Company’s Cannabis.org website/joint venture, $27,976 in relation to GrowLife Productions, Inc., $15,000 in relation~~our derivative instruments. The non-cash interest related to the ~~STVB joint venture,~~amortization of the debt discount associated with our convertible notes and ~~$60,814 relating~~accrued interest expense related to ~~other potential joint ventures. No such expenses were recorded during fiscal year 2012.~~our notes payable. The loss on debt conversions related to the conversion of our notes payable at prices below the market price.

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

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

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

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

~~- 21 -~~

~~Other Expenses~~

During the year ended December 31, 2013, the Company incurred net other expenses totaling $10,437,427 versus net other expenses of $915,229 during the same period in fiscal year 2012. Included in the $10,437,427 for the year ending December 31, 2013 was $5,106,073 of non-cash expense related to the beneficial conversion features (BCF) of the Company’s various convertible notes payable, $3,701,078 of non-cash expense related to the2015 included change in ~~fair value~~derivative liability of the Company’s derivative liabilities, $960,750 of non-cash expense related to the extinguishment of debt, $279,515 of non-cash expense related to the impairment of goodwill, $262,604 of non-cash expense related to the impairment of intangible assets, and $169,676 (of which $161,587 was non-cash) of interest expense. These expenses were partially$1,679,000, offset by interest expense of $1,119,000, other expense of $2,003,000 and loss on class action lawsuit settlements of $2,081,000. The change in derivative liability is the ~~$42,269 of other income related to rent owed the Company by a subtenant at its Boulder, Colorado facility.~~

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

~~Note that $10,471,607, or 99%, of the $10,479,696 of fiscal year 2013~~debt discount associated with our convertible notes, accrued interest expense related to our notes payable. The other expense ~~(excludes~~is primarily related to the ~~$42,269~~TCA funding. We accrued $2,081,000 as loss on class action lawsuits and contingent liabilities as of ~~other income) is non-cash, which means it does not have an adverse affect on the Company’s cash flows.~~December 31, 2015.

~~Loss~~Net (Loss)

~~The net~~Net loss for the year ended December 31, ~~2013~~2016 was ~~$21,380,138 with the same period in fiscal 2012 generating~~$7,695,000 as compared to a net loss of ~~$2,186,304. As noted above in “Other Expenses”, a significant portion of the Company’s net loss~~$5,689,000 for ~~fiscal year 2013 is related to non-cash expenses. The following is a brief summary of the non-cash expenses incurred by the Company during~~ the year ended December 31, ~~2013:~~

Year Ended December 31, 2013
Net loss - GAAP basis

$
(21,380,138
)
Less non-cash expenses:
    Non-cash interest expense

5,267,660

    Non-cash warrant expense

7,015,000

    Non-cash stock option expense

148,633

    Change in fair value of derivative

3,701,078

    Amortization of intangible assets

151,696

    Gain (loss) on extinguishment of debt

960,750

    Depreciation of plant & equipment

22,229

    Impairment of goodwill

279,515

    Impairment of intangible assets

262,604

    Impairment of inventory

62,882

    Services rendered for common stock

1,469,184

Total non-cash expenses

19,341,231

Net loss excluding non-cash items - Non-GAAP basis

$
(2,038,907
)
2015 for the reasons discussed above.

Net loss for the year ended December 31, 2016 included non-cash expense of $6,271,000, including (i) depreciation and amortization of $115,000; (ii) stock based compensation of $146,000 related to stock option grants; (iii) common stock issued for services of $285,000; (iv) the impairment of GrowLife Hydro, Inc. long-lived assets of $876,000; (v) accrued interest and amortization of debt discount on convertible notes payable of $635,000; (v) loss on debt conversions of $2,890,000; and (vi) change in derivative liability of $1,324,000.

Net loss for the year ended December 31, 2015 included non-cash expense of $3,759,000, including (i) depreciation and amortization of $120,000; (ii) stock based compensation of $176,000 related to stock option grants; (iii) common stock issued for services of $211,000; (iv) interest expense of $1,120,000, (v) loss on class action lawsuit settlements of $2,000,000; (vi) preferred shares issued for services of $300,000; (vii) issuance of Series B Convertible Preferred Stock of $1,500,000; and (viii) other of $176,000, offset by (ix) change in derivative liability of $724,000.

We expect losses to continue as we implement our business plan.

LIQUIDITY AND CAPITAL RESOURCES

We had cash of $103,000 and a net working capital deficit of approximately $4,007,000 (excluding the derivative liability- warrants of $2,702,000 as of December 31, 2016. We expect losses to continue as we grow our business. Our cash used in operations for the years ended December 31, 2016 and 2015 was $1,212,000, $1,376,000, respectively.

Shortly after the SEC suspended trading of our securities on April 10, 2014, some of our primary suppliers rescinded our credit terms and required us to pay cash for our product purchases and pay down our outstanding balance with these suppliers.

We will need to obtain additional financing in the future. There can be no assurance that we will be able to secure funding, or that if such funding is available, the terms or conditions would be acceptable to us. If we are unable to obtain additional financing, we may need to restructure our operations, divest all or a portion of our business or file for bankruptcy.

We have financed our operations through the issuance of convertible debentures and the sale of common stock.

February 1, 2017 Funding Agreements with Chicago Venture Partners, L.P.

On February 1, 2017, we closed the transactions described below with Chicago Venture Partners, L.P. (“Chicago Venture”).

~~- 22 -~~24

~~Liquidity~~Securities Purchase Agreement, Secured Promissory Notes, Membership Interest Pledge Agreement and ~~Capital Resources~~

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

During the year ended December 31, 2013, cash used in operations was $1,791,074 compared to cash used of $1,073,301 during the same period in the prior year. These expenses include wages, rents, cost of goods sold, professional fees for legal, accounting, and consultants, insurance, utilities, and sales and marketing.Security Agreement

~~During~~On January 9, 2017, the ~~year ended December 31, 2013, cash used in investing activities was $558,058, which consisted primarily of $550,000 for~~Company executed the ~~purchase of Rocky Mountain Hydroponics, LLC~~following agreements with Chicago Venture: (i) Securities Purchase Agreement; (ii) Secured Promissory Notes; (iii) Membership Interest Pledge Agreement; and ~~Evergreen Garden Center, LLC. Also included in~~(iv) Security Agreement (collectively the ~~$558,058 was $5,500 used for improvements~~“Chicago Venture Agreements”). The Chicago Venture Agreements are attached hereto, collectively, filed as Exhibit 10.1 to our ~~retail stores~~Current Report on Form 8-K filed with the SEC on February 7, 2017, and ~~$1,160 used for~~incorporated herein by reference. The Company entered into the ~~Company’s investment~~Chicago Venture Agreements with the intent of paying its debt, in ~~Vape Holdings, Inc. (see “NOTE 9 – INVESTMENT IN A RELATED PARTY”~~full, to TCA Global Credit Master Fund, LP (“TCA”)~~. During the year ended December 31, 2012, cash used in investing activities was $240,175,~~, which ~~was due primarily to the $250,000 for the purchase of Greners’ assets.~~

During the year ended December 31, 2013, cash provided by financing activities was $4,143,806. In fiscal year 2012, cash provided by financing activities was $1,325,641. The following is a summary of cash provided by financing activities:included any TCA affiliates.

For the Year Ended December 31,
2013 2012

Proceeds from the issuance of common stock $ 1,294,365 $ 15,250
Proceeds from the issuance of 10% convertible note 156,000 -
Proceeds from the issuance of convertible notes 1,850,000 1,141,092
Proceeds from options exercised 9,000 -
Proceeds from notes payable 1,130,000 -
Proceeds from additional contributed capital - 120,402
Payments on notes payable and accrued interest (296,719) (50,000)
Proceeds from related party 1,160 98,897
$ 4,143,806 $ 1,325,641

~~- 23 -~~

~~During~~The total amount of funding under the ~~year ended December 31, 2013, the~~Chicago Venture Agreements is $1,105,000 (the “Debt”). Each Convertible Promissory Note carries an original issue discount of $100,000 and a transaction expense amount of $5,000, for total debt of $1,105,000. The Company ~~issued 36,981,862~~agreed to reserve 500,000,000 of its shares of ~~its~~ common stock for ~~cash via its December 2011 Subscription Agreement.~~issuance upon conversion of the Debt, if that occurs in the future. If not converted sooner, the Debt is due on or before January 9, 2018. The ~~shares were sold~~Debt carries an interest rate of ten percent (10%). The Debt is convertible, at ~~a price of $0.035~~Chicago Venture’s option, into the Company’s common stock at $0.009 per share ~~and generated proceeds~~subject to ~~the Company~~adjustment as provided for in the Secured Promissory Notes attached hereto and incorporated herein by this reference. As of the date of this report on Form 8-K, Chicago Venture has funded the entire amount of ~~$1,294,365. As of December 31, 2013,~~ the ~~Company had closed its Subscription Agreement.~~Debt.

~~During~~Chicago Venture’s obligation to fund the ~~year ended December 31, 2013, the Company issued 470,237 shares of its common stock~~Debt was secured by Chicago Venture’s 60% interest in ~~relation to the exercise of stock options by Eric Shevin, who joined the Company’s Board of Directors in April 2013. These shares generated proceeds to the Company~~Typenex Medical, LLC, an Illinois corporation, as provided for in the ~~amount~~Membership Pledge Agreement attached hereto and incorporated herein by this reference.

Payment of ~~$9,000.~~All TCA Obligations

On January ~~8, 2013,~~10, 2017, Chicago Venture, at the Company’s instruction, remitted funds of $1,495,901 to TCA in order to satisfy all debts to TCA. On or around January 11, 2017, the Company ~~issued a 10% convertible note (the “10% Convertible Note)~~was notified by TCA that $13,540 were due to ~~Black Mountain Equities, Inc (“BME”). The rate of~~TCA in order for TCA to release its security interest ~~on the convertible note is 10%, and BME, at its sole discretion, can convert both the principal and accrued interest into shares of~~in the Company’s ~~common stock. The conversion price was~~assets. On February 1, 2017, TCA notified the lesser of (a) $0.04 per share or (b) 70% of the average of the 3 lowest daily volume weighted average closing prices occurring during the 20 consecutive trading days immediately preceding the applicable conversion date on which BME elects to convertCompany that all ~~or part of the note. During the three month period ended March 31, 2013, BME converted all of the principal~~funds were received and ~~accrued~~TCA would release its security interest ~~into 6,270,413 shares of the~~in Company’s ~~common stock. As of December 31, 2013, this note and all related interest had been~~assets. TCA has confirmed that it is paid in ~~full.~~

On March 14, 2013, an employee of the Company loaned us $25,000 via a note payable. Per the terms of the note, the principal accrues interest at the rate of 6% per year with a term of 90 days. The note does not require any principal and/or interest payments during the 90-day term, but the Company can make, at its sole discretion, principal and/or interest payments in any amount it chooses during the 90 day term. At the conclusion of the note’s 90-day termfull and the Company is ~~required to pay, in full,~~not aware of any ~~and all unpaid principal and/or interest. On June 26, 2013,~~other obligations that the Company ~~signed a revised agreement~~has as to TCA. The funds received under the Chicago Venture Agreements and previous Chicago Venture Agreements were used to pay-off TCA.

Prior Funding Agreements with this related party that extends the term through September 30, 2013. All of the other terms and conditions remained unchanged from the original agreement. On September 6, 2013, the Company issued 1,224,918 shares of its common stock at a per share price of $0.021 as payment in full for the $25,000 principal and $723 of accrued and unpaid interest.Chicago Venture Partners, L.P.

Entry into Securities Purchase Agreement with Chicago Venture Partners, L.P. As of September 30, 2013, this related party had voluntarily terminated his employment with the Company to pursue other business opportunities and the Company had satisfied this obligation in full as of December 31, 2013.

~~On May 1, 2013, the Company~~April 4, 2016, we entered into a Securities Purchase Agreement and Convertible Promissory Note (the “Chicago Venture Note”) with ~~a certain “accredited investor” (“Investor”), for the sale~~Chicago Venture, whereby we agreed to sell, and Chicago Venture agreed to purchase ~~of a $280,000 original issue discount secured 0% nonconvertible~~an unsecured convertible promissory note due October 31, 2013 (the “OID Note”). The OID Note is secured by obligations of the Company. The Company and each of its subsidiaries has granted and pledged to the OID Note Purchaser a continuing security interest in all personal property of the Company and its subsidiaries. Except for the original issue discount, the OID Note does not carry interest unless and until there is an Event of Default, in which case the outstanding balance would carry interest at 18% per annum. The Company can prepay the OID Note, in whole or in part, at any time without penalty. At closing, the Company received gross proceeds of $250,000 for such private placement, with the remaining $30,000 retained by the OID Note Purchaser as prepaid interest. The Company originally recorded the $30,000 as prepaid interest and subsequently expensed the entire $30,000 as interest expense during the year ended December 31, 2013. On October 11, 2013, the Holder of the $280,000 OID Note converted the entire $280,000 into 8,000,000 shares of the Company’s common stock at a per share conversion price of $0.035.

~~- 24 -~~

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

~~On October 11, 2013, the Company issued an additional $850,000 of 7% convertible notes to four Holders. Per the terms of these 7% Notes,~~ the original principal ~~balance is $850,000~~amount of $2,755,000. In connection with the transaction, we received $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 ~~is not secured by any collateral or any assets pledged~~we agreed to pay $5,000 to cover Purchaser’s legal fees, accounting costs and other transaction expenses.

The Secured Investor Notes are payable (i) $50,000 upon filing of a Registration Statement on Form S-1; (ii) $100,000 upon effectiveness of the ~~Holder. The maturity date is September 30, 2015,~~Registration Statement; and (iii) up to $200,000 per month over the ~~annual rate of interest is seven percent (7%), which increases to twenty-four percent (24%) per annum, or the maximum rate permitted under any applicable law, in the event of default. Subject~~10 months following effectiveness at our sole discretion, subject to certain ~~limitations,~~conditions. We agreed to file the ~~Holder can, at its sole discretion,~~Registration Statement within forty-five (45) days of the Closing and agreed to register shares of our common stock for the benefit of Chicago Venture in exchange for the payments under the Secured Investor Notes.

Chicago Venture has the option to convert the ~~outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common stock. The conversion price for the period of time from the date of this 7%~~ Note ~~through and including September 30, 2014 is the lesser of (a) $0.025 per share and (b) seventy percent (70%)~~at 65% of the average of the three (3) lowest ~~daily~~ volume weighted average ~~closing~~ prices ~~occurring during~~in the twenty (20) ~~consecutive trading days~~Trading Days immediately preceding the applicable conversion ~~date~~(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 which the Holder elects to convert all or part of this 7% Note, subject to adjustment as provided in this 7% Note. The conversion price is $0.025 per share for the period of October 1, 2014 through the maturity date of September 30, 2015, subject to adjustment as provided in this 7% Note. At any time after the 12-month period immediately following the date that is the earlier of this 7% Note, the Company has the option to pre-pay the entire outstanding principal amount of this 7% Note by paying to the Holder an amount equal to one hundred and fifty percent (150%) of the principal and interest then outstanding. The Company’s obligations under this 7% Note will accelerate upon a bankruptcy event with respect to the Companysix (6) months or any subsidiary, any default in the Company’s payment obligations under this 7% Note, the Company’s failure to issue shares of its common stock in connection with a conversion of this 7% Note, the Company’s or any subsidiary’s breach of any provision of any agreement providing for indebtedness of the Company or such subsidiary in an amount exceeding $100,000, the common stock of the Company being suspended or delisted from trading on the Over the Counter Bulletin Board (the “Primary Market”) market and the OTCQB, the Company losing its status as “DTC Eligible” or the Company becoming late or delinquent in its filing requirements with the Securities and Exchange Commission. Upon any such acceleration of this 7% Note, the Company shall be obligated to pay an amount equal to the greater of (i) one hundred and twenty percent (120%) of the outstanding principal of this 7% Note (plus all accrued but unpaid interest) and (ii) the product of (a) the highest closing price for the Company’s common stock for the five (5) days after the Registration Statement becomes effective, and on ~~which~~ the ~~Primary Market is open for business immediately preceding such acceleration and (b) a fraction, the numerator~~same day of ~~which is the outstanding principal of this 7% Note, and the denominator of which is the applicable conversion price as of the date of determination.~~

~~On December 20, 2013,~~each month thereafter, the Company ~~issued an additional $1,000,000 of 7% convertible notes to two Holders. Per~~will re-pay the ~~terms of these 7% Notes, the original principal balance is $1,000,000 and is not secured by any collateral~~Note in monthly installments in cash, or, any assets pledged to the Holder. The maturity date is September 30, 2015, and the annual rate of interest is seven percent (7%), which increases to twenty-four percent (24%) per annum, or the maximum rate permitted under any applicable law, in the event of default. Subjectsubject to certain ~~limitations, the Holder can,~~Equity Conditions, in our common stock at its sole discretion, convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common stock. The conversion price for the period of time from the date of this 7% Note through and including September 30, 2014 is the lesser of (a) $0.025 per share and (b) seventy percent (70%)65% of the average of the three (3) lowest ~~daily~~ volume weighted average prices in the twenty (20) Trading Days immediately preceding the applicable conversion (the “Installment Conversion Price”).

As discussed above, once effective, we have the discretion to require Chicago Venture to sell to us up to $200,000 per month over the next 10 months on the above terms. We would then have the option to issue shares registered under this Registration Statement to Chicago Venture. Through this prospectus, the selling stockholder may offer to the public for resale shares of our common stock that we may issue to Chicago Venture pursuant to the Chicago Venture Note.

For a period of no more than 36 months from the effective date of the Registration Statement, we may, from time to time, at our sole discretion, and subject to certain conditions that we must satisfy, draw down funds under the Chicago Venture Note.

Our ability to require Chicago Venture to fund the Chicago Venture Note is at our discretion, subject to certain limitations. Chicago Venture is obligated to fund if each of the following conditions are met; (i) the average and median daily dollar volumes of our common stock for the twenty (20) and sixty (60) trading days immediately preceding the funding date are greater than $100,000; (ii) our market capitalization on the funding date is greater than $17,000,000; (iii) we are not in default with respect to share delivery obligations under the note as of the funding date; and (iv) we are current in its reporting obligations. Chicago Venture’ obligations under the equity line are not transferable.

The issuance of our common stock under the Chicago Venture Note will have no effect on the rights or privileges of existing holders of common stock except that the economic and voting interests of each stockholder will be diluted as a result of any such issuance. Although the number of shares of common stock that stockholders presently own will not decrease, these shares will represent a smaller percentage of our total shares that will be outstanding after any issuances of shares of common stock to Chicago Venture. If we draw down amounts under the Chicago Venture Note when our share price is decreasing, we will need to issue more shares to repay the same amount than if our stock price was higher. Such issuances will have a dilutive effect and may further decrease our stock price.

There is no guarantee that we will be able to meet the foregoing conditions or any other conditions under the Securities Purchase Agreement and/or Chicago Venture Note or that we will be able to draw down any portion of the amounts available under the Securities Purchase Agreement and/or Chicago Venture Note. However, we do believe there is a strong likelihood, as long as we can meet the various conditions to funding, that we will receive the full amount of funding under the equity line of credit. Given our financial challenges and the competitive nature of our business, we also believe we will need the full amount of funding under the equity line of credit in order to fully realize our business plans.

A portion of the funds received from Chicago Venture will be used to pay off TCA Global Credit Master Fund, LP (“TCA”), a previous equity financing partner and a portion will be invested in our business. Specifically, we anticipate that approximately $1,400,000 is expected to be used to pay TCA and the remaining funds, if any, will be used for general business purposes such as marketing, product development, expansion and administrative costs. We are not aware of any relationship between TCA and Chicago Venture. We have had no previous transactions with Chicago Venture or any of Chicago Venture’ affiliates. We cannot predict whether the Chicago Venture transaction will have either a positive or negative impact on our stock price. However, in addition to the fact that each Chicago Venture conversion, when and if it occurs, has a dilutive effect on our stock, that should Chicago Venture convert large portions of the debt into registered shares and then sells those shares on the market, that our stock price could be depressed.

Debt Purchase Agreement and First Amendment to Debt Purchase Agreement and Note Assignment Agreement. On August 24, 2016, we closed a Debt Purchase Agreement and a First Amendment to Debt Purchase Agreement and related agreements with Chicago Venture and TCA.

On August 24, 2016, TCA closed an Assignment of Note Agreement and related agreements with Chicago Venture. The referenced agreements relate to the assignment of Company debt, in the form of debentures, by TCA to Chicago Venture. The Company was a party to the agreements between TCA and Chicago Venture because the Company is the “borrower” under the TCA held debentures.

Exchange Agreement, Convertible Promissory Note and related Agreements with Chicago Venture. On August 17, 2016, we closed an Exchange Agreement and a Convertible Promissory Note and related agreements with Chicago Venture whereby we agreed to the assignment of debentures representing debt between the Company, on the one hand, and with TCA, on the other hand. Specifically, we agreed that TCA could assign a portion of the Company’s debt held by TCA to Chicago Venture.

According to the Exchange Agreement, the debt is to be assigned in tranches, with the first tranche of debt assigned from TCA to Chicago Venture being $128,000 which is represented by an Initial Exchange Note as defined in the Exchange Agreement.

Funding from TCA Global Credit Master Fund, LP (“TCA”).

The First TCA SPA. On July 9, 2015, we closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP (“TCA”), an accredited investor, whereby we 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 (the “First TCA SPA”) occurred on July 9, 2015. Effective as of May 4, 2016, the Company and TCA entered into a First Amendment to the First TCA SPA whereby the parties agreed to amend the terms of the First TCA SPA in exchange for TCA’s forbearance of existing defaults by the Company.

The Second TCA SPA. On August 6, 2015, we closed a second Securities Purchase Agreement and related agreements with TCA whereby we agreed to sell and TCA agreed to purchase a $100,000 senior secured convertible redeemable debenture and we agreed to issue and sell to TCA, from time to time, and TCA agreed to purchase from us up to $3,000,000 of the Company’s common stock pursuant to a committed equity facility. The closing of the transaction (the “Second TCA SPA”) occurred on August 6, 2015. On April 11, 2016, we agreed with TCA to mutually terminate the Second TCA SPA.

Amendment to the First TCA SPA. On October 27, 2015, we entered into an Amended and Restated Securities Purchase Agreement and related agreements with TCA whereby we agreed to sell, and TCA agreed to purchase $350,000 of senior secured convertible, redeemable debentures. This was an amendment to the First TCA SPA (the “Amendment to the First TCA SPA”.) As of October 27, 2015, we sold $1,050,000 in Debentures to TCA and up to $1,950,000 in Debentures remain for sale by us. The closing of the Amendment to the First TCA SPA occurred on October 27, 2015. In addition, TCA has advanced us an additional $100,000 for a total of $1,150.000.

Issuance of Preferred Stock to TCA. Also, on October 21, 2015 we issued 150,000 Series B Preferred Stock at a stated value equal to $10.00 per share to TCA. 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 ~~occurring~~for the common stock during the ~~twenty (20)~~ten (10) consecutive trading days immediately preceding the ~~applicable~~ conversion date as quoted by Bloomberg, LP. On October 21, 2015, we also issued 51 shares of Series C Preferred Stock at $0.0001 par value per share to TCA. The Series C Preferred Stock is not convertible into our common stock. In the event of a default under the Amended and Restated TCA Transaction Documents, TCA can exercise voting control over our common stock with their Series C Preferred Stock voting rights.

TCA’s Forbearance. Due to our default on ~~which~~its repayment obligations under the ~~Holder elects~~TCA SPA’s and related documents, the parties agreed to ~~convert all~~restructure the SPA’s whereby TCA agreed to forbear from enforcement of our defaults and to restructure a payment schedule for repayment of debt under the SPAs. We defaulted because our operating results were not as expected and we were unable to generate sufficient revenue through its business operations to serve the TCA debt. Specifically, the First Amendment to Amended and Restated Securities Purchase Agreement made the following material modifications to the existing SPA’s:

●

All unpaid debentures were modified as described in more detail below.

●

Payments on the debentures shall be made by (i) debt purchase agreement(s) to be entered into by TCA, (ii) through proceeds raised from the transaction(s) with Chicago Venture; or ~~part~~(iii) by the Company directly.

●

The due date of ~~this 7% Note,~~the debentures was extended to April 28, 2018.

●

TCA agreed that it shall not enforce and shall forbear from pursuing enforcement of any existing defaults by us unless and until a future Company default occurs.

In furtherance of TCA’s forbearance, effective as of May 4, 2016, we issued Second Replacement Debenture A in the principal amount of $150,000 and Second Replacement Debenture B in the principal amount of $2,681,209.82 (collectively, the “Second Replacement Debentures”).

Per the First Amendment to Amended and Restated Securities Purchase Agreement, the Second Replacement Debentures were combined, and apportioned into two separate replacement debentures. The Second Replacement Debentures were intended to act in substitution for and to supersede the debentures in their entirety. It was the intent of the Company and TCA that while the Second Replacement Debentures replace and supersede the debentures, in their entirety, they were not in payment or satisfaction of the debentures, but rather were the substitute of one evidence of debt for another without any intent to extinguish the old debt. The maximum number of shares subject to ~~adjustment~~conversion under the Second Replacement Debentures is 383,028,714. This is an approximation. The estimation of the maximum number of shares issuable upon the conversion of the Second Replacement Debentures was calculated using an estimated average price of $.013 per share.

The Second Replacement Debentures contemplate TCA entering into debt purchase agreement(s) with third parties whereby TCA may, at its election, sever, split, divide or apportion the Second Replacement Debentures to accomplish the repayment of the balance owed to TCA by Company. The Second Replacement Debentures are convertible at 85% of the lowest daily volume weighted average price (“VWAP”) of our common stock during the five (5) business days immediately prior to a conversion date.

In connection with the above agreements, the parties acknowledged and agreed that certain advisory fees previously paid to TCA as provided in ~~this 7% Note.~~the SPAs in the amount of $1,500,000 have been added and included within the principal balance of the Second Replacement Debentures. The advisory fees related to financial, merger and acquisition and regulatory services provided to us. The conversion price ~~is $0.025 per share~~discount on the Second Replacement Debentures will not apply to the advisory fees added to the Second Replacement Debentures. TCA also agreed to surrender its Series B Preferred Stock in exchange for the ~~period~~$1,500,000 being added to the Second Replacement Debenture.

As more particularly described below, we remain in debt to TCA for the principal amount of ~~October~~$1,500,000. The remaining $1,400,000 of principal debt was assigned to Old Main Capital, LLC (see discussion immediately below.) We intend to use the funds generated from the Chicago Venture transaction to fuel its business operations and business plans which, in turn, will presumably generate revenues sufficient to avoid another default in the remaining TCA obligations. If we are unable to raise sufficient funds through the Chicago Venture transaction and/or generate sales sufficient to service the remaining TCA debt then we will be unable to avoid another default. Failure to operate in accordance with the various agreements with TCA could result in the cancellation of these agreements, result in foreclosure on our assets in an event of default which would have a material adverse effect on our business, results of operations or financial condition.

TCA Assignment of Debt to Old Main Capital, LLC

On September 9, 2016, we closed a Debt Purchase Agreement and related agreements (the “Old Main Transaction Documents”) with TCA and Old Main Capital, LLC (“Old Main”) whereby TCA agreed to sell and Old Main agreed to purchase in multiple tranches $1,400,000 in senior secured convertible, redeemable debentures (the “Assigned Debt”) (the “Old Main Transaction”). The Assigned Debt was our debt incurred in the TCA financing transactions that closed in 2015. We were required to execute the Old Main Transaction Documents as we are the “borrower” on the Assigned Debt.

Debt Purchase Agreement. As set forth above, we entered into the Debt Purchase Agreement on September 9, 2015 with TCA and Old Main whereby Old Main agreed to purchase, in tranches, $1,400,000 of debt previously held by TCA. We executed the Debt Purchase Agreement as it was the “borrower” under the Assigned Debt and was required to make certain representations and warranties regarding the Assigned Debt. The Assigned Debt is represented by a new “10% Senior Convertible Promissory Note” entered into by and between Old Main and the Company (more particularly described below.)

Exchange Agreement. In conjunction with the Debt Purchase Agreement, on September 9, 2016, we entered into an Exchange Agreement whereby we agreed to exchange, in tranches, the Assigned Debt, as well as any amendments thereto, with a 10% Senior Convertible Promissory Note (the “Note”) having a principal balance of $1,400,000. The closing dates for the exchanges, scheduled to occur in tranches, are set forth in Schedule 1 ~~2014 through~~attached to the Exchange Agreement.

10% Senior Convertible Promissory Note. Pursuant to the Exchange Agreement, we entered into a 10% Senior Convertible Promissory Note dated September 9, 2016 with Old Main whereby the Company agreed to be indebted to Old Main for the Assigned Debt. We promised to pay Old Main, by no later than the maturity date of September ~~30, 2015, subject to adjustment as provided in this 7% Note.~~ 9, 2017 the outstanding principal of the Assigned Debt together with interest on the outstanding principal amount under the Note, at the rate of ten percent (10%) per annum simple interest.

At any time after September 9, 2016, and while the ~~12-month period immediately following~~Note is still outstanding and at the ~~date~~sole option of this 7% Note, the Company has the option to pre-pay the entire outstanding principal amount of this 7% Note by paying to the Holder an amount equal to one hundred and fifty percent (150%) of the principal and interest then outstanding. The Company’s obligations under this 7% Note will accelerate upon a bankruptcy event with respect to the CompanyOld Main, Old Main may convert all or any subsidiary, any default in the Company’s payment obligations under this 7% Note, the Company’s failure to issue shares of its common stock in connection with a conversion of this 7% Note, the Company’s or any subsidiary’s breach of any provision of any agreement providing for indebtedness of the Company or such subsidiary in an amount exceeding $100,000, the common stock of the Company being suspended or delisted from trading on the Over the Counter Bulletin Board (the “Primary Market”) market and the OTCQB, the Company losing its status as “DTC Eligible” or the Company becoming late or delinquent in its filing requirements with the Securities and Exchange Commission. Upon any such acceleration of this 7% Note, the Company shall be obligated to pay an amount equal to the greater of (i) one hundred and twenty percent (120%)portion of the outstanding principal, accrued and unpaid interest redemption premium and any other sums due and payable hereunder or under any of ~~this 7% Note (plus all accrued but unpaid interest)~~the other Transaction Documents into shares of our Common Stock at a price equal to the lower of: (i) sixty-five percent (65%) of the lowest traded price of the Company’s Common Stock during the thirty (30) trading days prior to the Conversion Date; or (ii) sixty-five percent (65%) of the lowest traded price of the Common Stock in the thirty (30) Trading Days prior to the Closing Date.

Option Agreement. In connection with the Old Main Transaction Documents, TCA and ~~(ii)~~Old Main entered into an Option Agreement dated September 8, 2016 whereby TCA agreed to grant Old Main an option to purchase the ~~product~~Assigned Debt, or any portion thereof, under the terms and conditions of ~~(a)~~ the ~~highest closing price~~Debt Purchase Agreement. In consideration, Old Main agreed to pay the Option Payment as more particularly described in the Option Agreement.

On August 24, 2016, TCA terminated its Debt Purchase Agreement and related agreements with Old Main. The specific termination date is September 25, 2016, and Old Main had a right to purchase an additional $300,000 in debt from TCA.

Operating Activities

Net cash used in operating activities for the ~~Company’s~~year ended December 31, 2016 was $1,212,000. This amount was primarily related to a net loss of $7,695,000, offset by (i) an increase in inventory of $20,000; (ii) an increase in accounts payable and accrued expenses of $174,000; (iii) other of $17,000; and non-cash expenses of $6,271,000 including (i) depreciation and amortization of $115,000; (ii) stock based compensation of $146,000 related to stock option grants; (iii) common stock issued for services of $285,000; (iv) the impairment of GrowLife Hydro, Inc. long-lived assets of $876,000; (v) accrued interest and amortization of debt discount on convertible notes payable of $635,000; (v) loss on debt conversions of $2,890,000; and (vi) change in derivative liability of $1,324,000.

Financing Activities

Net cash provided by financing activities for the five (5) days on which the Primary Market is open for business immediately preceding such acceleration and (b) a fraction, the numerator of which is the outstanding principal of this 7% Note, and the denominator of which is the applicable conversion priceyear ended December 31, 2016 was $1,255,000. The amount related to funding provided by Chicago Venture.

Our contractual cash obligations as of December 31, 2016 are summarized in the ~~date of determination.~~table below:

Contractual Cash Obligations	Total	Less Than 1 Year	1-3 Years	3-5 Years	Greater Than 5 Years
Operating leases	$130,784	$115,205	$15,579	$-	$-
Convertible notes payable	2,920,196	2,920,196	-	-	-
Capital expenditures	25,000	25,000	-	-	-
	$3,075,980	$3,060,402	$15,579	$-	$-

~~- 25 -~~28

~~Unless~~

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, ~~generate significant revenues~~liquidity, capital expenditures or capital resources.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The application of GAAP involves the exercise of varying degrees of judgment. On an ongoing basis, we evaluate our estimates and ~~cash flows~~judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from operating activities, our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing, other collaborative agreements and strategic alliances. Our management is actively engaged in seeking additional capital to fund our operations in the short to medium term.these estimates under different assumptions or conditions. We ~~have relied on funds generated from operations, issuance of debt, and on the sale~~believe that of our ~~common stock~~significant accounting policies (see summary of significant accounting policies more fully described in Note 3 to ~~fund operations.~~Form 10-K for the year ended December 31, 2016), the following policies involve a higher degree of judgment and/or complexity:

Cash and Cash Equivalents- We ~~believe~~classify 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 ~~cash on hand and the forecasted cash flow from operations will be sufficient~~Federal Deposit Insurance Corporation up to ~~continue operations through the first half of 2014.~~

~~Off-Balance Sheet Arrangements~~

$250,000. We have not ~~entered into~~experienced any ~~off-balance sheet arrangements.~~

~~Critical Accounting Policies~~

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

~~Reverse Merger Accounting~~

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

~~Principles of Consolidation~~

~~The consolidated balance sheets include the accounts of the Company and its subsidiaries. The consolidated statements of operations include the Company’s~~such accounts and ~~the accounts of its subsidiaries from the date of acquisition. All intercompany transactions~~believes it is not exposed to any significant risk for cash on deposit.

Accounts Receivable and ~~balances have been eliminated in consolidation.~~

~~Use of Estimates~~

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

Revenue

-Revenue is recognized on the sale of a product when the product is shipped, which is when the risk of loss transfers to our customers, 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. ~~As of December 31, 2013 and 2012, we did not maintain a reserve for bad debt, which are minimal based upon our historical experience.~~

~~- 26 -~~

~~Sales Returns~~

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

~~Derivative Financial Instruments~~

The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. As of December 31, 2013, the Company had recorded a derivative liability in the amount of $9,324,000 (see “NOTE – 21 – DERIVATIVE LIABILITY”).

~~Stock Based Compensation~~

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

~~Recently Issued Accounting Standards~~

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

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

~~- 27 -~~

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

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

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

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

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

~~Not applicable.~~

~~ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.~~

~~INDEX TO CONSOLIDATED FINANCIAL STATEMENTS~~


~~Report of Independent Registered Public Accounting Firm~~		29

~~Consolidated Balance Sheets at December 31, 2013 and 2012~~		30

~~Consolidated Statements of Operations for the years ended December 31, 2013 and 2012~~		31

~~Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2013 and 2012~~		32

~~Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012~~		33

~~Notes to Consolidated Financial Statements~~		34

~~- 28 -~~

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

~~The Board of Directors and Stockholders’ of~~

~~GrowLife, Inc. and Subsidiaries:~~

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

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

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

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

~~/s/ Anton & Chia, LLP~~

~~Newport Beach, California~~

~~March 31, 2014~~

~~- 29 -~~

GrowLife, Inc. and Subsidiaries (formerly Phototron Holdings, Inc.)

Consolidated Balance Sheets

December 31, 2013 December 31, 2012

ASSETS
Current assets
   Cash $ 1,831,276 $ 36,602
   Restricted cash 46,400 46,400
   Accounts receivable, net 183,678 15,036
   Inventory, net 1,253,721 357,976
   Prepaid expenses 17,001 -
   Other receivable 3,666 -
   Deposits 46,173 15,990
Total current assets 3,381,915 472,004

Investment in a related party 1,122,397 -
Property and equipment, net 53,758 19,372
Intangibles 460,300 508,600
Goodwill 739,000 279,515

Total Assets $ 5,757,370 $ 1,279,491

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
   Accounts payable $ 1,095,204 $ 293,020
   Accrued expenses 175,603 19,368
   Deferred revenue 30,888 33,638
   Derivative liability 9,324,000 -
   Related party note payable 1,160 -
   Note payable & accrued interest - 193,180
Total current liabilities 10,626,855 539,206

Long-term convertible notes payable
974,479 1,077,640

Total liabilities 11,601,334 1,616,846

Stockholders' Deficit
   Preferred stock, $0.0001 par value, 3,000,000 shares
      authorized; zero and 3,000,000 issued and
      outstanding, respectively
- 300
   Common stock, $0.0001 par value, 1,000,000,000
      shares authorized, 755,694,870 and 389,704,765
      shares issued and outstanding, respectively 75,571 38,970
   Additional paid-in-capital
17,359,932
2,643,941
   Unrealized gain on investment in a related party 1,121,237 -
   Accumulated deficit (24,400,704 ) (3,020,566 )
   Total stockholders' deficit (5,843,964 ) (337,355 )

Total liabilities and stockholders' deficit $ 5,757,370 $ 1,279,491

See accompanying notes to consolidated financial statements

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

~~- 30 -~~

GrowLife, Inc. and Subsidiaries (formerly Phototron Holdings, Inc.)
Consolidated Statement of Operations

For the Years Ended
December 31,
2013 2012

Net revenue

$
4,858,976

$
1,450,745

Cost of goods sold

4,005,863

1,038,771

Gross profit

853,113

411,974

General and administrative

(3,163,007)

(1,323,736)

Shares issued for services rendered

(1,469,184)

(332,750)

Stock options expense

(148,633)

(26,563)

Warrant expense

(7,015,000)

-

Loss from operations

(10,942,711
)

(1,271,075
)

Other income (expense)

     Impairment of goodwill

(279,515
)

(634,128
)
     Impairment of intangible assets

(262,604
)

-

     Loss on extinguishment of debt

(960,750
)

(428,467
)
     Change in fair value of derivative

(3,701,078
)

525,619

     Other income

42,269

-

     Interest expense, net

(5,275,749
)

(378,253
)

Net loss

$
(21,380,138
)

$
(2,186,304
)

Net loss per share - (basic and diluted)

$
(0.04
)

$
(0.01
)

Weighted average shares outstanding (2) - (basic and diluted)

593,034,653

245,420,970

See accompanying notes to consolidated financial statements

The capital accounts of the Company have been retroactively restated to reflect the equivalent number of common shares based on the exchange ratio of the merger transaction in determining the basic and diluted weighted average shares. See Note 2.

~~- 31 -~~

~~GrowLife, Inc. and Subsidiaries (formerly Phototron Holdings, Inc.)~~
~~Consolidated Statements of Stockholders’ Deficit~~
~~For the Years Ended December 31, 2013 and 2012~~

Unrealized

Gain on
Investment
Additional
Preferred Stock Common Stock in Related Paid In Accumulated
Shares Amount Shares Amount Party Capital Deficit Total
Balance as of December 31, 2011 3,000,000 $ 300 157,000,000 $ 15,700 $ - $ (16,000 ) $ (379,262 ) $ (379,262 )

Shares issued to acquire Phototron - - 152,343,383 15,234 - 284,766 - 300,000

Capital contributions - - - - - 120,402 - 120,402

Imputed interest on non-interest bearing note payable - - - - - 2,500 - 2,500

Shares of common stock retired - - (1,884,796 ) (188 ) - 188 - -

Fair value of option vested - - - - - 26,563 - 26,563

435,715 shares purchased @ $0.035 per share - - 435,715 44 - 15,206 - 15,250

Shares issued for services rendered - - 23,608,333 2,361 - 330,389 - 332,750

Stock dividends - - 9,100,000 910 - 454,090 (455,000 ) -

Shares issued to acquire Urban Garden - - 3,906,252 391 - 155,859 - 156,250

Shares issued for cashless exercise of options - - 4,053,012 405 - (405 ) - -

Conversion of notes - - 41,142,857 4,113 - 283,887 - 288,000

To record beneficial conversion feature of new debt - - - - - 986,496 - 986,496

Net loss - - - - - - (2,186,304 ) (2,186,304 )

Balance as of December 31, 2012 3,000,000 $ 300 389,704,765 $ 38,970 $ - $ 2,643,941 $ (3,020,566 ) $ (337,355 )

Cancellation of all 3,000,000 shares of Preferred Stock (3,000,000 ) (300 ) - - - 300 - -

Options exercised for cash - - 470,237 47 - 8,953 - 9,000

Cashless exercise of options - - 3,680,773 368 - (368 ) - -

Cashless exercise of Gemini Master Fund Warrants - - 9,000,000 900 - (900 ) - -

Value of beneficial conversion feature of 6% Convertible Notes converted into common stock - - - - - 328,498 - 328,498

Value of beneficial conversion feature of 7% Convertible Notes converted into common stock - - - - - 676,900 - 676,900

Value of beneficial conversion feature related to the exchange of $750,000 Revolving Promissory Note for $750,000 7% Convertible Note - - - - - 109,926 - 109,926

Value of beneficial conversion feature related to the cashless exercise of the 5,000,000 Gemini Master Fund warrants - - - - - 312,500 - 312,500

Value of beneficial conversion feature related to the conversion of the $280,000 Gemini Master Fund note payable into 8,000,000 shares of common stock - - - - - 208,000 - 208,000

Value of beneficial conversion feature related to the issuance of 12% Convertible Notes related to RMH/EGC acquisition - - - - - 114,286 - 114,286

Shares issued related to the conversion of principal and interest related to the Company's convertible notes payable - - 262,595,733 26,261 - 3,014,739 - 3,041,000

Shares issued related to the acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC - - 7,857,141 786 - 274,214 - 275,000

Shares issued in relation to the sale of common stock per the Company's Subscription Agreement - - 36,981,862 3,698 - 1,290,667 - 1,294,365

Shares issued for services rendered and rent - - 45,404,359 4,541 - 1,464,643 - 1,469,184

Value of warrants expensed (issued to CANX and Hegyi, LLC) - - - - - 6,765,000 - 6,765,000

Value of stock options expensed - - - - - 148,633 - 148,633

Unrealized gain on investment in related party - - - - 1,121,237 - - 1,121,237

Net loss for the twelve months ended December 31, 2013 - - - - - - (21,380,138 ) (21,380,138 )

Balance as of December 31, 2013 - $ - 755,694,870 $ 75,571 $ 1,121,237 $ 17,359,932 $ (24,400,704 ) $ (5,843,964 )

~~See accompanying notes to consolidated financial statements~~

~~- 32 -~~

GrowLife, Inc. and Subsidiaries (formerly Phototron Holdings, Inc.)

Consolidated Statements of Cash Flows

For the Years Ended December 31,
2013 2012
Operating Activities

   Net loss $ (21,380,138 ) $ (2,186,304 )
   Adjustments to reconcile net loss to net cash used by
   operating activities
       Depreciation and amortization 22,229 8,528
       Reserve for inventories 62,882 27,843
       Amortization of debt discount 5,106,072 97,172
       Stock options expense 148,633 26,563
       Common stock issued for services rendered 1,469,184 332,750
       Loss on extinguishment of debt 960,750 428,467
       Change in fair value of derivative liability 3,701,078 (525,619 )
       Fair value of warrants issued
7,015,000
-
       Amortization of intangible assets 151,696 -
       Accrued interest on convertible notes payable 161,587 -
       Impairment of goodwill 279,515 634,128
       Impairment of intangible assets 262,604 -
       Imputed interest on related party notes payable - 2,500
   Changes in operating assets and liabilities
       Changes in restricted cash - (46,400 )
       Accounts receivable (127,129 ) (556 )
       Inventory (210,383 ) (28,031 )
       Prepaid expenses 18,071 15,004
       Other receivable (3,666 ) -
       Deposits 2,883 145
       Other assets - (3,600 )
       Accounts payable 468,517 170,412
       Accrued expenses 102,291 (59,941 )
       Deferred revenue (2,750 ) 33,638

Net cash used in operating activities (1,791,074 ) (1,073,301 )

Investing Activities

   Cash paid to acquire shares in Vape Holdings, Inc. (1,160 ) -
   Cash paid to acquire Rocky Mountain Hydroponics (550,000 ) -
   Cash paid to acquire Greners.com, Inc. - (250,000 )
   Cash acquired upon acquisition of Rocky Mountain Hydroponics (1,398 ) -
   Cash acquired upon acquisition of Phototron Holdings, Inc. - 9,825
   Cash paid for store improvements (5,500 ) -

Net cash used by investing activities (558,058 ) (240,175 )

Financing Activities

   Proceeds from the issuance of common stock 1,294,365 15,250
   Proceeds from the issuance of 10% convertible note 156,000 -
   Proceeds from the issuance of convertible notes 1,850,000 1,141,092
   Proceeds from options exercised 9,000 -
   Proceeds from notes payable 1,130,000 -
   Proceeds from additional contributed capital - 120,402
   Payments on notes payable and accrued interest (296,719 ) (50,000 )
   Advances from related party 1,160 98,897

Net cash provided by financing activities 4,143,806 1,325,641

Net increase in cash 1,794,674 12,165

Cash beginning of period 36,602 24,437

Cash end of period $ 1,831,276 $ 36,602

Supplemental disclosure of cash flow information
   Cash paid for interest $ 4,865 $ -

   Cash paid for income taxes $ - $ -

NON-CASH TRANSACTIONS
   Fair value of 170,000,000 warrants $
7,015,000
$ -
   Common stock issued to acquire Rocky Mountain
      Hydroponics/Evergreen Garden Center $ 275,000 $ -
   12% Senior Secured Convertible Notes issued to acquire Rocky
      Mountain Hydroponics/Evergreen Garden Center $ 800,000 $ -
   6% Senior secured convertible notes converted into
       common stock, principal and interest $    1,427,809 $ -
   7% Senior secured convertible notes converted into
       common stock, principal and interest $ 761,349 $ -
   12% Senior secured convertible notes converted into
       common stock, principal and interest $ 415,842 $ -
   Notes payable for Greners.com acquisition converted into
       common stock, principal and interest $ 156,000 $ -
   Common stock issued for cashless exercise of options $ 1,268 $ 405
   Notes and other liabilities converted into 6% convertible notes $ - $ 670,129
   OID Note converted into common stock $ 280,000 $ -
   Debt and interest converted to common stock $ - $ 288,000
   Debt discount in connection with issuance of convertible debt $ - $ 986,496
   Common stock dividends $ - $ 455,000
   Common stock retired $ - $ 188
   Common stock issued in acquisition of Soja, Inc. (dba Urban Garden Supply) $ - $ 156,250
   Note issued in acquisition of Greners.com $ - $ 200,000

~~See accompanying notes to consolidated financial statements~~

~~- 33 -~~

~~GROWLIFE, INC. and SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 1 - ORGANIZATION~~

GrowLife is a holding company with multiple operating businesses that manufacture and supply branded equipment and expendables in the USA for urban gardening, inclusive of equipment and expendables for growing of medical marijuana. Wholly owned GrowLife companies include SGT, GrowLife Hydroponics, Urban Garden, Phototron, and Greners. In addition to promotion and sales of GrowLife owned brands, GrowLife companies distribute and sell over 3,000 products (including the Stealth Grow line of LED lighting products and SG Sensors automated lighting and growing equipment) through on-line distribution channels, Greners, our on-line superstore, and through retail sales of the Company’s initial retail storefront business, Urban Garden. GrowLife’s website, www.cannabis.org is expected to provide GrowLife with another widely recognized and authoritative channel for branded product promotion and sales. GrowLife and its business units are organized and directed to operate strictly in accordance with all applicable state and federal laws.

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

On February 14, 2011, GrowLife, Inc. (formerly Phototron Holdings, Inc.) (“GrowLife”, the “Company”, “we,” “us,” “our”, “our company”) entered into an Agreement and Plan of Merger (“PHI Merger Agreement”) with PHI Merger Corporation, a California corporation and our wholly-owned subsidiary (“PHI MergerCo”), and Phototron, Inc., a California corporation (“Phototron”). The closing (the “PHI Closing”) of the transactions contemplated by the PHI Merger Agreement (the “PHI Merger”) occurred on March 9, 2011. At the PHI Closing, (a) PHI MergerCo was merged with and into Phototron; (b) Phototron became our wholly-owned subsidiary; (c) all of Phototron’s shares and options outstanding prior to the PHI Merger were exchanged (or assumed, in the case of options) for comparable securities of our company; and (d) 95% of our fully-diluted shares were owned by Phototron’s former shareholders and option holders. At the PHI Closing, we issued a total of 130,621,421 shares of our common stock to Phototron’s former shareholders, in exchange for the 1,666,666 shares of Phototron’s common stock outstanding prior to the PHI Merger. Upon the effectiveness of the PHI Merger, 8,662,262 shares of our common stock were retained by our existing stockholders. In connection with the PHI Merger, we changed our name from Catalyst Lighting Group, Inc. to Phototron Holdings, Inc., on March 9, 2011.

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

~~- 34 -~~

Since after the Merger former holders of SGT’s common stock owned in excess of 50% of our fully-diluted shares of common stock, and as a result of certain other factors, including that all members of our executive management are members of SGT’s management, SGT is deemed to be the acquiring company and we are deemed to be the legal acquirer for accounting purposes, and the Merger was accounted for as a reverse merger and a recapitalization in accordance with GAAP. The accompanying consolidated financial statements of GrowLife and its subsidiaries reflect the historical activity of SGT, and the historical stockholders’ equity of SGT has been retroactively restated for the equivalent number of shares received in the exchange after giving effect to the differences in par value offset to additional paid-in capital. In connection with the Merger Agreement, we are deemed to have issued an additional 152,343,383 shares of common stock to our stockholders existing prior to the Merger. Net liabilities of $542,716 have been assumed as part of the purchase price.

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

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

On August 6, 2012, GrowLife, Inc., a Delaware corporation and our wholly-owned subsidiary, merged with and into our company pursuant to the Certificate of Ownership and Merger filed with the Delaware Secretary of State on July 25, 2012 and effective August 6, 2012. As a result of the merger, on August 6, 2012, our corporate named changed from Phototron Holdings, Inc. to GrowLife, Inc.

On October 22, 2012, our wholly owned subsidiary GrowLife Hydroponics, Inc., a Delaware corporation (“GH”), completed the purchase of all of the shares (the “UG Shares”) of Soja, Inc. dba Urban Garden Supplies (the “Urban Garden”) from Richard Melograno, Michael Cook, and Scott Glass (collectively the “UG Sellers”). The effective date of the Stock Purchase Agreement was October 24, 2012 (“UG Agreement”). The UG Agreement included all of the assets and liabilities of Urban Garden which includes the inventory of the store located at 22516 Ventura Blvd., Woodland Hills, CA 91364 and various other assets. GH also assumed the liabilities of Urban Garden which were valued at $70,370. GrowLife’s CEO Sterling Scott personally guaranteed this liability. In consideration for the UG Shares, GrowLife agreed to pay to the UG Sellers an aggregate of 3,906,252 shares of the Company’s common stock valued at $156,250.

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

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

~~- 35 -~~

In accordance with the Agreement, the Company and CANX entered into a Warrant Agreement whereby the Company delivered CANX 140,000,000 freely transferable, unrestricted warrants to purchase 140,000,000 shares of the Company common stock, at a maximum strike price of $0.033 per share, par value $0.0001 share.

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

In accordance with the Agreement, the Company also issued a 7% Note to CANX (the “Note”) in exchange for the principal amount of $1,000,000. Per the terms of the Note, the maturity date is September 30, 2015, and the annual rate of interest is seven percent (7%), which increases to twenty-four percent (24%) per annum, or the maximum rate permitted under any applicable law, in the event of default. Subject to certain limitations, CANX can, at its sole discretion, convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common stock. The conversion price for the period of time from the date of the Note through and including September 30, 2014 is the lesser of (a) $0.025 per share and (b) seventy percent (70%) of the average of the three (3) lowest daily volume weighted average price occurring during the twenty (20) consecutive trading days immediately preceding the applicable conversion date on which CANX elects to convert all or part of the Note, subject to adjustment as provided in the Note. The conversion price is $0.025 per share for the period of October 1, 2014 through the maturity date of September 30, 2015, subject to adjustment as provided in the Note. The Company is required to reserve, at all times, the full number of shares of common stock issuable upon conversion of all outstanding amounts under this Note. At any time after the 12-month period immediately following the date of the Note, the Company has the option to pre-pay the entire outstanding principal amount of the Note by paying to CANX an amount equal to one hundred and fifty percent (150%) of the principal and interest then outstanding. The Company’s obligations under the Note will accelerate upon a bankruptcy event with respect to the Company or any subsidiary, any default in the Company’s payment obligations under the Note, the Company’s failure to issue shares of its common stock in connection with a conversion of any of the Note, the Company’s or any subsidiary’s breach of any provision of any agreement providing for indebtedness of the Company or such subsidiary in an amount exceeding $100,000, the common stock of the Company being suspended or delisted from trading on the Over the Counter Bulletin Board (the “Primary Market”) market and the OTCQB, the Company losing its status as “DTC Eligible” or the Company becoming late or delinquent in its filing requirements with the Securities and Exchange Commission. Upon any such acceleration of the Note, the Company shall be obligated to pay an amount equal to the greater of (i) one hundred and twenty percent (120%) of the outstanding principal of the Note (plus all accrued but unpaid interest) and (ii) the product of (a) the highest closing price for the Company’s common stock for the five (5) days on which the Primary Market is open for business immediately preceding such acceleration and (b) a fraction, the numerator of which is the outstanding principal of the Note, and the denominator of which is the applicable conversion price as of the date of determination.

From time to time, the Company may make modest investments in public or even privately held companies in our industry segment in order to facilitate business opportunities of the Company. The first such investment by the Company occurred in May 2013, when the Company made an investment in the amount of $1,160 in Vape Holdings, Inc. (“Vape”), a Nevada corporation. Following a series of transactions that are detailed in the “NOTE 9 – INVESTMENT IN A RELATED PARTY”, VAPE Holding, Inc. became a public company. Through its investment, GrowLife received and still owns as of the time of this filing 200,428 shares in VAPE Holdings, Inc (OTCQB: VAPE).

~~- 36 -~~

~~NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~

The summary of significant accounting policies presented below is designed to assist in understanding our consolidated financial statements. Such consolidated financial statements and accompanying notes are the representation of our management, who are responsible for their integrity and objectivity.

~~Basis of Presentation~~

~~The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) as promulgated in the United States of America.~~

~~Going Concern~~

Our consolidated financial statements have been prepared assuming that we will continue as a going concern. However, as of December 31, 2013, we have sustained recurring losses totaling $24,400,704 and have a stockholders’ deficit of $5,843,964. These conditions, among others, give rise to substantial doubt about our ability to continue as a going concern. Management is continuing to seek additional equity capital to fund the acquisition or to purchase an ongoing business. Until such time, we anticipate our working capital needs will be funded through notes from our major stockholders. Management believes these steps will provide us with adequate funds to sustain our continued existence. There is, however, no assurance that the steps taken by management will meet all of our needs or that we will continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

~~Reverse Merger Accounting~~

~~Principles of Consolidation~~

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

~~Use of Estimates~~

~~Revenue~~

Revenue is recognized on the sale of a product when the product is shipped, which is when the risk of loss transfers to our customers, and collection of the sale is reasonably assured. A product is not shipped without an order from the customer and the completion of credit acceptance procedures. The majority of our sales are cash or credit card; however, we occasionally extend terms to our customers. Accounts receivable are reviewed periodically for collectability. Balances outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. As of December 31, 2013 and 2012, we did not maintain a reserve for bad debts, which are minimal based upon our historical experience.

~~- 37 -~~

~~Sales Returns~~

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

~~Warranty Costs~~

Estimated future warranty obligations related to certain products are provided by charges to operations in the period in which the related revenue is recognized. Estimates are based, in part, on historical experience. During the year ended December 31, 2012, we negotiated a $46,000 credit with one of our vendors for future expected warranty repairs to defective units. This amount was used, in full, during the twelve month period ended December 31, 2013. As a result, there was no reserve for future warranty costs at December 31, 2013.

~~Shipping and Handling Fees and Cost~~

~~For the years ended December 31, 2013 and 2012, shipping and handling fees billed to customers of $242,779 and $124,337, respectively, were included in revenues.~~

~~For the years ended December 31, 2013 and 2012, shipping and handling costs of $243,448 and $156,503, respectively, were included in cost of goods sold.~~

~~Advertising Costs~~

~~Advertising costs are expensed as incurred and are included in general and administrative expenses in the amount of $220,514 and $203,470, for the years ended December 31, 2013 and 2012, respectively.~~

~~Cash and Cash Equivalents~~

~~We consider cash equivalents with original maturities of 90 days or less to be cash equivalents. As of December 31, 2013 and 2012, we have no cash equivalents.~~

~~Restricted Cash~~

~~As of December 31, 2013 and 2012, we had $46,400 of restricted cash on deposit as collateral to our retail merchandise sales provider.~~

~~Concentrations of Credit Risk~~

During the year ended December 31, 2013, approximately 80% of the Company’s purchases included in cost of sales were from seven suppliers, with two of those seven accounting for approximately 63% of the Company’s purchases included in cost of sales. As of December 31, 2013, the Company owed these seven suppliers $471,244. During fiscal year 2012, approximately 86% of the Company’s purchases included in cost of sales were from one supplier. This one vendor was owed $34,389 as of December 31, 2012.

~~Inventory~~

~~Inventory is~~ 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. We record a provision for excess and obsolete inventory whenever an impairment has been identified.The reserve for inventory was ~~$90,725 as of~~$20,000 at December 31, ~~2013~~2016 and ~~$27,843 as of December 31, 2012.~~

2015, respectively.

~~- 38 -~~

Fair Value Measurements and Financial Instruments– ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs).

~~Property~~Stock Based Compensation– We have share-based compensation plans under which employees, consultants, suppliers and ~~Equipment~~

~~Property~~directors may be granted restricted stock, as well as options and ~~equipment are stated at cost. Assets acquired and held under capital leases are initially recorded~~warrants to purchase shares of our common stock at the ~~lower of the present~~fair market value ~~of the minimum lease payments discounted~~ at the ~~implicit interest rate (35% for assets currently held under capital lease) or~~time of grant. Stock-based compensation cost to employees is measured by us at the grant date, based on 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 depreciatedaward, 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 during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reducerequisite service period under ASC 718. For options issued to employees, we recognize stock compensation costs utilizing 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, or (3) an adverse action or assessment by a regulator. 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 unit’s 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 unitmethodology over the ~~amount assigned~~related period of benefit. Grants of stock to ~~its other assets and liabilities is the implied fair value of goodwill.~~

~~We make critical assumptions and estimates in completing impairment assessments of goodwill~~non-employees and other ~~intangible assets. Our cash flow projections look several years into~~parties are accounted for in accordance with the future and include assumptions on variables such as future sales and operating margin growth rates, economic conditions, market competition, inflation and discount rates. A 10% decrease in the estimated discounted cash flows for the reporting units tested would result in an impairment that is not material to our results of operations. A 1.0 percentage point increase in the discount rate used would also result in an impairment that is not material to our results of operations.ASC 505.

We amortize 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 third quarter of each fiscal year for impairment, or more often if indicators warrant.

During the fiscal year ended December 31, 2013, the Company recorded impairment charges related to goodwill totaling $279,515 while also recording impairment charges related to other intangible assets in the amount of $262,604. During fiscal year 2012, we recorded $634,128 of impairment charges related to goodwill and no impairment charges related to other intangible assets.

~~Income Taxes~~

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a result of the implementation of certain provisions of ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined, ASC 740 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. We adopted the provisions of ASC 740 as of January 1, 2007, and have analyzed filing positions in each of the federal and state jurisdictions wheresmaller reporting company, we are not required to ~~file income tax returns, as well as all open tax years~~provide the information required by this Item. Nevertheless, we have no investments in ~~these jurisdictions. We have identified the U.S. Federal and California, Colorado, and Maine as our "major" tax jurisdictions.~~any market risk sensitive instruments either held for trading purposes or entered into for other than trading purposes.

~~- 39 -~~

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

~~We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change~~Reference is made to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. In addition, we did not record a cumulative effect adjustment related to the adoption of ASC 740. Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.

~~Fair Value of 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 - observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.~~

~~Level 2 - include other inputs that are directly or indirectly observable in the marketplace.~~

~~Level 3 - unobservable inputs which are supported by little or no market activity.~~

~~The carrying value of cash, accounts receivable, investment in a related party, accounts payables, and notes payable 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 12 months of the balance sheet date. As of December 31, 2013, the Company had derivative financial instruments as detailed in “NOTE 21 – DERIVATIVE LIABILITY”.

~~Loss Per Share~~

Basic loss per share is computed by dividing the net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all potentially dilutive common shares had been issued, using the treasury stock method. Potentially dilutive common shares were excluded from the diluted loss per share calculation because they were anti-dilutive.

The weighted average number of shares outstanding has been retroactively restated for the equivalent number of shares received by the accounting acquirer as a result of the reverse merger as if these shares had been outstanding as of the beginning of the earliest period presented. The 152,343,383 shares issued to the legal acquirer are included in the weighted average share calculation from April 5, 2012, the date of the exchange agreement.

As of December 31, 2013, there were potentially 366,477,564 shares of common stock issuable upon the exercise of warrants, options, and the conversion of notes payable as detailed below. These securities are considered anti-dilutive and are not included in diluted loss per share.

~~- 40 -~~

~~As of December 31, 2013~~
~~Warrants~~			~~165,000,000~~
~~Options~~			~~40,851,187~~
~~6% Senior Secured Convertible Notes~~			~~73,553,714~~
~~7% Convertible Notes~~			~~74,626,720~~
~~12% Senior Secured Convertible Notes~~			~~12,445,943~~
			~~366,477,564~~

With regard to the 6% Senior Secured Convertible Notes, Sterling Scott, the Company’s Chief Executive Officer, signed a First Amendment to Amended and Restated 6% Senior Secured Convertible Note (“the Amendment”) on November 30, 2013. The Amendment stated that the Company and Mr. Scott would not effect the conversion of $451,824.12 of principal and accrued and unpaid interest owed by the Company to Mr. Scott via a 6% Senior Secured Convertible Note until after the completion of the Company amending its Certificate of Incorporation to increase the authorized shares of common stock of the Company from 1,000,000,000 to 3,000,000,000. At a conversion price of $0.007 per share, the Amendment prevented 64,546,303 shares of stock being issued upon a potential conversion by Mr. Scott. On February 7, 2014, the Company held a shareholder meeting and proxy which resulted in shareholder approval to increase the number of shares authorized from 1,000,000,000 to 3,000,000,000.

As of December 31, 2012, there were potentially 12,851,187, 256,439,594, and 69,000,000 shares of common stock issuable upon the exercise of options, conversion of notes and conversion of preferred stock , respectively, for a total of 338,290,781 dilutive securities which are considered anti-dilutive and are not included in diluted loss per share.

~~Stock Based Compensation~~

~~Recently Issued Accounting Pronouncements~~

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

~~- 41 -~~

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

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

~~NOTE 3 – ACQUISITION - SGT~~

On March 21, 2012, we entered into the Merger Agreement. The Closing of the transactions contemplated by the Merger Agreement occurred on April 5, 2012. At the Closing, (a) MergerCo was merged with and into SGT; (b) SGT became our wholly-owned subsidiary; and (c) all SGT shares of common stock were exchanged for shares of our common stock and shares of our Series A Preferred Stock. At the Closing, we issued to SGT’s former stockholders, in exchange for the 200 shares of SGT’s common stock outstanding immediately prior to the Merger, 157,000,000 shares of our common stock and 3,000,000 shares of Series A Preferred Stock.

The Company has estimated that the fair value of the 152,343,383 common shares issued to our stockholders existing prior to the Merger to be $300,000; the purchase price has been 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:

~~- 42 -~~

Assets $ 258,494
Intangible assets 215,000
Goodwill 634,128
Total 1,107,622
Less fair value of liabilities assumed (807,622 )
Purchase price $ 300,000

~~The intangible assets relate to customer lists and will be amortized over their respective life of three years.~~

~~On December 31, 2012, we recorded an impairment of goodwill of $634,128.~~

See “NOTE 6 – PURCHASE – ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER” for unaudited pro-forma results of operations as if the acquisition had occurred at the beginning of the year ended December 31, 2012.

~~NOTE 4 – ASSET PURCHASE – GRENERS.COM~~

On July 23, 2012, we completed the purchase of substantially all of the assets of Greners, related to the online retail business currently operated by Greners, pursuant to the terms of an Asset Purchase Agreement. The Assets included equipment, finished goods, materials and supplies, contract rights, domain names and implemented and operational components of software. In addition, the Company assumed certain of Greners’ liabilities which included Greners’ liabilities and obligations under its contracts and all express and implied warranties related to any materials supplied by Greners prior to the closing date.

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

The Company has estimated that the fair value of the assets purchased to be $450,000. The purchase price has been 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:

Assets $ 93,000
Intangible assets 233,500
Goodwill 123,500
Total 450,000
Less fair value of liabilities assumed —
Purchase price $ 450,000

~~The intangible assets relate to customer lists and will be amortized over three years.~~

~~NOTE 5 – PURCHASE – URBAN GARDEN~~

On October 22, 2012, GH completed the purchase of all of the UG Shares from the UG Sellers. The effective date of the UG Agreement was October 24, 2012. The UG Agreement included all of the assets and liabilities of Urban Garden which includes the inventory of the store located at 22516 Ventura Blvd., Woodland Hills, CA 91364 and various other assets. GH also assumed the liabilities of Urban Garden which were valued at $70,761. GrowLife CEO Sterling Scott personally guaranteed this liability. In consideration for the UG Shares, GrowLife agreed to pay to the Sellers an aggregate of 3,906,250 shares of the Company’s common stock valued at $156,250.

~~- 43 -~~

The Company has estimated that the fair value of the assets purchased to be $227,011. The purchase price has been 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:

Inventory $ 35,000
Intangible assets 60,000
Goodwill 132,011
Total 227,011
Less fair value of liabilities assumed (70,761 )
Purchase price $ 156,250

~~The intangible assets relate to customer lists and trade names will be amortized over their respective life of five years.~~

~~NOTE 6 – PURCHASE – ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER~~

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

The Company has estimated that the fair value of the assets purchased to be $2,012,614. The Company retained the services of an independent, third-party consultant to review and analyze the allocation of the Company’s $1,625,000 purchase price of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC. Detailed below is the final manner on which the purchase price has been 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:

Allocation of Purchase Price for the acquisition of Rocky Mountain
Hydroponics, LLC and Evergreen Garden Center, LLC
Assets $ 907,614
Intangible assets 366,000
Goodwill 739,000
Total 2,012,614
Less fair value of liabilities assumed (387,614 )
Purchase price $ 1,625,000

The Company will expense the $366,000 of intangible assets at the rate of $6,100 per month over 5 years, beginning in June 2013 and ending in May 2018. During the twelve months ended December 31, 2013, the Company recorded amortization expense of $42,700 in relation to the $366,000 of intangible assets related to the acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC.

The following are unaudited pro-forma results of operations as if the acquisition had occurred at the beginning of the year ended December 31, 2012. Note that these pro-forma results include the operating results of SGT, Phototron, Greners, Urban Garden, and Rocky Mountain Hydroponics/Evergreen Garden Center:

~~- 44 -~~

For the Years Ended
December 31,
2013 2012

Net revenue

$
6,494,119

$
7,363,184

Cost of goods sold

5,132,976

5,164,584

Gross profit

1,361,143

2,198,600

General and administrative

(3,639,664)

(3,084,360)

Shares issued for services rendered

(1,469,184)

(332,750)

Stock options expense

(148,633)

(26,563)

Warrant expense

(7,015,000)

-

Loss from operations

(10,911,338
)

(1,245,073
)

Other income (expense)

     Impairment of goodwill

(279,515
)

(634,128
)
     Impairment of intangible assets

(262,604
)

-

     Loss on extinguishment of debt

(960,750
)

(428,467
)
     Change in fair value of derivative

(3,701,078
)

525,619

     Other income

43,082

-

     Interest expense, net

(5,275,749
)

(497,303
)

Net loss

$
(21,347,952
)

$
(2,279,352
)

Net loss per share - (basic and diluted)

$
(0.04
)

$
(0.01
)

Weighted average shares outstanding (2) - (basic and diluted)

600,891,794

253,278,111

~~NOTE 7 – JOINT VENTURE AGREEMENT WITH CANX USA, LLC~~

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

In accordance with the Agreement, the Company and CANX entered into a Warrant Agreement whereby the Company delivered CANX 140,000,000 freely transferable, unrestricted warrants to purchase 140,000,000 shares of the Company common stock, at a maximum strike price of $0.033 per share, par value $0.0001 share.

~~- 45 -~~

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

Organic Growth International, LLC was incorporated on January 7, 2014 in the State of Nevada and had no business activities during the twelve months ended December 31, 2013. As a result, the joint venture with CANX/OGI had no impact on the Company’s financial operations for the twelve months ended December 31, 2013 except for non-cash warrant expense related to the 140,000,000 warrants issued to CANX on November 19, 2013 (see “NOTE – 23 – STOCKHOLDERS’ DEFICIT”).

~~- 46 -~~

~~NOTE 8 – INVENTORY~~

~~Inventory is comprised of the following:~~

As of December 31,
2013 2012
Raw materials $ 94,681 $ 167,413
Finished goods 1,028,037 218,406
Inventory in transit 221,728 -
Less inventory reserve (90,725 ) (27,843 )
Net inventory $ 1,253,721 $ 357,976

Raw materials relate to inventory at the Company’s Phototron subsidiary, which purchases components from its vendors and then assembles finished units that are shipped to its customers. At December 31, 2013 the Company reviewed Phototron’s inventory and determined that impaired inventory totaled $40,725, an increase of $12,882 from the $27,843 of impaired inventory as of December 31, 2012. As a result, the Company recorded a $12,882 non-cash inventory impairment expense as of December 31, 2013 while also increasing the inventory reserve from $27,843 to $40,725 as of December 31, 2013. In addition, the Company also expensed $6,640 to cost of goods sold as of December 31, 2013 in relation to low-priced items such as nuts and bolts that had previously been capitalized as inventory.

Finished goods inventory relates to product at the Company’s retail stores, with the gross finished goods inventory totaling $1,078,037 as of December 31, 2013. This is product purchased from distributors, and in some cases directly from the manufacturer, and resold at our retail stores. During the twelve months ended December 31, 2013, the Company identified $50,000 of inventory impairment related to inventory held at its retail stores and recorded this as a $50,000 non-cash inventory impairment expense while also recording a $50,000 inventory reserve.

Inventory in transit relates to six containers of product that the Company is purchasing from an overseas vendor. As of December 31, 2013 the containers of product had not arrived in the United States and therefore were recorded as inventory in transit. The products purchased are typical items sold at the Company’s retail stores, such as lights, tents, reflectors, and ballasts. The containers of product/inventory are scheduled to arrive in the first quarter of fiscal year 2014.

~~NOTE 9 – INVESTMENT IN A RELATED PARTY~~

~~In May 2013, the Company made an investment in the amount of $1,160 in Vape Holdings, Inc. (“Vape”), a Nevada corporation.~~

~~Sterling Scott, the Company’s Chief Executive Officer, has a personal investment in Vape as well. As of the time~~page F-1 of this filing, Mr. Scott holds 269,541 shares of Vape’s common stock. Furthermore, the former President of GrowLife, Inc. is currently the Chief Executive Officer of Vape. As a result of Mr. Scott’s ownership of Vape common stock, the Company has deemed Vape to be a related party and therefore has recorded its investment in Vape as an “Investment in a related party” on its balance sheet.

The original cash investment of $1,160 resulted in the Company acquiring 29 units of an offering by Vape, with one unit consisting of 500 shares of common stock in Vape and the assignment of $25 of convertible debt owed by Peoplestring Corporation (“People”), a publicly traded company, to a third party. In the aggregate, the Company purchased 14,500 shares of the common stock of Vape and $725 of the assigned People debt, which accrues interest and is convertible into shares of Vape’s common stock at a per share conversion price of $0.002.

On September 30, 2013, Vape completed a reverse merger with People with Vape being the surviving entity (symbol “VAPE”). Per the terms of the reverse merger agreement between Vape and People, the Company’s original 14,500 shares of Vape common stock were exchanged for 7,653,611 shares of the now publicly traded Vape.report.

~~- 47 -~~

On December 24, 2013, Vape converted the assigned People debt and all accrued interest into shares of Vape’s common stock at a per share conversion price of $0.002, which resulted in the Company owning an additional 363,513 shares of Vape’s common stock. As a result, the Company held an aggregate amount of 8,017,123 shares of Vape’s common stock.

~~On January 8, 2014, Vape completed a 1 for 40 reverse split of its common stock, immediately after which the Company owned 200,428 shares of Vape common stock.~~

Adjusting for the reverse stock split that was completed on January 8, 2014, the value of the Company’s investment in Vape as of December 31, 2013 was $5.60 per share, or $1,122,397 (200,428 shares x $5.60 per share) in the aggregate. Accordingly, the Company adjusted its “Investment in a related party” balance sheet account from the original cost of $1,160 to the above mentioned fair value of $1,122,397 as of December 31, 2013. The corresponding credit entry was to “Unrealized gain on investment in a related party” in the “Stockholders’ Deficit” section of the Company’s balance sheet. Prior to the reverse merger between Vape and People, the Company did not value this investment as Vape had nominal business operations.

~~As of the time of this filing, the Company still owned 200,428 shares of Vape’s common stock.~~

~~NOTE 10 – PROPERTY AND EQUIPMENT~~

~~Property and equipment consists of the following as of:~~

As of December 31,
2013 2012
Machines and equipment $ 63,172 $ 5,554
Furniture and fixtures 49,787 39,177
Computer equipment 52,304 38,317
Leasehold improvements 53,040 20,435
Total property and equipment 218,303 103,483
Less accumulated depreciation and amortization (164,545 ) (84,111 )
Net property and equipment $ 53,758 $ 19,372

As a result of the Company’s acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC (“RMH/EGC”), the Company acquired property and equipment totaling $109,318 in the aggregate (see “NOTE 6 – PURCHASE – ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER”). Subsequent to its acquisition of RMH/EGC, the Company purchased an additional $5,500 of property and equipment related to its RMH/EGC stores. During the year ended December 31, 2013, the Company did not purchase any property and equipment related to its non-RMH/EGC business units.

As the result of the Company’s acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC (“RMH/EGC”), the Company acquired accumulated depreciation and amortization totaling $58,205 in the aggregate. Subsequent to its acquisition of RMH/EGC, the Company recorded $10,374 of depreciation and amortization expense related to the property and equipment of RMH/EGC, while recording $11,855 of depreciation and amortization expense related to its non-RMH/EGC property and equipment during the year ended December 31, 2013. Total depreciation and amortization expense for the year ended December 31, 2013 was $22,229 as compared to $8,528 during fiscal year 2012.

~~- 48 -~~

~~The following is a summary of the Company’s property and equipment transactions during fiscal year 2013:~~

Property and equipment as of December 31, 2012 $ 103,485
   Property and equipment acquired via RMH/EGC acquisition 109,318
   RMH/EGC property and equipment purchased post RMH/EGC acquisition 5,500
Total property and equipment as of December 31, 2013 218,303

Accumulated depreciation and amortization as of December 31, 2012 (84,111 )
   Accumulated depreciation and amortization acquired via RMH/EGC acquisition (58,205 )
   RMH/EGC depreciation and amortization post acquisition (10,374 )
   Non-RMH/EGC depreciation and amortization FY 2013 (11,855 )
Total accumulated depreciation and amortization as of December 31, 2013 (164,545 )

Net property and equipment as of December 31, 2013 $ 53,758

~~NOTE 11 – INTANGIBLE ASSETS~~

As of December 31, 2012, the Company had recorded intangible assets totaling $508,600, which included $218,600 as a result of its acquisition of SG Technologies Corp (see “NOTE 3 – ACQUISITION – SGT”), $230,000 related to its acquisition of Greners (see “NOTE 4 – ASSET PURCHASE – GRENERS.COM”), and $60,000 related to its acquisition of Urban Garden Supply (see “NOTE 5 – PURCHASE – URBAN GARDEN”). On June 7, 2013, The Company acquired Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC (“RMH/EGC”) (see “NOTE 6 – PURCHASE – ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER”), which resulted in the Company recording intangible assets of $366,000 related to the estimated value of both the workforce and trademarks/brand associated with RMH/EGC.

During the year ended December 31, 2013, the Company recorded amortization expense of $108,996 in relation to its non-RMH/EGC intangible assets. The Company also recorded $42,700 of amortization expense related to its RMH/EGC intangible assets during the year ended December 31, 2013.

At December 31, 2013, the Company evaluated its intangible assets and subsequently recorded a non-cash impairment of intangible assets expense in the amount of $262,604, all of which was related to its non-RMH/EGC intangible assets. Of the $262,604, $172,004 was related to the impairment of the intangible assets originally recorded as part of the SGT acquisition. As of December 31, 2013, the net book value of these intangible assets was $172,004, and given that the Company’s Phototron and SG Technologies subsidiaries recorded net losses totaling $339,840 during the year ended December 31, 2013, the Company deemed it to be a low probability of realizing future value related to these intangible assets. As of December 31, 2013, the Company had zero intangible assets recorded related to the SGT acquisition.

The Company also wrote-down the value of its Greners intangible assets by $50,604, to reflect a net book value of $133,400 as of December 31, 2013. Since acquiring Greners in July 2012, this unit has incurred net losses totaling approximately $96,600. As a result, the Company adjusted the December 31, 2013 net book value of these intangible assets to reflect the $96,600 net loss incurred since July 2012 ($230,000 - $96,600 = $133,400).

The remaining $39,996 of impairment of intangible assets reflects the write-off of the remaining net book value of the intangible assets related to the Company’s acquisition of Urban Garden Supply as of December 31, 2013. This unit has incurred losses totaling approximately $78,000 since its acquisition in October 2012, which exceeds the entire value of the original $60,000 of intangible assets recorded by the Company.

~~- 49 -~~

~~The following is a summary of the Company’s intangible assets:~~

Intangible assets as of December 31, 2012 $ 508,600
   Intangible assets recorded related to RMH/EGC acquisition 366,000
   FY 2013 amortization of non-RMH/EGC intangible assets (108,996 )
   FY 2013 amortization of RMH/EGC intangible assets (42,700 )
   FY 2013 impairment of non-RMH/EGC intangible assets (262,604 )
Net intangible assets as of December 31, 2013 $ 460,300

~~NOTE 12 – GOODWILL~~

As of December 31, 2012, the Company had recorded goodwill in the amount of $279,515 related to its various acquisitions. At December 31, 2013, the Company evaluated the goodwill associated with these acquisitions and deemed it to be impaired, as losses incurred from these units exceeded the amount of goodwill recorded. As a result, the Company recorded a non-cash impairment of goodwill expense of $279,515 as of December 31, 2013 to fully write-off the goodwill originally recorded in relation to these acquisitions.

On June 7, 2013, the Company acquired Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC (“RMH/EGC”) (see “NOTE 6 – PURCHASE – ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER”), which resulted in the Company recording goodwill in the amount of $739,000.

~~The following is a summary of the Company’s goodwill transactions:~~

Goodwill as of December 31, 2012 $ 279,515
Goodwill recorded related to acquisition of RMH/EGC 739,000
Impairment of goodwill (279,515 )
Goodwill as of December 31, 2013 $ 739,000

~~NOTE 13 – RELATED PARTY TRANSACTIONS~~

From time to time the Company’s Chief Executive Officer (CEO) has advanced various amounts to the Company. As of December 31, 2011, the amount due the CEO was $183,103, and additional advances of $98,897 were made to the Company through April 5, 2012. On April 5, 2012, the CEO converted $282,000 of these advances into a 6% senior convertible note. The CEO made further advances during the year ended December 31, 2012 which were converted into a 6% senior convertible note. As of December 31, 2012, total amount owed to the Company’s CEO was $429,111, which consisted of $413,680 in principal and $15,431 in accrued and unpaid interest, all of which was owed via the 6% senior convertible note. The Company’s CEO did not make any additional advances of any kind during the twelve months ended December 31, 2013, nor did he convert any of his 6% senior convertible note during this period. During fiscal year 2013 his note accrued an additional $24,821 of accrued and unpaid interest, resulting in a total amount owed to him of $453,932 as of December 31, 2013.

In May 2013, the family of Sterling Scott, the Company’s Chief Executive Officer, wired $1,160 on behalf of the Company to Vape Holdings, Inc. (“Vape”) (see “NOTE 9 – INVESTMENT IN A RELATED PARTY”) in relation to the purchase, by the Company, of shares of Vape’s common stock. As of December 31, 2013, the Company had recorded the $1,160 as a note payable due to a related party. There is no formal note agreement between the Company and Mr. Scott’s family, but both parties have agreed that the Company will pay Mr. Scott’s family interest at the rate of seven percent (7%) per annum from the date the loan originated until its repaid.

~~- 50 -~~

On June 26, 2013, the Company signed a revised agreement with this related party that extends the term through September 30, 2013. All of the other terms and conditions remained unchanged from the original agreement.

On March 20, 2013, the same employee of the Company who loaned us $25,000 via a note payable purchased 2,000,000 shares of the Company’s common stock at a price of $0.035 per share. The aggregate proceeds to the Company were $70,000. The shares were purchased as part of the Company’s Subscription Agreement dated December 2011.

On September 6, 2013, the Company issued 1,224,918 shares of its common stock at a per share price of $0.021 as payment in full of the $25,000 principal and $723 of accrued and unpaid interest. As of September 30, 2013, this related party had voluntarily terminated his employment with the Company to pursue other business opportunities and the Company had satisfied this obligation in full. During the year ended December 31, 2013, the Company had recorded $723 of interest expense related to this note. As of December 31, 2013, the only related party note payables recorded on the Company’s balance sheet were the $1,160 owed to the family of Sterling Scott and the 6% Senior Convertible Note payable owed to Mr. Scott (see “NOTE 16 – 6% SENIOR CONVERTIBLE NOTES”).

~~NOTE 14 – NOTES PAYABLE AND ACCRUED INTEREST~~

As of December 31, 2012, the Company had $193,180 of notes payable and accrued interest. During the year ended December 31, 2013, the Company eliminated all of the $193,180 of notes payable and accrued interest that it owed as of December 31, 2012. The details regarding the repayment of these notes payable during the year ended December 31, 2013 are as follows:

Principal &
Accrued
Interest
12.31.12

YTD 2013
Accrued
Interest

YTD 2013
Payments
Made

Balance
as of
12.31.13

Greners $ 153,250 $ 2,750 $ 156,000 $ -
Brian Sagheb 24,287 578 24,865 -
W-Net Fund I, L.P. - Revolver 15,643 - 15,643 -
$ 193,180 $ 3,328 $ 196,508 $ -

The $156,000 paid to Greners represents payment in full of the note payable that the Company issued in July 2012 in relation to its acquisition of Greners.com (see “NOTE 4 – ASSET PURCHASE – GRENERS.COM”). The $24,865 paid to Mr. Sagheb, a former Phototron officer, is payment in full for a loan that he made to the Company. The payment of $15,643 to W-Net Fund I, LP represents payment of the outstanding principal on a $150,000 revolving credit line. As stated above, as of December 31, 2013 the Company had repaid in full all amounts due related to the notes payable that were owed as of December 31, 2012.

On May 1, 2013, the Company entered into a Securities Purchase Agreement with a certain “accredited investor” (“Investor”), for the sale and purchase of a $280,000 original issue discount secured 0% nonconvertible promissory note due October 31, 2013 (the “OID Note”). The OID Note is secured by obligations of the Company. The Company and each of its subsidiaries has granted and pledged to the OID Note Purchaser a continuing security interest in all personal property of the Company and its subsidiaries. Except for the original issue discount, the OID Note does not carry interest unless and until there is an Event of Default, in which case the outstanding balance would carry interest at 18% per annum. The Company can prepay the OID Note, in whole or in part, at any time without penalty.

At closing, the Company received gross proceeds of $250,000 for such private placement, with the remaining $30,000 retained by the OID Note Purchaser as prepaid interest. The Company originally recorded the $30,000 as prepaid interest and subsequently expensed the entire $30,000 as interest expense during the year ended December 31, 2013.

~~- 51 -~~

On October 11, 2013, the Holder of the $280,000 OID Note converted the entire amount into 8,000,000 shares of the Company’s common stock at a per share conversion price of $0.035. On the date of conversion, the Company’s shares were valued at $0.061 per share, which resulted in a beneficial conversion value of $0.026 per share ($0.061 - $0.035 = $0.026), or $208,000 in the aggregate. As a result, the Company recorded a non-cash loss on extinguishment of debt in the amount of $208,000 as of the date of conversion.

During the year ended December 31, 2013, the Company was advanced, in the aggregate, $850,000 on its revolving promissory note (see “NOTE 15 – REVOLVING PROMISSORY NOTE”). On August 29, 2013, $750,000 was converted into a 7% Convertible Note (see “NOTE 19 – 7% CONVERTIBLE NOTE”), leaving an outstanding principal balance of $100,000 as of September 30, 2013. On October 16, 2013, the Company repaid this note in full, in cash, with the total payment equaling $100,518, of which $100,000 was principal and $518 was interest.

~~As of December 31, 2013, the Company had zero notes payable and accrued interest owed.~~

~~NOTE 15 – REVOLVING PROMISSORY NOTE~~

On June 6, 2013 the Company issued a Revolving Promissory Note (the “Revolving Note”) in the amount of $550,000 to W-Net Fund I, L.P. (the “Holder”). Per the terms of the Revolving Note, the Holder agrees to make advances to the Company from time to time during the 14 month Revolving Note term, at its sole discretion, in an aggregate principal amount at any one time outstanding which does not exceed $550,000 (the “Revolving Credit Commitment”). During the term of the Revolving Note, the Company may use the Revolving Credit Commitment by borrowing, prepaying any advances under the Revolving Note in whole or in part, and re-borrowing, all in accordance with the terms and conditions of the Revolving Note.

As set forth in the terms of the Revolving Note, the term is for a period of fourteen months, with the expiration date being July 31, 2014. Interest accrues from the date of any advances on any principal amount withdrawn, and on accrued and unpaid interest thereon, at the rate of 7% per annum (calculated on the basis of a 365 day year for the actual number of days elapsed), compounded annually. The Company was also obligated to pay the Holder a $5,000 transaction fee, which was deducted from the initial advance of funds and recorded as a general and administrative expense by the Company during the three month period ending June 30, 2013.

On August 6, 2013, the Company and W-Net amended the terms of the Revolving Note to increase the maximum amount of the advances that the Company could request under the Revolving Note from the original amount of $550,000 to the revised amount of $750,000. The Revolving Note was also amended to state that any additional requests for additional draws by the Company under the Revolving Note shall be at the sole discretion of W-Net. These were the only terms of the Revolving Note that were amended.

On June 7, 2013, the Company was advanced $550,000 in principal, with the funds being used to purchase RMH/EGC (see “NOTE 6 – PURCHASE – ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER”). Between August 1 and August 29, 2013, the Company was advanced an additional $200,000, which resulted in total outstanding advances in the amount of $750,000, which was the revised maximum amount of advances permissible to the Company. On August 29, 2013, the $750,000 outstanding principal balance on the Revolving Note was exchanged for a 7% convertible note (see “NOTE 19 – 7% CONVERTIBLE NOTE”), which reduced to zero the amount of advances on the Revolving Note. On September 20, 2013, the Company was advanced $100,000 on the Revolving Note. This note was repaid in full on October 16, 2013, with the Company remitting $100,518 in cash, with $100,000 representing principal owed and $518 of interest (see “NOTE 14 – NOTES PAYABLE AND ACCRUED INTEREST”). During the year ended December 31, 2013, interest expense totaling $9,508 was recorded by the Company in relation to this note.

~~- 52 -~~

~~NOTE 16 – 6% SENIOR SECURED CONVERTIBLE NOTES~~

On September 28, 2012, the Company entered into an amendment and exchange agreement (“Exchange Agreement”) with W-Net, Europa International, Inc., Sterling Scott, Robert Shapiro, Lauri Bilawa, Carla Badaracco and Forglen, LLC (the “Investors”). The Exchange Agreement provided for the issuance of new 6% Senior Secured Convertible Notes (the “6% Notes”) that replaced the 6% Senior Secured Convertible Notes that were previously issued during 2012. The 6% Notes accrue interest at the rate of 6% per annum and have a maturity date of April 15, 2015. No cash payments are required; however, accrued interest shall be 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 will accrue at the rate of 12% per annum. The 6% Notes are secured by substantially all of the assets of the Company.

The 6% Notes are convertible into common stock at the rate of $0.007 per share. The Company has determined that the conversion feature is considered a beneficial conversion feature and determined its value to be $785,459 as of December 31, 2012, which the Company recorded as a debt discount to the 6% Notes. As of December 31, 2012 the Company owed principal of $1,795,077 and accrued interest of $68,022 on these 6% Notes.

During the year ended December 31, 2013, the Company did not borrow any additional principal related to these notes. In fact, the Company’s outstanding principal balance decreased by $1,326,397 due to certain holders of these 6% Notes converting some, and in the case of six note holders, all of their outstanding principal into shares of the Company’s common stock.

~~The following is a summary of fiscal year 2013 transactions related to the Company’s 6% Notes:~~

6% senior secured convertible notes - principal & accrued interest as of December 31, 2012 $ 1,863,099
Principal converted into common stock FY 2013 (1,326,397 )
Accrued interest converted into common stock FY 2013 (75,687 )
Accrued and unpaid interest FY 2013 53,861
6% senior secured convertible notes - principal & accrued interest as of December 31, 2013 514,876

Debt discount related to conversion feature as of December 31, 2012 $ (785,459 )
Debt discount amortized as interest expense FY 2013 683,363
Debt discount related to conversion feature as of December 31, 2013 (102,096 )

Balance as of December 31, 2013 $ 412,780

As previously stated, the Company has determined that the conversion feature on the 6% Notes is a beneficial conversion feature, and the Company determined that the value of the beneficial conversion feature had decreased to $102,096 as of December 31, 2013. Accordingly, the Company recorded non-cash interest expense of $683,363 during the year ended December 31, 2013 to reflect the change in the value of the debt discount as of December 31, 2013.

~~- 53 -~~

~~NOTE 17 – 10% SENIOR CONVERTIBLE NOTE~~

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

During the year ended December 31, 2013, BME converted all of the principal and accrued interest into 6,270,413 shares of the Company’s common stock. The Company determined that the conversion feature was considered a beneficial conversion feature and determined its value on the date of conversion to be $156,000. Accordingly, the beneficial conversion feature has been accounted for as a valuation discount to the 10% Convertible Note and was fully amortized as of December 31, 2013 via effective interest method, with the Company recording $156,000 non-cash interest expense and $2,750 non-cash loss on extinguishment of debt.

The 10% Convertible Note was issued to BME in conjunction with the Exchange Agreement entered into on January 8, 2013 by and among the Company and BME. Per the terms and conditions the Exchange Agreement, BME purchased the Company’s note payable to Greners (the “Greners Note”), which was originally issued in July 2012 to the former owners of Greners (see “NOTE 4 – ASSET PURCHASE – GRENERS.COM”), from Donna Klauenburch and Tao Klauenburch (the “Sellers”), general partners who formerly did business as Greners.com (collectively, “Greners”) and from whom the Company purchased Greners.

BME purchased the Greners Note from the Sellers for $153,250, which represented the outstanding principal and accrued, and unpaid, interest owed at the time of BME’s purchase of the Greners Note on January 8, 2013. During the year ended December 31, 2013, BME converted all of the outstanding principal and interest related to the 10% Convertible Note into 6,270,413 shares of the Company’s common stock, which the Company valued at $156,000. In effect, the Grener’s Note was replaced by the 10% Convertible Note, which resulted in the Company recording $156,000 of non-cash interest expense and a $2,750 non-cash loss on extinguishment of debt, which reflects the difference between the $153,250 that BME paid the Sellers for the Grener’s Note and the $156,000 value of the 6,270,413 shares of the Company’s common stock issued to BME upon conversion of the 10% Convertible Note.

~~As of December 31, 2013, this note and all related interest had been paid in full.~~

~~NOTE 18 – 12% SENIOR SECURED CONVERTIBLE NOTE~~

On June 7, 2013, in conjunction with its acquisition of Rocky Mountain Hydroponics and Evergreen Garden Center (“RMH/EGC”) (see “NOTE 6 – PURCHASE – ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER”), the Company issued $800,000 of 12% Senior Secured Convertible Notes (the “12% Convertible Notes”) to the former owners of RMH/EGC.

The 12% Convertible Notes have a 2 year term, with the expiration date being June 8, 2015. The 12% Convertible Notes are secured by substantially all of the Company’s assets, which include the assets of all of the Company’s subsidiaries. Interest accrues daily on the outstanding principal amount at an annual rate of 12 percent and begins accruing on the Original Issue Date (June 7, 2013). Interest is calculated on the basis of a 360-day year, consisting of 12 thirty (30) calendar day periods.

The holders of the 12% Convertible Notes can, at their sole discretion, convert any, or all, of the outstanding principal and accrued and unpaid interest into shares of the Company’s common stock. The conversion price is set at $0.035 per share, which is subject to adjustment in the event of any stock splits, stock dividends, and similar events. Per the terms of these 12% Convertible Notes, any conversion by the holders must be for at least an amount equal to the greater of (a) $35,000 of the principal amount of these 12% Convertible Notes and any accrued but unpaid interest thereon, and (b) 5,000,000 shares of common stock (such number to be appropriately adjusted for any stock splits, stock dividends, and similar events).

~~- 54 -~~

During the year ended December 31, 2013, the Company recorded $51,451 of interest expense in relation to these 12% Convertible Notes. On December 16, 2013, two of the three Holders converted their entire principal and accrued and unpaid interest, which totaled $415,842, into 11,881,204 shares of the Company’s common stock at a per share conversion price of $0.035. As of December 31, 2013, the Company owed $408,000 in principal and $27,608 in accrued and unpaid interest on this note, for a total amount owed of $435,608.

On the date these notes were issued, it was determined that there was a beneficial conversion feature valued at $0.005 per share, or $114,285 in the aggregate. As a result, the Company recorded a non-cash interest expense of $73,000 during the year ended December 31, 2013. The remaining, unamortized value of the beneficial conversion feature related to these notes was $41,825 as of December 31, 2013, and the Company will amortize the $41,285 at the rate of $2,429 per month over the remaining term of these notes.

~~NOTE 19 – 7% CONVERTIBLE NOTE~~

On August 29, 2013, the Company issued a 7% Convertible Note (the “7% Note”) to W-Net Fund I, L.P. (the “Holder”), a Delaware limited partnership, in exchange for the Revolving Promissory Note originally issued on June 7, 2013 by the Company to the Holder and amended on August 6, 2013 (the “Exchanged Note”). Per the terms of the 7% Note, the original principal balance is $750,000 and is not secured by any collateral or any assets pledged to the Holder. The maturity date is September 30, 2015, and the annual rate of interest is seven percent (7%), which increases to twenty-four percent (24%) per annum, or the maximum rate permitted under any applicable law, in the event of default. Subject to certain limitations, the Holder can, at its sole discretion, convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common stock. The conversion price for the period of time from the date of this 7% Note through and including September 30, 2014 is the lesser of (a) $0.025 per share and (b) seventy percent (70%) of the average of the three (3) lowest daily volume weighted average price occurring during the twenty (20) consecutive trading days immediately preceding the applicable conversion date on which the Holder elects to convert all or part of this 7% Note, subject to adjustment as provided in this 7% Note. The conversion price is $0.025 per share for the period of October 1, 2014 through the maturity date of September 30, 2015, subject to adjustment as provided in this 7% Note. At any time after the 12-month period immediately following the date of this 7% Note, the Company has the option to pre-pay the entire outstanding principal amount of this 7% Note by paying to the Holder an amount equal to one hundred and fifty percent (150%) of the principal and interest then outstanding. The Company’s obligations under this 7% Note will accelerate upon a bankruptcy event with respect to the Company or any subsidiary, any default in the Company’s payment obligations under this 7% Note, the Company’s failure to issue shares of its common stock in connection with a conversion of this 7% Note, the Company’s or any subsidiary’s breach of any provision of any agreement providing for indebtedness of the Company or such subsidiary in an amount exceeding $100,000, the common stock of the Company being suspended or delisted from trading on the Over the Counter Bulletin Board (the “Primary Market”) market and the OTCQB, the Company losing its status as “DTC Eligible” or the Company becoming late or delinquent in its filing requirements with the Securities and Exchange Commission. Upon any such acceleration of this 7% Note, the Company shall be obligated to pay an amount equal to the greater of (i) one hundred and twenty percent (120%) of the outstanding principal of this 7% Note (plus all accrued but unpaid interest) and (ii) the product of (a) the highest closing price for the Company’s common stock for the five (5) days on which the Primary Market is open for business immediately preceding such acceleration and (b) a fraction, the numerator of which is the outstanding principal of this 7% Note, and the denominator of which is the applicable conversion price as of the date of determination.

~~- 55 -~~

Due to the “reset” clause in this 7% Note relating to the conversion price, the Company has determined that the conversion feature is considered a beneficial conversion feature and thereby creates a derivative liability for the Company, which is detailed in “NOTE 21 – DERIVATIVE LIABILITY”.

On August 29, 2013, the date on which the Revolving Promissory Note was exchanged for the 7% Convertible Note, the Company recorded a $750,000 non-cash “loss on extinguishment of debt” while also recording a corresponding $640,074 “derivative liability” (see “NOTE 21 – DERIVATIVE LIABILITY”) and a $109,926 increase in “additional paid-in capital” as related to the beneficial conversion feature associated with this 7% Note. On the date of issuance, the Company calculated the value of the derivative liability using the weighted-average 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 21.0%; (iii) risk free rate of 0.02%, (iv) expected term of 7 days ($550,000 was converted 7 days after issuance), (v) market value share price of $0.04, and (vi) per share conversion price of $0.02156.

On September 5, 2013, the Holder converted $550,000 of principal into 25,510,204 shares of the Company’s common stock at a per share conversion price of $0.02156. On September 17, 2013, the Holder converted an additional $150,000 of principal into 6,757,328 shares of the Company’s common stock at a per share conversion price of $0.02156. On December 19, 2013, the Holder of this note converted the remaining principal of $50,000 and accrued and unpaid interest of $11,349, which totals $61,349, into 2,453,945 shares of the Company’s common stock at a per share conversion price of $0.025. As of December 31, 2013, the original $750,000 7% convertible note had been fully converted into shares of the Company’s common stock and was no longer on the Company’s balance sheet.

On October 11, 2013, the Company issued an additional $850,000 of 7% convertible notes to four Holders. As previously stated, due to the “reset” clause in these 7% Notes relating to the conversion price, the Company has determined that the conversion feature is considered a beneficial conversion feature and thereby creates a derivative liability for the Company. On the date of issuance, the Company calculated the value of the derivative liability using the weighted-average 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 25.09%; (iii) risk free rate of 0.23%, (iv) expected term of 1 year, (v) market value share price of $0.063, and (vi) per share conversion price of $0.025. Based upon this model, the Company determined an initial derivative liability value of $1,292,000, which it recorded as a derivative liability as of the date of issuance while also recording a $442,000 non-cash interest expense and an $850,000 debt discount on its balance sheet in relation to the beneficial conversion feature (BCF) of these notes.

On December 31, 2013, the Company revalued the derivative value of the $850,000 7% Notes using the weighted-average Black-Scholes-Merton option pricing model with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 45.04%; (iii) risk free rate of 0.01%, (iv) expected term of 1 year, (v) market value share price of $0.151, and (vi) per share conversion price of $0.025. The Company determined the derivative value to be $4,284,000 as of December 31, 2013, which represents a change in the fair value of the derivative in the amount of $2,992,000 as compared to the derivative value on October 11, 2013. Accordingly, the Company recorded a non-cash change in fair value of derivative expense of $2,992,000 while also increasing the derivative liability from $1,292,000 to $4,284,000 as of December 31, 2013 (see “NOTE 21 – DERIVATIVE LIABILITY”).

On December 20, 2013, the Company issued an additional $1,000,000 of 7% convertible notes to two Holders. As previously stated, due to the “reset” clause in these 7% Notes relating to the conversion price, the Company has determined that the conversion feature is considered a beneficial conversion feature and thereby creates a derivative liability for the Company. On the date of issuance, the Company calculated the value of the derivative liability using the weighted-average 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 45.04%; (iii) risk free rate of 0.02%, (iv) expected term of 1 year, (v) market value share price of $0.14, and (vi) per share conversion price of $0.025. Based upon this model, the Company determined an initial derivative liability value of $4,600,000, which it recorded as a derivative liability as of the date of issuance while also recording a $3,600,000 non-cash interest expense and an $1,000,000 debt discount on its balance sheet in relation to the beneficial conversion feature (BCF) of these notes.

~~- 56 -~~

On December 31, 2013, the Company revalued the derivative value of the $1,000,000 7% Notes using the weighted-average Black-Scholes-Merton option pricing model with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 45.04%; (iii) risk free rate of 0.01%, (iv) expected term of 1 year, (v) market value share price of $0.151, and (vi) per share conversion price of $0.025. The Company determined the derivative value to be $5,040,000 as of December 31, 2013, which represents a change in the fair value of the derivative in the amount of $440,000 as compared to the derivative value on December 20, 2013. Accordingly, the Company recorded a non-cash change in fair value of derivative expense of $440,000 while also increasing the derivative liability from $4,600,000 to $5,040,000 as of December 31, 2013 (see “NOTE 21 – DERIVATIVE LIABILITY”).

As of December 31, 2013, the outstanding principal on the 7% Notes was $1,850,000 with accrued and unpaid interest in the amount of $15,668, for a total amount owed of $1,865,668. For the year ended December 31, 2013, the Company recorded $17,260 of interest expense related to these 7% Notes.

~~NOTE 20 – LONG-TERM CONVERTIBLE NOTES PAYABLE~~

~~The following table summarizes the Company’s long-term convertible notes payable as of December 31, 2013:~~

Principal Accrued Interest Debt Discount Total as of 12.31.13
6% Senior secured convertible notes $ 468,680 $ 46,196 $ (102,096 ) $ 412,780
12% Senior secured convertible notes 408,000 27,608 (41,285 ) 394,323
7% Senior secured convertible notes ($850,000) 850,000 13,367 (743,746 ) 119,621
7% Senior secured convertible notes ($1,000,000) 1,000,000 2,301 (954,546 ) 47,755
$ 2,726,680 $ 89,472 $ (1,841,673 ) $ 974,479

For comparison, the Company had total long-term convertible notes payable of $1,077,640 as of December 31, 2012, which consisted of principal in the amount of $1,795,077, accrued and unpaid interest totaling $68,022, and debt discount of $785,459. The long-term convertible notes payable as of December 31, 2012 were the 6% Senior Secured Convertible Notes (see “NOTE 16 – 6% SENIOR SECURED CONVERTIBLE NOTES”).

~~NOTE 21 – DERIVATIVE LIABILITY~~

During fiscal year 2012, which ended December 31, 2012, the Company issued the 6% Notes and the Company determined that the conversion feature in these 6% Notes created a derivative liability. The derivative liability was initially valued using the weighted-average 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 74%; (iii) risk free rate of 0.04% and (iv) expected term of 3.08 years. Based upon this model, the Company determined an initial value of $592,326. On December 31, 2012, the Company determined there was no longer a derivative liability related to these 6% Notes and fully expensed the value of the initial derivative liability as of December 31, 2012.

During the year ended December 31, 2013, the Company issued a 10% Convertible Note (see “NOTE 17 – 10% SENIOR CONVERTIBLE NOTE”) in the principal amount of $156,000. As of December 31, 2013 the entire balance of the 10% Convertible Note had been converted into 6,270,413 shares of the Company’s common stock. The Company determined that the conversion feature was considered a beneficial conversion feature and determined its value on the date of conversion to be $156,000. Accordingly, the beneficial conversion feature has been accounted for as a valuation discount to the 10% Convertible Note and was fully amortized as of December 31, 2013 via effective interest method, with the Company recording $156,000 non-cash interest expense and $2,750 non-cash loss on extinguishment of debt.

On the date of issuance, the Company evaluated the conversion feature of the 10% Convertible Note and determined that there was a derivative liability. The derivative liability was initially valued using the Black-Scholes option pricing model, with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 309%; (iii) risk free rate of 0.11% and (iv) expected term of 0.5 years. Based upon this model, the Company determined an initial value of $158,745. During the first quarter of fiscal year 2013, BME converted, on three separate dates, all of the principal and accrued interest into 6,270,413 shares of the Company’s common stock. The Company revalued the derivative liability as of each conversion, which resulted in the Company recording non-cash charges to change in fair value of derivative totaling $169,753 during the year ended December 31, 2013. As of December 31, 2013, the Company had no derivative liability with regard to this note.

~~- 57 -~~

On May 1, 2013, the Company issued warrants to GMF (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”) entitling GMF to purchase, at their discretion, 5,000,000 shares of the Company’s common stock. The warrants have a five-year term with an original exercise price of $0.05 per share. The warrants vest immediately and are exercisable in whole, or in part, at any time and from time to time on or after the issue date and on or before the termination date. Per the terms of the Common Stock Purchase Warrant (the “Warrant Agreement”) between the Company and GMF, the exercise price was reset on June 4, 2013 to $0.035 per share due to the Company’s sale/issuance of shares at $0.035 per share under its Subscription Agreement. On September 5, 2013, the exercise price was reset again to $0.02156 per share as a result of the Company issuing shares of its common stock at said per share price in relation to a debt conversion related to the Company’s 7% Convertible Notes (see ”NOTE 19 – 7% CONVERTIBLE NOTE”).

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

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

On October 11, 2013, Gemini Master Fund exercised the 5,000,000 warrants via a cashless exercise (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”). At the time of exercise the Company revalued the derivative liability using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 230%; (iii) risk free rate of 0.02% and (iv) expected term of 4.5 years (the same criteria used when valued at September 31, 2013), and determined that there had been no change in the fair value of the derivative liability since September 30, 2013. Accordingly, the Company reclassified the $312,500 derivative liability to additional paid-in capital on October 11, 2013. As of December 31, 2013, the Company no longer had a derivative liability related to these warrants.

On September 5, 2013, the Holder converted $550,000 of principal into 25,510,204 shares of the Company’s common stock at a conversion price of $0.02156 per share. On September 17, 2013, the Holder converted $150,000 of principal into 6,957,328 shares of the Company’s common stock at a conversion price of $0.02156 per share. As of September 30, 2013, there was $50,000 of principal outstanding in relation to the 7% Note.

The Company has determined that the 7% Note is a derivative liability due to the “reset” clause associated with the conversion price. On August 29, 2013, which represents the date that the Revolving Promissory Note was exchanged for the 7% Convertible Note, the Company valued the derivative liability of the 7% Note using the Black Scholes option pricing model using the assumptions detailed below. Also, as a result of the above mentioned conversions, the Company has valued the derivative liability of the 7% Note in three portions:

~~- 58 -~~

1st
Conversion

2nd
Conversion

Outstanding
09.30.13
Total
Original principal amount $ 550,000 $ 150,000 $ 50,000 $ 750,000
Conversion Date 09.05.13 09.17.13
Conversion price per share $ 0.02156 $ 0.02156 $ 0.02156
Amount converted $ 550,000 $ 150,000 $ 700,000
Shares 25,510,204 6,957,328 2,319,109
Stock price 08.29.13 $ 0.04 $ 0.04 $ 0.04
Volatility 21.0 % 21.0 % 21.0 %
Risk free rate 0.02 % 0.02 % 0.02 %
Per share derivative value $ 0.018 $ 0.018 $ 0.018
Derivative value 08.29.13 $ 469,388 $ 128,015 $ 42,671 $ 640,074

Accordingly, on August 29, 2013, the Company recorded a “derivative liability” of $640,074 in relation to the 7% Note while also recording a corresponding $640,074 non-cash “loss on extinguishment of debt”. The Company also determined that the exchange of the Revolving Promissory Note for the 7% Convertible Note created a beneficial conversion feature, the value of which was determined to be $109,926 ($750,000 – $640,074). Accordingly, the Company recorded a $109,926 non-cash “loss on extinguishment of debt” and a corresponding $109,926 increase to “additional paid-in capital”.

~~On both September 5~~th ~~and 17~~th, 2013, the above mentioned dates of conversion, the Company revalued the converted portion of the derivative liability, which was originally valued at $597,403 ($469,388+$128,015), using the Black-Scholes option pricing model and the assumptions detailed below:

1st
Conversion

2nd
Conversion
Total
Original principal amount $ 550,000 $ 150,000 $ 700,000
Conversion Date 09.05.13 09.17.13
Conversion price per share $ 0.02156 $ 0.02156
Amount converted $ 550,000 $ 150,000 $ 700,000
Shares 25,510,204 6,957,328
Stock price on date of conversion $ 0.03000 $ 0.05000
Volatility 21.0 % 21.0 %
Risk free rate 0.02 % 0.02 %
Per share derivative value $ 0.0084 $ 0.028
Derivative value on conversion date $ 214,286 $ 197,588 $ 411,874

The resulting $411,874 derivative value attributed to the $700,000 of converted debt resulted in a $185,529 reduction in the original $597,403 value recorded on August 29, 2013. As a result, the Company recorded a $185,529 reduction in the value of the derivative liability and a corresponding $185,529 non-cash gain to change in fair value of derivative during the three months ending September 30, 2013. The remaining $411,874 derivative liability ($597,403 - $185,529) related to the $700,000 converted on September 5th ~~and 17~~th ~~2013 was reclassified from a derivative liability to additional paid-in capital as of September 30, 2013.~~

On September 30, 2013, the Company revalued the derivative liability related to the $50,000 of outstanding principal related to the 7% Note. The Company used the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 21%; (iii) risk free rate of 0.02% and (iv) expected term of 6 months. This resulted in a value of $98,571 as of September 30, 2013, an increase of $55,900 from the $42,671 as of August 29, 2013. The Company fully expensed the $55,900 as a non-cash charge to change in fair value of derivative during the year ended December 31, 2013.

~~- 59 -~~

On December 19, 2013, the Holder of the original 7% Convertible Note converted the remaining principal of $50,000 and accrued and unpaid interest of $11,349, which totals $61,349, into 2,453,945 shares of the Company’s common stock at a per share conversion price of $0.025. At the time of conversion the Company revalued the derivative liability of this note using the weighted-average Black-Scholes-Merton option pricing model with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 21%; (iii) risk free rate of 0.01%, (iv) expected term of 1 day, (v) market value share price of $0.133, and (vi) per share conversion price of $0.025. This resulted in a derivative value of $265,026 as of December 19, 2013, which represents an increase in the fair value of the derivative of $166,455 as compared to the $98,571 derivative value as of September 30, 2013. Accordingly, the Company recorded a $166,455 non-cash change in the fair value of the derivative while also reclassifying the $265,026 derivative liability to additional paid-in capital as of December 19, 2013. As of December 31, 2013, there was no longer a derivative liability associated with the original $750,000 7% Convertible Note.

On December 31, 2013, the Company revalued the derivative liability associated with the $850,000 of 7% convertible notes using the weighted-average 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 45.04%; (iii) risk free rate of 0.01%, (iv) expected term of 1 year, (v) market value share price of $0.151, and (vi) per share conversion price of $0.025. This resulted in a derivative value of 4,284,000 as of December 31, 2013, which represents an increase of $2,992,000 from the $1,292,000 value as of October 11, 2013. As a result, the Company recorded a $2,992,000 non-cash change in the fair value of the derivative expense while also increasing the related derivative liability to $4,284,000 as of December 31, 2013.

On December 31, 2013, the Company revalued the derivative liability associated with the $1,000,000 of 7% convertible notes using the weighted-average 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 45.04%; (iii) risk free rate of 0.01%, (iv) expected term of 1 year, (v) market value share price of $0.151, and (vi) per share conversion price of $0.025. This resulted in a derivative value of 5,040,000 as of December 31, 2013, which represents an increase of $440,000 from the $4,600,000 value as of December 20, 2013. As a result, the Company recorded a $440,000 non-cash change in the fair value of the derivative expense while also increasing the related derivative liability to $5,040,000 as of December 31, 2013.

~~- 60 -~~

~~As of December 31, 2013, the Company had recorded a derivative liability in the amount of $9,324,000 as detailed below:~~

Derivative value of $850,000 7% Convertible Notes $ 4,284,000
Derivative value of $1,000,000 7% Convertible Notes 5,040,000
$ 9,324,000

~~NOTE 22 – COMMITMENTS AND CONTINGENCIES~~

~~Operating Leases~~

In May 2011, we 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 is $4,313.

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 is for ninety days and can be renewed, or terminated, by either party with ninety days written notice. The monthly rent is $3,257. The Company has committed to renting this space through June 2014.

On June 5, 2013, the Company entered into a lease to rent office space in Woodland Hills, California for its corporate headquarters. The landlord is 20259 Ventura Blvd LP, which is an affiliate of a stockholder of our company. The term is for ninety days and can be renewed, or terminated, by either party with thirty days written notice. The monthly rent is $6,758. The Company has committed to renting this space through May 2014.

Upon the Company’s acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC (“RMH/EGC”) (see “NOTE 6 - PURCHASE – ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER”) the Company assumed the lease for the RMH/EGC retail hydroponics store located in Portland, Maine. Per the terms of the lease, the commencement date was May 1, 2013 with an expiration date of April 30, 2016. The monthly rent for year one of the lease is $4,917, with monthly rent of $5,065 in year two, and monthly rent of $5,217 in year three (the final year) of the lease.

Upon the Company’s acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC (“RMH/EGC”) (see “NOTE 6 - PURCHASE – ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER”) the Company assumed the lease for the RMH/EGC retail hydroponics store located in Plaistow, New Hampshire. Per the terms of the lease, the commencement date was May 1, 2013 with an expiration date of July 31, 2015. The monthly rent throughout the term of the lease is $2,105, with the first three months of the lease being rent free.

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. Per the terms of the lease agreement, the commencement date was September 1, 2013 with an expiration date of August 31, 2015. The monthly rent is $3,000.

On September 23, 2013, the Company entered into an Assignment and Assumption and Amendment of Lease Agreement (the “Agreement”) for its retail hydroponics store in Peabody, Massachusetts. Per the terms of the Agreement, the original lease between the landlord and Evergreen Garden Center, LLC was assigned from Evergreen Garden Center, LLC to GrowLife Hydroponics, Inc. (“GLH”). In addition, per the terms of the Agreement, the term of the lease was extended from the original expiration date of October 31, 2013 to the new termination date of October 31, 2014. The monthly rent remained at $4,500 through October 31, 2014.

On October 21, 2013, the Company entered into a lease agreement for retail space for its hydroponics store in Avon (Vail), Colorado. Per the terms of the lease agreement, 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.

~~- 61 -~~

On January 23, 2014, the Company entered into a lease agreement for retail space for its hydroponics store in Boulder, Colorado. Per the terms of the lease agreement, the lease commences on February 1, 2014 and expires on April 30, 2017. Monthly rent for year one of the lease is $4,051, with monthly rent of $4,173 in year two, $4,298 in year three, and $4,427 for month 37 through 39.

~~Rent expense was $362,634 and $211,285 for the years ended December 31, 2013 and 2012 respectively.~~

~~Future minimum rental payments for each of the remaining years are as follows:~~

Years Ending December 31,
2014 $ 317,360
2015 182,327
2016 104,157
2017 49,748
2018 29,900
$ 683,492

~~NOTE 23 – STOCKHOLDERS’ DEFICIT~~

~~Preferred Stock~~

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

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

~~Common Stock~~

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

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

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

~~- 62 -~~

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

During the year ended December 31, 2013, the Company issued 12,680,773 shares of its common stock in relation to the cashless exercise of stock options. These shares were valued at zero by the Company. Included in the 12,680,773 shares was the October 14, 2013 cashless exercise by Gemini Master Fund of the warrants issued to them in May 2013.

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

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

~~Stock options~~

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

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

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

~~- 63 -~~

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

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

Options
Weighted
Average
Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
Value

Outstanding December 31, 2012 12,851,187 $ 0.090 8.2 $ -
Forfeited (6,000,000 ) - - -
Issued 34,000,000 $ 0.070 - $ 1,064,967
Outstanding December 31, 2013 40,851,187 $ 0.085 9.1 $ 1,064,967

Note that the above mentioned stock option grants were recorded in accordance with Financial Accounting Standards Board (FASB) ASC Topic 718, “Compensation – Stock Compensation”. The Company measured, and recorded, the fair value of the option grant as of the date of grant and is amortizing the computed value of the option grant over the related vesting period.

~~Warrants~~

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

~~- 64 -~~

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

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

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

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

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

Warrants
Weighted
Average
Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
Value

Outstanding December 31, 2012 - $ - - $ -
Issued 170,000,000 0.040
Exercised (5,000,000 ) 0.022
Outstanding December 31, 2013 165,000,000 $ 0.040 5.6 $ -

~~NOTE 24 – INCOME TAXES~~

Deferred taxes represent the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes. Temporary differences result primarily from the recording of tax benefits of net operating loss carry forwards and stock-based compensation.

As of December 31, 2013, the Company has an insufficient history to support the likelihood of ultimate realization of the benefit associated with the deferred tax asset. Accordingly, a valuation allowance has been established for the full amount of the net deferred tax asset.

~~- 65 -~~

~~The Company’s effective income tax rate differs from the amount computed by applying the federal statutory income tax rate to loss before income taxes as follows:~~

December 31,
2013 2012

Income tax benefit at the federal statutory rate -34 % -34 %
State income tax benefit, net of federal tax benefit -6 % -6 %
Change in fair value of warrant liability 20 % 20 %
Change in valuation allowance for deferred tax assets 20 % 20 %
Total 0 % 0 %

December 31,
2013 2012
Deferred tax assets:
Net operating loss carryforwards $ 5,895,966 $ 1,208,000
Less valuation allowance (5,895,966 ) (1,208,000 )
Net deferred tax asset $ - $ -

Net operating loss carryforwards
Accumulated deficit (21,380,138 ) (3,020,566 )
Effective tax rate 40 % 40 %
8,552,055 1,208,000

~~As of December 31, 2013 and 2012, the Company had estimated Federal and California income tax net operating loss carryforwards of approximately $9,031,880 and $2,047,325, respectively.~~

Section 382 of the Internal Revenue Code can limit the amount of net operating losses which may be utilized if certain changes to a company’s ownership occur. The Company is in the process of evaluating whether such changes in ownership occurred, and its effect on the utilization of its loss carryforwards.

As a result of the implementation of certain provisions of ASC 740, Income Taxes, the Company performed an analysis of its previous tax filings and determined that there were no positions taken that it considered uncertain. Therefore, there were no unrecognized tax benefits as of December 31, 2013 and 2012.

~~The following table summarizes the open tax years for each major jurisdiction:~~

~~Jurisdiction~~	~~Open Tax Years~~

~~Federal~~	~~2010-2012~~	��

~~State~~	~~2009-2012~~

~~- 66 -~~

~~NOTE 25 – SUBSEQUENT EVENTS~~

~~Conversion of 6% Senior Secured Convertible Note~~

On January 3, 2014, a Holder of the Company’s 6% Senior Secured Convertible Notes converted the remaining $30,000 of principal and $2,901 of accrued and unpaid interest into 4,700,196 shares of the Company’s common stock at a per share conversion price of $0.007. Upon conversion the Holder’s note has been repaid in full.

~~Interest Purchase Agreement~~

On January 24, 2014, GrowLife, Inc. (the “Company”) executed an Interest Purchase Agreement (“IPA”) whereby Wise Phoenix LLC, a Nevada limited liability company (“WP”), and AJOA Holdings, LLC, a Nevada limited liability company (“AJOA”) (WP and AJOA may be collective referred to as “Sellers”), sold to Organic Growth International, LLC, a Nevada limited liability company (“’OGI”), 25% of the fully diluted outstanding equity of CEN Biotech, Inc., a corporation organized under the laws of Canada (“CEN”). OGI is the Company’s previously announced joint venture with CANX USA, LLC, a Nevada limited liability company (“CANX”). The Company has a 45% ownership interest in OGI and there are conditions under which it may gain a majority interest in the joint venture. The Company is obligated to issue shares of common stock to the Sellers (see below). CEN, under the authority and inspection of the Canadian authorities, has been authorized to build a medical marijuana growing facility in Canada, which could produce as much as 1.3 million pounds of dried marijuana annually. CEN has not yet received approval to grow, harvest, or sell medical marijuana.

In addition to the 25% equity interest in CEN, OGI is entitled to a preference should there be any Distributed Income from the Company. Distributed Income is defined as CEN’s net income, after adding non-cash expenses less any reserves designated by CEN’s Board of Directors. The reserves are not to exceed 20% of CEN’s gross revenues. Under the terms of the IPA, Distributed Income is to be allocated 60% to OGI, 20% to AJOA, and 20% to WP until distributions have been made equal to $40,000,000. After the distribution of $40,000,000, any Distributed Income is to be allocated 40% to OGI, 30% to AJOA, and 30% to WP. It is the intention of the parties to the IPA that distributions from available funds are to be made at least on an annual basis.

CEN’s obligations to OGI under the IPA are secured by all of CEN’s assets, excluding personal property and inventory to be sold in the normal course of CEN’s business. OGI shall retain this security interest until such time as CEN has distributed an amount equal to $40,000,000.

In exchange for the rights discussed above, the Company is obligated to issue a total of 235,964,118 restricted shares of its common stock (“Payment Shares”) ($40,000,000 calculated at $0.17 per share), should certain conditions be satisfied. 117,647,059 of the Payment Shares will go to WP and the other 117,647,059 Payment Shares will go to AJOA upon the satisfaction of the issuance conditions. In addition to certain document delivery requirements (e.g., financial statements and other corporate records), GrowLife will issue the Payment Shares only if it receives documentary evidence that a Canadian government agency has by contract, license, or otherwise granted specific rights to Sellers or CEN to grow, harvest, sell, import or export cannabis and cannabis bi-products in an amount not less than 1.3 million pounds of dried cannabis annually. If CEN is granted the right to grow, harvest, and sell less than 1.3 million pounds, then OGI has the right to rescind the IPA or reduce the Payment Shares proportionately. This transaction is also conditioned upon the Company’s shareholders approving an increase in the Company’s authorized common stock at the February meeting of shareholders.

Finally, the Payment Shares, should they ever be issued, are subject to registration rights. The Company is obligated to use its best efforts to register the Payment Shares as quickly as possible under applicable state and federal securities laws.

It is especially important to note that OGI assigned all of its interests in and rights under the IPA to GrowLife under a separate agreement. The details of this assignment are described under “Assignment” below.

~~CEN Biotech, Inc. Shareholder Agreement~~

On January 24, 2014, the Company entered into a Shareholder Agreement of CEN Biotech, Inc. (the “Shareholder Agreement”). The Shareholder Agreement contemplated OGI’s assignment of the 25% equity interest in CEN to the Company and therefore notes that the Company has a 25% interest. The Company, AJOA, WP, Creative Edge Nutrition, Inc., and one individual, collectively representing 93% percent ownership of CEN, have signed the Shareholder Agreement as of January 24, 2014, as well as CEN itself. Another eight individuals representing the remaining 7% are expected to sign the Shareholder Agreement.

~~- 67 -~~

Under the Shareholder Agreement, WP, AJOA, and CANX each have the right to select one director to serve on CEN’s Board of Directors. The Shareholder Agreement dictates that certain corporate actions cannot be taken without the affirmative vote of each director (e.g., incurring indebtedness in excess of $500,000 for matters outside of the then-current budget). Additionally, there shall be no new shareholders without the prior written consent of the CEN Board of Directors. If the Company, or any other shareholder, wants to sell their interest in CEN, then the Company must provide written notice of the terms and conditions of the proposed sale or transfer. This written notice must be provided to the CEN Board of Directors, which shall have a right of first refusal to acquire the selling shareholder’s interest. If sixty days pass and the CEN Board of Directors has not exercised their right, the selling shareholder may consummate the noticed transaction.

~~Master Equipment, Procurement and Services Agreement~~

On January 24, 2014, OGI and CEN entered into a Master Equipment, Procurement, and Services Agreement (“MEPS”) dictating that the legal cannabis growing equipment needs of CEN shall be supplied by the Company on a primary basis, so long as specifications, price, and quality are substantially equal. This arrangement is required by the joint venture agreement that created OGI, which mandates that OGI purchase all of its necessary goods and services from the Company on an exclusive basis. Since it is a beneficiary, the Company executed the MEPS to signal its acceptance. In addition to functioning as a supplier, OGI was granted the global right to distribute all products and services sold or licensed by CEN anywhere in the world. The MEPS shall remain in effect for so longer as OGI or the Company is a CEN shareholder or five years, whichever is longer.

It should be noted that OGI assigned all of its interests in and rights under the MEPS to GrowLife under a separate agreement. The details of this assignment are described under “Assignment” below.

~~Profit Sharing Agreement~~

On January 24, 2014, WP, AJOA, OGI, and CEN entered into a Profit Sharing Agreement (“PSA”). Under the PSA, OGI is entitled to 7.7% of all Payments received by CEN. Payments are defined as total gross payments (including non-cash consideration), without setoff or deduction, paid directly or indirectly to CEN, its affiliates, or related parties. CEN has agreed to pay OGI the 7.7% of Payments on a quarterly basis until the cessation of the Company, subject to certain exceptions like mergers, acquisitions, and similar transactions. Lastly, when CEN’s cumulative manufacturing and sales volume reaches 1 million pounds of cannabis, CEN is required to make a $100 million distribution to OGI. It should be noted that OGI assigned all of its interests in and rights under the PSA to GrowLife under a separate agreement. The details of this assignment are described under “Assignment” below.

~~Assignment~~

On January 28, 2014, OGI assigned to the Company all of OGI’s right, title, and interest in and to the IPA, the Shareholder Agreement, MEPS, and PSA. The Company accepted this assignment along with all of its attendant rights and obligations.

~~RXNB TRANSACTION~~

~~RXNB Interest Purchase Agreement~~

On January 24, 2014, the Company executed an Interest Purchase Agreement (“RXNB IPA”) whereby WP and AJOA sold to OGI 40% of the fully diluted outstanding equity of R.X.N.B., Inc., a Nevada corporation (“RXNB”). As discussed above, the Company has a 45% ownership interest in OGI, a joint venture with CANX, and there are conditions under which it may gain a majority interest in the joint venture. The Company is obligated to issue shares of common stock to the Sellers under the RXNB IPA (see below). Among other ventures, RXNB manufactures and distributes vitamins, operates a laboratory, and owns certain cannabis growing-related intellectual property.

In addition to the 40% equity interest in RXNB, OGI is entitled to a preference should there be any Distributed Income (defined in CEN Transaction IPA). Under the terms of the RXNB IPA, Distributed Income is to be allocated 60% to OGI, 20% to AJOA, and 20% to WP until distributions have been made equal to $45,000,000. After the distribution of $45,000,000, any Distributed Income is to be allocated 40% to OGI, 30% to AJOA, and 30% to WP. It is the intention of the parties to the RXNB IPA that distributions from available funds are to be made at least on an annual basis.

~~- 68 -~~

RXNB’s obligations to OGI under the RXNB IPA are secured by all of RXNB’s assets, excluding personal property and inventory to be sold in the normal course of RXNB’s business. OGI shall retain this security interest until such time as RXNB has distributed an amount equal to $45,000,000.

In exchange for the rights discussed above, the Company is obligated to issue a total of 264,705,882 restricted shares of its common stock (“RXNB Payment Shares”) ($45,000,000 calculated at $0.17 per share). 132,352,941 of the RXNB Payment Shares will go to WP and the other 132,352,941 Payment Shares will go to AJOA. In the RXNB IPA, OGI guarantees that the Sellers will receive in the aggregate not less than $18,000,000 within nine months from January 24, 2014 or upon the Sellers’ liquidation of the RXNB Payment Shares, whichever is sooner. The RXNB Payment Shares will be issued by the Company to WP and AJOA after OGI receives certain documentation from WP, AJOA, and RXNB required by the RXNB IPA, including current and historical financial statements, insurance policy information, and certificates of good standing. OGI has the right to rescind the transaction should the required documents not be delivered within sixty business days. The RXNB Payment Shares will not be issued unless the Company’s shareholders approve and increase in the Company’s authorized common stock at the February meeting of shareholders.

Finally, the RXNB Payment Shares are subject to registration rights. The Company is obligated to use its best efforts to register the Payment Shares as quickly as possible under applicable state and federal securities laws.

~~RXNB Shareholder Agreement~~

On January 24, 2014, OGI, the joint venture co-owned by the Company, entered into a Shareholder Agreement of RXNB, Inc. (the “RXNB Shareholder Agreement”). AJOA and WP, the other two RXNB shareholders, along with RXNB itself, were also parties to the RXNB Shareholder Agreement.

Under the RXNB Shareholder Agreement, AP, AJOA, and CANX, the other co-owner of OGI, each have the right to select one director to serve on RXNB’s Board of Directors. Much like the CEN Shareholder Agreement, certain corporate actions cannot be taken without the affirmative vote of each director (e.g., paying discretionary bonuses to any officer or employee to the extent not included in the then-current budget). Additionally, there shall be no new RXNB shareholders without the prior written consent of the RXNB Board of Directors. If OGI, or any other shareholder, wants to sell their interest in RXNB, then OGI must provide written notice of the terms and conditions of the proposed sale or transfer. This written notice must be provided to the RXNB Board of Directors, which shall have a right of first refusal to acquire the selling shareholder’s interest. If sixty days pass and the RXNB Board of Directors has not exercised their right, the selling shareholder may consummate the noticed transaction.

~~RXNB Master Equipment, Procurement and Services Agreement~~

On January 24, 2014, OGI entered into a Master Equipment, Procurement and Services Agreement (“RXNB MEPS”) with RXNB dictating that the legal cannabis growing needs of WP, AJOA, and RXNB shall generally be supplied by the Company, so long as specification, price, and quality are substantially equal. This arrangement is required by the joint venture agreement that created OGI, which mandates that OGI purchase all of its necessary goods and services from the Company on an exclusive basis. Since it is a beneficiary, the Company executed the RXNB MEPS to signal its acceptance. In addition to functioning as a supplier, OGI was the worldwide right to market and distribute products sold or licensed by RXNB or its affiliates. The RXNB MEPS shall remain in effect for so long as OGI or the Company are shareholders or five years, whichever is longer.

~~RXNB Profit Sharing Agreement~~

On January 24, 2014, WP, AJOA, OGI, and RXNB entered into a Profit Sharing Agreement (“RXNB PSA”). Under the RXNB PSA, OGI is entitled to 40% of all Payments (same definition used in CEN Transaction) made to RXNB pursuant to RXNB’s 7% ownership of the gross licensing fees generated from a CEN license, or 2.8% of the total licensing fees. RXNB has agreed to pay OGI on a yearly basis until the cessation of the Company, subject to certain exceptions like mergers, acquisitions, and similar transactions.

~~Purchased Assets~~

In a January 24, 2014 document, the Sellers warranted that OGI shall receive a 40% interest in enumerated RXNB assets. These assets include all real property, equipment, and fixtures of RXNB and its subsidiaries, which have an approximate total value of $10,000,000. OGI will also receive a 40% ownership interest in all revenue streams and intellectual property owned by RXNB. The Company, through its minority interest in OGI, will not control these assets.

~~- 69 -~~

~~GENERAL NOTE ON RXNB TRANSACTION~~

OGI did NOT assign to the Company its interests under the various RXNB transaction documents. The Company does have a 45% ownership interest in OGI and will experience the benefits through that ownership.

~~Issuance of Warrants~~

On January 30, 2014, the Company issued warrants to a third party consultant (“the Holder”) granting the Holder the right to purchase 1,000,000 shares of the Company’s common stock at $0.28 per share, which represents the fair value of one share of the Company’s common stock as of January 30, 2014. Per the terms of the Warrant Agreement, the Holder can, at his sole discretion, exercise the warrants at any time on or after the date the Holder achieves the specified milestones contained in the Warrant Agreement. The term of the Warrant Agreement is ten (10) years from the date of grant, which is January 30, 2014. The issuance of this Warrant Agreement is contingent on formal approval by the Company’s Board of Directors, which has not been granted as of the time of this filing.

~~Conversion of 12% Senior Secured Convertible Notes~~

On January 31, 2014, a Holder of the Company’s 12% Senior Secured Convertible Notes (see “NOTE 18 – 12% SENIOR SECURED CONVERTIBLE NOTES”) converted the entire $408,000 of principal and $31,688 of accrued and unpaid interest into 12,562,518 shares of the Company’s common stock at a per share conversion price of $0.035. Upon conversion by the Holder, all of the principal and accrued and unpaid interest related the 12% Senior Secured Convertible Notes had been fully satisfied as of January 31, 2014.

~~Stock Option Exercise~~

On January 31, 2014, the Holder of a stock option granting Holder the right to purchase 2,351,187 shares of the Company’s common stock (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”) exercised his option at a per share exercise price of $0.019 for total cash proceeds to the Company of $44,673.

~~G.I.F.T Transaction~~

On January 31, 2014, the Company signed its first GrowLife Infrastructure Financing Transaction (G.I.F.T.) with CMMS, Inc. (“CMMS”), an Aspen, Colorado based medicinal cannabis company. Per the terms of the G.I.F.T. agreement, the Company has agreed to finance $280,000 of equipment, to be purchased from the Company, over a term of 5.5 years (66 months), with monthly payments in the amount of $6,878 beginning in month seven and ending in month sixty-six. This G.I.F.T. agreement was personally guaranteed by the President of CMMS.

~~Special Meeting of Shareholders~~

On February 7, 2014, GrowLife, Inc., a Delaware corporation (the “Company”), held a Special Meeting of Shareholders for the sole purpose of approving an amendment to the Company’s Certificate of Incorporation (the “Amendment”) to increase the authorized shares of common stock of the Company (“Common Stock”) from 1,000,000,000 to 3,000,000,000 (the “Common Stock Proposal”). The Company’s Board of Directors (the “Board”) previously approved the Common Stock Proposal effective December 9, 2013, subject to shareholder approval at the Special Meeting of Shareholders. The Common Stock Proposal was approved by Shareholders representing approximately 68.5% of the outstanding shares of the Company’s Common Stock voting at the meeting either in person or by proxy. A total of 573,878,915 votes were cast at the meeting either in person or by proxy which represents approximately 77.7% of the issued and outstanding shares of the Company’s Common Stock. Of the votes cast at the meeting, 506,035,500 shares voted in favor of the Common Stock Proposal (88.2% of shares voted) and 64,148,711 shares voted against (11.2% of shares voted), with 3,694,704 shares abstaining (0.6% of shares voted). There were no broker non-votes. The shareholder approval formally authorized the Company to file the Certificate of Amendment, which is effective as of February 13, 2014.

~~Shares Issued to Consultant~~

On February 13, 2014, the Company issued 29,420 shares of its common stock to an independent third party consultant as payment in full for services rendered. The shares were valued at $10,000 in the aggregate and $0.339 per share, which represents the average closing price of one share of the Company’s common stock for the previous ten (10) trading days.

~~Shares Issued to Public/Investor Realtions Consultant~~

On February 16, 2014, the Company issued 1,250,000 shares of its common stock to Integrity Media, Inc, (“Integrity”) the Company’s public/investor relations consultant. The issuance of these shares represents the second installment of shares due to Integrity with relation to a consulting agreement signed in November 2013. The shares were valued at $100,000 in the aggregate and $0.08 per share.

~~- 70 -~~

~~Consulting Agreement with a Board Member~~

On February 26, 2014, the Company engaged Jeff Giarraputo, who is currently a member of the Company’s Board of Directors, as an advisor to the Company for six (6) months, effective as of February 15, 2014. The scope of the work to be performed by Mr. Giarraputo is to provide marketing, business development, and general management to the Company as related to the cannabis industry. As compensation for these services, the Company, pending approval by its Board of Directors, will grant Mr. Giarraputo a stock option to purchase 2,000,000 shares of the Company’s common stock at $0.31 per share, which represents the 30-day trailing average of the Company’s common stock. All shares subject to the option will vest over a 6-month period beginning on the date of engagement (the “Vesting Commencement Date”). One-sixth (1/6) of the shares will vest one month after the Vesting Commencement Date, and thereafter 1/6th of the shares will vest each month on the same day of each month corresponding to the Vesting Commencement Date until all shares have vested, provided that Mr. Giarraputo does not cease to be a consultant of the Company prior to such date. The stock option grant shall be subject to the terms and conditions of the Company’s 2011 Stock Incentive Plan (“SIP”), including vesting requirements. No right to any stock is earned or accrued until such time that the shares become vested, nor does the grant confer any right to continue vesting or employment. As of the time of this filing, the Company’s Board of Directors had not approved this stock option grant.

~~Conversion of 7% Convertible Notes~~

On March 7, 2014, a Holder of one of the Company’s 7% Convertible Notes issued on October 11, 2013 (see “NOTE 19 – 7% CONVERTIBLE NOTES”) converted $50,000 of principal into 2,000,000 shares of the Company’s common stock at a per share conversion price of $0.025. The original principal amount of this Holder’s 7% Convertible Note was $250,000, which, after conversion of the $50,000, results in an outstanding principal balance of $200,000 which was converted into shares of the Company's common stock on March 18, 2013.

~~Letter of Intent With Vape Holdings, Inc.~~

~~On March 17, 2014, the Company announced that it had entered a Letter of Intent (“LOI”) with Vape Holdings, Inc. (“Vape”) to fund~~ ~~the research and development of patentable technology to create pharmaceutical grade extractions from cannabis. Per the terms of the LOI, e~~ach Company will bring its specific expertise to the joint venture; GrowLife providing equipment manufacturing while Vape provides guidance for the process technology and concentrate formulas. Cannabis extractions are a rapidly growing market segment of the legal cannabis market, and believed by many to be a significant part of the future of cannabis as consumers transition from the carcinogens often included with historical methods of drug delivery to the more modern, safer, and efficient systems reliant on cannabis extracts. To that end, the Company and Vape are intent on introducing medical, food, and pharma grade practices into the cannabis industry; from cultivation to extraction to delivery. This joint venture looks to service a void in the industry with regard to SOPs (Standard Operating Procedures) and GMPs (Good Manufacturing Practices), which are instrumental in all regulated food and pharma grade production/manufacturing

~~Conversion of 7% Convertible Notes~~

On March 18, 2014, three (3) Holders of the Company’s 7% Convertible Notes in the original principal amount of $600,000 issued on October 11, 2013 (see “NOTE 19 – 7% CONVERTIBLE NOTES”) converted all of the outstanding principal and accrued and unpaid interest related to their notes into 22,727,668 shares of the Company’s common stock at a per share conversion price of $0.025. The amount of principal converted was $550,000 and the accrued and unpaid interest totaled $18,192. Upon conversion by these three Holders, the Company had fully satisfied its obligations to these three Holders.

~~Stock Option Exercise~~

On March 20, 2014, the Holder of 4,500,000 stock options originally granted in May 2011 at an exercise price of $0.23 per share, converted, on a cashless basis, the entire option, which resulted in the Company issuing 2,775,000 shares to the option Holder. The cashless conversion was computed using the $0.60 share price as of March 19, 2014, which was in accordance with the terms of the option agreement.

~~Legal Matter~~

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

~~Shares Issued to Board Members~~

On March 31, 2014, the Company issued 500,000 shares, 2,000,000 shares in the aggregate, to each of its four (4) independent Board members as compensation for their Board service for the January 1, 2014 through March 31, 2014 period. The shares were valued at $0.02 per share and $40,000 in the aggregate and were issued in accordance with an August 2012 Board grant. The four independent Board members are Eric Shevin, Alan Hammer, Tony Ciabatonni, and Jeff Giarraputo.

~~- 71 -~~

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL ~~DISCLOSURE.~~

~~None.~~DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND ~~PROCEDURES.~~PROCEDURES

~~Evaluation of Disclosure Controls and Procedures~~

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer, who serves as our principal executive officer and our Chief Financial Officer, who serves as our principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.

As of December 31, 2013, our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2013, our disclosure controls and procedures were effective.

~~Management’s Annual Report on Internal Control over Financial Reporting~~

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) ofunder the Securities Exchange Act of 1934. Under the supervision and ~~for assessing~~with the participation of our management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial ~~reporting.~~reporting as of the end of the period covered by this report based on the framework in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our principal executive officer and principal financial officer concluded that our internal control over financial reporting were not effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with United States generally accepted accounting principles.

Pursuant to Regulation S-K Item 308(b), this Annual Report on Form 10-K does not include an attestation report of our company’s registered public accounting firm regarding internal control over financial reporting. The effectiveness of our internal control over financial reporting as of December 31, 2016 has not been audited by SD Mayer & Associates, LLP, an independent registered public accounting firm.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. ~~In addition,~~Also, projections of any evaluation of effectiveness ~~of internal control over financial reporting~~ to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. A control system, no matter how well designed and operated can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost.

~~Management has assessed~~a) Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive and principal financial officers concluded as of December 31, 2016 that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses in our internal controls over financial reporting discussed immediately below.

Identified Material Weakness

A material weakness in our internal control over financial reporting asis a control deficiency, or combination of ~~December 31, 2013. In making~~control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

Management identified the following material weakness during its assessment of internal ~~control~~controls over financial ~~reporting, management used~~reporting:

Audit Committee:

On June 3, 2014, we formed an Audit Committee and appointed an audit committee financial expert as defined by SEC and as adopted under the ~~criteria established in Internal Control — Integrated Framework, issued by the~~Sarbanes-Oxley Act of 2002. Prior to this, we did not have an Audit Committee ~~of Sponsoring Organizations of the Treadway Commission. This assessment included an evaluation of the design of our internal control over~~to oversee financial reporting and ~~testing~~used external service providers to ensure compliance with the SEC requirements. The current Audit Committee has one independent directors. We expect to expand this committee during 2017.

Other Weaknesses:

Our information systems lack sufficient controls limiting access to key applications and data.

Our inventory system lacked standardized product descriptions and effective controls to ensure the accuracy, valuation, and timeliness of the ~~operational effectiveness~~financial accounting process around inventory, including a lack of ~~those controls. Based on the results of this assessment, management has concluded that our internal control over financial reporting was not effective as of December 31, 2013 due~~accuracy and basis for valuation resulting in adjustments to the ~~limited size of our staff and budget. The following weaknesses/areas of concern were uncovered by our evaluation:~~

·	~~The lack of a computerized accounting system that links the Company’s different physical locations~~

·	~~The lack of a centralized Accounting/Finance department operating from the same location as the Company’s senior management~~

·	~~A lack of an offsite backup for the Company’s critical computerized data~~

·	~~A lack of a detailed, and written, set of company policies and procedures~~

·	~~Our information systems lack sufficient controls limiting access to key applications and data~~

Our inventory system lacks standardized product descriptions and effective controls to ensure the accuracy, valuation, and timeliness of the financial accounting process around inventory, including a lack of accuracy and basis for valuation resulting in adjustments to the amount of cost of revenues and the carrying amount of inventory.

b) Changes in Internal Control over Financial Reporting

~~There~~During the quarter ended December 31, 2016, there were no changes in our internal ~~control~~controls over financial reporting ~~that occurred~~ during this fiscal quarter, which were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the ~~fourth quarter of the year ended December 31, 2013~~Exchange Act, that ~~have~~ materially affected, or ~~that are~~is reasonably likely to have a materially affect, on our internal control over financial reporting.

ITEM 9B. OTHER ~~INFORMATION.~~INFORMATION

~~None.~~There were no disclosures of any information required to be filed on Form 8-K during the three months ended December 31, 2016 that were not filed.

~~- 72 -~~30

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE ~~GOVERNANCE.~~GOVERNANCE

The following changes in directors and named executive officers occurred during the year ending December 31, 2015 and 2016:

●

Marco Hegyi was appointed President on December 4, 2013 and Director on December 9, 2013. Mr. Hegyi was appointed Chairman of the Board and CEO on April 1, 2016.

●

Mark Scott was appointed Director on May 21, 2014, Chairman of the Audit Committee on June 3, 2014 and Consulting Chief Financial Officer on July 31, 2014. Mr. Scott resigned as Director and Chairman of the Audit Committee on October 18, 2015. Mr. Mark Scott was re-appointed to the Board of Directors and Secretary of GrowLife, Inc. on February 14, 2017.

●

Joseph Barnes was appointed Senior Vice President of Business Development on October 10, 2014.

●

Michael Fasci was appointed Director on October 27, 2015 and Chairman of the Audit and Compensation Committees on November 11, 2015. Mr. Fasci was appointed Secretary on April 1, 2016, which he resigned from on February 14, 2017.

●

Tara Antal was appointed Director on October 27, 2015 and resigned on March 4, 2016.

●

Brad Fretti was appointed Director on October 27, 2015 and Chairman of the Compensation Committee on November 11, 2015. Mr. Fretti resigned as Director and Chairman of the Compensation Committee on March 4, 2016.

Directors and Executive Officers

The following table sets forth ~~the names, ages, and positions of~~certain information about our current ~~executive officers and directors. All directors serve until the next annual meeting of stockholders or until their successors are elected and qualified. Officers are appointed by our board of~~ directors and ~~their terms of office are, except to the extent governed by an employment contract, at the discretion of our board of directors.~~executive officers:

Name	Age	~~Age~~		~~Position Held and Tenure~~Director/ Executive Officer

~~Sterling C. Scott~~		58	~~Director since April 5, 2012~~ ~~Chief Executive Officer, President, Secretary since April 5, 2012~~
~~John Genesi~~		49	~~Named Chief Financial Officer July 22, 2013~~
~~Justin Manns~~		38	~~Former Chief Financial Officer, resigned July 22, 2013. Former Director, resigned as a Director December 19, 2013. Currently Controller of GrowLife Hydroponics, Inc.~~
Marco Hegyi	59	56Chairman of the Board, CEO, President and Nominations and Governance Committee Chairman (1)
		~~Joined the Company as President on December 4, 2013. Also joined the Company’s Board of Directors on December 9, 2013~~
~~Rob Hunt~~Mark E. Scott	63	Consulting Chief Financial Officer
		41
Michael E. Fasci	58	Director, Audit Committee Chairman and Secretary (2)(3)
		~~Joined the Company as~~
Joseph Barnes	44	Senior Vice President of ~~GrowLife Hydroponics, Inc. on June 7, 2013. Also joined the Company’s Board of Directors on June 7, 2013~~
~~Eric Shevin~~		48	~~Joined the Company’s Board of Directors on April 1, 2013~~
~~Alan Hammer~~		67	~~Joined the Company’s Board of Directors on December 17, 2013~~
~~Anthony Ciabattoni~~		70	~~Joined the Company’s Board of Directors on December 19, 2013~~
~~Jeff Giarraputo~~		43	~~Joined the Company’s Board of Directors on December 19, 2013~~
~~Craig Ellins~~		59	~~Former Director who resigned as a Director April 12, 2013. Originally joined the Company as a Director March 9, 2011~~
~~Bob Kurilko~~		50	~~Former Director who resigned as a Director November 2, 2013. Originally joined the Company as a Director June 29, 2012~~Business Development

~~Biographical Information~~* Independent director

~~Sterling C. Scott -~~ Mr. Scott has almost 30 years of experience in a combination of managing small to medium sized businesses and in practicing business law. Mr. Scott was an associate and partner with Jenner & Block in Washington D.C. and concentrated on federal regulatory issues affecting businesses and related litigation until 1990. Subsequently, he transitioned to the Senior Management Team and General Counsel for Technical Management Services Company (TAMSCO), a privately held company with 800 employees and worldwide business interests, along with directly managing a TAMSCO incubator company engaged in innovative microbial solutions to water contamination. Most recently, Mr. Scott has served as Chief Executive Officer of SG Technologies, Corp. and has led the successful development and marketing of its innovative Stealth Grow LED line of technology products for the hydroponics industry. Mr. Scott received a Bachelor of Arts in Social Sciences from Shimer College and a Juris Doctor from DePaul University. Mr. Scott’s past experience, qualifications, attributes and skills led to the conclusion that Mr. Scott should serve on our Board in light of our proposed business and structure. Mr. Scott’s prior experience as Chief Executive Officer of SG Technologies, Corp., where he gained invaluable experience and contacts within both the hydroponics and cannabis industries, combined with his legal background, make him perfectly suited to be the Company’s Chief Executive Officer and a Director. Given the currently “challenging” legal framework(1) Member of the ~~cannabis industry, having a Chief Executive Officer~~Audit Committee.

(2) Member of the Compensation Committee.

(3) Member of the Nominations and ~~Director with a strong legal background is considered, by the Company, to give us a significant advantage as related to corporate strategy.~~Governance Committee.

~~- 73 -~~

All directors hold office until their successors are duly appointed or until their earlier resignation or removal.

~~John Genesi -~~ Marco HegyiMr. Genesi serves as the Company’s Chief Financial Officer, a position that he has held since July 22, 2013. Mr. Genesi has extensive experience in both public accounting and corporate finance, having served as the Chief Financial Officer at two other public companies. John’s corporate career in accounting/finance began in 1988 after he graduated from California State University, Fullerton with a Bachelor of Arts degree in Business Administration with a concentration in Finance. He began his career in the Finance department of a major U.S. aerospace company. After 5 years in the aerospace industry, John moved to Montana to manage a 6,000-acre ranching and mining operation. Next up was a venture capital backed high-tech startup in Silicon Valley, where he worked as Controller for a company that eventually grew to 300 employees. After his Silicon Valley experience, John moved back to southern California to become the Chief Financial Officer at Technical Services & Logistics, Inc (“TSLi”). It was here that he gained his first SEC reporting experience, as TSLi completed a reverse merger into a publicly traded shell company. John’s next CFO role came at LandBank Group, Inc. and its sister company, Strategic Financial Companies, LLC. As CFO of these companies, John presided over LandBank’s reverse merger into a publicly traded shell company and its subsequent SEC reporting obligations. While building and managing LandBank, John was also helping to take Strategic from a business plan to a company with over 100 employees and $30 million in revenue. During the five (5) years prior to joining GrowLife, Mr. Genesi served as Controller for a $35M Los Angeles based healthcare company (July2012 through March 2013) and as Chief Financial Officer of LandBank Group, Inc. and Strategic Financial Companies, LLC (June 2006 – ~~May 2012).~~

~~Justin Manns -~~ Mr. Manns serves as the Controller of GrowLife Hydroponics, Inc. while also managing the Company’s retail store in Santa Rosa, CA. Mr. Manns has an array of experience in public accounting, business management, and biological and health sciences. He has worked as a marine biologist, collecting, recording and analyzing data for the National Marine Fishery Service. He has served as an auditor for Ernst and Young in McLean, Virginia and the Reznick Group in Bethesda, Maryland. Mr. Manns received a Bachelor of Science in Accounting and Business Management from the The Robert H. Smith School of Business at the University of Maryland. He received a Bachelor of Science degree in Environmental & Biological Sciences from Antioch College in Yellow Springs, Ohio. Mr. Manns’ past experience, qualifications, attributes and skills led to the conclusion that Mr. Manns should serve on our Board in light of our proposed business and structure. During the five (5) years prior to joining GrowLife, Inc., Mr. Manns served as the Chief Financial Officer of SG Technologies, Corp. (August 2011 - March 2012) and prior to his work at SG Technologies, Corp. he worked as a Chiropractic Physician in Columbus, Ohio.

~~Marco Hegyi -~~ Mr. Hegyi joined ~~the Company~~GrowLife as its President on December 4, 2013 and a Member of its Board of Directors on December 9, ~~2013.~~2013 and was appointed as Chairman of the Nominations and Governance Committee and a member of the Compensation Committee on June 3, 2014. Mr. Hegyi was appointed as CEO and Chairman of GrowLife effective on April 1, 2016. Mr. Hegyi has served as an independent director of Visualant, Inc. since February 14, 2008 and as Chairman of the Board ~~since~~from May 2011, and served at the Chairman of ~~Visualant, Inc.~~the Audit and Compensation committees until his departure on February 2015. Previously, Mr. Hegyi ~~has been~~was a principal with the Chasm Group ~~since~~from 2006 to January 2014, where he has provided business consulting services. As a management consultant, Mr. Hegyi ~~has~~ applied his extensive technology industry experience to help early-stage ~~companies. Over the last four years he~~companies and has ~~focused on business planning, operational management, and financial supervision.~~been issued 10 US patents.

Prior to working as a consultant in 2006, Mr. Hegyi served as Senior Director of Global Product Management at Yahoo!. Prior to Yahoo!, Mr. Hegyi was at Microsoft leading program management for Microsoft Windows and Office beta releases aimed at software developers from 2001 to 2006. While at Microsoft, he formed new software-as-a-service concepts and created operating programs to extend the depth and breadth of the company’s unparalleled developer eco-system, including managing offshore, outsource teams in China and India, and being the named inventor of a filed Microsoft patent for a business process in service delivery.

During Mr. Hegyi’s career, he has served as President and CEO of private and public companies, Chairman and ~~Director~~director of boards, finance, compensation and audit committee chair, ~~Chief Operating Officer, Vice-President~~chief operating officer, vice-president of sales and marketing, ~~Senior Director~~senior director of product management, and he began his career as a systems software engineer. His patents issued to date include Configuring and Allocating Software Product Technical Services, United States US 7904875, issued March 8, 2011; Systems and Methods for Processing Eggs , United States US 8455026, issued June 4, 2013; Systems and Methods for Processing Eggs , United States US 8455030, issued June 4, 2013; and, Systems and Methods for Processing Eggs, United States US 8657098, issued February 25, 2014.

Mr. Hegyi earned a Bachelor of Science degree in Information and Computer Sciences from the University of California, Irvine, and has completed advanced studies in innovation marketing, advanced management, and strategy at Harvard Business School, Stanford University, UCLA Anderson Graduate School of Management, and MIT Sloan School of Management.

~~- 74 -~~31

Mr. Hegyi’s prior experience as Chairman and Chief Executive Officer of public companies, combined with his advanced studies in business management and strategy, were the primary factors in the decision to add Mr. Hegyi to the Company’s Board of Directors. As

Michael E. Fasci– Mr. Fasci joined GrowLife as a Member of its Board of Directors on October 27, 2015 and was appointed Audit Committee Chairman on November 11, 2015. On April 1, 2016, Mr. Fasci was appointed as the Secretary of the Company, ~~continues~~but resigned on February 14, 2017. Mr. Fasci is a 30-year veteran in the finance sector having served as an officer and director of many public and private companies. Mr. Fasci is a seasoned operator across various industries and has served in both CEO and CFO capacities for both growth and turnaround situations. Mr. Fasci began his career as a field engineer and then manager of various remediation filtration and environmental monitoring projects globally before focusing his efforts on the daily operations, accounting and financial reporting and SEC compliance of the numerous companies he has served. Mr. Fasci resides in East Taunton, Massachusetts and studied Electrical Engineering at Northeastern University and maintains his qualification as an Enrolled Agent of the Internal Revenue Service.

Mr. Fasci was appointed to ~~grow/expand, it will need a highly skilled individual such as Mr. Hegyi to manage~~ the ~~Company’s business operations while also interacting with the investment community.~~Board of Directors based on his financial, SEC and governance skills.

~~Robert Hunt~~Mark E. Scott – Mr. ~~Hunt, age 41,~~Mark Scott was re-appointed to the Board of Directors and Secretary of GrowLife, Inc. on February 14, 2017. Mr. Scott was previously a member of the Board of Directors and Secretary of GrowLife, Inc. from May 2014 until his resignation on October 18, 2015. Mr. Scott was appointed our Consulting Chief Financial Officer on July 31, 2014.

Mr. Scott served as (i) Chief Financial Officer, Secretary and Treasurer of Visualant, Inc., from May 2010 to August 31, 2016. Mr. Scott was Chief Financial Officer of U.S. Rare Earths, Inc., a consulting position he held December 19, 2011 to April 30, 2014 and Chief Financial Officer of Sonora Resources Corporation, a consulting position he held from June 15, 2011 to August 31, 2014. Also, Mr. Scott was Chief Financial Officer, Secretary and Treasurer of WestMountain Gold from February 28, 2011 to December 31, 2013 and was a consultant from December 2010 to February 27, 2011. Mr. Scott previously served as Chief Financial Officer and Secretary of IA Global, Inc. from October 2003 to June 2011. Mr. Scott also provides consulting services to other non-public entities from time to time. Mr. Scott has significant financial, capital market and relations experience in public and private microcap companies. Mr. Scott is a ~~director~~certified public accountant and ~~Executive Vice President~~received a Bachelor of ~~GrowLife, Inc as well as the current President of GrowLife Hydroponics. Mr. Hunt has spent the past five years~~Arts in the Gardening Industry specializing in Organic and Hydroponic growing methods formerly as the majority owner and CEO of both Rocky Mountain Hydroponics (RMH) in Colorado and Evergreen Garden Centers (EGC) in Massachusetts, New Hampshire, and Maine. He is a professional consultant to many dispensary owners and license seekers in multiple jurisdictions.

As the CEO of RMH and EGC, Mr. Hunt grew from one location to five and significantly increased revenue over each year of leadership, building it to annual sales of close to four million dollars. Mr. Hunt is also an active attorney in the State of Colorado, where he has helped advise and guide many cannabis dispensaries through a rapidly changing legal landscape.

Mr. Hunt is also the Chairman of the Coalition for Responsible Patient Care, based in Massachusetts, where he has taken an active role in helping to develop and implement the fledgling medical cannabis market in the Commonwealth.

Mr. Hunt has authored articles for publications as diverse as Hydrolife Magazine, Urban Garden and the Medical Marijuana Business Daily (MMBD). He is often quoted in articles as a professional in both the hydroponics and the medical cannabis industry, including publications such as The Boston Globe, The Boston Herald, The Boston Business Journal, CannaBusiness Magazine, The Phoenix, and Wicked Local. Mr. Hunt has also been a panelist for the National Cannabis Industry Association (NCIA) and the MMBD. He has been interviewed by: Entrepreneur Magazine, Fortune Magazine, The Boston Business Journal, NBC News, ABC News, The Boston Herald, MMJ Business Daily, iCannabis Radio, Unregular Radio, and The Cannabis Financial Network as well as numerous other publications and media outlets.

As one of the principal developers of Cannabis.org, a website focused on changing the scheduling of cannabis away from being a schedule I drug on the Federal Government’s list of controlled substances, Rob has been responsible for the majority of the written blogging commentary on the Cannabis.org Facebook page (~~www.https://www.facebook.com/tellthetruthfederalgovernment) and website (www.cannabis.org~~).

Mr. Hunt graduated from Suffolk University Law School in 2007 where in his final year he completed a semester long independent study about the disparity between cannabis being a Schedule I drug according to the Federal Government, yet at the time, thirteen U.S. States had medicinal cannabis laws on their books.

~~Rob graduated~~Accounting from the University of ~~Vermont in 2003 where he~~Washington.

Mr. Scott was the Speaker of the Senate in the Student Government and active in helping change the rules preventing students with prior arrests for drug possession from being prevented in obtaining federally backed student loans. Priorappointed to ~~this Mr. Hunt was~~ the ~~CEO of All About Content, a technology start-up based in Aliso Viejo, CA. He has also found success as both an accomplished sushi chef and a competitive professional skier.~~

~~The Company added Mr. Hunt to its~~ Board of Directors ~~because~~based on his financial, SEC and governance skills.

Joseph Barnes- Mr. Barnes was appointed Senior Vice President of Business Development for GrowLife, Inc. on October 10, 2014. Mr. ~~Hunt’s vast~~Barnes works from our Avon (Vail), Colorado store. Mr. Barnes joined GrowLife in 2010 and is responsible for all national sales operations including direct sales, retail and e-commerce. He led the sales team that recorded sales in 2014 of more than $8 million, a 100% increase from the previous year.

Mr. Barnes made the progressive and entrepreneurial decision to work with GrowLife after seeing the agricultural benefits of indoor growing. He is deeply passionate about clean and sustainable grows, and has deep relationships with many trusted cultivators. He holds extensive knowledge of indoor growing methods with concentrating on maximizing the yields for clean and ~~contacts within both~~healthy crops.

Barnes was a highly regarded snowboard instructor in Vail, Colorado prior to joining GrowLife. He worked with many top snowboard professionals, and received a Level 1 certification from American Association Snowboard Instructors (AASI). Before his days on the ~~cannabis~~slopes, Barnes was also a recruiting manager focusing on placing senior executives with international pharmaceutical/biotech companies. He also owned and ~~hydroponics industries. An important part of the Company’s strategy is to grow via acquisitions, and we believe that Mr. Hunt’s~~operated Chrome Night Life Arena, a 20,000 square foot indoor/outdoor venue based in Philadelphia with more than 65 employees.

Certain Significant Employees

There are no significant ~~industry experience and related network of contacts should prove~~employees required to be ~~extremely valuable to the implementation~~disclosed under Item 401(c) of ~~the Company’s strategic vision.~~Regulation S-K.

~~Eric Shevin~~ ~~- Mr. Shevin, through his practice “Law Offices of Eric D. Shevin~~Family Relationships

There are no family relationships among our directors and Associates”, represents clients exclusively in the area of State and Federal criminal law with a focus on marijuana and drug cases. Mr. Shevin’s practice, at which he has worked for the prior five (5) years, also represents clients in matters dealing with medical marijuana business formation and corporate representation. Presently, Mr. Shevin teaches a course on Medical Marijuana Laws to the Los Angeles County Judiciary, in addition to teaching at the NACDL Advanced Criminal Law Seminar in Aspen, Colorado. Mr. Shevin represents individuals nationally and has won significant victories for his clients in Hawaii, Louisiana, North Carolina, Utah, Arkansas, Missouri, Ohio, New York, Nevada, Texas, and Tennessee. Prior to starting his own practice, Mr. Shevin was a partner in a high volume criminal defense practice specializing in marijuana matters, unlawful searches, illegal police conduct, and unauthorized destruction of evidence. Mr. Shevin represented the California Hemp and Health Initiative on Writ of Mandate to the California Supreme Court and developed expertise in the areas of cannabis yield ratios, medical efficacy of marijuana, and government cultivation guidelines.executive officers.

~~- 75 -~~32

~~Mr. Shevin received his Juris Doctor degree~~

Involvement in Certain Legal Proceedings

None of our current directors or executive officers has, to the best of our knowledge, during the past ten years:

● Had any petition under the federal bankruptcy laws or any state insolvency law filed by or against, or had a receiver, fiscal agent, or similar officer appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time hereof, or any corporation or business association of which he was an executive officer at or within two years before the time hereof;

● Been convicted in a criminal proceeding or a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);

● Been the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the ~~University~~following activities:

● Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of ~~San Diego~~any of the foregoing, or as an investment adviser, underwriter, broker or dealer in ~~1992. Mr. Shevin completed a judicial clerkship~~securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;

● Engaging in any type of business practice; or

● Engaging in any activity in connection with the ~~Honorable Judge Bernard Revak~~purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;

● Been the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any federal or state authority barring, suspending, or otherwise limiting for more than 60 days the right of such person to engage in any activity described in (i) above, or to be associated with persons engaged in any such activity;

● Been found by a court of competent jurisdiction in a civil action or by the SEC to have violated any federal or state securities law, where the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated; or

● Been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, where the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended, or vacated.

Committees of the ~~San Diego Superior Court~~Board of Directors

The Board has three standing committees to facilitate and ~~interned with~~assist the ~~San Diego County District Attorney’s office, Juvenile Division. Mr. Shevin obtained his Bachelor~~Board in the execution of ~~Science degree at San Diego State University in 1989. He is past President~~its responsibilities. The committees are currently the Audit Committee, the Nominations and Governance Committee, and the Compensation Committee. The Committees were formed on June 3, 2014 by the current board of directors. The Audit Committee, Compensation and Nominations and Governance Committees each have two management directors. The table below shows current membership for each of the Financial Management Association’s National Honor Society. Through 20 years of daily courtroom experience, Mr. Shevin has developed extensive knowledge of all issues concerning marijuana and medical marijuana, including, but not limited to, defending marijuana cases in State and Federal court, cannabis yield ratios, medical efficacy of marijuana, and State Guidelines for the operation of cooperatives.standing Board committees.

~~Mr. Shevin has been published in The 420 Times, “As A Medical Marijuana Patient, What Are My Rights?”; Volume 3, 2010 and the West Coast Leaf, “LA’s Strict Ordinance Draws Patient Backlash~~”; Volume 3, No. 2, Summer 2010. Mr. Shevin has also been featured and/or quoted in more than 25 articles and news stories including the following media outlets: Los Angeles Times, Los Angeles Daily Journal, ABC News, CBS News, MSNBC, Fox News, Newshour with Jim Lehrer, Huffington Post, National Public Radio, Hartford Courant, Orange County Register, Orange County Weekly, The 420 Times, West Coast Leaf, Marijuana Anti Prohibition Project, Press Enterprise, Metropolitan News Enterprise, Hemp Evolution, The Compassion Club, Cannabis News, The Medical Marijuana Magazine, The Marijuana News, and High Times Freedom Fighter of the Month.

Mr. Shevin’s published opinion was “People v. Bergen, 166 Cal.App.4th 161 (2008). Established conclusive rights of medical marijuana patients to manufacture concentrated cannabis without the use of chemicals”.

~~His teaching experience includes:~~

· Audit	“~~HAS MEDICINE GONE TO POT; (The Marijuana Law, Its Impact on You~~	Compensation		Nominations and ~~Our Community)”, 2~~nd ~~Annual Pasadena Medical Society and Alliance Community Forum.~~Governance
Michael E. Fasci (Chairman)		Michael E. Fasci (Chairman)		Marco Hegyi (Chairman)

·	~~National Association of Criminal Defense Lawyers, Advanced Criminal Law Seminar, Aspen 2011.~~ ~~“TOMORROWS ISSUES TODAY, DEFENDING MEDICAL MARIJUANA CASES IN FEDERAL COURT AND MEDICAL MARIJUANA BUSINESS FORMATION AND REPRESENTATION~~.

·	“~~MEDICAL MARIJUANA LEGAL SEMINAR”, Course on Medical Marijuana Law to the Los Angeles County Judiciary, Winter 2011.~~

·	“~~MEDICAL MARIJUANA LEGAL ISSUES”, National Business Institute, Continuing Education for Legal Professionals. April 2011, 2012.~~

·	~~“MARIJUANA LAWS; WHAT’S THE LATEST”, Criminal Law Section MCLE Event, San Fernando Valley Bar Association. January, 2013.~~

~~Mr Shevin’s awards, honors, and affiliations are as follows:~~

·	~~Member, United States Supreme Court.~~

·	~~Southern California Super Lawyer for 2004, 2005 and 2009, 2012, 2013.~~

·	~~Defender of Justice Award, Americans for Safe Access, 2008.~~

·	~~Lifetime member, Legal Committee for the National Organization for the Reform of Marijuana Laws.~~

·	~~Sustaining member, Criminal Courts Bar Association, Los Angeles County.~~

Mr. Shevin’s legal experience/expertise in the cannabis industry was the motivation to add him to the Company’s Board of Directors. As the country’s legal framework related to cannabis evolves and changes, at what we believe will be a rapid pace, having a legal expert such as Mr. Shevin is considered, by the Company, to be critical in helping us plan and implement corporate strategy in a law abiding manner.

~~- 76 -~~

~~Alan Hammer~~ ~~– Mr. Hammer is a partner in the Roseland, New Jersey law firm~~Compensation Committee Interlocks and Insider Participation

None of Brach Eichler L.L.C., at which he has been employed the past five (5) years. He joined the predecessor firm immediately after graduation in 1971. He is former Managing Partner and a Member of the Executive Committee and Real Estate Practice Group. He has concentrated his practice in the areas of investment real estate transactions and tax certiorari proceedings. He has been peer review rated as AV Preeminent by Martindale-Hubbell for 25 years, its highest rating. He has been recognized by his peers as among the Best Lawyers in America and as a New Jersey Super Lawyer for the last 10 years. In 2014 he was named by Best Lawyers as the 2014 Newark Litigation – Real Estate “Lawyer of the Year”. He is also a Tier 1 attorney in Chambers USA. In addition to the practice of law, since 1972 when Mr. Hammer acquired his first apartment house he has been personally active in the ownership, management, and operation of investment properties, primarily apartment complexes, in New Jersey and Eastern Pennsylvania. Mr. Hammer served as Acting Chairman and CEO of Kushner Companies from August 2005 through September 2007 while continuing to practice law with the firm. Kushner Companies is a private real estate company which owned and operated over 20,000 apartments in New Jersey, New York, Pennsylvania, Delaware and Maryland as well as industrial properties, retail properties, office buildings, and hotels. After completing the successful sale of a 17,000 unit multifamily portfolio comprised of 86 properties in four states to AIG for an amount close to two billion dollars, Mr. Hammer returned to the full time practice of law. Mr. Hammer earned his J.D. from Rutgers University of Law in 1971 and his B.S. in real estate from Rider University in 1968. He is a member of the Bars of New Jersey, New York, and Pennsylvania.

The Company added Mr. Hammer to its Board of Directors because of his legal background and also because of his vast real estate experience. We have previously mentioned the importance of having strong legal experience to help us devise and implement corporate strategy, but the Company also believes that real estate will be a significant factor in the future of the cannabis industry. As more dispensaries and grow operations enter the industry, they will need facilities, ie real estate, in which to conduct their operations. We believe that having a Director such as Mr. Hammer, who has a tremendous real estate background, is a very significant advantage to the Company.

~~Anthony Ciabattoni~~ - Mr. Ciabattoni has an entrepreneurial background that includes the formation, growth, and eventual sale of three successful start-up companies. Since 1996, Mr. Ciabattoni has been a private investor and currently manages a diverse investment portfolio with assets ranging from real estate, satellite communications, and software. His business background includes sales and marketing management positions with two Fortune 150 companies. He was the founder of Pacific Business Interiors, which became the largest distributor of Steelcase office furniture in Southern California, and a leading facilities management service provider to Fortune 500 companies. In addition to serving as President and CEO of Pacific Business Interiors from 1983 until its sale in 1996, Mr. Ciabattoni founded Recycled Office Solutions in 1993, a re-manufacturer of office furniture systems. Since selling those companies, Mr. Ciabattoni has been involved in a wide range of investments in the real estate, energy, and private equity sectors. Heour executive officers serves as a member of the ~~Board~~board of ~~Advisors for Waveland Capital Group, LLC,~~directors or compensation committee, or other committee serving an ~~investment banking firm~~equivalent function, of any other entity that ~~advises and raises capital for early-stage medical technology companies, including NeoMatrix, LLC. Mr. Ciabattoni served~~has one or more of its executive officers serving as a ~~director~~member of ~~Transeastern Properties, a real estate development company recently acquired~~our board of directors or our compensation committee.

Code of Conduct and Ethics

We have adopted conduct and ethics standards titled the code of ethics, which is available at www.growlifeinc.com. These standards were adopted by ~~Technical Olympic USA, Inc. Mr. Ciabattoni received a Bachelor~~our board of ~~Arts Degree from the University of Delaware.~~

~~Mr. Ciabattoni’s past experience building, growing,~~directors to promote transparency and ~~selling companies were the qualifications that prompted us to add him~~integrity. The standards apply to our ~~Board~~board of ~~Directors. The Company is committed~~directors, executives and employees. Waivers of the requirements of our code of ethics or associated polices with respect to ~~growing from its current size/state~~members of our board of directors or executive officers are subject to ~~one that is an industry leader in terms~~approval of ~~both size and scope. Given his past success in building companies, we believe that having Mr. Ciabattoni as a Director will help us achieve our growth related goals.~~the full board.

~~Jeff Giarraputo -~~ Mr. Giarraputo has served on the Board of Directors of GrowLife, Inc. since December 19, 2013. In 1996 Mr. Giarraputo co-founded the global advertising agency Factory Design Labs, the visionary leader in customer creation for culture-driven lifestyle brands. From 1996 until current, Mr. Giarraputo has built Factory Design Labs into a multi-national agency with offices in Denver, USA, Shanghai, China and Verbier, Switzerland. In 2004, Mr. Giarraputo co-founded Beatport, the largest music store for DJs in the world. Beatport was privately held and headquartered in Denver, USA and Berlin, Germany until it was acquired in 2013. Mr. Giarraputo currently consults with a number of private equity companies as an advisor and/or board member. He is also an investor and mentor in several start-ups and later stage companies.

The Company added Mr. Giarraputo to its Board of Directors because of his sales and marketing, and in particular his “branding”, experience/expertise. The Company is committed to establishing the GrowLife brand as an industry leader, which makes an individual with Mr. Giarraputo’s experience and skillset a welcome addition to our Board of Directors.

~~- 77 -~~

~~Significant Employees~~

~~None.~~

~~Family Relationships~~

~~None.~~

~~Voting Arrangements~~

~~None.~~

Section 16(a) Beneficial Ownership Reporting ~~Compliance.~~Compliance

Our executive officers, directors and 10% stockholders are required under Section 16(a) of the ~~Securities~~ Exchange Act ~~of 1934 requires that our executive officers and directors, and persons who own more than ten percent of a registered class of our equity securities,~~to file reports of ownership and changes in ownership with the SEC. ~~Executive~~Copies of these reports must also be furnished to us.

Except as follows, based solely on a review of copies of reports furnished to us, as of December 31, 2016 our executive officers, directors and ~~greater-than-ten percent stockholders are required by SEC regulations to furnish us~~10% holders complied with all filing requirements.

Person	Filing Type	Transaction Date	Required File Date	Actual File Date
Michael E. Fasci	4	5/25/2016	5/27/2016	��5/31/2016
Marco Hegyi	4	10/21/2017	10/2/2016	10/25/2016

CANX and Logic Works Ownership

On July 10, 2014, we entered into 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.

CANX does not consider itself a beneficial owner due to its position that it has a 4.99% ownership limit. CANX further disclaims it has acted as a control group with Logic Works Therefore, CANX has not made any Section 16(a) ~~forms they file. Based solely~~filings. Likewise, at this time, we do not consider CANX a control party under SEC Rules.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Overview of Compensation Program

This Compensation Discussion and Analysis describes the material elements of compensation awarded to, earned by or paid to each of our executive officers named in the Compensation Table on ~~our review~~page 26 under “Remuneration of ~~the copies of the forms received by us and written representations from certain reporting persons that they have complied with the relevant filing requirements, we believe that,~~Executive Officers” (the “Named Executive Officers”) who served during the year ended December 31, ~~2013, all~~2016. This compensation discussion primarily focuses on the information contained in the following tables and related footnotes and narrative for the last completed fiscal year. We also describe compensation actions taken after the last completed fiscal year to the extent that it enhances the understanding of our executive compensation disclosure. The principles and guidelines discussed herein would also apply to any additional executive officers ~~directors and greater-than-ten percent stockholders complied with all Section 16(a) filing requirements.~~

~~Item 405 – Compliance with Section 16(a) of~~that the ~~SEA, 1934 – Regulation S-K~~Company may hire in the future.

The ~~Company has a duty to file certain forms pursuant to Section 16(a)~~Compensation Committee of the ~~SEA~~Board has responsibility for overseeing, reviewing and approving executive compensation and benefit programs in ~~regards to insider trading of officers, directors, and beneficial owners of more than ten (10%) of any class of equity securities~~accordance with the Compensation Committee’s charter. The member of the ~~Company. Based~~Compensation Committee is Michael E. Fasci. We expect to appoint two independent Directors to serve on ~~review of copies of such forms received by it, or written representations from certain reporting persons,~~ the ~~Company believes all filing requirements applicable to its officers, directors~~Compensation Committee during 2017.

Compensation Philosophy and ~~greater than ten (10%) percent beneficial owners were complied with except~~Objectives

The major compensation objectives for the ~~following below:~~

~~Item 405a Requirements~~

~~Section 16(a) Beneficial Ownership Reporting Compliance~~

~~Form 3~~

~~Form 3 is an initial reporting document to be filed by all insiders during the fiscal year listing the insider’s holdings of company securities, including derivative securities such~~Company’s executive officers are as stock options. The insider must file a Form 3 within 10 calendar days of becoming a director, officer, or greater than ten (10%) beneficial owner of Company stock. The insider must file a Form 3 even if the insider does not have a pecuniary interest in any stock of the company at the time of filing.

The following director(s), officer(s), or beneficial owner(s) of more than ten (10%) percent of any class of equity securities failed to file Form 3 on a timely basis as required by Section 16(a) of the SEA during the most recent fiscal year or prior fiscal years.

follows:

	1.	~~Marco Hegyi~~
	●	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.

~~Marco Hegyi has one (1) Form 3 filing where zero (0) transactions needed~~Role of Chief Executive Officer in Compensation Decisions

The Board approves all compensation for the chief executive officer. The Compensation Committee makes recommendations on the compensation for the chief executive officer and approves all compensation decisions, including equity awards, for our executive officers. Our chief executive officer makes recommendations regarding the base salary and non-equity compensation of other executive officers that are approved by the Compensation Committee in its discretion.

Setting Executive Compensation

The Compensation Committee believes that compensation for the Company’s executive officers must be managed to ~~be reported, but~~what we can afford and in a way that allows for us to meet our goals for overall performance. During 2016 and 2015, the ~~Form 3 was~~Compensation Committee and the Board compensated its Chief Executive Officers, President and Chief Financial Officer at the salaries indicated in the compensation table. This compensation reflected the financial condition of the Company. The Compensation Committee does not ~~filed on~~use a ~~timely basis. Currently,~~peer group of publicly-traded and privately-held companies in structuring the ~~Company is aware that there is one (1) known failure to file a required Form 3. However, the Company will remedy the situation by filing Marco Hegyi’s Form 3 no later than March 31, 2014.~~compensation packages.

~~- 78 -~~34

~~Alan Hammer~~

Executive Compensation Components for the Year Ended December 31, 2016

~~Alan Hammer has one (1) Form 3 filing where zero (0) transactions needed~~The Compensation Committee did not use a formula for allocating compensation among the elements of total compensation during the year that ended December 31, 2016. The Compensation Committee believes that in order to ~~be reported, but~~attract and retain highly effective people it must maintain a flexible compensation structure. For the ~~Form 3 was not filed on a timely basis. Currently,~~year that ended December 31, 2016, the principal components of compensation for named executive officers were base salary.

Base Salary

Base salary is intended to ensure that our employees are fairly and equitably compensated. Generally, base salary is used to appropriately recognize and reward the experience and skills that employees bring to the Company ~~is aware~~and provides motivation for career development and enhancement. Base salary ensures that ~~there is one (1) known failure~~all employees continue to ~~file~~receive a ~~required Form 3. However, the Company will remedy the situation by filing Alan Hammer’s Form 3 no later than March 31, 2014.~~basic level of compensation that reflects any acquired skills which are competently demonstrated and are consistently used at work.

~~Anthony Ciabattoni~~

Base salaries for the Company’s named executive officers are initially established based on their prior experience, the scope of their responsibilities and the applicable competitive market compensation paid by other companies for similar positions. Mr. Hegyi and Mr. Scott were compensated as described above based on the financial condition of the Company.

Anthony Ciabattoni has one (1) Form 3 filing where zero (0) transactions needed to be reported, but the Form 3 was not filed on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 3. However, the Company will remedy the situation by filing Alan Hammer’s Form 3 no later than March 31, 2014.Performance-Based Incentive Compensation

~~Jeffrey Giarraputo~~

Jeffrey Giarraputo has one (1) Form 3 filing where zero (0) transactions needed to be reported, but the Form 3 was not filed on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 3. However, the Company will remedy the situation by filing Alan Hammer’s Form 3 no later than March 31, 2014.

~~Form 4~~

Form 4 reflects any change in an insider’s beneficial ownership of the company’s securities, including transactions that are exempt from short-swing profit recovery under Rule 16b-3 under the SEA, such as the grant, exercise or conversion of stock options or other derivative securities or the withholdings of shares for tax purposes and must be filed within two (2) days of the transaction

The following director(s), officer(s), or beneficial owner(s) of more than ten (10%) percent of any class of equity securities failed to file Form 4 on a timely basis as required by Section 16(a) of the SEA during the most recent fiscal year or prior fiscal years.

~~Sterling Scott~~

Sterling Scott has three (3) Form 4 filings where three (3) transactions were not reported on a timely basis. Currently, the Company is aware that there are three (3) known failures to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for Sterling Scott that reflects these transactions no later than March 31, 2014. The Company also acknowledges that Sterling Scott’s Form 5 reflecting these transactions is also not filed on a timely basis.

~~John Genesi~~

John Genesi has one (1) Form 4 filing where one (1) transaction was not reported on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for John Genesi that reflects this transaction no later than March 31, 2014. The Company also acknowledges that John Genesi’s Form 5 reflecting this transaction is also not filed on a timely basis.

~~Justin Manns~~

Justin Manns has one (1) Form 4 filing where four (4) transactions were not reported on a timely basis. Currently, there are no known failures, and thus, the Company does not intend to file a subsequent Form 4 or 5 for Justin Manns.

~~- 79 -~~

~~Marco Hegyi~~

Marco Hegyi has one (1) Form 4 filing where one (1) transaction was not reported on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for Marco Hegyi that reflects this transaction no later than March 31, 2014. The Company also acknowledges that Marco Hegyi’s Form 5 reflecting this transaction is also not filed on a timely basis.

~~Robert Hunt~~

Robert Hunt has one (1) Form 4 filing where two (2) transactions were not reported on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for Robert Hunt that reflects these transactions no later than March 31, 2014. The Company also acknowledges that Robert Hunt’s Form 5 reflecting these transactions is also not filed on a timely basis.

~~Eric Shevin~~

Eric Shevin has three (3) Form 4 filings where three (3) transactions were not reported on a timely basis. Currently, the Company is aware that there are three (3) known failures to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for Eric Shevin that reflects these transactions no later than March 31, 2014. The Company also acknowledges that Eric Shevin’s Form 5 reflecting these transactions is also not filed on a timely basis.

~~Alan Hammer~~

Alan Hammer has one (1) Form 4 filing where one (1) transaction was not reported on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for Alan Hammer that reflects this transaction no later than March 31, 2014. The Company also acknowledges that Alan Hammer’s Form 5 reflecting this transaction is also not filed on a timely basis.

~~Anthony Ciabattoni~~

Anthony Ciabattoni has one (1) Form 4 filing where one (1) transaction was not reported on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for Anthony Ciabattoni that reflects this transaction no later than March 31, 2014. The Company also acknowledges that Anthony Ciabattoni’s Form 5 reflecting this transaction is also not filed on a timely basis.

~~Jeffrey Giarraputo~~

Jeffrey Giarraputo has one (1) Form 4 filing where one (1) transaction was not reported on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for Jeffrey Giarraputo that reflects this transaction no later than March 31, 2014. The Company also acknowledges that Jeffrey Giarraputo’s Form 5 reflecting this transaction is also not filed on a timely basis.

~~10.~~

~~Craig Ellins~~

Craig Ellins has two (2) Form 4 filings where two (2) transactions were not reported on a timely basis. Currently, the Company is aware that there are two (2) known failures to file a required Form 4. The Company is trying to remedy the situation by filing a Form 5 for Craig Ellins that reflects these transactions. However, Craig Ellins resigned from the Board of Directors in April, 2013Compensation Committee believes incentive compensation reinforces performance objectives, rewards superior performance and is ~~currently unavailable. The Company will file and disclose~~consistent with the ~~appropriate information as soon as the Company receives the requisite information.~~

~~- 80 -~~

~~11.~~

~~Robert Kurilko~~

Robert Kurilko has five (5) Form 4 filings where five (5) transactions were not reported on a timely basis. Currently, the Company is aware that there are five (5) known failures to file a required Form 4. The Company is trying to remedy the situation by filing a Form 5 for Robert Kurilko that reflects these transactions. However, Robert Kurilko resigned from the Boardenhancement of ~~Directors in November, 2013 and is currently unavailable. The Company will file and disclose the appropriate information as soon as the Company receives the requisite information.~~

~~Form 5~~

~~Form 5 is the annual report where insiders must file within 45 days after the end~~stockholder value. All of the Company’s ~~fiscal year. Any person who was an insider at~~Named Executive Officers are eligible to receive performance-based incentive compensation. The Compensation Committee did not recommend or approve payment of any time during the fiscal year must file a Form 5 unless either the insider had no reportable transactions required to be reported on a Form 4 or Form 5. Form 5 must include all reportable transactions that were exempt from the Form 4 and the two-day filing rule.

~~Please see above as to how the Company will file director(s), officer(s), and greater than ten (10%) percent beneficial owners Form 5.~~

~~Committees of the Board of Directors~~

~~We do not have a separately designated audit,~~performance-based incentive compensation or nominating committee of our Board and the functions customarily delegated to these committees are performed by our full Board. We are not a “listed company” under SEC rules and are therefore not required to have separate committees comprised of independent directors. The Company has, however, determined that Bob Kurilko (a former member as of November 2, 2013), Eric Shevin, Alan Hammer, Anthony Ciabattoni, and Jeff Giarraputo are “independent” as that term is defined in Section 5605 of the NASDAQ Marketplace Rules as required by the NASDAQ Stock Market.

~~The Board does not have a nominations committee because the Board does not believe that a defined policy with regard~~ to the consideration of candidates recommended by stockholders is necessary at this time because the functions of such committee are adequately performed by our Board. There are no specific minimum qualifications that the Board believes must be met by a candidate recommended by the Board. Currently, the entire Board decides on nominees, on the recommendation of any member of the Board, followed by the Board’s review of the candidates’ resumes and interviews of candidates. Based on the information gathered, the Board then makes a decision on whether to recommend the candidates as nominees for director. We do not pay any fee to any third party, or parties, to identify or evaluate or assist in identifying or evaluating potential nominees.

The Board does not have an audit committee. However, for certain purposes of the rules and regulations of the SEC and in accordance with the Sarbanes-Oxley Act of 2002, our Board is deemed to be its audit committee and as such functions as an audit committee and performs some of the same functions as an audit committee including: (i) selection and oversight of our independent accountant; (ii) establishing procedures for the receipt, retention, and treatment of complaints regarding accounting, internal controls, and auditing matters; and (iii) engaging outside advisors. Our Board has determined that its members do not include a person who is an “audit committee financial expert” within the meaning of the rules and regulations of the SEC. Our Board has determined that each of its members is able to read and understand fundamental financial statements and has substantial business experience that results in that member’s financial sophistication. Accordingly, our Board believes that each of its members has sufficient knowledge and experience to fulfill the duties and obligations of an audit committee.

The Board does not have a compensation committee because the Board believes that it is not necessary to have a compensation committee at this time because the functions of such committee are adequately performed by our Board.

~~- 81 -~~

~~Stockholder Communications~~

~~Our Board has determined not to adopt a formal methodology for communications from stockholders on the belief that any communication would be brought to the Board’s attention by our Chief~~Named Executive ~~Officer, Sterling C. Scott.~~

~~Meetings of the Board of Directors and Committees~~

~~Our Board took a number of actions by written consent of all of the directors~~Officers during the year ended December 31, ~~2013. Such actions~~2016 based on our financial condition.

Ownership Guidelines

The Compensation Committee does not require our executive officers to hold a minimum number of our shares. However, to directly align the interests of executive officers with the interests of the stockholders, the Compensation Committee encourages each executive officer to maintain an ownership interest in the Company.

Stock Option Program

Stock options are an integral part of our executive compensation program. They are intended to encourage ownership and retention of the Company’s common stock by named executive officers and employees, as well as non-employee members of the Board. Through stock options, the objective of aligning employees’ long-term interest with those of stockholders may be met by providing employees with the opportunity to build a meaningful stake in the Company.

The Stock Option Program assists us by:

- enhancing the link between the creation of stockholder value and long-term executive incentive compensation;

- providing an opportunity for increased equity ownership by executive officers; and

- maintaining competitive levels of total compensation.

Stock option award levels are determined by the ~~written consent of all directors~~Compensation Committee and vary among participants’ positions within the Company. Newly hired executive officers or promoted executive officers are ~~according to Delaware corporate law and our bylaws, valid and effective as if they had been passed~~generally awarded stock options, at ~~a meeting~~the discretion of the ~~directors duly called and held. The Board held approximately fifteen general meetings during 2013. Each director attended~~Compensation Committee, at ~~least 75%~~the next regularly scheduled Compensation Committee meeting on or following their hire or promotion date. In addition, such executives are eligible to receive additional stock options on a discretionary basis after performance criteria are achieved.

Options are awarded at the closing price of ~~all~~our common stock on the ~~meetings~~date of the ~~Board~~grant or last trading day prior to the date of the grant. The Compensation Committee’s policy is not to grant options with an exercise price that is less than the closing price of our common stock on the grant date.

Generally, the majority of the options granted by the Compensation Committee vest quarterly over two to three years or annually over five years of the 5-10-year option term. Vesting and exercise rights cease upon termination of employment and/or service, except in ~~2013. While~~ the ~~Company~~case of death (subject to a one year limitation), disability or retirement. Stock options vest immediately upon termination of employment without cause or an involuntary termination following a change of control. Prior to the exercise of an option, the holder has ~~not established~~no rights as a ~~policy~~stockholder with respect to ~~members of~~ the ~~Board attending annual meetings, each director is encouraged~~shares subject to ~~attend~~such option, including voting rights and the ~~annual meeting of stockholders. We did not hold an annual meeting of security holders during our last fiscal year. Our directors~~right to receive dividends or dividend equivalents.

The Named Executive Officers received stock option grants and ~~officers do not receive remuneration from us unless approved by our Board or pursuant to an employment contract. No compensation has been paid to our directors for attendance at any meetings~~warrants during the ~~last fiscal year.~~

~~Board Leadership Structure and Role in Risk Oversight~~

We do not separate the roles of Chief Executive Officer and Chairman of the Board because we believe that such roles are adequately performed by Sterling C. Scott. The benefits of Mr. Scott’s leadership of the Board stem from his experience in managing small to medium sized businesses and his involvement in the hydroponics industry, which provide a unique understanding of our culture and business. Also, servingyear ended December 31, 2016 as both the Chief Executive Officer and Chairman of the Board ensures that a constant flow of Company related information is available between the Board and our senior management. This flow of communication enables Mr. Scott to identify issues, proposals, strategies and other considerations for future Board discussions and to assume the lead in many of the resulting discussions during Board meetings. Our Board has responsibility for the oversight of risk management. A fundamental part of risk management is not only understanding the risks we face and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for us. The involvement of the Board in setting our business strategy is a key part of its assessment of risk management and the determination of what constitutes our appropriate level of risk. The Board regularly discusses with management our major risk exposures, their potential impact on us, and the steps taken to manage these risks. In addition, the Board may retain, on such terms as determined by the Board, in its sole discretion, independent legal, financial, and other consultants and advisors to advise and assist the Board in fulfilling its oversight responsibilities.

~~Code of Ethics~~

~~A code of ethics relates to written standards that are reasonably designed to deter wrongdoing and to promote:~~

~~Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;~~

~~Full, fair, accurate, timely, and understandable disclosure in reports and documents that are filed with, or submitted to, the SEC and in other public communications made by an issuer;~~

~~Compliance with applicable governmental laws, rules and regulations;~~

~~The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and~~

~~Accountability for adherence to the code.~~

~~We have not adopted a corporate code of ethics that applies to our executive officers.~~

outlined below.

~~- 82 -~~

~~ITEM 11. EXECUTIVE COMPENSATION.~~

~~Summary Compensation Table~~

~~The following table and related footnotes show the compensation paid during the fiscal years ended December 31, 2013 and 2012, to the Company’s named executive officers:~~

Name and Principal Position Year
Salary
($)

Bonus
($)

Stock
Awards
($)

Option Awards
($)

All
Other Compensation ($)

Total
($)
Sterling C. Scott (1, 13) 2013 20,000 58,333 537,600 615,933
CEO, President, Secretary and Director 2012 41,667 41,667

John Genesi (2, 13) 2013 79,167 448,000 527,167
Chief Financial Officer 2012

Justin Manns (3) 2013 78,330 46,667 124,997
Former CFO and Director, current Controller GrowLife Hydroponics, Inc. 2012 41,548 33,333 74,881

Marco Hegyi (4) 2013 10,834 1,725,000 1,735,834
President and Director 2012

Robert Hunt (5, 13) 2013 49,777 228,000 9,000 286,777
Director and President of 2012
GrowLife Hydroponics, Inc.

Eric Shevin (6) 2013 $30,000 $30,000
Director 2012

Alan Hammer (7) 2013 $1,667 $1,667
Director 2012

Anthony Ciabattoni (8) 2013 $1,444 $1,444
Director 2012

Jeff Giarraputo (9) 2013 $1,444 $1,444
Director 2012

Bob Kurilko (14) 2013 $33,667 $33,667
Director 2012 $17,000 $17,000

Brian B. Sagheb (10) 2013
Former CEO, CFO, Secretary, and Director 2012

Craig Ellins (11) 2013 10,000 10,000
Former CEO, CFO, Secretary, and Director 2012 15,000 15,000

Todd Denkin (12) 2013
Former Director 2012 15,889 15,889

~~- 83 -~~

Mr. Scott has served as GrowLife’s Chief Executive Officer since April 5, 2012. In 2013, Mr. Scott earned $20,000 in salary for his services as Chief Executive Officer. Mr. Scott was also issued 5,833,333 shares of our common stock valued at $58,333 for compensation for being an officer during the year ended December 31, 2013. In 2012, Mr. Scott was issued 4,166,667 shares of our common stock valued at $41,667 for compensation for being an officer. In November 2013, the Company’s Board of Directors granted Mr. Scott a stock option via the Company’s 2011 Stock Incentive Plan to purchase 12,000,000 shares of the Company’s common stock at an exercise price of $0.085 per share, which represents the fair value of one share of the Company’s common stock on the date of grant. Per the terms of the stock option agreement, the shares were to vest in twenty-four (24) equal monthly installments on the last day of each month commencing from and after October 31, 2013, they could be exercised at any time on or after the grant date, the term was ten years, and the options could be exercised on a cashless basis. The Company valued the options at $537,600 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 82.77%; (iii) risk free rate of 0.02%, (iv) expected term of 3 years, and a per share market price of $0.085, which was the closing price of the Company’s shares on November 1, 2013. Beginning in November 2013 and ending October 2015, the Company will expense the $537,600 at the rate of $22,400 per month over the 24-month vesting term of the option (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”).

Retirement and Other Benefits

Mr. Genesi became the Company’s Chief Financial Officer on July 22, 2013. Mr. Genesi earned $79,167 in salary during the year ended December 31, 2013. In November 2013, the Company’s Board of Directors granted Mr. Genesi a stock option via the Company’s 2011 Stock Incentive Plan to purchase 10,000,000 shares of the Company’s common stock at an exercise price of $0.085 per share, which represents the fair value of one share of the Company’s common stock on November 1, 2013. Per the terms of the stock option agreement, the shares were to vest in twenty-four (24) equal monthly installments on the last day of each month commencing from and after October 31, 2013, they could be exercised at any time on or after the grant date, the term was ten years, and the options could be exercised on a cashless basis. The Company valued the options at $448,000 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 82.77%; (iii) risk free rate of 0.02%, (iv) expected term of 3 years, and a per share market price of $0.085, which was the closing price of the Company’s shares on November 1, 2013. Beginning in November 2013 and ending October 2015, the Company will expense the $448,000 at the rate of $18,667 per month over the 24-month vesting term of the option (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”).

Mr. Manns has served as GrowLife’s Chief Financial Officer since June 28, 2012. He resigned this position in July 2013 to become the Controller for GrowLife Hydroponics, Inc. During the year ended December 31, 2013, Mr. Manns was issued 4,666,667 shares of the Company’s common stock valued at $46,667 for compensation for being an officer. Mr. Manns also received a salary totaling $78,330 during fiscal year 2013 for his services as CFO of GrowLife, Inc. and Controller of GrowLife Hydroponics, Inc. Mr. Manns resigned as a Director of the Company on December 19, 2013. In 2012, Mr. Manns was issued 3,333,333 shares of our common stock valued at $33,333 for compensation for being an officer.

We have no other retirement, savings, long-term stock award or other type of plans for the Named Executive Officers.

Mr. Hegyi joined the Company on December 4, 2013 as its President and became a member of its Board of Directors on December 9, 2013. Mr. Hegyi was paid a salary totaling $10,834 during the year ended December 31, 2013. On December 11, 2013, the Company issued 25,000,000 warrants to Hegyi, LLC (“Hegyi”), an entity controlled by Mr. Hegyi. The warrants have a ten-year term with an original exercise price of $0.08 per share. The warrants vest immediately and are exercisable in whole, or in part, at any time and from time to time on or after the issue date and on or before the termination date. The Company valued the warrants at the time of issuance using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 88.81%; (iii) risk free rate of 0.02%, and (iv) expected term of 3 years, which resulted in a value of $1,725,000.

Mr. Hunt joined the Company on June 7, 2013 as the President of GrowLife Hydroponics, Inc. and a member of the Company’s Board of Directors. Mr. Hunt was paid a salary totaling $49,777 during the year ended December 31, 2013 and a housing allowance totaling $9,000. In November 2013, the Company’s Board of Directors approved a stock option grant to Mr. Hunt via the Company’s 2011 Stock Incentive Plan to purchase 12,000,000 shares of the Company’s common stock at an exercise price of $0.043 per share, which represents the fair value of one share of the Company’s common stock on June 7, 2013. The option grant was made retro-active to June 7, 2013, the date on which Mr. Hunt became a Director of the Company and the President of GrowLife Hydroponics, Inc. Per the terms of the stock option agreement, the shares were to vest in twenty-four (24) equal monthly installments on the last day of each month commencing from and after June 7, 2013, they could be exercised at any time on or after the grant date, the term was ten years, and the options could be exercised on a cashless basis. The Company valued the options at $228,000 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 82.77%; (iii) risk free rate of 0.04%, (iv) expected term of 2 years, and a per share market price of $0.043, which was the closing price of the Company’s shares on June 7, 2013. Beginning in June 2013 and ending May 2015, the Company will expense the $228,000 at the rate of $9,500 per month over the 24-month vesting term of the option (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”).

Perquisites and Other Personal Benefits

Mr. Shevin joined the Company April 1, 2013 as an independent member of its Board of Directors. During the year ended December 31, 2013, Mr. Shevin was issued 1,500,000 shares of the Company’s common stock, valued at $30,000 in the aggregate, as compensation for serving as an independent member of the Company’s Board of Directors.

Mr. Hammer joined the Company December 17, 2013 as an independent member of its Board of Directors. During the year ended December 31, 2013, Mr. Hammer was issued 83,333 shares of the Company’s common stock, valued at $1,667 in the aggregate, as compensation for serving as an independent member of the Company’s Board of Directors.

During the year ended December 31, 2016, we provided the Named Executive Officers with medical insurance. The Company paid $10,273 in life insurance for Mr. Hegyi and $9,755 in insurance for Mr. Scott. No other perquisites or other personal benefits were provided to Named Executive Officers. The committee expects to review the levels of perquisites and other personal benefits provided to Named Executive Officers annually.

Mr. Ciabattoni joined the Company December 19, 2013 as an independent member of its Board of Directors. During the year ended December 31, 2013, Mr. Ciabattoni was issued 72,222 shares of the Company’s common stock, valued at $1,444 in the aggregate, as compensation for serving as an independent member of the Company’s Board of Directors. Mr. Ciabattoni shares were issued to the Ciabattoni Living Trust, of which Mr. Ciabattoni is the Trustee.

Mr. Giarraputo joined the Company December 19, 2013 as an independent member of its Board of Directors. During the year ended December 31, 2013, Mr. Giarraputo was issued 72,222 shares of the Company’s common stock, valued at $1,444 in the aggregate, as compensation for serving as an independent member of the Company’s Board of Directors.

Employment and consulting agreements are discussed below.

~~10)~~

Mr. Sagheb served as our CEO from March 9, 2011 through May 17, 2011 and from September 16, 2011 through January 17, 2012. Mr. Sagheb served as our CFO, Secretary and Director from March 9, 2011 through January 17, 2012. Mr. Sagheb had no involvement with the Company during the year ended December 31, 2013.

~~11)~~

Mr. Ellins served as a member of the Company’s Board of Directors from January 1, 2013 through March 31, 2013; he resigned as a Board member on April 12, 2013. During the year ended December 31, 2013, Mr. Ellins was issued 500,000 shares of the Company’s common stock, valued at $10,000 in the aggregate, as compensation for serving as a member of the Company’s Board of Directors. Since resigning as a member of the Company’s Board of Directors, Mr. Ellins has had no involvement with the Company. Mr. Ellins served as our CEO, CFO, and Secretary from January 17, 2012 through April 5, 2012. In 2012, Mr. Ellins was issued 1,500,000 shares of our common stock valued at $15,000 for compensation for being a director.

Tax and Accounting Implications

Deductibility of Executive Compensation

Subject to certain exceptions, Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") generally denies a deduction to any publicly held corporation for compensation paid to its chief executive officer and its three other highest paid executive officers (other than the principal financial officer) to the extent that any such individual's compensation exceeds $1 million. “Performance-based compensation” (as defined for purposes of Section 162(m)) is not taken into account for purposes of calculating the $1 million compensation limit, provided certain disclosure, shareholder approval and other requirements are met. We periodically review the potential consequences of Section 162(m) and may structure the performance-based portion of our executive compensation to comply with certain exceptions to Section 162(m). However, we may authorize compensation payments that do not comply with the exceptions to Section 162(m) when we believe that such payments are appropriate and in the best interests of the stockholders, after taking into consideration changing business conditions or the officer's performance

Accounting for Stock-Based Compensation

We account for stock-based payments including its Stock Option Program in accordance with the requirements of ASC 718, “Compensation-Stock Compensation.”

COMPENSATION COMMITTEE REPORT

The Compensation Committee, sets and administers policies that govern the Company's executive compensation programs, and incentive and stock programs. The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

THE COMPENSATION COMMITTEE

Michael E. Fasci (Chairman)

EXECUTIVE COMPENSATION

REMUNERATION OF EXECUTIVE OFFICERS

The following table provides information concerning remuneration of the chief executive officer, the chief financial officer and another named executive officer for the years ended December 31, 2016 and 2015:

Summary Compensation Table

					Non-EquityIncentive
				Stock	Plan	Option	Other
		Salary	Bonus	Awards	Compensation	Awards	Compensation	Total
Principal Position		($)	($)	($) (1)	($)	($)	($)	($)
Marco Hegyi, President and Director (2)	12/31/2016	$250,000	$-	$-	$-	$-	$34,231	$284,231
	12/31/2015	$250,000	$-	$-	$-	$-	$8,561	$258,561

Mark E. Scott, Consulting Chief Financial Officer (3)	12/31/2016	$156,250	$-	$60,000	$-	$-	$9,755	$226,005
	12/31/2015	$156,250	$-	$-	$-	$7,312	$-	$163,562

Joseph Barnes, Senior Vice President of Business	12/31/2016	$120,000	$-	$-	$-	$-	$-	$120,000
Development (4)	12/31/2015	$90,000	$-	$-	$-	$-	$-	$90,000

~~- 84 -~~36

~~12)~~

~~Mr. Denkin resigned as a director on April 5, 2012. Since his resignation he has had no involvement with the Company.~~

~~13)~~

The above mentioned stock and option grants were recorded in accordance with Financial Accounting Standards Board (FASB) ASC Topic 718, “Compensation – Stock Compensation��. The Company measured, and recorded, the fair value of the option grant as of the date of grant and is amortizing the computed value of the option grant over the related vesting period.

~~14)~~

Mr. Kurilko is a former director who resigned as of November 2, 2013. During fiscal year 2013, Mr. Kurilko received 1,683,333 shares s compensation for Board service for January 1, 2013 through November 2, 2013. During fiscal year 2012, Mr. Kurilko received 1,700,000 shares.

~~Employment Contracts~~(1) For 2013, reflects the aggregate grant date fair value of stock awards granted during the relevant fiscal year calculated in accordance with FASB ASC Topic 718 as reflected in the terms of the August 12, 2012 Compensation Plan. For 2014, these amounts reflect the grant date market value as required by Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC Topic 718.

(2) Mr. Hegyi was paid a salary of $250,000 during the year ended December 31, 2016 and $250,000 (cash salary of $203,500 and accrued salary of $46,500) during the year ended December 31, 2015. This 2015 accrual was based on the tight cash flow of the Company and agreed to by Mr. Hegyi, but there was no formal deferral agreement. There was no accrued interest paid on the unpaid salary.

On ~~June 7, 2013,~~April 15, 2016, an entity controlled by Marco Hegyi converted $20,000 of accrued salary into 1,000,000 shares of our common stock at the market price of $0.020 per share. On October 12, 2016, an entity controlled by Marco Hegyi converted $40,000 of accrued salary into 4,000,000 shares of our common stock at the market price of $0.010 per share. The shares were valued at the fair market price of $0.01 per share.

We paid life insurance of $10,273 and $8,561 for Mr. Hegyi during the years ended December 31, 2016 and 2015, respectively. On October 21, 2016, Mr. Hegyi received a Warrant to purchase up to 10,000,000 shares of our common stock at an exercise price of $0.01 per share. In addition, Mr. Hegyi received Warrants to purchase up to 10,000,000 shares of our common stock at an exercise price of $0.01 per share which vest on October 21, 2017 and 2018. The Warrants are exercisable for 5 years. The warrants were valued at $390,000 and we ~~entered into an Executive Services Agreement (the “Hunt Agreement”) with Rob Hunt, pursuant to which we engaged Mr. Hunt, from~~recorded $23,958 of compensation expense for the close of business on June 7, 2013 through June 7, 2015, to provide consulting and management services as the President of GrowLife Hydroponics, Inc. Upon Mr. Hunt’s employment by the Company, the Company shall pay Mr. Hunt an annual salary of $75,000 (the “Base Salary”). Such Base Salary shall increase to the annual rate of $100,000 on the first day of the month following the month in which GrowLife’s gross monthly sales reach $840,000. Mr. Hunt shall also be entitled to receive an annual cash bonus (“Bonus”) as follows for its fiscal year 2013: 175% of the Base Salary in effectwarrants that had vested as of December 31, 2016.

(3) Mark E. Scott was appointed consulting Chief Financial Officer on July 31, 2014. Mr. Scott was paid a consulting fee of $156,250 during the year ended December 31, 2016 and $156,250 (cash salary of $105,000 and accrued salary of $51,250 during the year ended December 31, 2015. This accrual was based on the tight cash flow of the ~~Company’s applicable fiscal~~Company and agreed to by Mr. Scott, but there was no formal deferral agreement. There was no accrued interest paid on the unpaid consulting fee.

On January 4, 2016, an entity controlled by Mr. Scott converted $30,000 of accrued consulting fees and expenses into 3,000,000 shares of our common stock at the market price $0.010 per share. On October 21, 2016, an entity controlled by Mr. Scott converted $40,000 in accrued consulting and expenses into 4,000,000 shares of our common stock at $0.01 per share. The price per share was based on the thirty-day trailing average.

Mr. Scott was reimbursed $9,755 for insurance expenses during the year ~~if GrowLife achieves 100% of sales projections for such fiscal year; 100% of the Base Salary in effect as of~~ended December 31, of the Company’s applicable fiscal year, if GrowLife achieves at least 80% but less than 100% of sales projections for such fiscal year; and 50% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves at least 50% but less than 80% of sales projections for such fiscal year. The Bonus, if any, shall be paid to2016. On October 21, 2016, Mr. Hunt upon the earlier of (1) the completion of the preparation of the Company’s audited financial statements for such fiscal year and (2) April 1 of the Company’s next fiscal year. Mr. Hunt shall be entitled to receive an annual cash bonus (“Bonus”) as follows for its fiscal year 2014: 175% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves 100% of sales projections for such fiscal year; 100% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves at least 80% but less than 100% of sales projections for such fiscal year; and 50% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves at least 50% but less than 80% of sales projections for such fiscal year. The Bonus, if any, shall be paid to Mr. Hunt upon the earlier of (1) the completion of the preparation of the Company’s audited financial statements for such fiscal year and (2) April 1 of the Company’s next fiscal year. Mr. Hunt shall receive, upon approval by the Company’s Board of Directors, non-qualified options to purchase 12,000,000Scott was granted 6,000,000 shares of the Company’s common stock at a$0.01 per share ~~exercise~~or $60,000. The price ~~equal~~per share was based on the thirty-day trailing average. An entity controlled by Mr. Scott had a two million share stock option that was previously issued vest on April 18, 2016 upon the Company securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB. The option was valued at $7,312.

Grants of Stock Based Awards during the year ended December 31, 2016

The Compensation Committee approved the following performance-based incentive compensation to the ~~fair~~Named Executive Officers for the year ended December 31, 2016:

			Estimated Future Payouts Under			Estimated Future Payouts Under		Stock Awards;	Number of
			Non-Equity Incentive Plan			Equity Incentive Plan		Number of	Securities	Exercise or	Grant Date
			Awards			Awards		Shares of	Underlying	Base Price of	Fair Value of
	Grant	Threshold	Target	Maximum	Threshold	Target	Maximum	Stock or Units	Options	Option Awards	Stock and
Name	Date	($)	($)	($)	(#)	(#)	(#)	(#)	(#)	($/Sh) (1)	Option Awards
Marco Hegyi	-	$-	-	$-	-	-	-	-	-	$-	$-

Mark E. Scott (2)	-	$-	-	$-	-	-	-	6,000,000	-	$0.010	$60,000

Joseph Barnes	-	$-	-	$-	-	-	-	-	-	$-	$-

(1)These amounts reflect the grant date market value of one share of the Company’s common stock on the date of grant, which is June 7, 2013 and represents the date on which Mr. Hunt became a Director of the Company and President of GrowLife Hydroponics, Inc, vesting in 24 equal monthly installments on the last day of each month commencing from and after June 7, 2013. The Company shall also apply for and obtain “term” life insurance upon the life of Mr. Hunt, effective as ~~of January 1, 2012, in an amount equal to Mr. Hunt’s then current Base Salary. The beneficiary of such policy shall be the person(s) designated~~required by Mr. Hunt. During Mr. Hunt’s term of employment hereunder, the Company shall provide to Mr. Hunt a monthly housing stipend of $1,500. In the event that the Company and Mr. Hunt mutually agree to Mr. Hunt’s relocation to Los Angeles County, California, the Company shall pay Mr. Hunt’s relocation costs, up to a maximum amount of $5,000, and shall pay for reasonable temporary housing for Mr. Hunt and his family for a period of 3 months. During Mr. Hunt’s term of employment hereunder, Mr. Hunt and, to the extent applicable, Mr. Hunt’s dependents and beneficiaries, shall be allowed to enjoy and participate in all benefit plans and programs, including improvements or modifications of the same, which are now, or may hereafter be, available to other executive employees of the Company and its subsidiaries. Such benefit plans and programs shall include, without limitation, medical insurance, D&O insurance, and such similar benefits, plans and programs as may be maintained by the Company. During Mr. Hunt’s term of employment hereunder, Mr. Hunt shall be entitled to incur and be reimbursed by the Company for all reasonable business expenses. Mr. Hunt’s engagement with the Company may be terminated for the reasons set forth below. To the extent Mr. Hunt serves as a member of the Company’s Board of Directors, at the request of the Company’s Board of Directors, Mr. Hunt agrees to resign from his position as a director of the Company within 24 hours after his engagement is terminated. This Agreement shall terminate upon Mr. Hunt’s death (“Death”). The Company shall pay Mr. Hunt’s estate (i) on the date it would have been payable to Mr. Hunt any unpaid Base Salary and accrued vacation, if any, earned prior to Mr. Hunt’s Death, and (ii) any unpaid reimbursements due Mr. Hunt for expenses incurred by Mr. Hunt prior to his Death. If, as a result of Mr. Hunt’s incapacity due to physical or mental illness, thereby causing Mr. Hunt to have been absent from the full time performance of substantially all of his material duties with the Company for a continuous period of 180 days, Mr. Hunt’s engagement may be terminated by the Company or by Mr. Hunt for “Disability.” If terminated for disability, the Company shall pay Mr. Hunt: (a) any unpaid Base Salary and accrued vacation, if any, earned prior to the Effective Date of Termination, and (b) any unpaid reimbursements due for expenses incurred prior to the Effective Date of Termination. The Company may terminate Mr. Hunt’s engagement hereunder for Cause. In the event of termination for Cause, Mr. Hunt will be entitled to such Base Salary and accrued vacation, if any, earned through the date of termination which earned amounts shall be payable on the date of termination for Cause, but will not be entitled to any other salary, benefits, bonuses, or other compensation after such date. This Agreement may also be terminated Without Cause by the Company at any time by the delivery to Mr. Hunt of a written notice of termination. Upon such termination, Mr. Hunt shall be entitled to receive the following: (a) such Base Salary and accrued vacation, if any, earned through the date of termination; (b) a termination fee equal to his then-current Base Salary for six equal monthly installments; and (c) his options shall continue to vestRegulation S-K Item 402(n)(2), computed in accordance with ~~their terms, and such options shall expire~~FASB ASC Topic 718.

(2) On October 21, 2016, an entity controlled by Mr. Scott, our Chief Financial Officer, was granted 6,000,000 shares of our common stock at $0.01 per share. The price per share was based on the ~~latest termination date set forth in~~thirty-day trailing average.

Outstanding Equity Awards as of December 31, 2016

The Named Executive Officers had the applicable stock option agreements. Mr. Hunt may terminate this Agreement upon 30 days written notice to the Company. In the event Mr. Hunt terminates this Agreement for “Good Reason,” Mr. Hunt shall be entitled to receive: (a) such Base Salary and accrued vacation, if any, earned through the datefollowing outstanding equity awards as of termination; (b) a termination fee equal to his then-current Base Salary for six equal monthly installments; and (c) his options shall continue to vest in accordance with their terms, and such options shall expire on the latest termination date set forth in the applicable stock option agreements. In the event Mr. Hunt terminates this Agreement other than for Disability or Good Reason, the Company shall pay Mr. Hunt: (a) such Base Salary and accrued vacation, if any, earned through the date of termination; and (b) any unpaid reimbursements for expenses incurred through the date of termination.December 31, 2016:

~~- 85 -~~37

	Option Awards					Stock Awards
	Number of	Number of	Number of					Number of	Market or
	Securities	Securities	Securities			Number of	Market Value	Unearned Shares,	Payout Value of
	Underlying	Underlying	Underlying			Shares or Units	of Shares or	Units or Other	Unearned Shares,
	Unexercised	Unexercised	Unexercised	Option		of Stock	Units of	Rights That	Units, or Other
	Options	Options	Unearned	Exercise	Option	That Have Not	Stock That	Have Not	Rights That Have
	Exercisable	Unexerciseable	Options	Price	Expiration	Vested	Have Not Vested	Vested	Not Vested
Name	(#)	(#)	(#)	($) (1)	Date	(#)	($)	(#)	($)
Marco Hegyi (2)	-	-	-	$-		-	$-	-	$-

Mark E. Scott (3)	1,777,778	2,222,222	-	$0.01	7/30/2019	-	$-	-	$-

Joseph Barnes (4)	6,500,000	1,500,000	-	$0.01	10/9/2019	-	$-	-	$-

(1)These amounts reflect the grant date market value as required by Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC Topic 718.

(2) On ~~November 3, 2013,~~October 21, 2016, an entity controlled by Mr. Scott cancelled stock option grants totaling 12,000,000 shares of our common stock at $0.01 per share. An entity controlled by Mr. Scott has an additional 2,000,000 share stock option grant which continues to vest monthly over 36 months and a 2,000,000 share stock option grant which vests upon the achievement of certain performance goals related to acquisitions.

(3) Mr. Barnes stock option grant consists of 6,500,000 shares of our common stock which vest quarterly over three years beginning October 1, 2014 and 2,000,000 shares of our common stock that vested October 10, 2014. On October 12, 2016, we amended the exercise price of the stock option grants for Mr. Barnes to $0.010 per share.

Option Exercises and Stock Vested for the year ended December 31, 2016

Mr. Hegyi, Scott and Barnes did not have any option exercised or stock that vested during the year ended December 31, 2016.

Pension Benefits

We do not provide any pension benefits.

Nonqualified Deferred Compensation

We do not have a nonqualified deferral program.

Employment and Consulting Agreements

Employment Agreement with Marco Hegyi

On October 21, 2016, we entered into ~~an Executive Services~~ Agreement (the “Scott Agreement”) with Sterling Scott, pursuant to which we engaged Mr. Scott, from the close of business on November 2, 2013 through November 2, 2016, to provide consulting and management services as our Chief Executive Officer. Per the terms of the Scott Agreement, Mr. Scott shall receive an annual salary of $120,000, he shall be eligible for any benefits made generally available by the Company, he shall be eligible to receive any bonuses made generally available by the Company, and he shall be reimbursed for any reasonable expenses incurred while performing his duties as the Company’s Chief Executive Officer. The Scott Agreement also granted Mr. Scott non-qualified options to purchase 12,000,000 shares of the Company’s common stock at an exercise price equal to the fair market value of one share of the Company’s common stock on the date of grant. The options include a cashless exercise feature and vest in twenty-four (24) equal monthly installments on the last day of each month commencing on October 31, 2013. In the event that the Company’s Board of Directors determines to accept any offers that would when executed result in a change of control transaction involving more than 50% of the issued shares of Company, then vesting of non-qualified options to Mr. Scott shall be accelerated, at the election in writing by the Mr. Scott, to the date on which the Company’s Board of Directors determined to accept such offer. Except in situations where the employment of Mr. Scott is terminated For Cause, By Death or By Disability, in the event that the Company terminates the employment of Mr. Scott at any time, Mr. Scott will be eligible to immediately receive all remaining compensation due under the Scott Agreement. This calculation will be based on the then-current Base Salary of Mr. Scott and the amount of days remaining in the Employment Term. Mr. Scott shall also immediately receive the issuance of five percent (5.0%) of the Company’s common stock on a fully diluted basis, giving effect to the issuance. Mr. Scott shall not be entitled to any severance payments if his employment is terminated For Cause, By Death or By Disability, or if Mr. Scott’s employment is terminated by Mr. Scott. For purposes of the Scott Agreement, “For Cause” shall mean: (i) Mr. Scott commits a crime involving dishonesty, breach of trust, or physical harm to any person; or (ii) Mr. Scott willfully engages in conduct that is in bad faith and materially injurious to the Company, including but not limited to, misappropriation of trade secrets, fraud or embezzlement. The Company may terminate Mr. Scott’s employment For Cause at any time, without any advance notice. The Company shall pay to Mr. Scott all compensation to which Mr. Scott is entitled up through the date of termination, subject to any other rights or remedies of Employer under law; and thereafter all obligations of the Company under this Agreement shall cease. Mr. Scott’s employment shall terminate automatically upon his death. The Company shall pay to Mr. Scott’s beneficiaries or estate, as appropriate, any compensation then due and owing. Thereafter all obligations of the Company under the Scott Agreement shall cease. If Mr. Scott becomes eligible for the Company’s long term disability benefits or if, in the sole opinion of the Company, Mr. Scott is unable to carry out the responsibilities and functions of the position held by Mr. Scott by reason of any physical or mental impairment for more than ninety (90) consecutive days or more than one hundred and twenty (120) days in any twelve (12) month period, then, to the extent permitted by law, the Company may terminate Mr. Scott’s employment. The Company shall pay to Mr. Scott all compensation to which he is entitled up through the date of termination, and thereafter all obligations of the Company under this Agreement shall cease. Mr. Scott may terminate employment with the Company at any time for any reason or no reason at all, upon thirty (30) days’ advance written notice. During such notice period Mr. Scott shall continue to diligently perform all of his duties hereunder. The Company shall have the option, in its sole discretion, to make Mr. Scott’s termination effective at any time prior to the end of such notice period as long as the Company pays Mr. Scott all compensation to which he is entitled up through the last day of the thirty-day notice period. Thereafter all obligations of the Company shall cease.

On November 3, 2013, we entered into an Executive Services Agreement (the “Genesi Agreement”) with John Genesi, pursuant to which we engaged Mr. Genesi, from the close of business on November 2, 2013 through November 2, 2016, to provide consulting and management services as our Chief Financial Officer. Per the terms of the Genesi Agreement, Mr. Genesi shall receive an annual salary of $100,000, he shall be eligible for any benefits made generally available by the Company, he shall be eligible to receive any bonuses made generally available by the Company, and he shall be reimbursed for any reasonable expenses incurred while performing his duties as the Company’s Chief Financial Officer. The Genesi Agreement also granted Mr. Genesi non-qualified options to purchase 10,000,000 shares of the Company’s common stock at an exercise price equal to the fair market value of one share of the Company’s common stock on the date of grant. The options include a cashless exercise feature and vest in twenty-four (24) equal monthly installments on the last day of each month commencing on October 31, 2013. In the event that the Company’s Board of Directors determines to accept any offers that would when executed result in a change of control transaction involving more than 50% of the issued shares of Company, then vesting of non-qualified options to Mr. Genesi shall be accelerated, at the election in writing by the Mr. Genesi, to the date on which the Company’s Board of Directors determined to accept such offer. Except in situations where the employment of Mr. Genesi is terminated For Cause, By Death or By Disability, in the event that the Company terminates the employment of Mr. Genesi at any time, Mr. Genesi will be eligible to immediately receive all remaining compensation due under the Genesi Agreement. This calculation will be based on the then-current Base Salary of Mr. Genesi and the amount of days remaining in the Employment Term. Mr. Genesi shall also immediately receive the issuance of two and one-half percent (2.5%) of the Company’s common stock on a fully diluted basis, giving effect to the issuance. Mr. Genesi shall not be entitled to any severance payments if his employment is terminated For Cause, By Death or By Disability, or if Mr. Genesi’s employment is terminated by Mr. Genesi. For purposes of the Genesi Agreement, “For Cause” shall mean: (i) Mr. Genesi commits a crime involving dishonesty, breach of trust, or physical harm to any person; or (ii) Mr. Genesi willfully engages in conduct that is in bad faith and materially injurious to the Company, including but not limited to, misappropriation of trade secrets, fraud or embezzlement. The Company may terminate Mr. Genesi’s employment For Cause at any time, without any advance notice. The Company shall pay to Mr. Genesi all compensation to which Mr. Genesi is entitled up through the date of termination, subject to any other rights or remedies of Employer under law; and thereafter all obligations of the Company under this Agreement shall cease. Mr. Genesi’s employment shall terminate automatically upon his death. The Company shall pay to Mr. Genesi’s beneficiaries or estate, as appropriate, any compensation then due and owing. Thereafter all obligations of the Company under the Genesi Agreement shall cease. If Mr. Genesi becomes eligible for the Company’s long term disability benefits or if, in the sole opinion of the Company, Mr. Genesi is unable to carry out the responsibilities and functions of the position held by Mr. Genesi by reason of any physical or mental impairment for more than ninety (90) consecutive days or more than one hundred and twenty (120) days in any twelve (12) month period, then, to the extent permitted by law, the Company may terminate Mr. Genesi’s employment. The Company shall pay to Mr. Genesi all compensation to which he is entitled up through the date of termination, and thereafter all obligations of the Company under this Agreement shall cease. Mr. Genesi may terminate employment with the Company at any time for any reason or no reason at all, upon thirty (30) days’ advance written notice. During such notice period Mr. Genesi shall continue to diligently perform all of his duties hereunder. The Company shall have the option, in its sole discretion, to make Mr. Genesi’s termination effective at any time prior to the end of such notice period as long as the Company pays Mr. Genesi all compensation to which he is entitled up through the last day of the thirty-day notice period. Thereafter all obligations of the Company shall cease.

~~- 86 -~~

~~On December 4, 2013, we entered into an Executive Services Agreement (the “Hegyi Agreement”)~~ with Marco Hegyi pursuant to which wethe Company engaged Mr. Hegyi ~~from the close of business~~as its Chief Executive Officer through October 20, 2018. Mr. Hegyi’s previous Employment Agreement was dated December 4, 2013 and which was set to expire on December 4, 2013 through December 4, 2016, to provide consulting and management services as our President. Per the terms of the Hegyi Agreement, Mr. Hegyi will establish a Company in Seattle, Washington while also maintaining operations in the Southern California area. 2016.

Mr. Hegyi’s annual compensation is ~~$150,000 for the first year of the Term; $250,000 for the second year of the Term; and $250,000 for the third year of the Term.~~$250,000. Mr. Hegyi is also entitled to receive an annual bonus equal to four percent (4%) of the Company’s EBITDA for that year. The annual bonus shall be paid no later than 31 days ~~(i.e., by January 31~~st) following the end of each calendar year. Mr. Hegyi’s first annual bonus will be calculated based on the Company’s EBITDA for calendar year 2014, with such bonus payable on or before January 31, 2015. If Mr. Hegyi’s 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. Hegyi’s employment, he (or to a trust or other related or affiliated entity designated by

Mr. Hegyi ~~for estate planning purposes) is entitled to~~received a Warrant to purchase up to ~~25,000,000~~10,000,000 shares of common stock of the Company at an exercise price of ~~$0.08~~$0.01 per share (the “Hegyi Warrant”) (see “NOTE 23 – STOCKHOLDERS’ DEFICT”). The warrants shall be exercisable for a period of 10 years commencing on the date on which the Company completes the increase in the number of its authorized shares of common stock. Immediately after the execution of theshare. In addition, Mr. Hegyi ~~agreement, the Company will increase its authorized shares in an amount sufficient~~received Warrants to ~~have authorized~~purchase up to 10,000,000 shares of common stock ~~available for the full exercise of Hegyi’s warrant to purchase up to 25,000,000 shares of common stock. The Company undertakes to: (1) have the Board~~ of the Company ~~vote to amend its certificate~~at an exercise price of ~~incorporation to increase the authorized shares of common stock in the Company by a sufficient amount to provide for the Hegyi Warrant to be immediately~~$0.01 per share which vest on October 21, 2017 and 2018. The Warrants are exercisable for 25,000,000 shares of common stock, subject to shareholder approval; (2) have the Board reserve up to 25,000,000 shares of common stock for exercise of the Hegyi Warrant, subject to the completion of the increase in authorized shares, and (3) prepare a Company proxy statement for and hold a meeting of the shareholders of the Company to vote to approve the amendment to the Company’s certificate of incorporation to increase the authorized shares. If an amendment to the Company’s certificate of incorporation increasing the authorized shares has not been filed with the Secretary of State of the State of Delaware within six (6) months from the date of the Hegyi Agreement, then such failures shall be a Change of Control event. The Company will also reimburse Mr. Hegyi for all reasonable and necessary travel and other out-of-pocket business expenses incurred by him in the performance of his duties and responsibilities, subject to and consistent with the Company’s business expense reimbursement policies in effect from time to time, including an itemized list of the expenses incurred and appropriate receipts and supporting documentation. 5 years.

Mr. Hegyi will be entitled to participate in all group employment benefits that are offered by ~~the Company~~us to ~~the Company’s~~our 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~~we will purchase and maintain during the Term ~~a “key manager”~~an insurance policy on Mr. Hegyi’s life in the amount of ~~$4,000,000, paid as~~ $2,000,000 payable to Mr. Hegyi’s named heirs or estate as the ~~beneficiary, and $2,000,000 payable to the Company.~~ beneficiary.

If prior to the expiration of the Term, the Company terminates Mr. Hegyi’s employment for “Cause”, or if Mr. Hegyi voluntarily terminates his employment without “Good Reason”, or if Mr. Hegyi’s employment is terminated by reason of his death, then all of the Company’s 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 terminateswe terminate Mr. Hegyi’s employment at any time prior to the expiration of the Term without Cause, as defined in the Employment Agreement, 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:~~receive (i) his ~~base salary~~Base Salary amount through the end of the Term; and (ii) his ~~annual bonus~~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. Term.

If there has been a “Change in Control” and the Company (or its successor or the surviving entity) terminates Mr. Hegyi’s 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 ~~the following:~~ (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~~we (or its successor or the surviving entity) ~~terminates~~terminate Mr. Hegyi’s 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 ~~the following:~~ (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. Hegyi’s 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, we 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. Scott’s 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 Company’s EBITDA for that year. Our Board of Directors granted Mr. Scott an option to purchase sixteen million shares of our Common Stock under our 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, we reduced the exercise price to $0.01 per share. The shares vest as follows:


	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, 2016);

	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.

On October 21, 2016, Mr. Scott cancelled stock option grants totaling 12,000,000 shares of our common stock at $0.01 per share. Mr. Scott has an additional 2,000,000 share stock option grant which continues to vest monthly over 36 months and a 2,000,000 share stock option grant which vests upon the achievement of certain performance goals related to acquisitions.

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 our Stock Incentive Plan, including vesting requirements. In the event that Mr. Scott’s continuous status as consultant to the Company is terminated by us without Cause or Mr. Scott terminates his employment with us 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 our 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 us to our 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, we are required to purchase and maintain an insurance policy on Mr. Scott’s life in the amount of $2,000,000 payable to Mr. Scott’s named heirs or estate as the beneficiary. Finally, Mr. Scott is entitled to twenty days of vacation annually and has certain insurance and travel employment benefits.

If, prior to the expiration of the Term, we Mr. Scott’s employment for Cause, or if Mr. Scott voluntarily terminates his employment without Good Reason, or if Mr. Scott’s employment is terminated by reason of his death, then all of our 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 our obligation under a termination by the Company without Cause or Mr. Scott terminates his employment for Good Reason are discussed above.

~~- 87 -~~39

~~Outstanding Equity Awards~~Promotion Letter with Joseph Barnes

On October 10, 2014, we entered into a Promotion Letter with Joseph Barnes which was effective October 1, 2014 pursuant to which we engaged Mr. Barnes as its Senior Vice-President of Business Development from October 1, 2014 on an at ~~Fiscal Year-End~~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. Barnes’s compensation is $90,000 on an annual basis. On January 1, 2016, Mr. Barnes salary was increased to $120,000 per year. Mr. Barnes received a bonus of $6,500 and is also entitled to receive a quarterly bonus based on growth of our growth margin dollars. No quarterly bonuses were earned under this Promotion Letter. Mr. Barnes was granted an option to purchase eight million shares of our common stock under our 2011 Stock Incentive Plan at $0.050 per share. The shares vest as follows:


	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.

On October 12, 2016, we amended the exercise price of the stock option grants for Mr. Barnes to $0.010 per share.

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 our Stock Incentive Plan, including vesting requirements. In the event that Mr. Barnes’s continuous status as employee to us is terminated by us without Cause or Mr. Barnes terminates his employment with us 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 our 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 us to our 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 has certain insurance and travel employment benefits.

Mr. Barnes may receive severance benefits and our obligation under a termination by the Company without Cause or Mr. Barnes terminates his employment for Good Reason are discussed above.

Potential Payments upon Termination or Change in Control

The ~~following table provides information regarding~~Company’s Employment Agreement with Marco Hegyi has provisions providing for severance payments as detailed below.

		Early	Not For Good	Change in
Executive	For Cause	or Normal	Cause	Control	Disability
Payments Upon	Termination	Retirement	Termination	Termination	or Death
Separation	on 12/31/16	on 12/31/16	on 12/31/16	on 12/31/16	on 12/31/16
Compensation:
Base salary (1)	$-	$-	$468,750	$600,000	$-
Performance-based incentive
compensation	$-	$-	$-	$-	$-
Stock options	$-	$-	$-	$-	$-

Benefits and Perquisites:
Health and welfare benefits	$-	$-	$-	$-	$-
Accrued vacation pay	$-	$-	$-	$-	$-

Total	$-	$-	$468,750	$600,000	$-

(1)

Reflects amounts to be paid upon termination without cause and upon termination in a change of control, less any months worked.

Mr. Scott and Mr. Barnes currently do not have amounts to be paid upon termination without cause and upon termination in a change of control. There outstanding stock options ~~held~~vests fully vest under certain conditions.

DIRECTOR COMPENSATION

We primarily use stock options grants to incentive compensation to attract and retain qualified candidates to serve on the Board. This compensation reflected the financial condition of the Company. In setting director compensation, we consider the significant amount of time that Directors expend in fulfilling their duties to the Company as well as the skill-level required by our ~~named executive officers as~~members of the ~~end of our fiscal~~Board. During year ended December 31, ~~2013.~~

Name

Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable

Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable

Option
Exercise
Price ($) (1)

Option
Expiration
Date

Sterling C. Scott
12,000,000
- $0.085 November 1, 2023
CEO, Secretary, and Director

John Genesi 10,000,000 - $0.085 November 1, 2023
Chief Financial Officer

Rob Hunt 12,000,000 - $0.043 June 6, 2023
President of GrowLife Hydroponics, Inc and Director
2016, Marco Hegyi did not receive any compensation for his service as director. The compensation disclosed in the Summary Compensation Table on page 36 represents the total compensation.

~~None~~

Director Summary Compensation

				Non-Equity	Non-Qualified
	Fees Earned			Incentive	Deferred
	or Paid in			Plan	Compensation	Other
	Cash	Stock	Option	Compensation	Earnings	Compensation
Name	$	Awards (1)	Awards	($)	$	($)	Total
Marco Hegyi	$-	$-	$-	$-	$-	$-	$-

Michael E. Fasci (2)	-	65,000	-	-	-	-	65,000

Tara Antal (3)	-	-	-	-	-	-	-

Brad Fretti (4)	-	-	-	-	-	-	-

	$-	$65,000	$-	$-	$-	$-	$65,000

(1)These amounts reflect the grant date market value as required by Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC Topic 718.

(2)On January 27, 2016, we issued 1,500,000 shares of its common stock to Michael E. Fasci pursuant to a service award for $15,000. The shares were valued at the ~~executive officers listed~~fair market price of $0.01 per share. On May 25, 2016, we issued 2,500,000 shares of its common stock to Michael E. Fasci pursuant to a service award for $50,000. The shares were valued at the fair market price of $0.02 per share.

(3) Ms. Antal resigned as a director on March 4, 2016. She did not receive any compensation as a director.

(4) Mr. Fretti resigned as a director on March 4, 2016. He did not receive any compensation as a director.

Compensation Paid to Board Members

Our independent non-employee directors are not compensated in cash. The only compensation has been in the ~~above table exercised options~~form of stock awards. There is no stock compensation plan for independent non-employee directors. There was no Director compensation during the ~~fiscal~~ year ended December 31, ~~2013.~~2016.

~~Compensation of Directors~~

~~We did not pay any separate compensation to our directors prior to August 2012. Commencing in August 2012, outside board members were awarded 2,000,000 shares per year which vest quarterly.~~

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER ~~MATTERS.~~MATTERS

The following table ~~presents~~sets forth certain information regarding the ~~beneficial~~ ownership of our common stock ~~by the following persons~~ as of ~~March~~December 31, ~~2014: (i)~~ 2016 by:

	●	each director and nominee for director;

	●	each person known by us to own beneficially 5% or more of our common stock;

	●	each ~~executive~~ officer named in the summary compensation table elsewhere in this report; and

	●	all directors and executive officers as a group.

The amounts and ~~director, (ii) all executive officers and directors as a group and (iii) each stockholder known to be the beneficial owner~~percentages of ~~more than 5% of our outstanding~~ common stock ~~(not taking into account contractual restrictions~~beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ~~ownership.)~~

~~Beneficial~~ ownership ~~is determined in accordance with~~of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership within 60 days. Under these rules more than one person may be deemed a beneficial owner of the same securities and ~~generally includes voting or investment power with respect~~a person may be deemed to ~~securities.~~ be a beneficial owner of securities as to which such person has no economic interest.

Unless otherwise indicated below, ~~to our knowledge, the persons and entities~~each beneficial owner named in the table ~~have~~has sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. ~~Shares~~The address of ~~our~~each beneficial owner is 5400 Carillon Point, Kirkland, WA 98033 and the address of more than 5% of common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of March 31, 2014 are deemed to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

is detailed below.

~~- 88 -~~41

~~The information presented in this table is based~~

	Shares Beneficially Owned
Name of Beneficial Owner	Number	Percentage (1)
Directors and Named Executive Officers
Marco Hegyi (2)	40,000,000	2.4%
Mark E. Scott (3)	14,777,778	0.9%
Michael E. Fasci (4)	5,500,000	*
Joseph Barnes (5)	6,800,000	*
Total Directors and Officers (4 in total)	67,077,778	4.1%

* Less than 1%.

(1)

Based on ~~865,090,859~~1,656,120,083 shares of common stock outstanding as of December 31, 2016.

(2) Reflects the shares beneficially owned by Marco Hegyi, including warrants to purchase 35,000,000 shares of our common stock ~~outstanding~~at $0.01 per share/

(3) Reflects the shares beneficially owned by Mark E. Scott, including stock option grants totaling 1,777,778 shares that Mr. Scott has the right to acquire in sixty days.

(4) Reflects the shares beneficially owned by Michael E. Fasci.

(5) Reflects the shares beneficially owned by Joseph Barnes, including stock option grants totaling 6,500,000 shares that Mr. Barnes has the right to acquire in sixty days.

	Shares Beneficially Owned
Name and Address of Beneficial Owner	Number	Percentage
CANX USA LLC (1)
410 South Rampart Blvd., Suite 350	540,000,000	24.6%
Las Vegas, NV 89145		(Capped at
		4.99%)

Logic Works LLC (2)	92,774,167	5.3%
9616 Emeraude Avenue		(Capped at
Las Vegas, NV 89147		4.99%)

(1) Reflects a warrant to purchase common stock totaling 540,000,000 beneficially owned by CANX USA LLC. CANX does not consider themselves a control group based on ~~March~~the individual ownership and legal structure of CANX. Each owner has a 4.99% ownership limit and the owners cannot act as a control group.

(2) Reflects 92,774,167 shares beneficially owned by Logic Works LLC related to Convertible Notes. Logic Works does not consider themselves a control group because Logic Works has a 4.99% ownership limit.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Review and Approval of Related Person Transactions

We have operated under a Code of Conduct for many years. Our Code of Conduct requires all employees, officers and directors, without exception, to avoid the engagement in activities or relationships that conflict, or would be perceived to conflict, with the Company’s interests or adversely affect its reputation. It is understood, however, that certain relationships or transactions may arise that would be deemed acceptable and appropriate upon full disclosure of the transaction, following review and approval to ensure there is a legitimate business reason for the transaction and that the terms of the transaction are no less favorable to the Company than could be obtained from an unrelated person.

The Audit Committee is responsible for reviewing and approving all transactions with related persons. The Company has not adopted a written policy for reviewing related person transactions. The Company reviews all relationships and transactions in which the Company and our directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. As required under SEC rules, transactions that are determined to be directly or indirectly material to the Company or a related person are disclosed.

Certain Relationships

Please see the transactions with CANX, LLC and Logic Works in Note 5, TCA Global Credit Master Fund LP and Chicago Venture Partners, L.P. discussed in Note 7, 8 10 and 13.

Transactions with an Entity Controlled by Marco Hegyi

An entity controlled by Mr. Hegyi received a warrant to purchase up to twenty five million shares of our common stock at an exercise price of $0.08 per share was reduced to $0.01 per share on December 18, 2015.

On October 12, 2016, the Company issued 4,000,000 shares of its common stock to an entity affiliated with Marco Hegyi, our Chief Executive Officer, pursuant to a conversion of debt for $40,000. The shares were valued at the fair market price of $0.01 per share.

On October 21, 2016, we entered into Agreement with Marco Hegyi pursuant to which the Company engaged Mr. Hegyi as its Chief Executive Officer through October 20, 2018. Mr. Hegyi’s previous Employment Agreement was dated December 4, 2013 and which is set to expire on December 4, 2016. Mr. Hegyi received a Warrant to purchase up to 10,000,000 shares of our common stock at an exercise price of $0.01 per share. In addition, Mr. Hegyi received Warrants to purchase up to 10,000,000 shares of our common stock at an exercise price of $0.01 per share which vest on October 21, 2017 and 2018. The Warrants are exercisable for 5 years.

Transactions with an Entity Controlled by Mark E. Scott

An entity controlled by Mr. Scott received an option to purchase sixteen million shares of our common stock at an exercise price of $0.07 per share was reduced to $0.01 per share on December 18, 2015. Two million shares vested on August 17, 2015 with the Company’s resolution of the class action lawsuits. An additional two million share stock option vest on April 18, 2016 upon the Company securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB.

On January 4, 2016, we issued 3,000,000 shares of its common stock to an entity affiliated with Mark E. Scott, 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 October 21, 2016, Mr. Scott, the Company’s Chief Financial Officer, converted $40,000 in deferred compensation into 4,000,000 shares of our common stock at $0.01 per share. The price per share was based on the thirty-day trailing average.

On October 21, 2016, Mr. Scott, the Company’s Chief Financial Officer, was granted 6,000,000 shares of our common stock at $0.01 per share. The price per share was based on the thirty-day trailing average.

Transactions with Michael E. Fasci

On January 27, 2016, we issued 1,500,000 shares of its common stock to Michael Fasci, a member of the Board of Directors, for director services. The shares were valued at the fair market price of $0.01 per share.

On May 25, 2016, we issued 2,500,000 shares of its common stock to Michael Fasci, a member of the Board of Directors, for director services. The shares were valued at the fair market price of $0.02 per share.

On October 21, 2016, we entered into a Consulting Agreement with an entity controlled by Michael E. Fasci, a Director. Mr. Fasci is to provide services related to lender management, financing and acquisitions. Mr. Fasci’s compensation is 2,000,000 shares of our common stock valued at $0.01 per share and to be issued on April 21, 2017 and October 21, 2017.

Agreement with Jeff Giarraputo

On February 26, 2014, we engaged Jeff Giarraputo, a member of the Board of Directors, as an advisor to us for six months effective as of February 15, 2014. Mr. Giarraputo agreed to provide marketing, business development, and general management to us related to the cannabis industry. As compensation for these services, and subject to approval by our Board of Directors, we were expected to grant Mr. Giarraputo a stock option to purchase 2,000,000 shares of our common stock at $0.31 per share, which represents the 30-day trailing average of our common stock. All shares subject to the option vested over a six-month period beginning on the date of engagement and are subject to the terms and conditions of our 2011 Stock Incentive Plan including vesting requirements. On August 19, 2014, the Parties cancelled this Agreement and the stock option grant was not issued.

Director Independence

The Board has affirmatively determined that Michael E. Fasci is independent as of December 31, ~~2014.~~2016. For purposes of making that determination, the Board used NASDAQ’s Listing Rules even though the Company is not currently listed on NASDAQ. The Board expects to appoint independent directors during 2017 so that the majority of the Directors are independent.

Name of Beneficial Owner
Amount of
Beneficial Ownership
Percent of
Beneficial Ownership
Executive Officers and Directors
   Sterling Scott (2, 12)          73,737,499 8.5%
   John Genesi (3, 12)          10,000,000 1.2%
   Justin Manns (4, 12)          15,703,205 1.8%
   Rob Hunt (5, 12)          27,746,460 3.2%
   Marco Hegyi (6, 12)          25,000,000 2.9%
   Eric Shevin (7, 12)            2,004,200 0.2%
   Alan Hammer (8, 12)               808,333 0.1%
   Anthony Ciabattoni (9, 12)               572,222 0.1%
   Jeff Giarraputo (10, 12)               572,222 0.1%
   Bob Kurilko (11, 12)            3,383,333 0.4%
       159,527,474 18.5%
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit Committee Pre-Approval Policy

The Audit Committee has established a pre-approval policy and procedures for audit, audit-related and tax services that can be performed by the independent auditors without specific authorization from the Audit Committee subject to certain restrictions. The policy sets out the specific services pre-approved by the Audit Committee and the applicable limitations, while ensuring the independence of the independent auditors to audit the Company's financial statements is not impaired. The pre-approval policy does not include a delegation to management of the Audit Committee’s responsibilities under the Exchange Act. During the year ended December 31, 2016, the Audit Committee pre-approved all audit and permissible non-audit services provided by our independent auditors.

Service Fees Paid to the Independent Registered Public Accounting Firm

On July 13, 2016, we dismissed PMB Helin Donovan LLP as our independent registered public accounting firm. On July 13, 2016 we engaged the services of SD Mayer and Associates, LLP as our new independent registered public accounting firm to audit our consolidated financial statements as of December 31, 2016 and 2015 and for the years then ended. The decision to change accountants was approved by our Audit Committee.

The following is the breakdown of aggregate fees paid for the last two fiscal years:

	Year Ended	Year Ended
	December 31, 2016	December 31, 2015
Audit fees	$52,500	$67,225
Audit related fees	10,000	26,480
Tax fees	20,355	-
All other fees	12,500	6,050

	$95,355	$99,755

- “Audit Fees” are fees paid for to PMB for professional services for the audit of our financial statements.

- “Audit-Related fees” are fees paid to Mayer for professional services not included in the first two categories, specifically, SAS 100 reviews, SEC filings and consents, and accounting consultations on matters addressed during the audit or interim reviews, and review work related to quarterly filings.

- “Tax Fees” are fees primarily for tax compliance paid to PMB and Mayer in connection with filing US income tax returns.

- “All other fees were paid to PMB related to the review of registration statements on Form S-1.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) FINANCIAL STATEMENTS:

The Company’s financial statements, as indicated by the Index to Consolidated Financial Statements set forth below, begin on page F-1 of this Form 10-K, and are hereby incorporated by reference. Financial statement schedules have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

~~Shares issued and outstanding~~ ~~outstanding as~~Title of ~~March 31, 2014~~ Document		~~806,090,859~~	Page
~~Options issued to Officers~~Report of SD Mayer and ~~Directors~~Associates, LLP		~~34,000,000~~
~~Warrants issued to Officers and Directors~~		~~25,000,000~~	F-1

~~865,090,859~~Consolidated Balance Sheets as of December 31, 2016 and 2015	F-2

Consolidated Statements of Operations for the years ended December 31, 2016 and 2015	F-3

Consolidated Statements of Changes in Stockholders' (Deficit) for the years ended December 31, 2016 and 2015	F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015	F-5

Notes to the Financial Statements	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 hereby incorporated by reference.

3.2	Amended and Restated Bylaws. Filed as an exhibit to the Company’s Form 8-K filed with the SEC on June 9, 2014, and hereby incorporated by reference.

3.3	Second Amended and Restated Bylaws of GrowLife, Inc. dated October 16, 2015. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 26, 2015, and hereby incorporated by reference.

3.4	Certificate of Designation for Series B Preferred Stock. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 29, 2015, and hereby incorporated by reference.

3.5	Certificate of Designation for Series C Preferred Stock. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 29, 2015, and hereby 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 8, 2011, and hereby incorporated by reference.

10.1	Form of 7% Convertible Note. Filed as an exhibit to the Company’s Form 8-K and filed with the SC on October 11, 2013, and hereby incorporated by reference.

10.2	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.

10.3	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.

10.4	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 dated December 31, 2014 and filed with the SEC on September 30, 2015, and incorporated by reference.

1. 10.5	~~Unless otherwise stated,~~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 ~~address is c/o~~Company’s Form 10-K dated December 31, 2014 and filed with the SEC on September 30, 2015, and incorporated by reference.

10.6	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 hereby incorporated by reference.

10.7	Employment Agreement for Marco Hegyi dated December 4, 2013. Attached as an exhibit to the Company’s Form 8-K/A and filed with the SEC on June 20, 2014, and hereby incorporated by reference.

10.8	Amended Employment Agreement for Marco Hegyi dated June 20, 2014. Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on June 20, 2014, and hereby incorporated by reference.

10.9	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.

10.10	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.

10.11	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.

10.12	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.

10.13	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.

10.14	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.

10.15	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.

10.16	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.

10.17	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.

10.18	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.

10.19	Securities Purchase Agreement, dated July 9, 2015, entered into by and between GrowLife, Inc., ~~20301 Ventura Blvd, Suite 126, Woodland Hills, California 91364.~~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.

10.20	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.

10.21	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.

10.22	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.

10.23	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.

10.24	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.

10.25	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.

2. 10.26	~~Includes 5,833,333 shares issued~~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 ~~Mr. Scott during fiscal year 2013 as~~ the ~~final installments due related to a Board grant in~~Company’s Form 8-K and filed with the SEC on August ~~2012. Excludes shares of our common stock that may be issued to Mr. Scott in the event that some or all of the 6%~~ 12, 2015, and hereby incorporated by reference.

10.27	Senior Secured Convertible ~~Note indebtedness is converted~~Redeemable Debenture dated August 6, 2015 and entered into by Mr. Scott from debt to shares. Also excludes the variable amount of shares of our common stock issuable upon conversion of the interest accrued on Mr. Scott’s note (see “NOTE 16 – 6% SENIOR CONVERTIBLE NOTES”). Mr. Scott also holds options to purchase 12,000,000 shares of the Company’s common stock (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”)and between GrowLife, Inc., ~~of which all 12,000,000 shares are included in the above Beneficial Ownership analysis. As of the time of this filing, Mr. Scott had not exercised any of his options.~~

3.	Mr. Genesi holds options to purchase 10,000,000 shares of the Company’s common stock (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”), of which all 10,000,000 shares are included in the above Beneficial Ownership analysis. As of the time of this filing, Mr. Genesi had not exercised any of his options.

~~Includes 4,666,667 shares issued to Mr. Manns during fiscal year 2013~~its subsidiaries and TCA Global Credit Master Fund LP. Filed as the final installments due related to a Board grant in August 2012. Mr. Manns is a former Director and the Company’s former Chief Financial Officer. Mr. Manns is currently the Controller of GrowLife Hydroponics, Inc.

5.	~~Includes 3,333,942 shares issued to Mr. Hunt pursuant~~an exhibit to the Company’s ~~acquisition~~Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference.

10.28	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.

10.29	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.

10.30	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.

10.31	Amended and Restated Securities Purchase Agreement, dated October 27, 2015, entered into by and among 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 October 29, 2015, and hereby incorporated by reference.

10. 32	Amended and Restated Senior Secured, Convertible, Redeemable Debenture, dated October 27, 2015, entered into by and between GrowLife, Inc. and Purchaser. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 29, 2015, and hereby incorporated by reference.

10.33	Amendment to Employment Agreement by and between GrowLife Inc. and Marco Hegyi dated January 25, 2016 but effective December 18, 2015.

10.34	Securities Purchase Agreement, dated April 5, 2016, entered into by and among GrowLife, Inc., and Chicago Venture Partners, LP Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 11, 2016, and hereby incorporated by reference.

10.35	Convertible Promissory Note, dated April 5, 2016, entered into by and between GrowLife, Inc. and Chicago Venture Partners, LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 11, 2016, and hereby incorporated by reference.

10.36	Form of ~~Rocky Mountain Hydroponics,~~Secured Investor Note, dated April 5, 2016, entered into by and between GrowLife, Inc. and Chicago Venture Partners, LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 11, 2016, and hereby incorporated by reference.

10.37	Waiver Agreement, dated April 11, 2016, by and between GrowLife, Inc. and TCA Global Credit Master Fund, LP. Filed as an exhibit to the Company’s Registration Statement on Form S-1 filed with the SEC on July 11, 2016, and hereby incorporated by reference.

10.38	First Amendment to Securities Purchase Agreement, effective as of May 4, 2016, entered into by and among 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 May 9, 2016, and hereby incorporated by reference.

10.39	Second Replacement Debenture A, dated May 4, 2016, 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 May 9, 2016, and hereby incorporated by reference.

10.40	Second Replacement Debenture B, dated May 4, 2016, 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 May 9, 2016, and hereby incorporated by reference.

10.41	Debt Purchase Agreement, dated June 9, 2016, entered into by and between TCA Global Credit Master Fund, LP, Old Main Capital, LLC and GrowLife, Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 16, 2016, and hereby incorporated by reference.

10.42	Exchange Agreement, dated June 9, 2016, entered into by and among Old Main Capital, LLC and GrowLife, Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 16, 2016, and hereby incorporated by reference.

10.43	10% Senior Convertible Promissory Note, dated June 9, 2016, entered into by and among Old Main Capital, LLC and GrowLife, Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 16, 2016, and hereby incorporated by reference.

10.44	Option Agreement, dated June 8, 2016, entered into by and among TCA Global Credit Master Fund, LP and Old Main Capital, LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 16, 2016, and hereby incorporated by reference.

10.45	Advisory Services Agreement, dated September 27, 2015, entered into by and GrowLife, Inc. and TCA Global Credit Master Fund, LP. Filed as an exhibit to the Company’s Registration Statement on Form S-1 filed with the SEC on July 11, 2016, and hereby incorporated by reference.

10.46	Amendment to Advisory Services Agreement, dated October 27, 2015, entered into by and GrowLife, Inc. and TCA Global Credit Master Fund, LP. Filed as an exhibit to the Company’s Registration Statement on Form S-1 filed with the SEC on July 11, 2016, and hereby incorporated by reference.

10.47	Exchange Agreement dated August 17, 2016, entered into by and between GrowLife, Inc. and Chicago Venture Partners, L.P. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 30, 2016, and hereby incorporated by reference.

10.48	Debt Purchase Agreement dated August 15, 2016, entered into by and between GrowLife, Inc., TCA Global Credit Master Fund, LP and Chicago Venture Partners, L.P. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 30, 2016, and hereby incorporated by reference.

10.49	First Amendment to Debt Purchase Agreement dated August 15, 2016, entered into by and between GrowLife, Inc., TCA Global Credit Master Fund, LP and Old Main Capital, LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 30, 2016, and hereby incorporated by reference.

10.50	Marco Hegyi Employment Agreement and Warrants dated October 21, 2016. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 27, 2016, and hereby incorporated by reference.

10.51	Consulting Agreement dated October 21, 2016 with an entity controlled by Michael E. Fasci (attached herewith).

10.52	Consent to Judgement and Settlement Agreement dated December 7, 2016 y and between Evergreen Garden Center ~~LLC. (“RMH/EGC”),~~LLC and GrowLife Hydroponics, Inc. and William C. Rowell Family Limited Partnership for our Portland, Maine store (attached herewith).

14.1	Code of ~~which he was majority owner. Also includes 12,412,518 shares issued to Mr. Hunt on January 31, 2014 pursuant to his conversion of the principal~~Conduct and ~~accrued and unpaid interest related to the 12% Senior Secured Convertible Note issued to him on June 7, 2013 related~~Ethics dated May 15, 2014. Attached as an exhibit to the Company’s ~~acquisition of RMH/EGC. Mr. Hunt also holds options~~Form 8-Kfiled and with the SEC on June 9, 2014, and hereby incorporated by reference.

16.1	Letter dated July 14, 2016 from PMB Helin Donovan LLP. Filed as an exhibit to ~~purchase 12,000,000 shares~~the Company’s Form 8-K and filed with the SEC on July 14, 2016, and hereby incorporated by reference

21.1	Subsidiaries of the ~~Company’s common stock (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”),~~Registrant (filed herewith).

31.01	Certification of ~~which all 12,000,000 shares are included in the above Beneficial Ownership analysis. As~~Principal Executive Officer Pursuant to Rule 13a-14 Filed herewith.

31.02	Certification of Principal Financial Officer Pursuant to Rule 13a-14 Filed herewith.

32.01	CEO Certification Pursuant to Section 906 of the ~~time~~Sarbanes-Oxley Act Filed herewith.

32.02	CFO Certification Pursuant to Section 906 of ~~this filing, Mr. Hunt had not exercised any of his options.~~the Sarbanes-Oxley Act 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 and 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 and 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 and filed with the SEC on October 26, 2015, and hereby incorporated by reference.

101.INS*	XBRL Instance Document

101.SCH*	XBRL Taxonomy Extension Schema Document

101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB*	XBRL Taxonomy Extension Labels Linkbase Document

101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document

*Filed Herewith. Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

~~- 89 -~~

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

GrowLife, Inc.:

We have audited the accompanying consolidated balance sheets of GrowLife, Inc. (the “Company”) as of December 31, 2016 and 2015 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years ended December 31, 2016 and 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of GrowLife, Inc. as of December 31, 2016 and 2015, and the results of its consolidated operations and its cash flows for the years ended December 31, 2016 and 2015 in conformity with generally accepted accounting principles in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has sustained a net loss from operations and has an accumulated deficit since inception. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are also described in Note 2. The consolidated `financial statements do not include any adjustments that might result from the outcome of this uncertainty.

SD Mayer & Associates, LLP

/s/ SD Mayer & Associates, LLP

March 31, 2017

Seattle, WA

F-1

GROWLIFE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31, 2016	December 31, 2015
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$103,070	$60,362
Inventory, net	418,453	398,439
Deposits	11,163	16,754
Total current assets	532,686	475,555

EQUIPMENT, NET	1,890	10,327

OTHER ASSETS
Intangible assets, net	-	243,604
Goodwill	-	739,000

TOTAL ASSETS	$534,576	$1,468,486

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

CURRENT LIABILITIES:
Accounts payable - trade	$1,529,919	$1,272,572
Accounts payable - related parties	10,952	71,920
Accrued expenses	132,656	121,765
Accrued expenses - related parties	19,605	53,287
Derivative liability	2,701,559	1,377,175
Current portion of convertible notes payable	2,798,800	2,287,868
Deferred revenue	47,995	25,000
Total current liabilities	7,241,486	5,209,587

LONG TERM LIABILITIES:
Convertible notes payable	-	-

COMMITMENTS AND CONTINGENCIES	-	2,000,000

MEZZANINE EQUITY:
Contingently redeemable common stock-
0 and 15,000,000 shares issued and outstanding at 9/30/2016 and 12/31/2015, 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, 0 and
150,000 shares issued and outstanding at 12/31/16 and 12/31/15, respectively	-	15
Series C Convertible Preferred stock - $0.0001 par value, 51 shares authorized,
51 shares issued and outstanding at 12/31/2016 and 12/31/2015, respectively	-	-
Common stock - $0.0001 par value, 3,000,000,000 shares authorized, 1,656,120,083
and 891,116,496 shares issued and outstanding at 12/31/2016 and 12/31/2015, respectively	165,600	89,098
Additional paid in capital	117,537,822	110,585,434
Accumulated deficit	(124,410,332)	(116,715,648)
Total stockholders' deficit	(6,706,910)	(6,041,101)

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$534,576	$1,468,486

The accompanying notes are an integral part of these consolidated financial statements.

F-2

Mr. Hegyi holds warrants to purchase 25,000,000 shares of the Company’s common stock (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”), all of which are exercisable within 60 days of this filing and are included in the above Beneficial Ownership analysis. As of the time of this filing, Mr. Hegyi had not exercised any of his warrants.

Includes 4,200 shares received by Mr. Shevin via the exercise of options at a per share price of $0.019, which resulted in gross proceeds to the Company of $9,000. Also includes 1,500,000 shares received by Mr. Shevin as compensation for Board service for April 1, 2013 through December 31, 2013. ~~Also includes 500,000 shares issued to Mr. Shevin on March 31, 2014 as compensation for Board service for the period of January 1, 2014 through March 31, 2014.~~GROWLIFE, INC. AND SUBSIDIARIES

Represents 83,333 shares received as compensation for Board service for the period of December 17, 2013 through December 31, 2013, 225,000 shares purchased by Mr. Hammer in January 2014 on the open market, and 500,000 shares received as compensation for Board service for the period of January 1, 2014 through March 31, 2014.

Represents 72,222 shares received as compensation for Board service for the period of December 19, 2013 through December 31, 2013 and 500,000 shares received as compensation for Board service for the period of January 1, 2014 through March 31, 2014. ~~Mr. Ciabattoni’s shares have been issued to the Ciabattoni Living Trust, of which Mr. Ciabattoni is the Trustee.~~

~~10.~~

~~11.~~

Mr. Kurilko is a former Director who has had no affiliation with the Company since he resigned as a Director on November 2, 2013. Includes 1,683,333 shares received as compensation for Board service for January 1, 2013 through November 2, 2013. During fiscal year 2012, Mr. Kurilko received 1,700,000 shares valued at $17,000.

~~12.~~

Note that the above mentioned stock and option grants were recorded in accordance with Financial Accounting Standards Board (FASB) ASC Topic 718, “Compensation – Stock Compensation”. The Company measured, and recorded, the fair value of the grant as of the date of grant and , with respect to option grants, is amortizing the computed value of the option grant over the related vesting period.CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended,
	December 31, 2016	December 31, 2015

NET REVENUE	$1,231,281	$3,499,642
COST OF GOODS SOLD	1,275,580	2,980,503
GROSS PROFIT	(44,299)	519,139
GENERAL AND ADMINISTRATIVE EXPENSES	1,888,537	2,684,107
IMPAIRMENT OF LONG-LIVED ASSETS	876,056	-
OPERATING LOSS	(2,808,892)	(2,164,968)

OTHER INCOME (EXPENSE):
Change in fair value of derivative	(1,324,384)	1,678,541
Interest expense, net	(816,750)	(1,118,635)
Other income (expense), primarily related to TCA funding	144,882	(2,002,533)
Loss on debt conversions	(2,889,540)	-
Loss on class action lawsuit settlements	-	(2,081,250)
Total other (expense)	(4,885,792)	(3,523,877)

(LOSS) BEFORE INCOME TAXES	(7,694,684)	(5,688,845)

Income taxes - current benefit	-	-

NET (LOSS)	$(7,694,684)	$(5,688,845)

Basic and diluted (loss) per share	$(0.01)	$(0.01)

Weighted average shares of common stock outstanding- basic and diluted	1,197,565,907	884,348,627

~~Changes in Control Arrangements~~The accompanying notes are an integral part of these consolidated financial statements.

~~None.~~

~~Equity Compensation Plan Information~~F-3

GROWLIFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

	Series B Convertible Preferred Stock		Series C Convertible Preferred Stock		Common Stock		Unrealized Gain on
	Shares	Amount	Shares	Amount	Shares	Amount	Investment in Related Party	Additional Paid in Capital	Accumulated Deficit	Total Stockholders' (Deficit)
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)
Stock based compensation for stock options	-	-	-	-	-	-	-	145,729	-	145,729
Shares issued for debt conversion	-	-	-	-	13,400,000	1,340	-	142,660	-	144,000
Shares issued for services rendered	-	-	-	-	26,020,000	2,602	-	282,598	-	285,200
Shares issued for convertible note and interest conversion	-	-	-	-	595,442,539	59,546	-	5,594,400	-	5,653,946
Shares issued for mezzanine equity					15,000,000	1,500	-	298,500	-	300,000
Series B Convertible Preferred Stock converted into convertible notes payable	(150,000)	(15)	-	-	-	-	-	(1,499,985)	-	(1,500,000)
Shares issued for class action settlements	-	-	-	-	115,141,048	11,514	-	1,988,486	-	2,000,000
Net loss for the year ended December 31, 2016	-	-	-	-	-	-	-	-	(7,694,684)	(7,694,684)

Balance as of December 31, 2016	-	$-	51	$-	1,656,120,083	$165,600	$-	$117,537,822	$(124,410,332)	$(6,706,910)

The ~~following table sets forth information concerning~~accompanying notes are an integral part of these consolidated financial statements.

F-4

GROWLIFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended,
	December 31, 2016	December 31, 2015

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$(7,694,684)	$(5,688,845)
Adjustments to reconcile net loss to net cash (used in)
operating activities
Depreciation and amortization	8,437	13,715
Amortization of intangible assets	106,548	106,548
Stock based compensation	145,729	175,661
Preferred shares issued for services	-	300,000
Common stock issued for services	285,200	210,985
Amortization of debt discount	514,668	(158,237)
Change in fair value of derivative liability	1,324,384	(723,740)
Accrued interest on convertible notes payable	120,824	310,500
Loss on class action settlements	-	2,000,000
Loss on debt conversions	-	1,500,000
Excess and obsolete inventory	-	20,215
Write-off of patent expenses	-	3,600
Loss on debt conversions	2,889,540	-
Impairment of long-lived assets	876,056	-
Changes in operating assets and liabilities:
Inventory	20,014	464,696
Prepaid expenses	-	41,791
Deposits	(5,591)	16,830
Accounts payable	196,379	215,362
Accrued expenses	(22,791)	(209,972)
Deferred revenue	22,995	25,000
CASH (USED IN) OPERATING ACTIVITIES	(1,212,292)	(1,375,891)

CASH FLOWS FROM INVESTING ACTIVITIES:
	-	-
	-	-
NET CASH PROVIDED BY INVESTING ACTIVITIES:	-	-

CASH FLOWS FROM FINANCING ACTIVITIES:
Cash provided from Convertible Promissory Note with Chicago Venture Partners, L.P.	1,255,000	-
Proceeds from the issuance of convertible debt	-	1,150,000
Series B Convertible Preferred Stock	-	15
NET CASH PROVIDED BY FINANCING ACTIVITIES	1,255,000	1,150,015

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	42,708	(225,876)

CASH AND CASH EQUIVALENTS, beginning of period	60,362	286,238

CASH AND CASH EQUIVALENTS, end of period	$103,070	$60,362

Supplemental disclosures of cash flow information:
Interest paid	$-	$10,500
Taxes paid	$-	$-

Non-cash investing and financing activities:
Shares issued for convertible note and interest conversion	$2,764,406	$-
Shares issued for debt conversion	$144,000	$171,000
Shares issued for class action settlements	$2,000,000	$-
Shares issued for mezzanine equity	$300,000	$-
Series B Convertible Preferred Stock converted into convertible notes payable	$(1,500,000)	$-
Series B Convertible Preferred Stock converted into convertible notes payable debt discount	$315,669	$-

The accompanying notes are an integral part of these consolidated financial statements.

F-5

GROWLIFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION

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 Company’s goal of becoming the nation’s largest cultivation facility service provider for the production of organics, herbs and greens and plant-based medicines has not changed. The Company’s 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. GrowLife companies distribute and sell over 15,000 products through its e-commerce distribution channel, GrowLifeEco.com, and through our ~~equity compensation plans~~regional retail storefronts. GrowLife and its business units are organized and directed to operate strictly in accordance with all applicable state and federal laws.

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 Company’s Board of Directors and President of GrowLife Hydroponics, Inc.

On February 18, 2016, the Company’s 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.

NOTE 2 –GOING CONCERN

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 $7,694,684 and $5,688,845 for the years ended December 31, 2016 and 2015, respectively. Our net cash used in operating activities was $1,212,192 and $1,375,891 for the years ended December 31, 2016 and 2015, respectively.

The Company anticipates that it will record losses from operations for the foreseeable future. As of December 31, 2016, our accumulated deficit was $124,410,332. 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, 2016 and 2015 filed with the SEC on March 31, 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.

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS

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.

F-6

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 as of December 31, 2016 and 2015, respectively.

Property and Equipment - Property and equipment are stated at cost. Assets acquired under capital leases are initially recorded at the lower of the present value of the minimum lease payments discounted at the implicit interest rate 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 Company’s 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 unit’s 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.

On March 10, 2017, the Audit Committee reviewed the GrowLife Hydroponics, Inc. operations and based on the capital intensive nature of the business and operating results determined that the goodwill value of $739,000 and intangible assets of $137,056 were impaired as of December 31, ~~2013.~~2016. The Company recorded an impairment of goodwill and intangible assets associated with GrowLife Hydroponics, Inc. of $876,056 as general and administrative expenses during the three months ended December 31, 2016.

Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column
(a) (b) (a) (c)
Equity compensation plans 40,851,187 $    0.085 --
   approved by security holders (1)
Equity compensation plans not 165,000,000 $     0.040 --
   approved by security holders (2)
Total 205,851,187 $    0.049 --
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:

1.	~~Consists of awards issued and issuable pursuant to the 2011 Stock Incentive Plan.~~

2.	~~Consists of warrants issued to CANX and Hegyi, LLC, an entity controlled by Marco Hegyi, the Company’s President.~~

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.

~~- 90 -~~F-7

~~ITEM 13. CERTAIN RELATIONSHIPS~~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.

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, 2016 and December 31, 2015, there was no reserve for sales returns, which are minimal based upon our historical experience.

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.

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, 2016, there are also (i) stock option grants outstanding for the purchase of 12,010,000 common shares at a $0.010 average strike price; (ii) warrants for the purchase of 595 million common shares at a $0.031 average exercise price; and (iii) 207,812,222 shares related to convertible debt that can be converted at $0.0036 per share. In addition, we have an unknown number of common shares to be issued under the TCA Global Credit Master Fund LP and Chicago Venture Partners, L.P. financing agreements. 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.

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.

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 the Company’s consolidated financial statements.

F-8

In May 2014, as part of its ongoing efforts to assist in the convergence of GAAP and International Financial Reporting Standards, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which is a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of promised services or goods in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. The standard must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. In July 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, which defers the implementation of this new standard to be effective for fiscal years beginning after December 15, 2017. Early adoption is permitted effective January 1, 2017. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard pursuant to ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, and in May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which amend certain aspects of the new revenue recognition standard pursuant to ASU 2014-09. The Company currently evaluating which transition approach we will utilize and the impact of adopting this accounting standard on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-15, Disclosures of Uncertainties About an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company does not expect that this guidance will have a material impact on its financial position, results of operations or cash flows.

In January 2015, the FASB issued ASU 2015-01, Income Statement—Extraordinary and Unusual Items. The objective of this Update is to simplify the income statement presentation requirements in Subtopic 225-20 by eliminating the concept of extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2014-220—Income Statement—Extraordinary Items (Subtopic 225-20), which has been deleted. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. the Company’s does not expect this update to have a material impact on financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). The standard amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU 2016-02 is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting ASU 2016-02 on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU makes targeted amendments to the accounting for employee share-based payments. This guidance is to be applied using various transition methods such as full retrospective, modified retrospective, and prospective based on the criteria for the specific amendments as outlined in the guidance. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted, as long as all of the amendments are adopted in the same period. The Company is currently evaluating the impact of adopting ASU 2016-09 on the Company’s financial statements.

In June 2016, the FASB issued Accounting Standards Update ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. This ASU is not expected to have a material impact on the Company’s financial statements.

In August 2016, the FASB issued Accounting Standards Update ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. Stakeholders indicated that there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This Accounting Standards Update addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this Update apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230.This Update is the final version of Proposed Accounting Standards Update EITF-15F—Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments (Topic 230), which has been deleted. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted as all of the amendments are adopted in the same period. This ASU is not expected to have a material impact on the Company’s financial statements.

F-9

NOTE 4 – TRANSACTIONS WITH CANX USA, LLC AND ~~RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.~~LOGIC WORKS LLC

Transactions with ~~Officers~~CANX, LLC and ~~Directors~~Logic Works LLC

Other than the transactions described below, since January 1, 2013, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party:

	•	~~in which the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years; and~~
	•	in which any director, executive officer, stockholder who beneficially owns 5% or more of our common stock or any member of their immediate family had or will have a direct or indirect material interest.

On November 19, 2013, the Company entered into a Joint Venture Agreement with CANX, 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 Company’s operations in its current retail hydroponic businesses and in other synergistic business verticals and facilitating additional funding for commercially financeable transactions of up to $40,000,000.

The Company initially owned a non-dilutive 45% share of OGI and the Company could 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 that is convertible at $0.033 per share, subject to adjustment as provided in the warrant. The five-year warrant expires November 18, 2018. Also, in accordance with the Joint Venture Agreement, on February 7, 2014 the Company issued an additional warrant to purchase 100,000,000 shares of our common stock that is convertible at $0.033 per share, subject to adjustment as provided in the warrant. The five-year warrant expires February 6, 2019.

GrowLife received the $1 million as a convertible note in December 2013, received the $1.3 million commitment but not executed and by January 2014 OGI had Letters of Intent with four investment and acquisition transactions valued at $96 million. Before the deals could close, the SEC put a trading halt on our stock on April 10, 2014, which resulted in the withdrawal of all transactions. The business disruption from the trading halt and the resulting class action and derivative lawsuits ceased further investments with the OGI joint venture. The Convertible Note was converted into GrowLife, Inc. common stock as of the year ended December 31, 2016.

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 Amended and Restated Joint Venture Agreement with CANX modified the Joint Venture Agreement dated November 19, 2013 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 loan requiring approval in advance by CANX; (iii) confirmed that the five year warrants, subject to adjustment, 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 adjustment, 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; and (vi) a four year term, subject to adjustment.

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 required approval in advance by Logic Works, provided 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. As of March 31, 2017, the outstanding balance on the Convertible Note was $39,251.

OGI was incorporated on January 7, 2014 in the State of Nevada and had no business activities as of December 31, 2016.

NOTE 5 – INVENTORY

Inventory as of December 31, 2016 and December 31, 2015 consists of the following:

F-10

	December 31,
	2016	2015

Finished goods	$438,453	$418,439
Inventory reserve	(20,000)	(20,000)
Total	$418,453	$398,439

Finished goods inventory relates to product at the Company’s 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.

NOTE 6 – CONVERTIBLE NOTES PAYABLE, NET

Convertible notes payable as of December 31, 2016 consisted of the following:

				Balance
		Accrued	Debt	As of
	Principal	Interest	Discount	December 31, 2016
6% Secured convertible note (2014)	$330,295	$3,692	$-	$333,987
7% Convertible note ($850,000)	250,000	164,137	-	414,137
Replacement debenture with TCA ($2,830,210)	1,468,009	18,350	-	1,486,359
10% OID Convertible Promissory Note with Chicago Venture Partners, L.P.	683,042	2,670	(121,395)	564,317
	$2,731,346	$188,849	$(121,395)	$2,798,800

Convertible notes payable as of December 31, 2015 consisted of the following:

				Balance
		Accrued	Debt	As of
	Principal	Interest	Discount	December 31, 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 ($1,150,000)	1,150,000	68,510	(552,139)	666,371
	$2,413,680	$510,251	$(636,063)	$2,287,868

Several of the Company’s 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. As a result, the Company accrued interest on these notes at the default rates. 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 as of December 31, 2016 and 2015.

6% Senior Secured Convertible Notes Payable (2012)

On September 28, 2012, the Company ~~issued a~~entered into an Amendment and Exchange Agreement with investors, including Sterling Scott, our then CEO. The Exchange Agreement provided for the issuance of new 6% Senior Secured Convertible ~~Note (the “Scott Note”) in~~Notes that replaced the ~~amount of $282,000 to Sterling Scott, the Company’s Chief Executive Officer.~~6% Senior Secured Convertible Notes that were previously issued during 2012. The ~~Scott Note accrues~~6% Notes accrued interest at the rate of 6% per annum and ~~has~~had a maturity date of April 15, 2015. No cash payments ~~are~~were required; however, accrued interest ~~shall be~~was due at maturity. In the event of a default ~~Mr. Scott~~the investors may declare the entire principal and accrued interest to be due and payable. Default interest ~~will accrue~~accrued at the rate of 12% per annum. The ~~Scott Note is~~6% Notes were secured by substantially all of the assets of the Company. On September 28, 2012, the original Scott Note was amended to reflect an additional cash investment in the amount of $131,680 made by Mr. Scott, which resulted in a new principal balance owed by the Company ~~to Mr. Scott in the amount of $413,680. The amended Scott Note included a fixed per share conversion price of $0.007.~~

~~On February 8, 2013, Eric Shevin, an independent Board Member, exercised options to purchase 470,237 shares of the Company’s common stock for $9,000.~~

~~On June 7, 2013, in connection with the Company’s acquisition of Rocky Mountain Hydroponics, LLC~~ and ~~Evergreen Garden Center, LLC (“RMH/EGC”) (see “NOTE 6 – PURCHASE – ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER"), the Company issued 3,333,942 shares of its~~were convertible into common stock at the rate of $0.007 per share. The Company determined that the conversion feature was a ~~per share price~~beneficial conversion feature.

As of ~~$0.035 ($116,688 in~~September 10, 2014, the ~~aggregate)~~outstanding principal balance on Mr. Scott’s 6% convertible note was $413,680 and accrued interest were sold to ~~Rob Hunt,~~two parties not related to us. On April 27, 2015, the ~~President of GrowLife Hydroponics, Inc. and a member~~Company entered into Amendment One of the ~~Company’s Board of Directors. The shares were issued as consideration for the purchase of RMH/EGC, of which he is a former owner. The Company also issued a 12%~~Amended and Restated 6% Senior Secured Convertible Note, ~~(see “NOTE 18 –~~which increased the interest rate to 12% ~~SENIOR SECURED CONVERTIBLE NOTE”)~~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 date of conversion.

F-11

During the year ended December 31, 2015, the Company recorded interest expense of $26,964 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 ~~$408,000~~$586,174.

During the year ended December 31, 2016, the Company recorded interest expense of $105,016 related to ~~Mr. Hunt as additional consideration for the Company’s acquisition~~these 6% convertible notes. Two investors converted principal and interest of ~~RMH/EGC.~~

~~In November 2013, the Company’s Board of Directors approved a stock option grant to Mr. Hunt via the Company’s 2011 Stock Incentive Plan to purchase 12,000,000~~$413,680 and $67,418, respectively, into shares of the Company’s common stock at ~~an exercise~~a per share conversion price of ~~$0.043~~$0.007. As of December 31, 2016, the outstanding principal and interest on these 6% convertible notes was $0.

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, provided for interest at 6% with a default interest of 24% per ~~share,~~annum and requires repayment by June 26, 2016. The Note is convertible into common stock of the Company at the lesser of $0.007 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 ~~represents~~Logic Works elects to convert all or part of this 6% Convertible Note, subject to adjustment as provided in the ~~fair value~~Note.

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, a lender and shareholder of ~~one share~~the Company.

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.

During the year ended December 31, 2016, the Company recorded interest expense of $20,837 and $83,924 of non-cash interest expense related to the amortization of the debt discount associated with this 6% convertible note, respectively. Logic Works converted interest of $47,386 into shares of the Company’s common stock ~~on June 7, 2013. The option grant~~at a per share conversion price of $0.0036.

As of December 31, 2016, the Company has borrowed $330,295 under the Secured Convertible Note and Secured Credit Facility, accrued interest was ~~made retro-active to June 7,~~$3,692 and the unamortized debt discount was $0, which results in a net amount of $333,987.

7% Convertible Notes Payable

On October 11, 2013, the Company issued 7% Convertible Notes in the aggregate amount of $850,000 to investors, including $250,000 to Forglen LLC. The Note was due September 30, 2015. All other Notes were converted in 2014. 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 Company’s securities and Forglen has $250,000 of principal and interest outstanding on its note payable as of December 31, 2015 and September 30, 2016. The current annual rate of interest is 24% per annum. The conversion price was $0.007 per share. The Company determined that the conversion feature was a beneficial conversion feature.

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 of $250,000 was due September 30, 2015. The current annual rate of interest is 24% per annum. The conversion price was $0.007 per share. The Company determined that the conversion feature was a beneficial conversion feature.

During the year ended December 31, 2015, the Company recorded interest expense of $105,041 and $174,252 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.

During the year ended December 31, 2016, the Company recorded interest expense of $0 related to these 7% convertible notes. Logic Works converted principal of $250,000 and interest of $75,149 and interest of into shares of the Company’s common stock at a per share conversion price of $0.004 to $0.007. As of December 31, 2016, the outstanding principal on these 7% convertible notes was $250,000, accrued interest was $164,137, and unamortized debt discount was $0, which results in a net amount of $414,137.

F-12

Funding from TCA Global Credit Master Fund, LP (“TCA”)

The First TCA SPA. On July 9, 2015, the Company closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP (“TCA”), an accredited investor, whereby the Company agreed to sell and TCA agreed to purchase up to $3,000,000of senior secured convertible, redeemable debentures, of which $700,000 was purchased on July 9, 2015 and up to $2,300,000 could be purchased in additional closings. The closing of the transaction (the “First TCA SPA”) occurred on July 9, 2015. Effective as of May 4, 2016, the Company and TCA entered into a First Amendment to the First TCA SPA whereby the parties agreed to amend the terms of the First TCA SPA in exchange for TCA’s forbearance of existing defaults by the Company.

The Second TCA SPA. On August 6, 2015, the Company closed a second Securities Purchase Agreement and related agreements with TCA 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 Company’s common stock pursuant to a committed equity facility. The closing of the transaction (the “Second TCA SPA”) occurred on August 6, 2015. On April 11, 2016, the Company agreed with TCA to mutually terminate the Second TCA SPA.

Amendment to the First TCA SPA. On October 27, 2015, the Company entered into an Amended and Restated Securities Purchase Agreement and related agreements with TCA whereby the Company agreed to sell, and TCA agreed to purchase $350,000 of senior secured convertible, redeemable debentures. This was an amendment to the First TCA SPA (the “Amendment to the First TCA SPA”.) As of October 27, 2015, the Company sold $1,050,000 in Debentures to TCA and up to $1,950,000 in Debentures remained for sale by the Company. The closing of the Amendment to the First TCA SPA occurred on October 27, 2015. In addition, TCA has advanced the Company an additional $100,000 for a total of $1,150.000.

Issuance of Preferred Stock to TCA. 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. 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. On October 21, 2015, we also issued 51 shares of Series C Preferred Stock at $0.0001 par value per share to TCA. The Series C Preferred Stock is not convertible into our common stock. In the event of a default under the Amended and Restated TCA Transaction Documents, TCA can exercise voting control over our common stock with their Series C Preferred Stock voting rights.

TCA’s Forbearance. Due to the Company’s default on ~~which Mr. Hunt became~~its repayment obligations under the TCA SPA’s and related documents, the parties agreed to restructure the SPA’s whereby TCA agreed to forbear from enforcement of our defaults and to restructure a ~~Director~~payment schedule for repayment of debt under the SPAs. The Company defaulted because our operating results were not as expected and the Company was unable to generate sufficient revenue through its business operations to serve the TCA debt. Specifically, the First Amendment to Amended and Restated Securities Purchase Agreement made the following material modifications to the existing SPA’s:

●

All unpaid debentures were modified as described in more detail below.

●

The due date of the debentures was extended to April 28, 2018.

●

TCA agreed that it shall not enforce and shall forbear from pursuing enforcement of any existing defaults by us unless and until a future Company default occurs.

In furtherance of TCA’s forbearance, effective as of May 4, 2016, the Company issued Second Replacement Debenture A in the principal amount of $150,000 and Second Replacement Debenture B in the principal amount of $2,681,210 (collectively, the “Second Replacement Debentures”).

Per the First Amendment to the Amended and Restated Securities Purchase Agreement, the Second Replacement Debentures were combined, and apportioned into two separate replacement debentures. The Second Replacement Debentures were intended to act in substitution for and to supersede the debentures in their entirety. It was the intent of the Company and TCA that while the ~~President~~Second Replacement Debentures replace and supersede the debentures, in their entirety, they were not in payment or satisfaction of ~~GrowLife Hydroponics, Inc. Per~~the debentures, but rather were the substitute of one evidence of debt for another without any intent to extinguish the old debt. As of September 30, 2016, the maximum number of shares subject to conversion under the Second Replacement Debentures is19,401,389. This is an approximation. The estimation of the maximum number of shares issuable upon the conversion of the Second Replacement Debentures was calculated using an estimated average price of $0.0036 per share.

The Second Replacement Debentures contemplate TCA entering into debt purchase agreement(s) with third parties whereby TCA may, at its election, sever, split, divide or apportion the Second Replacement Debentures to accomplish the repayment of the balance owed to TCA by Company. The Second Replacement Debentures are convertible at 85% of the lowest daily volume weighted average price (“VWAP”) of the Company’s common stock during the five (5) business days immediately prior to a conversion date.

F-13

In connection with the above agreements, the parties acknowledged and agreed that certain advisory fees previously paid to TCA as provided in the SPAs in the amount of $1,500.000 have been added and included within the principal balance of the Second Replacement Debentures. The advisory fees related to financial, merger and acquisition and regulatory services provided to the Company. The conversion price discount on the Second Replacement Debentures will not apply to the advisory fees added to the Second Replacement Debentures. TCA also agreed to surrender its Series B Preferred Stock in exchange for the $1,500,000 being added to the Second Replacement Debenture.

As more particularly described below, the Company remains in debt to TCA for the principal amount of $1,500,000. The remaining $1,400,000 of principal debt was assigned to Old Main Capital, LLC (see discussion immediately below.) The Company intends to use the funds generated from the Chicago Venture transaction to fuel its business operations and business plans which, in turn, will presumably generate revenues sufficient to avoid another default in the remaining TCA obligations. If the Company is unable to raise sufficient funds through the Chicago Venture transaction and/or generate sales sufficient to service the remaining TCA debt then the Company will be unable to avoid another default. Failure to operate in accordance with the various agreements with TCA could result in the cancellation of these agreements, result in foreclosure on the Company’s assets in an event of default which would have a material adverse effect on our business, results of operations or financial condition.

At the date of the TCA debt restructuring the remaining unamortized discount was expensed to interest in the amount of $482,112 and the Company recognized a loss on restructuring of $ 279,897.

As of December 31, 2016, the Company is indebted to TCA under the First and Second Replacement Debentures in the amount of $1,468,009, accrued interest was $18,350 and the unamortized debt discount was $0, which results in a net amount of $1,486,359.

During the year ended December 31. 2016, Old Main converted principal and accrued interest of $757,208 into 144,650,951 shares of our common stock at a per share conversion price of $0.0052.

During the year ended December 31, 2016, Chicago Venture converted principal and accrued interest of $1,403,599 into 264,672,323 shares of our common stock at a per share conversion price of $0.0053.

During the year ended December 31. 2016, the Company recorded the unamortized debt discount reversal of $750,339 related to the TCA financing as a reduction in additional paid in capital because TCA did not convert its debt but assigned its debentures to others.

The Company has recorded a loss on these transactions in the amount of $2,889,540. The loss on debt conversions related to the conversion of our notes payable at prices below the market price.

On January 10, 2017, Chicago Venture, at the Company’s instruction, remitted funds of $1,495,901 to TCA in order to satisfy all debts to TCA. On or around January 11, 2017, the Company was notified by TCA that $13,540 were due to TCA in order for TCA to release its security interest in the Company’s assets. On February 1, 2017, TCA notified the Company that all funds were received and TCA would release its security interest in Company’s assets. TCA has confirmed that it is paid in full and the Company is not aware of any other obligations that the Company has as to TCA. The funds received under the Chicago Venture Agreements and previous Chicago Venture Agreements were used to pay-off TCA.

TCA Assignment of Debt to Old Main Capital, LLC

On June 9, 2016, the Company closed a Debt Purchase Agreement and related agreements (the “Old Main Transaction Documents”) with TCA and Old Main Capital, LLC (“Old Main”) whereby TCA agreed to sell and Old Main agreed to purchase in multiple tranches $1,400,000 in senior secured convertible, redeemable debentures (the “Assigned Debt”) (the “Old Main Transaction”). The Assigned Debt was our debt incurred in the TCA financing transactions that closed in 2015. We were required to execute the Old Main Transaction Documents as the Company is the “borrower” on the Assigned Debt.

Debt Purchase Agreement.As set forth above, the Company entered into the Debt Purchase Agreement on June 9, 2015 with TCA and Old Main whereby Old Main agreed to purchase, in tranches, $1,400,000 of debt previously held by TCA. The Company executed the Debt Purchase Agreement as it was the “borrower” under the Assigned Debt and was required to make certain representations and warranties regarding the Assigned Debt. The Assigned Debt is represented by a new “10% Senior Convertible Promissory Note” entered into by and between Old Main and the Company (more particularly described below.)

Exchange Agreement.In conjunction with the Debt Purchase Agreement, on June 9, 2016, the Company entered into an Exchange Agreement whereby we agreed to exchange, in tranches, the Assigned Debt, as well as any amendments thereto, with a 10% Senior Convertible Promissory Note (the “Note”)having a principal balance of $1,400,000. The closing dates for the exchanges, scheduled to occur in tranches, are set forth in Schedule 1 attached to the Exchange Agreement.

F-14

10% Senior Convertible Promissory Note.Pursuant to the Exchange Agreement, the Company entered into a 10% Senior Convertible Promissory Note dated June 9, 2016 with Old Main whereby the Company agreed to be indebted to Old Main for the Assigned Debt. The Company promised to pay Old Main, by no later than the maturity date of June 9, 2017 the outstanding principal of the Assigned Debt together with interest on the outstanding principal amount under the Note, at the rate of ten percent (10%) per annum simple interest.

At any time after June 9, 2016, and while the Note is still outstanding and at the sole option of Old Main, Old Main 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 our Common Stock at a price equal to the lower of: (i) sixty-five percent (65%) of the lowest traded price of the Company’s Common Stock during the thirty (30) trading days prior to the Conversion Date; or (ii) sixty-five percent (65%) of the lowest traded price of the Common Stock in the thirty (30) Trading Days prior to the Closing Date.

Option Agreement.In connection with the Old Main Transaction Documents, TCA and Old Main entered into an Option Agreement dated June 8, 2016 whereby TCA agreed to grant Old Main an option to purchase the Assigned Debt, or any portion thereof, under the terms and conditions of the Debt Purchase Agreement. In consideration, Old Main agreed to pay the Option Payment as more particularly described in the Option Agreement.

During the year ended December 31. 2016, Old Main converted principal and accrued interest of $757,208 into 144,650,951 shares of our common stock at a per share conversion price of $0.0052.

Funding from Chicago Venture Partners, L.P. (“Chicago Venture”)

Securities Purchase Agreement with Chicago Venture Partners, L.P. As of April 4, 2016, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note (the “Chicago Venture Note”) with Chicago Venture, whereby we agreed to sell, and Chicago Venture agreed to purchase an unsecured convertible promissory note in the original principal amount of $2,755,000. In connection with the transaction, the Company received $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 we agreed to pay $5,000 to cover Purchaser’s legal fees, accounting costs and other transaction expenses.

The Secured Investor Notes are payable (i) $50,000 upon filing of a Registration Statement on Form S-1; (ii) $100,000 upon effectiveness of the Registration Statement; and (iii) up to $200,000 per month over the 10 months following effectiveness at our sole discretion, subject to certain conditions. The Company filed the Registration Statement within forty-five (45) days of the Closing and agreed to register shares of our common stock for the benefit of Chicago Venture in exchange for the payments under the Secured Investor Notes.

Chicago Venture has the option ~~agreement,~~to convert the ~~shares were to vest~~Note at 65% of the average of the three (3) lowest volume weighted average prices in ~~twenty-four (24) equal monthly installments~~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 ~~last~~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 ~~commencing~~thereafter, the Company will re-pay the Note in monthly installments in cash, or, subject to certain Equity Conditions, in the Company’s 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”).

As discussed above, once effective, the Company has the discretion to require Chicago Venture to sell to us up to $200,000 per month over the next 10 months on the above terms. The Company would then have the option to issue shares registered under this Registration Statement to Chicago Venture. Through this prospectus, the selling stockholder may offer to the public for resale shares of the Company’s common stock that we may issue to Chicago Venture pursuant to the Chicago Venture Note.

For a period of no more than 36 months from the effective date of the Registration Statement, we may, from time to time, at the Company’s sole discretion, and subject to certain conditions that we must satisfy, draw down funds under the Chicago Venture Note.

The Company’s ability to require Chicago Venture to fund the Chicago Venture Note is at its discretion, subject to certain limitations. Chicago Venture is obligated to fund if each of the following conditions are met; (i) the average and median daily dollar volumes of the Company’s common stock for the twenty (20) and sixty (60) trading days immediately preceding the funding date are greater than $100,000; (ii) the Company’s market capitalization on the funding date is greater than $17,000,000; (iii) the Company is not in default with respect to share delivery obligations under the note as of the funding date; and (iv) the Company is current in its reporting obligations. Chicago Venture’ obligations under the equity line are not transferable.

F-15

The issuance of the Company’s common stock under the Chicago Venture Note will have no effect on the rights or privileges of existing holders of common stock except that the economic and voting interests of each stockholder will be diluted as a result of any such issuance. Although the number of shares of common stock that stockholders presently own will not decrease, these shares will represent a smaller percentage of the Company’s total shares that will be outstanding after ~~June 7, 2013, they~~any issuances of shares of common stock to Chicago Venture. If the Company’s draw down amounts under the Chicago Venture Note when the Company’s share price is decreasing, the Company will need to issue more shares to repay the same amount than if the Company’s stock price was higher. Such issuances will have a dilutive effect and may further decrease our stock price.

There is no guarantee that the Company will be able to meet the foregoing conditions or any other conditions under the Securities Purchase Agreement and/or Chicago Venture Note or that the Company will be able to draw down any portion of the amounts available under the Securities Purchase Agreement and/or Chicago Venture Note. However, the Company does believe there is a strong likelihood, as long as we can meet the various conditions to funding, that the Company will receive the full amount of funding under the equity line of credit. Given the Company’s financial challenges and the competitive nature of our business, the Company also believes it will need the full amount of funding under the equity line of credit in order to fully realize the business plans.

A portion of the funds received from Chicago Venture will be used to pay off TCA, a previous equity financing partner and a portion will be invested in our business. Specifically, the Company anticipates that approximately $1,400,000 is expected to be used to pay TCA and the remaining funds, if any, will be used for general business purposes such as marketing, product development, expansion and administrative costs. The Company is not aware of any relationship between TCA and Chicago Venture. The Company has had no previous transactions with Chicago Venture or any of Chicago Venture’s affiliates. The Company cannot predict whether the Chicago Venture transaction will have either a positive or negative impact on our stock price. However, in addition to the fact that each Chicago Venture conversion, when and if it occurs, has a dilutive effect on the Company’s stock price, that should Chicago Venture convert large portions of the debt into registered shares and then sells those shares on the market, that the Company’s stock price could be ~~exercised~~depressed.

As of December 31, 2016, the outstanding balance due to Chicago Venture is $683,042, accrued interest was $2,670, net of the OID of $121,395, which results in a net amount of $564,317. The OID has been recorded as a discount to debt and will be amortized over the life of the loan.

During the year ended December 31. 2016, Chicago Venture converted principal and accrued interest of $1,403,599 into 264,672,323 shares of our common stock at ~~any time on~~a per share conversion price of $0.0053.

On January 10, 2017, Chicago Venture, at the Company’s instruction, remitted funds of $1,495,901 to TCA in order to satisfy all debts to TCA. On or ~~after~~around January 11, 2017, the ~~grant date,~~Company was notified by TCA that $13,540 were due to TCA in order for TCA to release its security interest in the ~~term was ten years,~~Company’s assets. On February 1, 2017, TCA notified the Company that all funds were received and TCA would release its security interest in Company’s assets. TCA has confirmed that it is paid in full and the ~~options~~Company is not aware of any other obligations that the Company has as to TCA. The funds received under the Chicago Venture Agreements and previous Chicago Venture Agreements were used to pay-off TCA.

Debt Purchase Agreement and First Amendment to Debt Purchase Agreement and Note Assignment AgreementOn August 24, 2016, the Company closed a Debt Purchase Agreement and a First Amendment to Debt Purchase Agreement and related agreements with Chicago Venture and TCA.

Exchange Agreement, Convertible Promissory Note and related Agreements with Chicago VentureOn August 17, 2016, the Company closed an Exchange Agreement and a Convertible Promissory Note and related agreements with Chicago Venture whereby the Company agreed to the assignment of debentures representing debt between the Company, on the one hand, and with TCA, on the other hand. Specifically, the Company agreed that TCA could assign a portion of the Company’s debt held by TCA to Chicago Venture.

According to the Exchange Agreement, the debt is to be ~~exercised~~assigned in tranches, with the first tranche of debt assigned from TCA to Chicago Venture being $128,000 which is represented by an Initial Exchange Note as defined in the Exchange Agreement.

NOTE 7 – DERIVATIVE LIABILITY

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 ~~cashless basis.~~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.

F-16

Derivative liability as of December 31, 2016 is as follows:

				Carrying
	Fair Value Measurements Using Inputs			Amount at
Financial Instruments	Level 1	Level 2	Level 3	December 31, 2016

Liabilities:
Derivative Instruments	$-	$2,701,559	$-	$2,701,559

Total	$-	$2,701,559	$-	$2,701,559

For the year ended December 31, 2016, the Company recorded non-cash income of $1,324,384 related to the “change in fair value of derivative” expense related to its 6%, 7% and 18% convertible notes

Derivative liability as of December 31, 2015 is as follows:

				Carrying
	Fair Value Measurements Using Inputs			Amount at
Financial Instruments	Level 1	Level 2	Level 3	December 31, 2015

Liabilities:
Derivative Instruments	$-	$1,377,175	$-	$1,377,175

Total	$-	$1,377,175	$-	$1,377,175

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.

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.

7% Convertible Notes

As of December 31, 2015, the Company had outstanding 7% convertible notes for $500,000 that the Company determined had an embedded derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the ~~options~~derivative liability of these notes at ~~$228,000~~$105,515 using the ~~Black-Scholes~~Black-Scholes-Merton option pricing model, ~~using~~which approximates the Monte Carlo and other binomial valuation techniques, with the following ~~assumptions:~~assumptions (i) dividend yield of 0%; (ii) expected volatility of ~~82.77%~~133.2%; (iii) risk free rate of ~~0.04%~~.001%, (iv) stock price of $.005, (v) per share conversion price of $0.007, and (vi) expected term of 2.25 years, ~~and a per share market price of $0.043, which was the closing price of the Company’s shares on June 7, 2013. Beginning in June 2013 and ending May 2015,~~as the Company ~~will expense~~estimated that these notes would be converted by March 31, 2016.

As of December 31, 2016, the ~~$228,000 at~~Company had outstanding 7% convertible notes with a remaining balance of $250,000 that the ~~rate of $9,500 per month over~~Company determined had an embedded derivative liability due to the ~~24-month vesting term of~~“reset” clause associated with the ~~option (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”).~~

In November 2013, the Company’s Board of Directors granted Sterling Scott, the Company’s Chief Executive Officer, a stock option via the Company’s 2011 Stock Incentive Plan to purchase 12,000,000 shares of the Company’s common stock. Per the terms of the stock option agreement, the shares were to vest in twenty-four (24) equal monthly installments on the last day of each month commencing on October 31, 2013. The term is ten years and the options include a cashless exercise feature.note’s conversion price. The Company valued the ~~options~~derivative liability of these notes at ~~$537,600~~$1,495,495 using the ~~Black-Scholes~~Black-Scholes-Merton option pricing model, ~~using~~which approximates the Monte Carlo and other binomial valuation techniques, with the following ~~assumptions:~~assumptions (i) dividend yield of 0%; (ii) expected volatility of ~~82.77%~~160.0%; (iii) risk free rate of ~~0.02%~~.001%, (iv) stock price of $0.017, (v) per share conversion price of $0.0036, and (vi) expected term of 3.25 years, ~~and a per share market price~~as the Company estimates that the balance of ~~$0.085, which was the closing price~~these notes will be converted by March 31, 2017.

6% Convertible Notes

As of ~~the Company’s shares on November 1, 2013. Beginning in November 2013 and ending October~~December 31, 2015, the Company ~~will expense~~had outstanding unsecured 6% convertible notes for $350,000 that the ~~$537,600 at~~Company determined were a derivative liability due to the ~~rate of $22,400 per month over~~“reset” clause associated with the ~~24-month vesting term of the option (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”).~~

~~- 91 -~~

In November 2013, the Company’s Board of Directors granted John Genesi, the Company’s Chief Financial Officer, a stock option via the Company’s 2011 Stock Incentive Plan to purchase 10,000,000 shares of the Company’s common stock. Per the terms of the stock option agreement, the shares were to vest in twenty-four (24) equal monthly installments on the last day of each month commencing from and after October 31, 2013, they could be exercised at any time on or after the grant date, the term was ten years, and the options could be exercised on a cashless basis.note’s conversion price. The Company valued the ~~options~~derivative liability of these notes at ~~$448,000~~$54,377 using the ~~Black-Scholes~~Black-Scholes-Merton option pricing ~~model using~~model. which approximates the Monte Carlo and other binomial valuation techniques, with the following ~~assumptions:~~assumptions (i) dividend yield of 0%; (ii) expected volatility of ~~82.77%~~133.2%; (iii) risk free rate of ~~0.02%~~0.34%, (iv) stock price of $0.005, (v) per share conversion price of $0.007, and (vi) expected term of 3.56 years.

F-17

As of December 31, 2016, the Company had outstanding unsecured 6% convertible notes for $330,295 that the Company determined had an embedded derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $1,206,064 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 .001%, (iv) stock price of $0.017, (v) per share conversion price of $0.0036, and (vi) expected term of .25 years, as the Company estimates that these notes will be converted by March 31, 2017.

Funding from TCA Global Credit Master Fund, LP (“TCA”).

The First TCA SPA. On July 9, 2015, the Company closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP (“TCA”), an accredited investor, whereby the Company agreed to sell and TCA agreed to purchase up to $3,000,000of 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 (the “First TCA SPA”) occurred on July 9, 2015. Effective as of May 4, 2016, the Company and TCA entered into a First Amendment to the First TCA SPA whereby the parties agreed to amend the terms of the First TCA SPA in exchange for TCA’s forbearance of existing defaults by the Company.

Amendment to the First TCA SPA. On October 27, 2015, the Company entered into an Amended and Restated Securities Purchase Agreement and related agreements with TCA whereby the Company agreed to sell, and TCA agreed to purchase $350,000 of senior secured convertible, redeemable debentures. This was an amendment to the First TCA SPA (the “Amendment to the First TCA SPA”.) As of October 27, 2015, the Company sold $1,050,000 in Debentures to TCA and up to $1,950,000 in Debentures remain for sale by the Company. The closing of the Amendment to the First TCA SPA occurred on October 27, 2015. In addition, TCA has advanced the Company an additional $100,000 for a total of $1,150.000.

TCA’s Forbearance. Due to the Company’s default on its repayment obligations under the TCA SPA’s and related documents, the parties agreed to restructure the SPA’s whereby TCA agreed to forbear from enforcement of our defaults and to restructure a payment schedule for repayment of debt under the SPAs. The Company defaulted because our operating results were not as expected and the Company were unable to generate sufficient revenue through its business operations to serve the TCA debt. Specifically, the First Amendment to Amended and Restated Securities Purchase Agreement made the following material modifications to the existing SPA’s:

●

All unpaid debentures were modified as described in more detail below.

●

The due date of the debentures was extended to April 28, 2018.

●

TCA agreed that it shall not enforce and shall forbear from pursuing enforcement of any existing defaults by us unless and until a future Company default occurs.

F-18

Per the First Amendment to Amended and Restated Securities Purchase Agreement, the Second Replacement Debentures were combined, and apportioned into two separate replacement debentures. The Second Replacement Debentures were intended to act in substitution for and to supersede the debentures in their entirety. It was the intent of the Company and TCA that while the Second Replacement Debentures replace and supersede the debentures, in their entirety, they were not in payment or satisfaction of the debentures, but rather were the substitute of one evidence of debt for another without any intent to extinguish the old debt. As of September 30, 2016, the maximum number of shares subject to conversion under the Second Replacement Debentures is 19,401,389. This is an approximation. The estimation of the maximum number of shares issuable upon the conversion of the Second Replacement Debentures was calculated using an estimated average price of $.0036 per share.

The Second Replacement Debentures contemplate TCA entering into debt purchase agreement(s) with third parties whereby TCA may, at its election, sever, split, divide or apportion the Second Replacement Debentures to accomplish the repayment of the balance owed to TCA by Company. The Second Replacement Debentures are convertible at 85% of the lowest daily volume weighted average price (“VWAP”) of the Company’s common stock during the five (5) business days immediately prior to a conversion date.

In connection with the above agreements, the parties acknowledged and agreed that certain advisory fees previously paid to TCA as provided in the SPAs in the amount of $1,500,000 have been added and included within the principal balance of the Second Replacement Debentures. The advisory fees related too financial, merger and acquisition and regulatory services provided to the Company. The conversion price discount on the Second Replacement Debentures will not apply to the advisory fees added to the Second Replacement Debentures. TCA also agreed to surrender its Series B Preferred Stock in exchange for the $1,500,000 being added to the Second Replacement Debenture.

As more particularly described below, the Company’s remain in debt to TCA for the principal amount of $1,500,000. The remaining $1,400,000 of principal debt was assigned to Old Main Capital, LLC (see discussion immediately below.) The Company intends to use the funds generated from the Chicago Venture transaction to fuel its business operations and business plans which, in turn, will presumably generate revenues sufficient to avoid another default in the remaining TCA obligations. If the Company is unable to raise sufficient funds through the Chicago Venture transaction and/or generate sales sufficient to service the remaining TCA debt then the Company will be unable to avoid another default. Failure to operate in accordance with the various agreements with TCA could result in the cancellation of these agreements, result in foreclosure on the Company’s assets in an event of default which would have a material adverse effect on our business, results of operations or financial condition.

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.

At the inception of the Replacement Debentures, the embedded derivative liability was remeasured at fair value and the Company recorded a net gain of $420,822, 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 150.0%; (iii) risk free rate of 0.001%, (iv) stock price of $0.015, (v) per share conversion price of $0.013, and (vi) expected term of 1.0 year.

At inception, the Company valued the conversion feature of the Replacement Debentures as a derivative liability in the amount of $979,716 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 150.0%; (iii) risk free rate of .52%, (iv) stock price of $.015, (v) per share conversion price of $0.013, and (vi) expected term of 1.0 years, as the Company estimated that the Replacement Debentures will be converted by September 30, 2017. The amount was recorded as a discount to debt and will be amortized over the life of the debentures.

As of December 31, 2016, the Company remaining debt was below $1,500,000 and does not include a derivative liability.

NOTE 8 – RELATED PARTY TRANSACTIONS AND CERTAIN RELATIONSHIPS

Since January 1, 2015, 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 in Note 5, TCA Global Credit Master Fund LP and Chicago Venture Partners, L.P. discussed in Note 4, 6, 7 and 13.

F-19

Transactions with an Entity Controlled by Marco Hegyi

On April 15, 2016, the Company issued 1,000,000 shares of its common stock to an entity affiliated with Marco Hegyi, our Chief Executive Officer, pursuant to a conversion of debt for $20,000. The shares were valued at the fair market price of ~~$0.085,~~$0.02 per share. On October 12, 2016, the Company issued 4,000,000 shares of its common stock to an entity affiliated with Marco Hegyi, pursuant to a conversion of debt for $40,000. The shares were valued at the fair market price of $0.01 per share.

On October 21, 2016, the Company entered into Agreement with Marco Hegyi pursuant to which the Company engaged Mr. Hegyi as its Chief Executive Officer through October 20, 2018. Mr. Hegyi’s previous Employment Agreement was dated December 4, 2013 and which is set to expire on December 4, 2016. Mr. Hegyi received a Warrant to purchase up to 10,000,000 shares of common stock of the ~~closing~~Company at an exercise price of $0.01 per share. In addition, Mr. Hegyi received Warrants to purchase up to 10,000,000 shares of common stock of the Company at an exercise price of $0.01 per share which vest on October 21, 2017 and 2018. The Warrants are exercisable for 5 years.

Transactions with an Entity Controlled by Mark E. Scott

On January 4, 2016, the Company issued 3,000,000 shares of its common stock to an entity affiliated with Mark E. Scott, our Chief Financial Officer, pursuant to a conversion of accrued consulting fees and expenses for $30,000. The shares were valued at the fair market price of $0.01 per share. On October 21, 2016, an entity affiliated with Mr. Scott converted $40,000 in accrued consulting fees and expenses into 4,000,000 shares of the Company’s common stock at $0.01 per share. The price per share was based on the thirty-day trailing average. On October 21, 2016, an entity affiliated with Mr. Scott was granted 6,000,000 shares of the Company’s common stock at $0.01 per share. The price per share was based on ~~November 1, 2013. Beginning in November 2013 and ending~~the thirty-day trailing average. On October ~~2015,~~21, 2016, an entity affiliated with Mr. Scott cancelled stock option grants totaling 12,000,000 shares of the Company’s common stock at $0.01 per share.

Transactions with Michael E. Fasci

On January 27, 2016, the Company ~~will expense the $448,000~~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 ~~rate~~fair market price of ~~$18,667~~$0.01 per ~~month over the 24-month vesting term of the option (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”).~~

~~In March 2013,~~share. On May 25, 2016, the Company issued 2,500,000 shares of its common stock to ~~Sterling Scott, the Company’s Chief Executive Officer, as consideration for services provided to the Company. These shares represent an installment due to Mr. Scott in relation~~Michael E. Fasci pursuant to a ~~Board grant from August 2012.~~service award for $50,000. The shares were valued at ~~$25,000~~the fair market price of $0.02 per share.

On October 21, 2016, the Company entered into a Consulting Agreement with an entity controlled by Michael E. Fasci. Mr. Fasci agreed to provide services related to lender management, financing and acquisitions. Mr. Fasci’s compensation is 2,000,000 shares of our common stock valued at $0.01 per share and to be issued on April 21, 2017 and October 21, 2017.

NOTE 9 – EQUITY

Authorized Capital Stock

The Company has authorized 3,010,000,000 shares of capital stock, of which 3,000,000,000 are shares of voting common stock, par value $0.0001 per share, and 10,000,000 are shares of preferred stock, par value $0.0001 per share.

Non-Voting Preferred Stock

Under the terms of our articles of incorporation, the Company’s board of directors is authorized to issue shares of non-voting preferred stock in one or more series without stockholder approval. The Company’s 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 Company’s board of directors to issue non-voting preferred stock and determine the Company’s 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 we have no present plans to issue any shares of preferred stock.

F-20

Series B Preferred Stock Designation

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 the Company’s liquidation or dissolution, Series B Preferred Stock has no priority or preference with respect to distributions of any assets by 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 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.

In connection with the First Amendment to Amended and Restated Securities Purchase Agreement, TCA surrendered the Series B Preferred Stock.

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 ~~aggregate.~~Company’s 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.

In ~~March 2013,~~connection with the closing of the Chicago Venture transactions which closed on February 1, 2017, TCA surrendered the Series C Preferred Stock.

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, 2016, the Company had had the following sales of unregistered of equity securities to accredited investors unless otherwise indicated:

On January 4, 2016, the Company issued ~~2,000,000~~3,000,000 shares of its common stock to ~~Justin Manns, the Company’s former~~an entity affiliated with Mark E. Scott, our Chief Financial Officer, a former member of the Company’s Board of Directors, and the current Controller of GrowLife Hydroponics, Inc. The shares were issued as consideration for services provided to the Company. These shares represent an installment due to Mr. Manns in relationpursuant to a ~~Board grant from August 2012.~~conversion of accrued consulting fees and expenses for $30,000. The shares were valued at ~~$20,000 in~~ the ~~aggregate.~~

~~In November 2013, the Company issued 3,333,333 shares~~fair market price of ~~its common stock to Sterling Scott, the Company’s Chief Executive Officer, as consideration for services provided to the Company. These shares represent the final installment due to~~$0.01 per share. On October 21, 2016, an entity affiliated with Mr. Scott converted $40,000 in ~~relation to a Board grant from August 2012. The~~accrued consulting fees and expenses into 4,000,000 shares ~~were valued at $33,333 in the aggregate.~~

~~In November 2013, the Company issued 2,666,667 shares of its common stock to Justin Manns, the Company’s former Chief Financial Officer, a former member~~ of the Company’s Board of Directors, and the current Controller of GrowLife Hydroponics, Inc. The shares were issued as consideration for services provided to the Company. These shares represent the final installment due to Mr. Manns in relation to a Board grant from August 2012. The shares were valued at $26,667 in the aggregate.

On November 30, 2013, Sterling Scott, the Company’s Chief Executive Officer, signed a First Amendment to Amended and Restated 6% Senior Secured Convertible Note (“the Amendment”). The Amendment stated that the Company and Mr. Scott would not effect the conversion of $451,824.12 of principal and accrued and unpaid interest owed by the Company to Mr. Scott via a 6% Senior Secured Convertible Note until after the completion of the Company amending its Certificate of Incorporation to increase the authorized shares of common stock of the Company from 1,000,000,000 to 3,000,000,000. At a conversion price of $0.007 per share, the Amendment prevented 64,546,303 shares of stock being issued upon a potential conversion by Mr. Scott. On February 7, 2014, the Company held a shareholder meeting and proxy which resulted in shareholder approval to increase the number of shares authorized from 1,000,000,000 to 3,000,000,000.

In December 2013, the Company paid $100,000 cash to Eastside Mountain Corporation, which is controlled by Marco Hegyi, the Company’s President and a member of its Board of Directors, to perform a business assessment of the Company.

On December 11, 2013, the Company issued 25,000,000 warrants to Hegyi, LLC (“Hegyi”), an entity controlled by Marco Hegyi, who was hired as President of the Company in December 2013. The warrants have a ten-year term with an original exercise price of $0.08at $0.01 per share. The ~~warrants vest immediately and are exercisable in whole, or in part, at any time and from time to time~~price per share was based on ~~or after~~ the issue date and on or before the termination date. The Company valued the warrants at the time of issuance using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 88.81%; (iii) risk free rate of 0.02% and (iv) expected term of 3 years, which resulted in a value of $1,725,000. As previously stated, the Company will expense the $1,725,000 at the rate of $14,375 per month over the ten-year lifethirty-day trailing average. On October 21, 2016, an entity affiliated with Mr. Scott was granted 6,000,000 shares of the ~~warrant agreement.~~

~~- 92 -~~

Company’s common stock at $0.01 per share. The price per share was based on the thirty-day trailing average. On October 21, 2016, an entity affiliated with Mr. Scott cancelled stock option grants totaling 12,000,000 shares of the Company’s common stock at $0.01 per share.

~~During the twelve months ended December 31, 2013,~~On January 27, 2016, the Company issued 1,500,000 shares of its common stock to ~~Eric Shevin, an independent member of the Company’s Board of Directors, as consideration for his service as~~Michael E. Fasci, a Board ~~member from April 1, 2013 through December 31, 2013.~~Director, pursuant to a service award for $15,000. The shares were valued at ~~$30,000 in~~ the ~~aggregate.~~

~~During the twelve months ended December 31, 2013,~~fair market price of $0.01 per share. On May 25, 2016, the Company issued ~~1,683,333~~2,500,000 shares of its common stock to ~~Bob Kurilko,~~Michael E. Fasci pursuant to a ~~former independent member of the Company’s Board of Directors, as consideration~~service award for ~~his service as a Board member from January 1, 2013 through November 2, 2013.~~$50,000. The shares were valued at ~~$33,667 in~~ the ~~aggregate.~~fair market price of $0.02 per share.

~~During~~

F-21

In consideration for advisory services provided by TCA to the ~~twelve months ended December 31, 2013,~~Company, the Company issued ~~500,000~~15,000,000 shares of Common Stock during the year ending December 31, 2015. As the common stock was conditionally redeemable, the Company recorded the common stock as mezzanine equity in the accompanying consolidated balance sheet as of December 31, 2015. As of September 30, 2016, the shares are no longer conditionally redeemable and were recorded as issued and outstanding common stock.

The Company issued $2 million in common stock or 115,141,048 shares of our 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.

On April 15, 2016, the Company issued 1,000,000 shares of its common stock to ~~Craig Ellins,~~an entity affiliated with Marco Hegyi, our Chief Executive Officer, pursuant to a ~~former independent member~~conversion of ~~the Company’s Board of Directors, as consideration~~debt for ~~his service as a Board member from January 1, 2013 through March 31, 2013.~~$20,000. The shares were valued at ~~$10,000 in~~ the ~~aggregate.~~

fair market price of $0.02 per share. On ~~December 31, 2013,~~October 12, 2016, the Company issued ~~83,333~~4,000,000 shares of its common stock to ~~Alan Hammer,~~ an ~~independent member~~entity affiliated with Marco Hegyi, pursuant to a conversion of ~~the Company’s Board of Directors, as consideration~~debt for ~~his service as a Board member from December 17, 2013 through December 31, 2013.~~$40,000. The shares were valued at ~~$1,667 in~~ the ~~aggregate.~~fair market price of $0.01 per share.

On ~~December 31, 2013,~~July 13, 2016, the Company issued ~~72,222~~6,000,000 shares of common stock pursuant to Settlement Agreement and Release with Mr. Robert Hunt, a former executive, which were valued at the fair market price of $0.010 per share.

On October 21, 2016, the Company issued 5,020,000 shares to two former directors and a supplier (unaccredited) for services provided. The Company valued the 5,020,000 shares at $0.01 per share or $50,200.

During the year ended December 31. 2016, the Company issued 6,400,000 shares of its common stock to ~~Anthony Ciabattoni, an independent member~~two service providers (one unaccredited) pursuant to conversions of ~~the Company’s Board of Directors, as consideration for his service as a Board member from December 19, 2013 through December 31, 2013.~~debt totaling $64,000. The shares were valued at ~~$1,444 in~~ the ~~aggregate. Mr. Ciabattoni’s~~fair market price of $0.010 per share.

During the year ended December 31. 2016, Holders of the Company’s Convertible Notes Payables, converted principal and accrued interest of $1,080,247 into 186,119,285 shares ~~have been issued to~~of the ~~Ciabattoni Living Trust,~~Company’s common stock at a per share conversion price of ~~which Mr. Ciabattoni is~~$0.006.

During the ~~Trustee.~~year ended December 31. 2016, Old Main converted principal and accrued interest of $757,208 into 144,650,951 shares of our common stock at a per share conversion price of $0.0052.

During the year ended December 31. 2016, Chicago Venture converted principal and accrued interest of $1,403,599 into 264,672,323 shares of our common stock at a per share conversion price of $0.0053.

During the year ended December 31, 2015, the Company had had the following sales of unregistered sales of equity securities:

On ~~December 31, 2013,~~June 16, 2015, the Company issued ~~72,222~~7,772,725 shares of its common stock to ~~Jeff Giarraputo,~~a supplier 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.

Warrants

The Company issued the following warrants during the year ended December 31, 2016.

On October 21, 2016, Mr. Hegyi received a Warrant to purchase up to 10,000,000 shares of common stock of the Company at an ~~independent member~~exercise price of $0.01 per share. In addition, Mr. Hegyi received Warrants to purchase up to 10,000,000 shares of common stock of the Company at an exercise price of $0.01 per share which vest on October 21, 2017 and 2018. The Warrants are exercisable for 5 years. The warrants were valued at $390,000 and the Company recorded $23,958 of compensation expense for the warrants that had vested at December 31, 2016.

A summary of the warrants issued as of December 31, 2016 is as follows:

F-22

	December 31, 2016
		Weighted
		Average
		Exercise
	Shares	Price
Outstanding at beginning of period	565,000,000	$0.032
Issued	30,000,000	0.010
Exercised	-	-
Forfeited	-	-
Expired	-	-
Outstanding at end of period	595,000,000	$0.031
Exerciseable at end of period	595,000,000

A summary of the status of the warrants outstanding as of December 31, 2016 is presented below:

	December 31, 2016
	Weighted	Weighted		Weighted
	Average	Average		Average
Number of	Remaining	Exercise	Shares	Exercise
Warrants	Life	Price	Exerciseable	Price
540,000,000	2.31	$0.033	540,000,000	$0.033
55,000,000	3.54	0.010	35,000,000	0.010


595,000,000	2.34	$0.031	575,000,000	$0.032

Warrants totaling 35,000,000 shares of common stock had an intrinsic value of $245,000 as of December 31, 2016.

NOTE 10– STOCK OPTIONS

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 Company’s common stock could be granted in the form of Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, and Other Stock-Based Awards. On April 18, 2013, the Company’s Board of Directors voted to increase to 35,000,000 the maximum allowable shares of the Company’s common stock allocated to the 2011 Stock Incentive Plan. The Company has outstanding unexercised stock option grants totaling 12,010,000 shares as ~~consideration for his service as a Board member from December 19, 2013 through~~of December 31, ~~2013.~~ 2016. 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 ~~shares were valued at $1,444 in~~Company records compensation expense associated with stock options and other equity-based compensation using the ~~aggregate.~~

~~Commencing in August 2012, outside board members were awarded 2,000,000 shares per year which vest quarterly.~~

~~Our board~~Black-Scholes-Merton option valuation model for estimating fair value of ~~directors conducts an appropriate review~~stock options granted under our plan. The Company amortizes the fair value of ~~and oversees all related party transactions~~stock options on a ~~continuing~~ratable basis ~~and reviews potential conflict~~over the requisite service periods, which are generally the vesting periods. The expected life of ~~interest situations where appropriate. Our board~~awards granted represents the period of ~~directors has not adopted formal standards to apply when it reviews, approves or ratifies any related party transaction. However, our board of directors believes~~time that ~~the related party transactions~~they are ~~fair and reasonable to our company and on terms comparable to those reasonably~~ 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

F-23

During the year ended December 31, 2016, the Company had the following stock option activity:

An entity controlled by Mr. Scott had a two million share stock option that was previously issued vest on April 18, 2016 upon the Company securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB.

An employee resigned January 13, 2016 and an option to purchase five million shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan expired on April 13, 2016.

An employee forfeited a stock grant for 10,000 shares of the Company’s common stock during the nine months ended September 30, 2016.

On October 12, 2016, the Company amended the exercise price of the stock option grants for Mr. Barnes to $0.010 per share.

On October 21, 2016, Mr. Scott cancelled stock option grants totaling 12,000,000 shares of the Company’s common stock at $0.01 per share. Mr. Scott has an additional 2,000,000 share stock option grant which continues to vest monthly over 36 months and a 2,000,000 share stock option grant which vests upon the achievement of certain performance goals related to acquisitions.

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 Company’s common stock under the Company’s 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 Company’s common stock under the Company’s 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 Company’s common stock under the Company’s 2011 Stock Incentive Plan at $0.05 per share expired during the year ended December 31, 2015.

As of December 31, 2016, there are 12,010,000 options to purchase common stock at an average exercise price of $0.010 per share outstanding under the 2011 Stock Incentive Plan. The Company recorded $121,770 and $175,661 of compensation expense, net of related tax effects, relative to stock options for the years ended December 31, 2016 and 2015 in accordance with ASC 505. Net loss per share (basic and diluted) associated with this expense was approximately ($0.00). As of December 31, 2016, there is $22,631 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 2.88 years.

Stock option activity for the years ended December 31, 2016 and 2015 is as follows:

	Weighted Average
	Options	Exercise Price	$
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
Granted	-	-	-
Exercised	-	-	-
Forfeitures	(17,010,000)	(0.041)	(690,500)
Outstanding as of December 31, 2016	12,010,000	$0.010	$120,500

The following table summarizes information about stock options outstanding and exercisable at December 31, 2016:

F-24

		Weighted	Weighted		Weighted
		Average	Average		Average
Range of	Number	Remaining Life	Exercise Price	Number	Exercise Price
Exercise Prices	Outstanding	In Years	Exerciseable	Exerciseable	Exerciseable
$0.05	10,000	3.11	$0.050	6,667	$0.050
0.01	12,000,000	2.88	0.010	8,277,778	0.010
	12,010,000	2.88	$0.010	8,284,444	$0.010

Stock option grants totaling 12,010,000 shares of common stock have an intrinsic value of $84,070 as of December 31, 2016.

NOTE 11 – COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS

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”). 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, our insurer, filed a lawsuit contesting insurance coverage on the above legal proceedings. The Company accrued $2,000,000 as settlement of the Consolidated Class Action and Derivative Action lawsuits alleging violations of federal securities laws that were filed against the Company during the year ending December 31, 2015. The Company issued $2 million in common stock or 115,141,048 shares of the Company’s 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.

Sales, Payroll and Other Tax Liabilities

As of December 31, 2016, the Company owes approximately $128,989 in sales tax.

Potential Convertible Note Defaults

Other Legal Proceedings

The Company been sued for non-payment of lease payments at closed stores in Boulder, Colorado and Plaistow, New Hampshire. 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

On December 7, 2016, the Company entered into entered into a Consent to Judgement and Settlement Agreement related to its retail hydroponics store located in Portland, Maine. This Agreement provides for a monthly lease payment of $4,668 through May 2, 2017. If the Company is in compliance with the Settlement Agreement, it can can extend the lease from May 2, 2017 to May 1, 2020 at the monthly lease payment of $5,373. The Company also agreed to a repayment schedule for past due rent of $70,013. The Company does not have an option to extend the lease after May 1, 2020.

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 May 31, 2016, the Company rented space at 5400 Carillon Point, Kirkland, Washington 98033 for $1,539 per month for its corporate office. The Company’s agreement expires May 31, 2017 and can be extended.

F-25

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:

Years Ended December 31,	Total
2017	$115,205
2018	15,579
2019	0
2020	0
2021	-
Beyond	-
Total	$130,784

Employment and Consulting Agreements

Employment Agreement with ~~independent third parties~~Marco Hegyi

On October 21, 2016, the Company entered into an Employment Agreement with Marco Hegyi pursuant to which the Company engaged Mr. Hegyi as its Chief Executive Officer through October 20, 2018. Mr. Hegyi’s previous Employment Agreement was dated December 4, 2013 and which is set to expire on December 4, 2016.

Mr. Hegyi’s annual compensation is $250,000. Mr. Hegyi is also entitled to receive an annual bonus equal to four percent (4%) of the Company’s EBITDA for that year. The annual bonus shall be paid no later than 31 days following the ~~same goods and/or services~~end of each calendar year.

Mr. Hegyi received a Warrant to purchase up to 10,000,000 shares of common stock of the Company at an exercise price of $0.01 per share. In addition, Mr. Hegyi received Warrants to purchase up to 10,000,000 shares of common stock of the ~~time they~~Company at an exercise price of $0.01 per share which vest on October 21, 2017 and 2018. The Warrants are ~~authorized by our board of directors.~~exercisable for 5 years.

~~Director Independence~~

~~In conjunction with the preparation of this report, using the definition of “independence” established~~Mr. Hegyi will be entitled to participate in all group employment benefits that are offered by the ~~NASDAQ Stock Market, we have evaluated all relationships between each director~~Company to the Company’s senior executives and ~~us. Based~~management employees from time to time, subject to the terms and conditions of such benefit plans, including any eligibility requirements. In addition, the Company will purchase and maintain during the Term an insurance policy on Mr. Hegyi’s life in the ~~foregoing definition, we have determined that Eric Shevin, Anthony Ciabattoni, Alan Hammer, and Jeff Giarraputo currently meet~~amount of $2,000,000 payable to Mr. Hegyi’s named heirs or estate as the ~~definition~~beneficiary.

If the Company terminates Mr. Hegyi’s employment at any time prior to the expiration of ~~an “independent” director~~the Term without Cause, as defined in the ~~applicable rules~~Employment Agreement, or if Mr. Hegyi terminates his employment at any time for ~~companies traded on~~“Good Reason” or due to a “Disability”, Mr. Hegyi will be entitled to receive (i) his Base Salary amount through the NASDAQ Stock Market. Our board of directors will continually monitor the standards established for director independence under applicable law or listing requirements and will take all reasonable steps to assure compliance with those standards.

~~ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.~~

~~On September 14, 2012, we dismissed Weinberg & Co. P.A. (“Weinberg”) as its independent registered public accounting firm. The decision was approved by our Board.~~

The reports of Weinberg on our financial statements for the fiscal years ended December 31, 2011 and 2010 did not contain an adverse opinion or disclaimer of opinion and were not modified as to uncertainty, audit scope, or accounting principles, except the report did contain an explanatory paragraph related to our ability to continue as a going concern. During the fiscal years ended December 31, 2011 and 2012, there were (i) no disagreements with Weinberg on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Weinberg would have caused Weinberg to make reference to the subject matterend of the ~~disagreements~~Term; and (ii) his Annual Bonus amount for each year during the remainder of the Term.

If there has been a “Change in Control” and the Company (or its successor or the surviving entity) terminates Mr. Hegyi’s 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 ~~report,~~successor or the surviving entity) terminates Mr. Hegyi’s 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 ~~(ii) no “reportable events”~~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 ~~that term~~described in Section 280G of the Internal Revenue Code of 1986, as amended; (iii) payment of Mr. Hegyi’s 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 ~~defined~~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 ~~Item 304(a)(1)(v) of Regulation S-K.~~Control, whichever is longer.

Consulting Chief Financial Officer Agreement with an Entity Controlled by Mark E. Scott

~~- 93 -~~F-26

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 ~~14, 2012,~~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. Scott’s 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 Company’s EBITDA for that year. The Company’s Board of Directors granted Mr. Scott an option to purchase sixteen million shares of the Company’s Common Stock under the Company’s 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:


	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, 2016);

	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.

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 Company’s Stock Incentive Plan, including vesting requirements. In the event that Mr. Scott’s 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 Company’s 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 Company’s 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. Scott’s life in the amount of $2,000,000 payable to Mr. Scott’s 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. Scott’s employment for Cause, or if Mr. Scott voluntarily terminates his employment without Good Reason, or if Mr. Scott’s employment is terminated by reason of his death, then all of the Company’s 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 Company’s 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 we engaged ~~Anton & Chia, LLP~~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. Barnes’s compensation is $90,000 on an annual basis. On January 1, 2016, Mr. Barnes salary was increased to $120,000 per year. Mr. Barnes received a bonus of $6,500 and is also entitled to receive a quarterly bonus based on growth of our ~~new independent registered public accounting firm.~~growth margin dollars. No quarterly bonuses were earned under this Promotion Letter. Mr. Barnes was granted an option to purchase eight million shares of our common stock under our 2011 Stock Incentive Plan at $0.050 per share. The ~~appointment~~shares vest as follows:


	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.

F-27

On October 12, 2016, the Company amended the exercise price of ~~Anton & Chia, LLP~~the stock option grants for Mr. Barnes to $0.010 per share.

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 our Stock Incentive Plan, including vesting requirements. In the event that Mr. Barnes’s continuous status as employee to us is terminated by us without Cause or Mr. Barnes terminates his employment with us 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 our Stock Incentive, then 100% of the total number of shares shall immediately become vested.

Mr. Barnes was ~~approved~~entitled to participate in all group employment benefits that are offered by the Company to our ~~Board. During~~senior executives and management employees from time to time, subject to the ~~fiscal~~terms and conditions of such benefit plans, including any eligibility requirements. Finally, Mr. Barnes is entitled to fifteen days of vacation annually and has certain insurance and travel employment benefits.

Mr. Barnes may receive severance benefits and our obligation under a termination by the Company without Cause or Mr. Barnes terminates his employment for Good Reason are discussed above.

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.

Consulting Agreement with an Entity Controlled by Michael E. Fasci

NOTE 12 – INCOME TAXES

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 $6,500,000 and $5,800,000 and for the years ended December 31, ~~2011~~2016 and ~~2012, we did~~2015, respectively.

The Company has net operating loss carryforwards of approximately $16,000,000, which expire in 2022-2032. Because it is not ~~consult with Anton & Chia, LLP~~more likely than not that sufficient tax earnings will be generated to utilize the net operating loss carryforwards, a corresponding valuation allowance of approximately $6,600,000 was established as of December 31, 2016. 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 ~~(i)~~ the ~~application~~amount of ~~accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion~~net operating loss carryforwards that may be ~~rendered on the Company's financial statements, and Anton & Chia, LLP did not provide either~~used to offset taxable income when a ~~written report or oral advice to~~corporation has undergone significant changes in its stock ownership. There can be no assurance that the Company ~~that was an important factor considered by~~will be able to utilize any net operating loss carryforwards in the ~~Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii)~~future.

For the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.

~~Audit Fees~~

The aggregate fees billed by Anton & Chia, LLP for professional services rendered for the audit of our annual financial statements and review of financial statements included in our quarterly reports and services that are normally provided in connection with statutory and regulatory filings were $135,386 for the fiscal year ended December 31, ~~2013.~~2016, the Company’s 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 ~~aggregate fees billed by Anton & Chia, LLP for professional services rendered for~~principal components of the audit of our annual financial statements and review of financial statements included in our quarterly reports and services that are normally provided in connection with statutory and regulatory filings were $25,139 for the fiscal year endedCompany’s deferred tax assets at December 31, ~~2012.~~2016 and 2015 are as follows:

~~The aggregate fees billed by Weinberg for professional services rendered~~

	2016	2015	2014	2013
U.S. operations loss carry forward and state at statutory rate of 40%	$6,584,821	$5,852,421	$5,038,976	$3,612,736
Less valuation allowance	(6,584,821)	(5,852,421)	(5,038,976)	(3,612,736)
Net deferred tax assets	-	-	-	-
Change in valuation allowance	$(6,584,821)	$(5,852,421)	$(5,038,976)	$(3,612,736)

A reconciliation of the United States Federal Statutory rate to the Company’s effective tax rate for the audit of our annual financial statements and review of financial statements included in our quarterly reports and services that are normally provided in connection with statutory and regulatory filings were $51,554 and $73,820 for the fiscal years ended December 31, ~~2012~~2016 and ~~2011, respectively.~~

~~Audit-Related Fees~~

~~None.~~

~~Tax Fees~~

~~During fiscal year 2013, we recorded accounting/professional fees totaling $12,000 that were billed to us by Hartley Moore Accountancy for the preparation of our 2012 annual tax returns.~~

~~All Other Fees~~

~~None.~~

~~PART IV~~

~~ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.~~

~~The financial statements filed~~2015is as ~~part of this Annual Report on Form 10-K are listed on page 28.~~

~~The exhibits filed with this Annual Report on Form 10-K are listed in the attached Exhibit Index.~~

follows:

~~- 94 -~~F-28

	2016	2015	2014	2013
Federal statutory rate	-34.0%	-34.0%	-34.0%	-34.0%
State income tax rate	-6.0%	-6.0%	-6.0%	-6.0%
Change in valuation allowance	40.0%	40.0%	40.0%	40.0%
Effective tax rate	0.0%	0.0%	0.0%	0.0%

The Company’s tax returns for 2011 to 2015 are open to review by the Internal Revenue Service.

NOTE 13 – SUBSEQUENT EVENTS

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, 2016, the following material transactions occurred:

Equity Issuances

On January 2, 2017, Brighton Capital LLC converted debt of $127,148 into 15,893,500 shares of our common stock at a per share conversion price of $0.008.

During the three months ended March 31, 2017, Chicago Venture converted principal and interest of $1,253,000 into 190,189,197 shares of our common stock at a per share conversion price of $0.007.

On February 28, 2017, Logic Works converted principal and interest of $291,044 into 82,640,392 shares of our common stock at a per share conversion price of $.004.

Transactions with Chicago Venture Partners, L.P. (‘Chicago Venture”) and TCA Global Credit Master Fund, LP (“TCA”)

On February 1, 2017, the Company closed the transactions described below with Chicago Venture Partners, L.P. (“Chicago Venture”).

Securities Purchase Agreement, Secured Promissory Notes, Membership Interest Pledge Agreement and Security Agreement

On January 9, 2017, the Company executed the following agreements with Chicago Venture: (i) Securities Purchase Agreement; (ii) Secured Promissory Notes; (iii) Membership Interest Pledge Agreement; and (iv) Security Agreement (collectively the “Chicago Venture Agreements”). The Company entered into the Chicago Venture Agreements with the intent of paying its debt, in full, to TCA Global Credit Master Fund, LP (“TCA”), which included any TCA affiliates.

The total amount of funding under the Chicago Venture Agreements is $1,105,000.00 (the “Debt”). Each Convertible Promissory Note carries an original issue discount of $100,000 and a transaction expense amount of $5,000, for total debt of $1,105,000. The Company agreed to reserve 500,000,000 of its shares of common stock for issuance upon conversion of the Debt, if that occurs in the future. If not converted sooner, the Debt is due on or before January 9, 2018. The Debt carries an interest rate of ten percent (10%). The Debt is convertible, at Chicago Venture’s option, into the Company’s common stock at $0.009 per share subject to adjustment as provided for in the Secured Promissory Notes attached hereto and incorporated herein by this reference. As of the date of this report on Form 8-K, Chicago Venture has funded the entire amount of the Debt.

Chicago Venture’s obligation to fund the Debt was secured by Chicago Venture’s 60% interest in Typenex Medical, LLC, an Illinois corporation, as provided for in the Membership Pledge Agreement attached hereto and incorporated herein by this reference.

The Company’s obligation to pay the Debt, or any portion thereof, is secured by all of the Company’s assets as described in Schedule A to the Security Agreement attached hereto and incorporated herein by this reference.

Payment of All TCA Obligations

F-29

Director Appointments

On February 14, 2017, the board appointed Katherine McClain and Mark E. Scott, our consulting Chief Financial Officer, to the Board of Directors.

Impairment of Goodwill and Intangible Assets

On March 10, 2017, the Audit Committee reviewed the GrowLife Hydroponics, Inc. operations and based on the capital intensive nature of the business and operating results, determined that the goodwill value of $739,000 and intangible assets of $137,056 were impaired as of December 31, 2016. The Company recorded an impairment of goodwill and intangible assets associated with GrowLife Hydroponics, Inc. of $876,056 during the three months December 31, 2016.

Dissolution of Certain Non-Operating Subsidiaries

The Company determined that certain wholly-owned subsidiaries were unnecessary for the ongoing operations of the Company’s 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 for GrowLife Productions, Inc. due to the fact that the Company no longer operates any business under this wholly-owned subsidiary.

Potential Convertible Note Defaults

F-30

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ~~the registrant~~GrowLife, Inc. (the "Registrant") has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	GROWLIFE, INC.
	~~(Registrant)~~



Date: March 31, ~~2014~~2017	By:	/s/ ~~Sterling Scott~~	Marco Hegyi
		~~Sterling Scott~~	Marco Hegyi
		~~Chairman,~~ Chief Executive Officer ~~& President~~	and Director (Principal Executive Officer)

~~Date: March 31, 2014~~	By:	/s/ ~~John Genesi~~	Mark E. Scott
		~~John Genesi~~	Mark Scott
		Chief Financial Officer,	Director and Secretary (Principal Financial and Accounting Officer)

~~POWER OF ATTORNEY~~

The undersigned directors and officers of GrowLife, Inc. do hereby constitute and appoint Sterling Scott, and each of them, with full power of substitution and resubstitution, as their true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto, and we do hereby ratify and confirm all that said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the ~~registrant~~Registrant and in the capacities and on the dates ~~indicated.~~indicated:

~~Signature~~SIGNATURES	TITLE	~~Title~~		~~Date~~DATE

~~/s/ Sterling Scott~~		~~Chairman, Chief Executive Officer, President, Secretary, and Director~~		~~March 31, 2014~~

~~/s/ John Genesi~~		~~Chief Financial Officer~~		~~March 31, 2014~~

/s/ Marco Hegyi		~~President of GrowLife, Inc.~~Chief Executive Officer and Director		March 31, ~~2014~~2017
Marco Hegyi	(Principal Executive Officer)

/s/ ~~Rob Hunt~~Mark E. Scott		~~President of GrowLife Hydroponics, Inc.~~Chief Financial Officer, Director and ~~Director~~	Secretary	March 31, ~~2014~~2017
Mark E. Scott	(Principal Financial/Accounting Officer)
~~/s/ Eric Shevin~~		~~Director~~		~~March 31, 2014~~

~~/s/ Alan Hammer~~		~~Director~~		~~March 31, 2014~~

~~/s/ Jeff Giarraputo~~

~~Director~~

~~March 31, 2014~~

~~/s/ Anthony Ciabattoni~~

~~Director~~

~~March 31, 2014~~

~~- 95 -~~

~~PART II~~

~~OTHER INFORMATION~~

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.~~

~~On January 1, 2013 the Company issued 2,000,000 shares of its common stock to an independent third party. These shares were issued on a non-cash basis and were compensation for services rendered.~~

Beginning January 3, 2013, and ending on March 20, 2013, the Company issued 15,278,861 shares of its common stock to certain investors in relation to the Company’s Subscription Agreement dated December 2011. The shares were issued for cash at $0.035 per share.

On January 3, 2013, the Company issued 333,333 shares of its common stock to Zcapital, Inc. in relation to the Company’s licensing agreement to use Zcapital’s website Cannabis.org. The shares were issued on a non-cash basis.

On January 9, 2013, the Company issued 4,500,000 shares of its common stock to W-Net Fund I, LP in relation to the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $31,500 reduction in the outstanding principal balance of the 6% Convertible Notes.

On January 18, 2013, the Company issued 2,097,209 shares of its common stock to Black Mountain Equities, Inc. The shares were issued in relation to the 10% Convertible Note entered into on January 8, 2013 between the Company and Black Mountain Equities, Inc.. The conversion price was $0.024 per share and resulted in a $50,370 reduction in the outstanding principal balance of the 10% Convertible Note.

On February 1, 2013, the Company issued 11,000,000 shares of its common stock to W-Net Fund I, LP in relation to the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $77,000 reduction in the outstanding principal balance of the 6% Convertible Notes.

On February 1, 2013, the Company issued 2,203,580 shares of its common stock to Black Mountain Equities, Inc. The shares were issued in relation to the 10% Convertible Note entered into on January 8, 2013 between the Company and Black Mountain Equities, Inc.. The conversion price was $0.025 per share and resulted in a $56,353 reduction in the outstanding principal balance of the 10% Convertible Note.

On February 5, 2013, the Company issued 1,969,624 shares of its common stock to Black Mountain Equities, Inc. The shares were issued in relation to the 10% Convertible Note entered into on January 8, 2013 between the Company and Black Mountain Equities, Inc.. The conversion price was $0.025 per share and resulted in a $49,277 reduction in the outstanding principal balance of the 10% Convertible Note. The 10% Convertible Note was fully converted after this transaction.

On February 7, 2013, the Company issued 10,000,000 shares of its common stock to Europa International, Inc. in relation to the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $70,000 reduction in the outstanding principal balance of the 6% Convertible Notes.

On February 7, 2013, the Company issued 1,428,571 shares of its common stock to a Holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $10,000 reduction in the outstanding principal balance of the 6% Convertible Notes.

~~On February 8, 2013, the Company issued 470,237 shares of its common stock in relation to the exercising of a stock option. The option was exercised for cash at $0.019 per share.~~

On February 12, 2013, the Company issued 13,000,000 shares of its common stock to W-Net Fund I, LP in relation to the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $91,000 reduction in the outstanding principal balance of the 6% Convertible Notes.

On February 14, 2013, the Company issued 7,396,477 shares of its common stock to Forglen, LLC in relation to the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $51,775 reduction in the outstanding principal balance of the 6% Convertible Notes.

~~- 96 -~~

On February 18, 2013, the Company issued 10,000,000 shares of its common stock to W-Net Fund I, LP in relation to the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $70,000 reduction in the outstanding principal balance of the 6% Convertible Notes.

~~On February 21, 2013, the Company issued 731,202 shares of its common stock in relation to the exercising of a stock option. The option was exercised on a non-cash basis.~~

~~On February 23, 2013, the Company issued 298,949 shares of its common stock in relation to the exercising of a stock option. The option was exercised on a non-cash basis.~~

~~On February 23, 2013, the Company issued 1,197,479 shares of its common stock in relation to the exercising of a stock option. The option was exercised on a non-cash basis.~~

~~On March 1, 2013, the Company issued 1,453,143 shares of its common stock in relation to the exercising of a stock option. The option was exercised on a non-cash basis.~~

On March 8, 2013, the Company issued 12,000,000 shares of its common stock to W-Net Fund I, LP in relation to the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $84,000 reduction in the outstanding principal balance of the 6% Convertible Notes.

On March 31, 2013, the Company issued 9,045,833 shares of its common stock to Board of Directors and employees. These shares were issued on a non-cash basis and were compensation for services rendered.

On April 1, 2013, the Company issued 2,000,000 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $20,000 in the aggregate and $0.01 per share.

On April 2, 2013, the Company issued 17,000,000 shares of its common stock to a certain holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $119,000 reduction in the outstanding principal balance of the 6% Convertible Notes.

On April 11, 2013, the Company issued 620,000 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $21,700 in the aggregate and $0.035 per share.

Beginning April 16, 2013 and ending on June 4, 2013, the Company issued 2,528,572 shares of its common stock to certain investors in relation to the Company’s Subscription Agreement dated December 2011. The shares were issued for cash at $0.035 per share and generated proceeds to the Company in the amount of $88,500.

On April 18, 2013, the Company issued a total of 1,625,000 shares of its common stock to 6 third-party consultants. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $65,000 in the aggregate and $0.04 per share.

On April 19, 2013, the Company issued 333,333 shares of its common stock to a third-party consultant in relation to the Company’s licensing agreement to use the website “Cannabis.org”. The shares were issued on a non-cash basis and were valued at $11,667 in the aggregate and $0.035 per share.

On April 26, 2013, the Company issued 14,000,000 shares of its common stock to a certain holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $98,000 reduction in the outstanding principal balance of the 6% Convertible Notes.

On May 1, 2013, the Company issued 137,300 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $6,000 in the aggregate and $0.0437 per share.

On May 16, 2013, the Company issued 1,464,970 shares of its common stock to a certain holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $10,000 reduction in the outstanding principal balance of the 6% Convertible Notes and a $255 reduction in accrued and unpaid interest on these notes.

~~- 97 -~~

On May 22, 2013, the Company issued 22,429.669 shares of its common stock to a certain holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $193,000 reduction in the outstanding principal balance of the 6% Convertible Notes and a $13,008 reduction in accrued and unpaid interest on these notes.

On May 22, 2013, the Company issued 1,333,334 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $13,333 in the aggregate and $0.01 per share.

On May 23, 2013, the Company issued 19,771.748 shares of its common stock to a certain holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $110,604 reduction in the outstanding principal balance of the 6% Convertible Notes and a $27,798 reduction in accrued and unpaid interest on these notes.

On June 5, 2013, the Company issued 551,657 shares of its common stock to its landlord at 20301 Ventura Blvd, Woodland Hills, CA. These shares were payment in full for the Company’s monthly rent for June, July, and August 2013. These shares were valued at $20,274 in the aggregate and $0.0367 per share.

~~On June 7, 2013, the Company issued 7,857,141 shares of its common stock to the former owners of~~ ~~RMH/EGC~~. These shares were issued as partial payment for the Company’s purchase of 100% of the ownership interests of both Rocky Mountain Hydroponics and Evergreen Garden Center. These shares were valued at $275,000 in the aggregate and $0.035 per share.

On June 7, 2013, the Company issued 2,000,000 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $100,000 in the aggregate and $0.05 per share.

On June 7, 2013, the Company issued a total of 3,700,000 shares of its common stock to 4 third-party consultants. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $333,000 in the aggregate and $0.09 per share.

On June 18, 2013, the Company issued 15,935,428 shares of its common stock to a certain holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $100,000 reduction in the outstanding principal balance of the 6% Convertible Notes and a $11,548 reduction in accrued and unpaid interest on these notes.

On June 30, 2013, the Company issued 637,500 shares of its common stock to certain employees. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $57,375 in the aggregate and $0.09 per share.

On July 18, 2013, the Company issued 3,000,000 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $120,000 in the aggregate and $0.04 per share.

On July 18, 2013, the Company issued 2,000,000 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $80,000 in the aggregate and $0.04 per share.

On August 15, 2013, the Company issued 27,297,747 shares of its common stock to a certain holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $172,293 reduction in the outstanding principal balance of the 6% Convertible Notes and payment in full for all accrued and unpaid interest.

On August 26, 2013, the Company issued 702,592 shares of its common stock to its landlord at 20301 Ventura Blvd, Woodland Hills, CA. These shares were payment in full for the Company’s monthly rent for September, October, and November 2013. These shares were valued at $20,274 in the aggregate and $0.0289 per share.

On August 30, 2013, the Company issued 2,000,000 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $80,000 in the aggregate and $0.04 per share.

~~- 98 -~~

On September 5, 2013, the Company issued 25,510,204 shares of its common stock to a certain holder of the Company’s 7% Convertible Notes. The conversion price was $0.02156 per share and resulted in a $550,000 reduction in the outstanding principal balance of the 7% Convertible Notes.

On September 6, 2013, the Company issued 1,224,918 shares of its common stock to a former employee of the Company as payment in full of both principal and accrued interest related to $25,000 loaned to the Company in March 2013. These shares were issued at $0.021 per share.

On September 17, 2013, the Company issued 6,757,328 shares of its common stock to a certain holder of the Company’s 7% Convertible Notes. The conversion price was $0.02156 per share and resulted in a $150,000 reduction in the outstanding principal balance of the 7% Convertible Notes.

On September 20, 2013, the Company issued 519,200 shares of its common stock to an unrelated third party in exchange for product/inventory valued at $18,172 in the aggregate. The shares were issued at a price of $0.035 per share.

On September 30, 2013, the Company issued 537,500 shares of its common stock to certain employees. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $48,375 in the aggregate and $0.09 per share.

On September 30, 2013, the Company issued 1,000,000 shares of its common stock to its two (2) independent members of the Company’s Board of Directors. These shares were issued on a non-cash basis and were compensation for services rendered during the April – June 2013 period. These shares were valued at $20,000 in the aggregate and $0.02 per share.

On October 14, 2013, the Company issued 9,000,000 shares of its common stock in relation to the cashless exercise of warrants by Gemini Master Fund. These shares were valued at zero dollars by the Company.

On October 14, 2013, the Company issued 8,000,000 shares of its common stock in relation to the conversion of a $280,000 note payable to Gemini Master Fund. The shares were issued via the Company’s Subscription Agreement and were valued at $0.035 per share and $280,000 in the aggregate.

On November 15, 2013, the Company cancelled the issuance of 1,500,000 shares of its common stock that the Company had previously approved for issuance to two (2) independent third party consultants as consideration for services to be rendered. The shares were originally valued at $0.04 per share and $60,000 in the aggregate. The Company debited its equity accounts $60,000 in the aggregate upon the cancellation of these shares on November 15, 2013.

On November 16, 2013, the Company issued 1,250,000 shares of its common stock to Integrity Media, Inc. in relation to the Company’s service agreement with Integrity Media dated November 16, 2013. The shares were issued on a non-cash basis and were consideration for investor/public relations services provided by Integrity Media to the Company. The shares were valued at $0.08 per share and $100,000 in the aggregate.

On November 26, 2013, the Company issued 25,000 shares of its common stock to one of its employees for services rendered. The issuance of these shares was approved by the Company’s Board of Directors on February 15, 2013. These shares were issued on a non-cash basis and were valued at $2,250 in the aggregate and $0.09 per share.

On December 3, 2013, a Holder of the Company’s 6% Senior Secured Convertible Notes converted the entire principal and accrued and unpaid interest into 6,073,111 shares of the Company’s common stock. The shares were valued at $0.007 per share and $42,512 in the aggregate.

On December 4, 2013, the Company issued 500,000 shares of its common stock to an independent third party as consideration for services provided to the Company. The shares were issued on a non-cash basis and were valued at $0.09 per share and $45,000 in the aggregate.

On December 16, 2013, two (2) of the Holders of the Company’s 12% Senior Secured Convertible Notes converted their entire principal and accrued and unpaid interest into 11,881,204 shares of the Company’s common stock. The shares were valued at $0.035 per share and $415,842 in the aggregate.

~~- 99 -~~

On December 19, 2013, a Holder of the Company’s 7% Senior Secured Convertible Notes converted the remaining principal and accrued and unpaid interest into 2,453,945 shares of the Company’s common stock. The shares were valued at $0.025 per share and $61,349 in the aggregate.

On December 31, 2013, the Company issued 475,000 shares of its common stock to certain employees. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $42,750 in the aggregate and $0.09 per share.

On December 31, 2013, the Company issued 1,000,000 shares of its common stock to one of its independent members of the Company’s Board of Directors. These shares were issued on a non-cash basis and were compensation for services rendered during the July 1 �� December 31, 2013 period. These shares were valued at $20,000 in the aggregate and $0.02 per share.

On December 31, 2013, the Company issued 683,333 shares of its common stock to a former independent member of the Company’s Board of Directors. These shares were issued on a non-cash basis and were compensation for services rendered during the July 1, 2013 through November 2, 2013 period. These shares were valued at $13,667 in the aggregate and $0.02 per share.

On December 31, 2013, the Company issued 227,777 shares of its common stock to three (3) of its independent members of the Company’s Board of Directors. These shares were issued on a non-cash basis and were compensation for services rendered during the December 17, 2013 through December 31, 2013 period. These shares were valued at $4,556 in the aggregate and $0.02 per share.

During the three-month period ended December 31, 2013, the Company sold 19,174,429 shares of its common stock via the Company’s Subscription Agreement. The shares were sold at a per share price of $0.035 and generated gross proceeds to the Company in the amount of $671,105.

During the three-month period ended December 31, 2013, the Company issued 8,666,667 shares of its common stock to four (4) of its employees in relation to a Unanimous Written Consent of the Board of Directors dated August 8, 2012. These shares represent the final installment due to these four employees and were valued at $0.01 per share and $86,667 in the aggregate.

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

~~- 100 -~~

~~Exhibit Index~~

~~Exhibit Number~~		~~Description of Exhibit~~

~~2.1~~ /s/ Michael E. Fasci	Director	Securities Purchase Agreement dated June 7, 2013, by and among GrowLife, Inc., GrowLife Hydroponics, Inc., Sequoia, LLC, Pressure Drop Holdings, LLC and Sachin Karia. Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2013.March 31, 2017
Michael E. Fasci

~~10.1~~	Securities Purchase Agreement, dated May 1, 2013, by and between GrowLife, Inc. and Gemini Master Fund, Ltd .. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2013.Director	March 31, 2017
Katherine McLain
~~10.2~~	~~Form of OID Secured Bridge Note. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2013.~~

~~10.3~~	~~Form of Common Stock Purchase Warrant. Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2013.~~

~~10.4~~	Revolving Promissory Note dated June 7, 2013 issued by GrowLife, Inc. in favor of W-Net Fund I, L.P. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2013.

~~10.5~~	~~Form of 12% Senior Secured Convertible Note. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2013.~~

~~10.6~~	Amendment to Revolving Promissory Note dated August 6, 2013 by and between GrowLife, Inc. and W-Net Fund I, L.P. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 9, 2013.

~~31.1~~	~~Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.~~

~~31.2~~	~~Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.~~

~~32.1~~	~~Certificate of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.~~

~~32.2~~	~~Certificate of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.~~

~~101~~	~~XBRL information~~

* XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

~~- 101 -~~

Revenue By Brand

	FY 2013		FY 2012
GrowLife Hydroponics, Inc. (1) (2)	$	2,753,761	$	118,522
Greners.com (3)		1,791,802		828,311
Phototron & SG Technologies Corp (4)		313,413		503,912
	$	4,858,976	$	1,450,745

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

	High		Low
Year ended December 31, 2012
First Quarter	$	0.140	$	0.050
Second Quarter	$	0.110	$	0.025
Third Quarter	$	0.054	$	0.011
Fourth Quarter	$	0.065	$	0.010


Year ended December 31, 2013
First Quarter	$	0.120	$	0.035
Second Quarter	$	0.061	$	0.004
Third Quarter	$	0.064	$	0.030
Fourth Quarter	$	0.158	$	0.050

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

	For the Three-Month Periods Ended
	March 31, 2013			June 30, 2013			September 30, 2013			December 31, 2013			Full Year 2013

Revenue	$	760,709		$	872,557		$	1,313,399		$	1,912,311		$	4,858,976

Cost of goods sold		511,583			684,693			1,051,776			1,757,811			4,005,863

Gross profit		249,126			187,864			261,623			154,500			853,113

General and administrative		(556,993)			(630,710)			(902,813)			(1,072,491)			(3,163,007)
Share based compensation		(179,125)			(648,349)			(386,821)			(254,889)			(1,469,184)
Stock option expense		-			-			-			(148,633)			(148,633)
Warrant expense		-			(250,000)			-			(6,765,000)			(7,015,000)

Loss from operations		(486,992	)		(1,341,195	)		(1,028,011	)		(8,086,513	)		(10,942,711	)

Other income (expense)
Impairment of goodwill		-			-			-			(279,515	)		(279,515	)
Impairment of intangible assets		-			-			-			(262,604	)		(262,604	)
Loss on extinguishment of debt		(2,750	)		-			(750,000	)		(208,000	)		(960,750	)
Change in fair value of derivative		(169,753	)		-			67,130			(3,598,455	)		(3,701,078	)
Other income		-			-			35,865			6,404			42,269
Interest expense, net		(523,467	)		(275,772	)		(129,697	)		(4,346,813	)		(5,275,749	)

Net loss	$	(1,182,962	)	$	(1,616,967	)	$	(1,804,713	)	$	(16,775,496	)	$	(21,380,138	)

Net loss per share (basic and diluted)	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.02	)	$	(0.04	)

Weighted average shares outstanding (basic and diluted)		443,605,824			556,633,753			644,706,947			722,820,898			593,034,653

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

Net loss excluding non-cash items - Non-GAAP basis	$	(2,038,907	)

	For the Year Ended December 31,
	2013		2012

Proceeds from the issuance of common stock	$	1,294,365	$	15,250
Proceeds from the issuance of 10% convertible note		156,000		-
Proceeds from the issuance of convertible notes		1,850,000		1,141,092
Proceeds from options exercised		9,000		-
Proceeds from notes payable		1,130,000		-
Proceeds from additional contributed capital		-		120,402
Payments on notes payable and accrued interest		(296,719)		(50,000)
Proceeds from related party		1,160		98,897
	$	4,143,806	$	1,325,641

GrowLife, Inc. and Subsidiaries (formerly Phototron Holdings, Inc.)
Consolidated Statement of Operations


	For the Years Ended
	December 31,
	2013			2012

Net revenue	$	4,858,976		$	1,450,745

Cost of goods sold		4,005,863			1,038,771

Gross profit		853,113			411,974

General and administrative		(3,163,007)			(1,323,736)
Shares issued for services rendered		(1,469,184)			(332,750)
Stock options expense		(148,633)			(26,563)
Warrant expense		(7,015,000)			-

Loss from operations		(10,942,711	)		(1,271,075	)

Other income (expense)
Impairment of goodwill		(279,515	)		(634,128	)
Impairment of intangible assets		(262,604	)		-
Loss on extinguishment of debt		(960,750	)		(428,467	)
Change in fair value of derivative		(3,701,078	)		525,619
Other income		42,269			-
Interest expense, net		(5,275,749	)		(378,253	)

Net loss	$	(21,380,138	)	$	(2,186,304	)

Net loss per share - (basic and diluted)	$	(0.04	)	$	(0.01	)

Weighted average shares outstanding (2) - (basic and diluted)		593,034,653			245,420,970

See accompanying notes to consolidated financial statements

													Unrealized
													Gain on Investment		Additional
	Preferred Stock						Common Stock						in Related		Paid In			Accumulated
	Shares			Amount			Shares			Amount			Party		Capital			Deficit			Total
Balance as of December 31, 2011		3,000,000		$	300			157,000,000		$	15,700		$	-	$	(16,000	)	$	(379,262	)	$	(379,262	)

Shares issued to acquire Phototron		-			-			152,343,383			15,234			-		284,766			-			300,000

Capital contributions		-			-			-			-			-		120,402			-			120,402

Imputed interest on non-interest bearing note payable		-			-			-			-			-		2,500			-			2,500

Shares of common stock retired		-			-			(1,884,796	)		(188	)		-		188			-			-

Fair value of option vested		-			-			-			-			-		26,563			-			26,563

435,715 shares purchased @ $0.035 per share		-			-			435,715			44			-		15,206			-			15,250

Shares issued for services rendered		-			-			23,608,333			2,361			-		330,389			-			332,750

Stock dividends		-			-			9,100,000			910			-		454,090			(455,000	)		-

Shares issued to acquire Urban Garden		-			-			3,906,252			391			-		155,859			-			156,250

Shares issued for cashless exercise of options		-			-			4,053,012			405			-		(405	)		-			-

Conversion of notes		-			-			41,142,857			4,113			-		283,887			-			288,000

To record beneficial conversion feature of new debt		-			-			-			-			-		986,496			-			986,496

Net loss		-			-			-			-			-		-			(2,186,304	)		(2,186,304	)

Balance as of December 31, 2012		3,000,000		$	300			389,704,765		$	38,970		$	-	$	2,643,941		$	(3,020,566	)	$	(337,355	)

Cancellation of all 3,000,000 shares of Preferred Stock		(3,000,000	)		(300	)		-			-			-		300			-			-

Options exercised for cash		-			-			470,237			47			-		8,953			-			9,000

Cashless exercise of options		-			-			3,680,773			368			-		(368	)		-			-

Cashless exercise of Gemini Master Fund Warrants		-			-			9,000,000			900			-		(900	)		-			-

Value of beneficial conversion feature of 6% Convertible Notes converted into common stock		-			-			-			-			-		328,498			-			328,498

Value of beneficial conversion feature of 7% Convertible Notes converted into common stock		-			-			-			-			-		676,900			-			676,900

Value of beneficial conversion feature related to the exchange of $750,000 Revolving Promissory Note for $750,000 7% Convertible Note		-			-			-			-			-		109,926			-			109,926

Value of beneficial conversion feature related to the cashless exercise of the 5,000,000 Gemini Master Fund warrants		-			-			-			-			-		312,500			-			312,500

Value of beneficial conversion feature related to the conversion of the $280,000 Gemini Master Fund note payable into 8,000,000 shares of common stock		-			-			-			-			-		208,000			-			208,000

Value of beneficial conversion feature related to the issuance of 12% Convertible Notes related to RMH/EGC acquisition		-			-			-			-			-		114,286			-			114,286

Shares issued related to the conversion of principal and interest related to the Company's convertible notes payable		-			-			262,595,733			26,261			-		3,014,739			-			3,041,000

Shares issued related to the acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC		-			-			7,857,141			786			-		274,214			-			275,000

Shares issued in relation to the sale of common stock per the Company's Subscription Agreement		-			-			36,981,862			3,698			-		1,290,667			-			1,294,365

Shares issued for services rendered and rent		-			-			45,404,359			4,541			-		1,464,643			-			1,469,184

Value of warrants expensed (issued to CANX and Hegyi, LLC)		-			-			-			-			-		6,765,000			-			6,765,000

Value of stock options expensed		-			-			-			-			-		148,633			-			148,633

Unrealized gain on investment in related party		-			-			-			-			1,121,237		-			-			1,121,237

Net loss for the twelve months ended December 31, 2013		-			-			-			-			-		-			(21,380,138	)		(21,380,138	)

Balance as of December 31, 2013		-		$	-			755,694,870		$	75,571		$	1,121,237	$	17,359,932		$	(24,400,704	)	$	(5,843,964	)

GrowLife, Inc. and Subsidiaries (formerly Phototron Holdings, Inc.)
Consolidated Statements of Cash Flows

	For the Years Ended December 31,
	2013			2012
Operating Activities
Net loss	$	(21,380,138	)	$	(2,186,304	)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization		22,229			8,528
Reserve for inventories		62,882			27,843
Amortization of debt discount		5,106,072			97,172
Stock options expense		148,633			26,563
Common stock issued for services rendered		1,469,184			332,750
Loss on extinguishment of debt		960,750			428,467
Change in fair value of derivative liability		3,701,078			(525,619	)
Fair value of warrants issued		7,015,000			-
Amortization of intangible assets		151,696			-
Accrued interest on convertible notes payable		161,587			-
Impairment of goodwill		279,515			634,128
Impairment of intangible assets		262,604			-
Imputed interest on related party notes payable		-			2,500
Changes in operating assets and liabilities
Changes in restricted cash		-			(46,400	)
Accounts receivable		(127,129	)		(556	)
Inventory		(210,383	)		(28,031	)
Prepaid expenses		18,071			15,004
Other receivable		(3,666	)		-
Deposits		2,883			145
Other assets		-			(3,600	)
Accounts payable		468,517			170,412
Accrued expenses		102,291			(59,941	)
Deferred revenue		(2,750	)		33,638

Net cash used in operating activities		(1,791,074	)		(1,073,301	)

Investing Activities
Cash paid to acquire shares in Vape Holdings, Inc.		(1,160	)		-
Cash paid to acquire Rocky Mountain Hydroponics		(550,000	)		-
Cash paid to acquire Greners.com, Inc.		-			(250,000	)
Cash acquired upon acquisition of Rocky Mountain Hydroponics		(1,398	)		-
Cash acquired upon acquisition of Phototron Holdings, Inc.		-			9,825
Cash paid for store improvements		(5,500	)		-

Net cash used by investing activities		(558,058	)		(240,175	)

Financing Activities
Proceeds from the issuance of common stock		1,294,365			15,250
Proceeds from the issuance of 10% convertible note		156,000			-
Proceeds from the issuance of convertible notes		1,850,000			1,141,092
Proceeds from options exercised		9,000			-
Proceeds from notes payable		1,130,000			-
Proceeds from additional contributed capital		-			120,402
Payments on notes payable and accrued interest		(296,719	)		(50,000	)
Advances from related party		1,160			98,897

Net cash provided by financing activities		4,143,806			1,325,641

Net increase in cash		1,794,674			12,165

Cash beginning of period		36,602			24,437

Cash end of period	$	1,831,276		$	36,602

Supplemental disclosure of cash flow information
Cash paid for interest	$	4,865		$	-

Cash paid for income taxes	$	-		$	-

NON-CASH TRANSACTIONS
Fair value of 170,000,000 warrants	$	7,015,000		$	-
Common stock issued to acquire Rocky Mountain
Hydroponics/Evergreen Garden Center	$	275,000		$	-
12% Senior Secured Convertible Notes issued to acquire Rocky
Mountain Hydroponics/Evergreen Garden Center	$	800,000		$	-
6% Senior secured convertible notes converted into
common stock, principal and interest	$	1,427,809		$	-
7% Senior secured convertible notes converted into
common stock, principal and interest	$	761,349		$	-
12% Senior secured convertible notes converted into
common stock, principal and interest	$	415,842		$	-
Notes payable for Greners.com acquisition converted into
common stock, principal and interest	$	156,000		$	-
Common stock issued for cashless exercise of options	$	1,268		$	405
Notes and other liabilities converted into 6% convertible notes	$	-		$	670,129
OID Note converted into common stock	$	280,000		$	-
Debt and interest converted to common stock	$	-		$	288,000
Debt discount in connection with issuance of convertible debt	$	-		$	986,496
Common stock dividends	$	-		$	455,000
Common stock retired	$	-		$	188
Common stock issued in acquisition of Soja, Inc. (dba Urban Garden Supply)	$	-		$	156,250
Note issued in acquisition of Greners.com	$	-		$	200,000

Assets	$	258,494
Intangible assets		215,000
Goodwill		634,128
Total		1,107,622
Less fair value of liabilities assumed		(807,622	)
Purchase price	$	300,000

Assets	$	93,000
Intangible assets		233,500
Goodwill		123,500
Total		450,000
Less fair value of liabilities assumed		—
Purchase price	$	450,000

Inventory	$	35,000
Intangible assets		60,000
Goodwill		132,011
Total		227,011
Less fair value of liabilities assumed		(70,761	)
Purchase price	$	156,250

Allocation of Purchase Price for the acquisition of Rocky Mountain
Hydroponics, LLC and Evergreen Garden Center, LLC
Assets	$	907,614
Intangible assets		366,000
Goodwill		739,000
Total		2,012,614
Less fair value of liabilities assumed		(387,614	)
Purchase price	$	1,625,000

	As of December 31,
	2013			2012
Raw materials	$	94,681		$	167,413
Finished goods		1,028,037			218,406
Inventory in transit		221,728			-
Less inventory reserve		(90,725	)		(27,843	)
Net inventory	$	1,253,721		$	357,976

Property and equipment as of December 31, 2012	$	103,485
Property and equipment acquired via RMH/EGC acquisition		109,318
RMH/EGC property and equipment purchased post RMH/EGC acquisition		5,500
Total property and equipment as of December 31, 2013		218,303

Accumulated depreciation and amortization as of December 31, 2012		(84,111	)
Accumulated depreciation and amortization acquired via RMH/EGC acquisition		(58,205	)
RMH/EGC depreciation and amortization post acquisition		(10,374	)
Non-RMH/EGC depreciation and amortization FY 2013		(11,855	)
Total accumulated depreciation and amortization as of December 31, 2013		(164,545	)

Net property and equipment as of December 31, 2013	$	53,758

Intangible assets as of December 31, 2012	$	508,600
Intangible assets recorded related to RMH/EGC acquisition		366,000
FY 2013 amortization of non-RMH/EGC intangible assets		(108,996	)
FY 2013 amortization of RMH/EGC intangible assets		(42,700	)
FY 2013 impairment of non-RMH/EGC intangible assets		(262,604	)
Net intangible assets as of December 31, 2013	$	460,300

Goodwill as of December 31, 2012	$	279,515
Goodwill recorded related to acquisition of RMH/EGC		739,000
Impairment of goodwill		(279,515	)
Goodwill as of December 31, 2013	$	739,000

	Principal & Accrued Interest 12.31.12		YTD 2013 Accrued Interest		YTD 2013 Payments Made		Balance as of 12.31.13
Greners	$	153,250	$	2,750	$	156,000	$	-
Brian Sagheb		24,287		578		24,865		-
W-Net Fund I, L.P. - Revolver		15,643		-		15,643		-
	$	193,180	$	3,328	$	196,508	$	-

6% senior secured convertible notes - principal & accrued interest as of December 31, 2012	$	1,863,099
Principal converted into common stock FY 2013		(1,326,397	)
Accrued interest converted into common stock FY 2013		(75,687	)
Accrued and unpaid interest FY 2013		53,861
6% senior secured convertible notes - principal & accrued interest as of December 31, 2013		514,876

Debt discount related to conversion feature as of December 31, 2012	$	(785,459	)
Debt discount amortized as interest expense FY 2013		683,363
Debt discount related to conversion feature as of December 31, 2013		(102,096	)

Balance as of December 31, 2013	$	412,780

	Principal		Accrued Interest		Debt Discount			Total as of 12.31.13
6% Senior secured convertible notes	$	468,680	$	46,196	$	(102,096	)	$	412,780
12% Senior secured convertible notes		408,000		27,608		(41,285	)		394,323
7% Senior secured convertible notes ($850,000)		850,000		13,367		(743,746	)		119,621
7% Senior secured convertible notes ($1,000,000)		1,000,000		2,301		(954,546	)		47,755
	$	2,726,680	$	89,472	$	(1,841,673	)	$	974,479

	1st Conversion			2nd Conversion			Outstanding 09.30.13			Total
Original principal amount	$	550,000		$	150,000		$	50,000		$	750,000
Conversion Date		09.05.13			09.17.13
Conversion price per share	$	0.02156		$	0.02156		$	0.02156
Amount converted	$	550,000		$	150,000					$	700,000
Shares		25,510,204			6,957,328			2,319,109
Stock price 08.29.13	$	0.04		$	0.04		$	0.04
Volatility		21.0	%		21.0	%		21.0	%
Risk free rate		0.02	%		0.02	%		0.02	%
Per share derivative value	$	0.018		$	0.018		$	0.018
Derivative value 08.29.13	$	469,388		$	128,015		$	42,671		$	640,074

Derivative value of $850,000 7% Convertible Notes	$	4,284,000
Derivative value of $1,000,000 7% Convertible Notes		5,040,000
	$	9,324,000

Years Ending December 31,
	2014	$	317,360
	2015		182,327
	2016		104,157
	2017		49,748
	2018		29,900
		$	683,492

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

Name and Principal Position	Year	Salary ($)	Bonus ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Sterling C. Scott (1, 13)	2013	20,000		58,333	537,600		615,933
CEO, President, Secretary and Director	2012			41,667			41,667

John Genesi (2, 13)	2013	79,167			448,000		527,167
Chief Financial Officer	2012

Justin Manns (3)	2013	78,330		46,667			124,997
Former CFO and Director, current Controller GrowLife Hydroponics, Inc.	2012	41,548		33,333			74,881

Marco Hegyi (4)	2013	10,834				1,725,000	1,735,834
President and Director	2012

Robert Hunt (5, 13)	2013	49,777			228,000	9,000	286,777
Director and President of	2012
GrowLife Hydroponics, Inc.

Eric Shevin (6)	2013			$30,000			$30,000
Director	2012

Alan Hammer (7)	2013			$1,667			$1,667
Director	2012

Anthony Ciabattoni (8)	2013			$1,444			$1,444
Director	2012

Jeff Giarraputo (9)	2013			$1,444			$1,444
Director	2012

Bob Kurilko (14)	2013			$33,667			$33,667
Director	2012			$17,000			$17,000

Brian B. Sagheb (10)	2013
Former CEO, CFO, Secretary, and Director	2012

Craig Ellins (11)	2013			10,000			10,000
Former CEO, CFO, Secretary, and Director	2012			15,000			15,000

Todd Denkin (12)	2013
Former Director	2012	15,889					15,889

Name	Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable	Option Exercise Price ($) (1)	Option Expiration Date

Sterling C. Scott	12,000,000	-	$0.085	November 1, 2023
CEO, Secretary, and Director

John Genesi	10,000,000	-	$0.085	November 1, 2023
Chief Financial Officer

Rob Hunt	12,000,000	-	$0.043	June 6, 2023
President of GrowLife Hydroponics, Inc and Director

Name of Beneficial Owner	Amount of Beneficial Ownership	Percent of Beneficial Ownership
Executive Officers and Directors
Sterling Scott (2, 12)	73,737,499	8.5%
John Genesi (3, 12)	10,000,000	1.2%
Justin Manns (4, 12)	15,703,205	1.8%
Rob Hunt (5, 12)	27,746,460	3.2%
Marco Hegyi (6, 12)	25,000,000	2.9%
Eric Shevin (7, 12)	2,004,200	0.2%
Alan Hammer (8, 12)	808,333	0.1%
Anthony Ciabattoni (9, 12)	572,222	0.1%
Jeff Giarraputo (10, 12)	572,222	0.1%
Bob Kurilko (11, 12)	3,383,333	0.4%
	159,527,474	18.5%

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column
Plan Category	(a)		(b)		(a) (c)
Equity compensation plans		40,851,187		$ 0.085		--
approved by security holders (1)
Equity compensation plans not		165,000,000		$ 0.040		--
approved by security holders (2)
Total		205,851,187		$ 0.049		--