GROWLIFE, INC. (Form: 10-K, Received: 09/30/2015 16:44:43)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 2014

o TRANSACTION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transaction period from ________ to ________

Commission file number 000-50385

GrowLife, Inc.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

90-0821083

(I.R.S. Employer Identification No.)

500 Union Street, Suite 810, Seattle, WA 98101

(Address of principal executive offices and zip code)

(800) 977-5255

(Registrant’s telephone number, including area code)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes ý No

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. o Yes ý No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 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. ý Yes o No

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

Indicate by check mark if disclosure of delinquent filers 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. o

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 accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	o	Non-accelerated filer	o	Smaller reporting company	ý
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No

As of June 30, 2014 (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 (for this purpose, all outstanding and issued common stock minus stock held by the officers, directors and known holders of 10% or more of the Company’s common stock) was $74,452,264.

As of September 30, 2015 there were 902,116,496 shares of the issuer’s common stock, $0.0001 par value per share, 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.

TABLE OF CONTENTS

		Page
PART 1		1

ITEM 1.	Description of Business	1

ITEM 1A.	Risk Factors	6

ITEM 1B	Unresolved Staff Comments	15

ITEM 2.	Properties	15

ITEM 3.	Legal Proceedings	16

ITEM 4.	Mine Safety Disclosures	16

PART II		17

ITEM 5.	Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17

ITEM 6.	Selected Financial Data	20

ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	26

ITEM 8.	Financial Statements and Supplementary Data	26

ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	26

ITEM 9A.	Controls and Procedures	26

ITEM 9B.	Other Information	27

PART III		28

ITEM 10.	Directors, Executive Officers and Corporate Governance	28

ITEM 11.	Executive Compensation	33

ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	43

ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	45

ITEM 14.	Principal Accounting Fees and Services	48

PART IV		49

ITEM 15.	Exhibits, Financial Statement Schedules	49

	SIGNATURES	54

PART I

ITEM 1. DESCRIPTION OF BUSINESS

THE COMPANY AND OUR BUSINESS

GrowLife, Inc. (“GrowLife” or the “Company”) was incorporated under the laws of the State of Delaware and are headquartered in Seattle, Washington. We were founded in 2012 with the Closing of the Agreement and Plan of Merger with SGT Merger Corporation. We have authorized common stock of 3,000,000,000 shares at $0.0001 par value and 3,000,000 shares of preferred stock with a par value of $0.0001 were authorized by the shareholders. There is no preferred stock issued and the terms have not been determined as of September 30, 2015.

Our 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. 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 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.

We primarily sell through our wholly owned subsidiary, GrowLife Hydroponics, Inc. In addition to the promotion and sales of GrowLife owned brands, GrowLife companies distribute and sell over 3,000 products through its e-commerce distribution channel, Greners.com, and through our regional retail storefronts. GrowLife and its business units are organized and directed to operate strictly in accordance with all applicable state and federal laws.

Overcoming Company Challenges

We grew through a series of acquisitions in 2012 and 2013 leading to seven retail stores. In 2013 we expected to grow through the following three key initiatives (i) expanding to 30 retail stores at an expected average annual revenue of $1.25 million with 12 stores in 2014 resulting in sales of $15 million; (ii) educating the investment community of the demand for indoor growing equipment from the cannabis industry; and (iii) engaging a joint venture investor willing to provide financial resources for acquisitions and strategic investments. These three initiatives were expected to help position us as the leading supplier and participating investor to the emerging cannabis industry and were therefore announced and allocated resources with those goals in mind.

The retail expansion plan, starting in July 2013, was expected to maintain the pre-acquisition revenue pace of GrowLife Hydroponic’s earlier purchase of Rocky Mountain Hydroponics, LLC, a Colorado limited liability company (“RMC”), and Evergreen Garden Center, LLC, a Maine limited liability company (“EGC”), and generate sales of $5.5 million in 2013. For several reasons, GrowLife Hydroponics achieved 2013 revenue of $4.8 million. In addition, GrowLife Hydroponics opened two more stores in Plaistow, New Hampshire and Peabody, Massachusetts. This seven store expansion across five states exposed three issues with the retail expansion plan: (i) the cost of inventory, integration and ramp up in offsetting revenue was understated; (ii) the laws, policies and resulting customer purchase process across the five states varied greatly and lowered the expected economies of scale; and (iii) the competitive hydroponic supplier market lowered expected operating margins. The lack of financial resources to offset the operating losses from the retail expansion initiative necessitated a change of our plans.

An education initiative was formed where we engaged Grass Roots Research and Distribution, Inc., a market research and marketing firm, to study our 2013 plan, the emerging growth of the cannabis industry and estimate the possible financial impact to GrowLife and its valuation. Sets of reports were published and supported with GrowLife press releases to educate the new industry and generate greater awareness of GrowLife. While this initiative proved successful in 2013, we ceased to engage Grass Roots in 2014, after we changed our business strategy.

The third investor initiative was formed in November 2013, through the Organic Growth International, LLC (“OGI”), a joint venture, between GrowLife and CANX USA LLC (“CANX”). CANX would provide the financial resources for OGI to facilitate acquisitions and strategic investments. GrowLife issued warrants for 240 million GrowLife shares to CANX and CANX would provide up to $40 million in mutually agreed upon investments, $1 million in a convertible note and a $1.3 million commitment towards the GrowLife Infrastructure Funding & Technology (“GIFT”) program. 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.

Starting in June 2014 we focused on cost reductions with minimal revenue loss as our focus. The primary reduction in operating costs came from (i) streamlining non-profitable personnel, lowering expenses by replacing the Woodland Hills, California

headquarters with that of Seattle, Washington that serves more people at a lower cost; (ii) closing the unprofitable Peabody, Massachusetts, Woodland Hills, California and Plaistow, New Hampshire stores; (iii) relocating the Greners e-commerce operation from Santa Rosa, California to the Boulder, Colorado store until a new Denver facility is set up; (iv) reducing full-time employees from 46 to 8 as of September 30, 2015; and (v) closing the Phototron subsidiary in California. While transition costs were paid out, the repurposing of company resources is expected to reduce our operating expenses and allows for greater market reach and efficiencies.

However, the challenges of operating a public company under the strains grey market trading and lawsuits, as well as limited access to investment capital kept the company lean. We also chose to convert about three months of inventory into cash. This reduced our inventory level from $1.8 million to $924,000 and lowered our gross margins to 16.5%. This conscientious decision was made to help us transition through this period. As for our $7.7 million of our general and administrative expenses, there were approximately $3.6 million in non-recurring/non-cash stock expenses, which resulted in net cash expenses at approximately $4.1 million for the year ended December 31, 2014.

We remain focused on hiring the best people to expand our direct sales personnel. These personnel are knowledgeable in using the most progressive growing technologies that fit our customer’s needs. Whether they are small-scale local cultivation facilities or large-scale regional cultivators, our customer service team recommends smart medium, cost-effective lighting and ventilation, and the right nutrients that are best suited for the crop objective. Our knowledge layer is strategic for the evolution of the indoor growing industry. Unlike an outdoor superstore, GrowLife serves the specialty cultivation business as indoor crops are designed to deliver multiple grow cycles with greater quality and yield not available in outdoor agriculture. Technologies will be available to provide our customers with a way to further tune their ordering process and crop development using their own experience.

Customer Insights

GrowLife has the unique advantage of working with many cultivators of all sizes across most states that have differing laws and policies for indoor growing. This advantage has given us insights into our customers changing needs. During the last twelve months we have seen a dramatic change in many key areas that required us to adjust our strategies even faster than expected. For example, we expected the retail business to be eclipsed by e-commerce and direct sales combined, however, we now see that each one is surpassing retail sales. While localized, on-hand inventory has a benefit to most cultivators; price, by far, is driving most purchasing decisions. Simply putting up an e-commerce website without a presence in the retail and direct channels is not enough to engage the leading suppliers. Therefore, it remains critical that GrowLife continues to execute its multi-channel strategy, albeit at a different composition.

The driving force behind the customer’s pricing pressure is not that cultivators are greedily seeking to increase their profits or capitalize on the expected commoditization of growing equipment and supplies. Instead, cultivators are quickly adjusting their business models to make a profit. Also, the innovation of optimized indoor growing equipment and supplies is keeping them from becoming a commodity. Indoor cultivation business models, whether they are organic fruits and vegetables or cannabis, have been based on supplying a premium priced crop to serve increasing demand. The dynamics where most of the volume produced is based on supplying a premium crop that is saturating premium demand means that the premium price will drop. Only 18 months ago, a 1/8 of a pound of premium cannabis was selling for about $70. Today, the same crop in the same market sells for less than half that price and the surplus that is being sold in the non-premium market is selling for about 25% of the price; in some cases, for less.

Our observations from customers reveal that the more sophisticated cultivators have made the business model adjust and most new cultivators have not distinguished the new price elasticity of demand. In the chart below, the demand line (green) for high grade intersected supply line (red) to define an equilibrium price point. As new cultivators entered the market they assumed that demand would increase for high grade and create what we call a phantom demand (gray) so that the increase in overall supply would lead to an increase in price (Pp). However, many reports support that the increase in supply stayed aligned with the original demand (green) and has led to the lower new price (Pn). The overall increase in demand that is commonly mentioned is not for high grade but for commercial grade, which is used for edibles and a less sophisticated palate.

narcoticnews.com/drug-prices/marijuana/

bloomberg.com/news/articles/2015-06-22/this-survey-says-that-marijuana-prices-are-crashing-in-colorado

The cost of indoor growing, which included equipment, supplies, water, electricity, housing and skilled labor, requires capital. The risk and limited supply of the capital demanded a higher cost for the cannabis market than that of common fruits and vegetables. The cultivator has found themselves needing to pay more from their crop than expected and needing to sell at close to last year’s prices to achieve a reasonable return. Many customers have indicated that they were prepared to accept a 20-30% drop in selling price, but a 50% drop has created business challenges.

Another unanticipated issue is the separation of dispensaries (cannabis retailers) from the cultivation process. Cultivators now must market their crop to dispensaries that make higher margins, but have many supplier choices. This is leading to the segmentation between boutique premiums versus large commercial grade operations. Thus, the business model adjustments those cultivators are going through. Premium growers seek to scale in order to cover expenses and commercial grade cultivators must decrease prices or introduce quality production to win over dispensaries.

We are working with cultivators of all sizes, across all states at different stages; all of which are seeking to lower operating costs. Since resources such as water and electricity are limited and expensive, we help cultivators get more with less. Vertical farming has become a real and practical cultivation process for volume where a 20-by-30 square foot room that normally houses about 150 plants can now grow over 550 plants, almost three times more. Specially designed vertical lighting with 360-degree coverage and using 35% less power now delivers the necessary light with less heat, thus lowering the HVAC power demand. Finally, specially designed pots automatically control both watering and drainage efficiently. We have both the expertise and supplier relationships to help cultivators scale up with configurations like these.

Market Size and Growth

As the states across the country approve medicinal cannabis usage, with different THC and CBD compositions, cultivators purchase equipment and supplies from us and similar indoor supply companies. Therefore, as the cannabis market grows so does the revenue growth opportunity for us. Researchers from The ArcView Group, a cannabis industry investment and research firm based in Oakland, California, found that the U.S. market for cannabis grew 74 percent in 2014 to $2.7 billion, up from $1.5 billion in 2013. Today, 23 states plus Washington, DC have legalized cannabis for medical use and four states plus Washington, DC have passed recreational use into law.

We serve 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 techniques have primarily been used to cultivate plant-based medicines. Plant-based medicines often require high-degree of regulation and controls including government compliance, security, and crop consistency, making indoor growing techniques 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.

The ArcView report indicates that plant-based medicines are the fastest-growing market in the U.S., and conservatively predicts the market could be worth more than $10 billion within five years. Several industry pundits including Dr. Sanjay Gupta of CNN believe that plant-based medicines may even displace prescription pain medication by providing patients with a safer, more affordable alternative.

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.

Strategy

Our goal is to become the nation’s largest cultivation facility service provider for the production of organics, herbs and greens and plant-based medicines. We intend to achieve our goal by (i) offering the best terms for the full range of build-out equipment and consumable supplies, (ii) maintain a nationwide, multi-channel sales network presence, and (iii) deliver superior, innovative products exclusively.

First, we serve the needs of all size cultivators and each one’s unique formulation. 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. Grow expansions may also qualify for leasing terms by one of our financing partner.

Second, 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 differing benefits. Retail sells at list price by offering inventory convenience, e-commerce provides the lowest price without requiring local inventory, and direct sales delivers the best bid price for high-volume purchasers.

And third, our experience with hundreds of customers allow 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 has obtained exclusive access to purchase and distribute.

Our company will expand on these strategies until it serves all the indoor cultivators throughout the country. Once a customer is engaged, we will gradually expand their purchasing market share.

Key Market Priorities

Demand for indoor growing equipment is currently high due to legalization of plant-based medicines, primarily cannabis, which is mainly due to equipment purchases for build-out and repeated consumables. This demand is projected to continue to grow as a result of the supporting state laws in 23 states and the District of Columbia. Continued innovation in more efficient build-out technologies along with larger and consolidated cultivation facilities will further expand market demand for our products and services.

We expect for the market to continue to segment into urban farmers serving groups of individuals, community cultivators, and large-scale cultivation facilities across the states. Each segment will be optimized to different distribution channels that we currently provide. Our volume purchasing will allow us to obtain the best prices and maximize both our revenues and gross margins.

The nature of the cannabis industry’s inefficiencies due to the lack of interstate commerce imposed by the Federal government has segmented the market opportunities by State laws, population and demand. Currently, Colorado laws and population demand make it the most progressive and top market in the industry. We have elected to have two major regional retail stores in Boulder and Vail, Colorado direct sales team and centralized our national e-commerce operations in Boulder, Colorado. We are currently reaching into over 17 states using both direct sales of exclusive supplier contracts and GrowLife eco products to other hydroponic retailers.

Employees

Starting the three months ended September 30, 2014, we reduced our manpower count from 46 to 8 as of September 30, 2015 by leveraging all our manpower across many areas. All company operations are continually reviewed for growth opportunities and direct sales along with GrowLife eco , a premium line of eco-friendly products, is enabling the Company to expand its coverage in a cost-effective manner.

As of September 30, 2015, we had one full-time employee and two consultants at our Seattle, Washington office. Marco Hegyi, our President, is based in Seattle, Washington. Mark E. Scott, our consulting CFO, is based out of in Seattle, Washington and Atlanta, Georgia. In addition, we have 7 employees located throughout the United States who operate our e-commerce, direct sales and retail businesses. None of our employees is subject to a collective bargaining agreement or represented by a trade or labor union. We believe that we have a good relationship with our employees.

Key Partners

Our key customers varying by state and are expected to be more defined as the 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, and Sunlight Supply to product specific suppliers such as Solis-Tek and CAN USA. 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, HydraFarm, and UHS. Other key competitors on the retail side include Way to Grow, Cultivate Colorado and many local product resellers of hydroponic equipment. On the e-commerce business, GrowersHouse.com, Hydrobuilder.com, HorticultureSource.com and smaller online resellers using Amazon and eBay e-commerce sub-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 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.greners.com, and www.urbangardensupplies.com.

We have a policy of entering into confidentiality and non-disclosure agreements with our employees and some of our vendors and customers as necessary.

Government Regulation

Currently, there are currently twenty-three 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. About a dozen other states are considering legislation to similar effect. There are currently four states 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.

THE COMPANY’S COMMON STOCK

Our common stock trades on the grey market under the symbol “PHOT.” While the company is currently without a market maker, its stock does trade directly between buyers and sellers.

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 I, 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 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 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 our funding from TCA Global Credit Master Fund, LP (“TCA”).

On July 9, 2015, we closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP, 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 occurred on July 9, 2015.

On August 6, 2015, we closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP, 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 occurred on August 6, 2015.

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 material adverse affect on our business, results of operations or financial condition.

Suspension of trading of the Company’s securities.

On April 10, 2014, we received notice from the SEC that trading of the Company’s 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, the Company has 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 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.

SEC charges 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 Form 10-K. 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 our business, results of operations or financial condition.

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

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 Agreements require the filing of a registration statement on Form S-1 within 10 days of the filing of our Form 10-Q for the period ended June 30, 2014. Due to our grey sheet trading status and other issues, we have not filed the registration statement.

Previously, we entered into a Joint Venture Agreement with CANX USA LLC, a Nevada limited liability company. Under the terms of the Joint Venture Agreement, the Company and CANX formed Organic Growth International, LLC (“OGI”), a Nevada limited liability company, for the purpose of expanding the 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 the closing of the Agreement, CANX agreed to provide a commitment for funding in the amount of $1,300,000 for a GrowLife Infrastructure Funding Technology program transaction and provided additional funding under a 7% Convertible Note instrument for $1,000,000, including $500,000 each from Logic Works and China West III Investments LLC, entities that are unaffiliated with CANX and operate as separate legal entities. We initially owned a non-dilutive 45% share of OGI and we may acquire a controlling share of OGI as provided in the Joint Venture Agreement. In accordance with the Joint Venture Agreement, the Company and CANX entered into a Warrant Agreement whereby the Company delivered to CANX a warrant to purchase 140,000,000 shares of the Company common stock at a maximum strike price of $0.033 per share. Also in accordance with the Joint Venture Agreement, we issued an additional warrant to purchase 100,000,000 shares of our common stock at a maximum strike price of $0.033 per share on February 7, 2014.

On April 10, 2014, as a result of the suspension in the trading of our securities, we went into default on our 7% Convertible Notes Payable for $500,000 each from Logic Works and China West III. As a result, we accrued interest on these notes at the default rate of 24% per annum. Furthermore, as a result of being in default on these notes, the Holders could have, at their sole discretion, called these notes.

Waiver and Modification Agreement

We entered into a Waiver and Modification Agreement dated June 25, 2014 with Logic Works LLC whereby the 7% Convertible Note with Logic Works dated December 20, 2013 was modified to provide for (i) a waiver of the default under the 7% Convertible Note; (ii) a conversion price which is the lesser of (A) $0.025 or (B) twenty percent (20%) of the average of the three (3) lowest daily VWAPs occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date on which the Holder elects to convert all or part of this Note; (iii) the filing of a registration statement on Form S-1 within 10 days of the filing of the Company’s Form 10-Q for the period ended June 30, 2014; and (iv) continuing interest of 24% per annum. China West III converted its Note into common stock on June 4, 2014. Due to our grey sheet trading status and other issues, we have not filed the registration statement.

Amended and Restated Joint Venture Agreement

We entered into an Amended and Restated Joint Venture Agreement dated July 1, 2014 with CANX whereby the Joint Venture Agreement dated November 19, 2013 was modified to provide for (i) up to $12,000,000 in conditional financing subject to review by GrowLife and approval by OGI for business growth development opportunities in the legal cannabis industry for up to six months, subject to extension; (ii) up to $10,000,000 in working capital loans, with each loaning requiring approval in advance by CANX; (iii) confirmed that the five year warrants, subject to extension, at $0.033 per share for the purchase of 140,000,000 and 100,000,000 were fully earned and were not considered compensation for tax purposes by the Company; (iv) granted CANX five year warrants, subject to extension, to purchase 300,000,000 shares of common stock at the fair market price of $0.033 per share as determined by an independent appraisal; (v) warrants as defined in the Agreement related to the achievement of OGI milestones; (vi) a four year term, subject to adjustment and (vi) the filing of a registration statement on Form S-1 within 10 days of the filing of our Form 10-Q for the period ended June 30, 2014. Due to our grey sheet trading status and other issues, we have not filed the registration statement.

Secured Convertible Note and Secured Credit Facility

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 requires approval in advance by Logic Works, provides for interest at 6% with a default interest of 24% per annum and requires repayment by June 26, 2016. The Note is convertible into our common stock at the lesser of $0.007 or (B) 20% of the average of the three (3) lowest daily VWAPs occurring during the 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 our assets. We also agreed to file a registration statement on Form S-1 within 10 days of the filing of our Form 10-Q for the three months ended June 30, 2014 and have the registration statement declared effective within ninety days of the filing of our Form 10-Q for the three months ended June 30, 2014. Due to our grey sheet trading status and other issues, we have not filed the registration statement.

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. As of June 30, 2015, we have borrowed $350,000 under the Secured Convertible Note and Secured Credit Facility dated June 25, 2014 with Logic Works.

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 affect on our business, results of operations or financial condition.

The restatement of our unaudited financial statements may result in litigation or government enforcement actions. Any such action would likely harm our business, prospects, financial condition and results of operations.

In connection with the review of our Form 10-Q for the three months ended March 31, 2014, management determined that previously issued unaudited consolidated financial statements issued for the three months ended March 31, 2014 contained an error, which was non-cash in nature. We reviewed the impact of this error and determined that the impact of this error for the three months ended March 31, 2014 unaudited consolidated financial statements was material. On June 19, 2014, after review by our independent registered public accounting firm and legal counsel, our Audit Committee of our Board of Directors concluded that we should restate our unaudited interim financial statements for the three months ended March 31, 2014 to reflect the correction of the previously identified error in the unaudited consolidated financial statements for this period.

We filed Form 10Q/A on June 27, 2014 and restated the consolidated balance sheet as of March 31, 2014, and the consolidated statements of operations and consolidated cash flows for the three months ended March 31, 2014 to reflect the correcting book entry as described below. There was no impact to our actual cash balances as a result of these errors, and these errors do not change net cash flows from financing activities. There was no impact of this error on net cash flows from operating activities.

The restatement of our unaudited financial statements may expose us to risks associated with litigation, regulatory proceedings and government enforcement actions. In addition, securities class action litigation has often been brought against companies, which have been unable to provide current public information or which have restated previously filed financial statements. Any of these actions could result in substantial costs, divert management's attention and resources, and harm our business, prospects, results of operation and 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 September 30, 2015, 23 states and the District of Columbia allow its citizens to use medical marijuana. Additionally, 4 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 has 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. However, there is no guarantee that the administration will not change its stated 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.

We were in default on our convertible notes payable.

On April 10, 2014, as a result of the SEC suspension in the trading of our securities, we went into default on our 6% Senior Secured Convertible Notes Payable and our 7% Convertible Notes Payable. As a result, we accrued interest on these notes at the default rate of 12% and 24% per annum, respectively. Furthermore, as a result of being in default on these notes, the Holders could have, at their sole discretion, called these notes.

During July 2014, we reached settlement agreements with our holders of the 7% Convertible Notes Payable and we are not in default under any of our convertible notes payable. We are accruing interest at the interest rate in the settlement agreements. Any default could have a significant adverse affect 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.

As a result of the regulatory environment, we have experienced the closing of several of our 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 have a material adverse effect on our business, financial condition and/or results of operations.

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 23 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.

Our history of net losses has raised substantial doubt regarding our ability to continue as a going concern. If we do not continue as a going concern, investors could lose their entire investment.

Our history of net losses has raised substantial doubt about our ability to continue as a going concern, and as a result, our independent registered public accounting firms included an explanatory paragraph in their reports on our financial statements as of and for the years ended December 31, 2014 and 2013 with respect to this uncertainty. Accordingly, our ability to continue as a going concern will 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 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 as a going concern.

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

We have experienced net losses since inception. As of December 31, 2014, we had an accumulated deficit of $111 .0 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 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 audit of our financial statements for the year ended December 31, 2014, 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 our financial reports and other disclosures.

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

	●	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. 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.

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.

To date, our revenue growth has been derived primarily from the sale of our 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.

If we incur substantial liability from litigation, complaints, or enforcement actions resulting from misconduct by our distributors, our financial condition could 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.

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.

We may be unable to obtain intellectual property rights to effectively protect our 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.

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.

We are involved in a highly competitive industry where we may compete with numerous other companies who offer alternative methods or approaches, 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.

Transfers of our securities may be restricted by virtue of state securities “blue sky” laws, which prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states.

Transfers of our common stock may be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to 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.

Our success depends to a significant degree upon the continued contributions of key management and other personnel, some of whom could be difficult to replace. We do not maintain key man life insurance covering our officers except for Marco Hegyi, our President. 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.

We have limited insurance.

We have limited directors’ and officers’ liability insurance and commercial liability insurance policies. Any significant claims would have a material adverse effect on our business, financial condition and results of operations.

Risks Related to our Common Stock

CANX, Logic Works and China West could have significant influence over matters submitted to stockholders for approval.

As of September 30, 2015, CANX, Logic Works and China West in the aggregate hold shares representing approximately 53 . 8% of our common stock on a fully-converted basis and could be considered a control group for purposes of SEC rules. However, their agreements limit their ownership to 4.9% individually and each of the parties disclaims its status as a control group or a beneficial owner due to the fact that their beneficial ownership is limited to 4.9% per their agreements. Beneficial ownership includes shares over which an individual or entity has investment or voting power and includes shares that could be issued upon the exercise of options and warrants within 60 days after the date of determination. 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 of our securities, we lost all market makers and currently trade on the grey market of OTCBB. Until we comply with FINRA Rule 15c2-11, we will trade on the grey market, which limits quotations and marketability of securities. Holders of our common stock will continue to find 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 will likely decline.

Although our stock currently does not meet the definition of a “penny stock” due to an increase in our revenues for past two years, in the recent past our stock was categorized as a penny stock and it is possible that our stock may become a penny stock again in the future. The SEC has adopted Rule 15g-9 which generally defines "penny stock" to be any equity security that has a market

price (as defined) less than US$ 5.00 per share or an exercise price of less than 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). If our securities were to become a penny stock in the future, they would be covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in 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 its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the 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 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 written agreement to the transaction. Finally, broker-dealers may not handle penny stocks under $0.10 per share.

These disclosure requirements 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 affect on the market price of our common stock, regardless of our actual operating performance. These factors could have a material adverse affect 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 September 30, 2015, there were approximately 902.1 million shares of our common stock issued and outstanding. In addition, as of September 30, 2015, there are also (i) stock option grants outstanding for the purchase of 40.6 million common shares at a $0.058 average strike price; (ii) warrants for the purchase of 565.0 million common shares at a $0.035 average exercise price; (iii) 235.6 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 are obligated to issue $2 million in common stock or approximately 115.1 million shares related 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. If all stock option grant, warrant and contingent shares are issued, approximately 1.864 billion of our currently authorized 3 billion shares of common stock will be issued and outstanding.

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.

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 $0.007 to $0.78 per share.

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

Our 6% Senior Secured Convertible Notes Payable, our 7% Convertible Notes Payable and our 6% Convertible Secured Convertible Note and Secured Credit Facility dated June 25, 2014 with Logic Works may require an adjustment in the conversion price if we issue common stock, warrants or equity below the price that is reflected in the convertible notes payable. Any adjustment in the conversion price also could affect the market price of the common 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 the foreseeable future.

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

Not applicable.

ITEM 2. PROPERTIES

Current Operating Leases

Upon our acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC, we assumed the lease for the RMH/EGC retail hydroponics store located in Portland, Maine. The lease commencement date was May 1, 2013 with an expiration date of April 30, 2016. The monthly rent for year one of the lease was $4,917, with monthly rent of $5,065 in year two, and monthly rent of $5,217 in year three of the lease. We have an option to extend the lease for two three year terms as long it is not in default under the lease.

On October 21, 2013, we entered into a lease agreement for retail space for our 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.

On January 23, 2014, we entered into a lease agreement for retail space for its hydroponics store in Boulder, Colorado. The lease commenced on February 1, 2014 and expires on May 31, 2017. Monthly rent for year one of the lease was $4,051, with monthly rent of $4,173 in year two, $4,298 in year three, and $4,427 for month 37 through 39. We have an option to extend the lease for one three year terms as long it is not in default under the lease.

On June 18, 2014, we rented space at 500 Union Street, Suite 810, Seattle, Washington for our corporate office on a month to month basis at the current monthly payment of $1,700 per month.

Terminated 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 was $4,313. We terminated this lease as of May 31, 2014.

Upon our acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, we assumed the lease for the RMH/EGC retail hydroponics store located in Plaistow, New Hampshire. The lease commencement date was May 1, 2013 with an expiration date of January 31, 2016. The monthly rent throughout the term of the lease is $2,105. We vacated this store and expect to terminate this lease during 2015.

On June 5, 2013, we entered into a lease to rent office space in Woodland Hills, California for our corporate headquarters. The landlord was 20259 Ventura Blvd LP, which was a previous affiliate of a stockholder of our company. The term was for ninety days and can be renewed, or terminated, by either party with thirty days written notice. The monthly rent was $6,758. We terminated this lease as of June 30, 2014.

On May 30, 2013, we entered into a lease to rent retail space in Woodland Hills, California for its Urban Garden Supply (Soja, Inc.) hydroponics store. The term was for ninety days and can be renewed, or terminated, by either party with ninety days written notice. The monthly rent was $3,257. We terminated this lease as of June 1, 2015.

On August 26, 2013, we entered into a lease agreement for warehouse and retail space for its Greners (Business Bloom, Inc.) business unit in Santa Rosa, California. The lease commencement date was September 1, 2013 with an expiration date of August 31, 2015. The monthly rent is $3,000. We terminated this lease as of November 25, 2014.

On September 23, 2013, we entered into an Assignment and Assumption and Amendment of Lease Agreement for our retail hydroponics store in Peabody, Massachusetts. The original lease between the landlord and Evergreen Garden Center, LLC was assigned from Evergreen Garden Center, LLC to GrowLife Hydroponics, Inc. In addition, the term of the lease was extended from the original expiration date of October 31, 2013 to October 31, 2014. The monthly rent remained at $4,500 through October 31, 2014. This lease expired on October 31, 2014.

We are in default on our Portland, Maine and Boulder, Colorado store leases for non-payment of the lease payments and are negotiating with the landlords.

ITEM 3. LEGAL PROCEEDINGS

We are involved in the disputes and legal proceedings 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.

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 us in United States District Court, Central District of California (the “Court”). At a hearing held on July 21, 2014, the three class action lawsuits were consolidated into one case with Lawrence Rosen as the lead plaintiff (the “Consolidated Class Action,” styled Romero et al. vs. GrowLife et al.). On May 15, 2014 and August 4, 2014, respectively two shareholder derivative lawsuits were filed against us 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. On January 20, 2015, the Court ordered all of the above actions stayed pending completion of mediation of the dispute.

The parties then worked diligently to finalize settlement documentation on the above actions. On April 27, 2015, the Court preliminarily approved the proposed settlement of the Consolidated Class Action.

On June 1, 2015, the Court preliminarily approved the proposed settlement of the Derivative Actions pursuant to a proposed stipulated settlement agreement.

On August 3, 2015, the Court entered a Final Order and Judgment resolving the Consolidated Class Action litigation in its entirety. The Consolidated Class Action was thereby dismissed in its entirety with prejudice and without costs.

On August 10, 2015, pursuant to a settlement by and between the Company and AmTrust North America, AmTrust’s lawsuit contesting insurance coverage of the Consolidated Class Action and Derivative Actions was dismissed in its entirety with prejudice pursuant to a Stipulation for Dismissal of Entire Action with Prejudice executed by and between AmTrust and the Company.

On August 17, 2015, the Court entered a Final Order and Judgment resolving the Derivative Actions in their entirety. The Derivative Actions were thereby dismissed in their entirety with prejudice.

As a result of the foregoing, all litigation discussed herein is resolved in full at this time.

We are obligated to issue $2 million in common stock or approximately 115.1 million shares related 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.

Section 16(b) Claims

We received four demand letters from potential plaintiffs regarding alleged Section 16(b) short-swing violations by Sterling Scott in July 2014. We believe the claims are without merit and responded to the Section 16(b) claims accordingly. Two of the four claims have acknowledged our position and have been withdrawn. There has been no response to our position from the remaining two potential plaintiffs.

Sales and Payroll Tax Liabilities

As of September 30, 2015, we owe approximately $87,000 in sales tax and $20,000 in payroll taxes primarily from early 2014. We are currently negotiating or operating under payment plans on these liabilities.

Other Legal Proceedings

We are in default on our Portland, Maine and Boulder, Colorado store leases for non-payment of lease payments and we are negotiating with the landlords. We are currently subject to legal actions with various vendors.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY 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 3,003,000,000 shares of capital stock, of which 3,000,000,000 are shares of voting common stock, par value $0.0001 per share, and 3,000,000 are shares of non-voting preferred stock, par value $0.0001 per share. There are no preferred shares issued and the terms have not been determined.

Capital Stock Issued and Outstanding

As of September 30, 2015, we have issued and outstanding securities on a fully diluted basis:

●	902,116,496 shares of common stock;
●	Stock option grants for the purchase of 40,570,000 shares of common stock at average exercise price of $0.058;
●	Warrants to purchase an aggregate of 565,000,000 shares of common stock with expiration dates between November 2018 and July 2019 at an exercise price of $0.035 per share;
●	235,575,286 shares of common stock to be issued for the conversion of Convertible Notes Payables with expiration dates between September 2015 and June 2016 at a conversion price of $0.007 per share;
●	6,000,000 shares of common stock that may be issued to a former executive related to a severance agreement; and
●	We are obligated to issue $2 million in common stock or approximately 115,141,048 shares related 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.

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 its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of non-voting preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. There are no shares of non-voting preferred stock presently outstanding and we have no present plans to issue any shares of preferred stock.

Warrants to Purchase Common Stock

As of September 30, 2015, warrants to purchase an aggregate of 565,000,000 shares of common stock with expiration dates between November 2018 and July 2019 at an average exercise price of $0.035 per share are outstanding.

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 40,570,000 shares at an average exercise price of $0.058 per share as of September 30, 2015. 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 Price of and Dividends on Common Equity and Related Stockholder Matters

Our common stock trades on the grey market under the symbol “PHOT.” While the company is currently 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 may not be indicative of our common stock price under different conditions.

Period Ended	High		Low
Year Ending December 31, 2015
Through September 24, 2015	$	0.18	$	0.01
June 30, 2015	$	0.06	$	0.01
March 31, 2015	$	0.35	$	0.02

Year Ending December 31, 2014
December 31, 2014	$	0.36	$	0.01
September 30, 2014	$	0.80	$	0.01
June 30, 2014	$	0.64	$	0.06
March 31, 2014	$	0.78	$	0.16

Year Ended December 31, 2013
December 31, 2013	$	0.16	$	0.05
September 30, 2013	$	0.06	$	0.03
June 30, 2013	$	0.06	$	0.01
March 31, 2013	$	0.12	$	0.04

As of September 24, 2015, the closing price of the company's common stock was $0.010 per share. As of September 30, 2015, there were 902,116,496 shares of common stock outstanding held by approximately 116 stockholders of record. This number does not include the approximately 15,000 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

Recent Sales of Unregistered Securities

During the three months ended December 31, 2014, we had the following sales of unregistered sales of equity securities.

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.

We have 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.

We issued 400,000 shares of our common stock to consultants and employees for services at the fair market price of $0.053 per share.

We issued 1,600,000 shares of common stock relating to the conversion of liabilities at the fair market price of $0.05 per share.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information as of December 31, 2014 related to the equity compensation plan in 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		40,720,000		0.058		-
Total		40,720,000		0.058		-

ITEM 6. SELECTED FINANCIAL DATA

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, 2014, 2013 and 2012. 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.

	Years Ended December 31,
	2014			2013			2012
	(Audited)			(Audited)			(Audited)
STATEMENT OF OPERATIONS DATA:
Net revenue	$	8,538		$	4,859		$	1,451
Cost of goods sold		7,173			4,006			1,039
Gross profit		1,365			853			412
General and administrative expenses		7,851			11,796			1,683
Operating (loss)		(6,486	)		(10,943	)		(1,271	)
Other expense		(80,140	)		(10,437	)		(915	)
Net (loss)	$	(86,626	)	$	(21,380	)	$	(2,186	)
Net (loss) per share	$	(0.10	)	$	(0.04	)	$	(0.01	)
Weighted average number of shares		834,503,868			593,034,693			245,420,970

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

Our 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. 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 a nationwide network of local representatives, regional fulfillment centers and its e-Commerce team, GrowLife provides essential goods and services including media (i.e., farming soil), industry-leading hydroponics equipment, plant nutrients, and thousands more products to specialty grow operations starting with 17 states.

We primarily sell through our wholly owned subsidiary, GrowLife Hydroponics, Inc. In addition to the promotion and sales of GrowLife owned brands, GrowLife companies distribute and sell over 3,000 products through its eCommerce distribution channel, Greners.com, our on-line superstore, and through our retail storefronts that serve as regional fulfillment centers. GrowLife and its business units are organized and directed to operate strictly in accordance with all applicable state and federal laws.

We grew through a series of acquisitions in 2012 and 2013 leading to seven retail stores. In 2013, we expected to grow through the following three key initiatives (i) expanding to 30 retail stores at an expected average annual revenue of $1.25 million with 12 stores in 2014 resulting in sales of $15 million; (ii) educating the investment community of the demand for indoor growing equipment from the legal cannabis industry; and (iii) engaging a joint venture investor willing to provide financial resources for acquisitions and strategic investments. These three initiatives were expected to help position us as the leading supplier and participating investor to the emerging legal cannabis industry and were therefore announced and allocated their own resources.

The retail expansion plan, starting in July 2013, was expected to maintain the pre-acquisition revenue pace of GrowLife Hydroponic’s earlier purchase of Rocky Mountain Hydroponics, LLC, a Colorado limited liability company (“RMC”), and Evergreen Garden Center, LLC, a Maine limited liability company (“EGC”), and generate sales of $5.5 million in 2013. For several reasons, GrowLife Hydroponics experienced achieved 2013 revenue at $4.8 million. In addition, GrowLife Hydroponics opened two more stores in Plaistow, New Hampshire and Peabody, Massachusetts. This seven store expansion across five states exposed three issues with the retail expansion plan: (i) the cost of inventory, integration and ramp up in offsetting revenue was understated; (ii) the laws, policies and resulting customer purchase process across the five states varied greatly and lowered the expected economies of scale; and (iii) the competitive hydroponic supplier market lowered expected operating margins. The lack of financial resources to offset the operating losses from the retail expansion initiative led to a change of plan.

An education initiative was formed where we engaged Grass Roots Research and Distribution, Inc., a market research and marketing firm, to study our 2013 plan, the emerging growth of the legal Cannabis industry and estimate the possible financial impact to GrowLife and its valuation. Sets of reports were published and supported with GrowLife press releases to educate the new industry and generate greater awareness of GrowLife. While this initiative proved successful in 2013, we ceased to engage Grass Roots in 2014, after we changed our business strategy.

The third investor initiative was formed in November 2013, through the Organic Growth International, LLC (“OGI”), a joint venture, between GrowLife and CANX USA LLC (“CANX”). CANX would provide the financial resources for OGI to facilitate acquisitions and strategic investments. GrowLife issued warrants for 240 million GrowLife shares to CANX and CANX would provide up to $40 million in mutually agreed upon investments, $1 million in a convertible note and a $1.3 million commitment towards the GrowLife Infrastructure Funding & Technology (“GIFT”) program. 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 in 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.

Starting in June 2014 we focused on cost reductions with minimal revenue loss has been our focus. The primary reduction in operating costs came from (i) streamlining non-profitable personnel, lowering expenses by replacing the Woodland Hills, California headquarters with that of Seattle, Washington that serves more people at a lower cost; (ii) closed the unprofitable Peabody, Massachusetts, Woodland Hills, California and Plaistow, New Hampshire stores; (iii) relocated the Greners eCommerce operation from Santa Rosa, California to the Boulder, Colorado store until a new Denver facility is set up; (iv) reducing full-time employees from 46 to 8 as of September 30, 2015; and (v) closing the Phototron subsidiary in California. While transition costs were paid out, the repurposing of company resources is expected to reduce our operating expenses and allows for greater market reach and efficiencies.

However, the challenges of operating a public company under the strains gray market trading and lawsuits, that are in negotiations, as well as limited access to investment capital kept the company lean. We also chose to convert about three months of inventory into cash. This reduced our inventory level from $1.8 million to $924,000 and lowered our gross margins to 16.5%. This conscientious decision was made to help us transition through this period. As for our $7.7 million of our general and administrative expenses, there were approximately $3.6 million in non-recurring/non-cash stock expenses, which resulted in net cash expenses at approximately $4.1 million for the year ended December 31, 2014.

RESULTS OF OPERATIONS

The following table presents certain consolidated statement of operations information and presentation of that data as a percentage of change from year-to-year.

(dollars in thousands)

		Years Ended December 31,
		2014			2013			$ Variance			% Variance
Net revenue		$	8,538		$	4,859		$	3,679			75.7	%
Cost of goods sold			7,173			4,006			3,167			-79.1	%
Gross profit			1,365			853			512			60.0	%
General and administrative expenses			7,851			11,796			(3,945	)		33.4	%
Operating loss			(6,486	)		(10,943	)		4,457			40.7	%
Other income (expense):
	Impairment of goodwill		-			(280	)		280			100.0	%
	Impairment of intangible assets		-			(262	)		262			100.0	%
	Loss on extinguishment of debt		-			(961	)		961			100.0	%
	Change in fair value of derivative		(16,253	)		(3,701	)		(12,552	)		-339.2	%
	Other income		-			42			(42	)		-100.0	%
	Realized gain on sale of investment		187			-			187			100.0	%
	Interest expense, net		(64,074	)		(5,275	)		(58,799	)		-1114.7	%
Total other income (expense)			(80,140	)		(10,437	)		(69,703	)		-667.8	%
Income (loss) before income taxes			(86,626	)		(21,380	)		(65,246	)		-305.2	%
	Income taxes - current benefit		-			-			-			0.0	%
Net income (loss)		$	(86,626	)	$	(21,380	)	$	(65,246	)		-305.2	%

YEAR ENDED DECEMBER 31, 2014 COMPARED TO THE YEAR ENDED DECEMBER 31, 2013

Revenue

Net revenue for the year ended December 31, 2014 increased $3,679,000 to $8,538,000 as compared to $4,859,000 for the year ended December 31, 2013. The increase was due to revenue from the retail stores acquired by GrowLife Hydroponics’ acquisition of Rocky Mountain Hydroponics and Evergreen Garden Center on June 7, 2013.

Cost of Goods Sold

Cost of sales for the year ended December 31, 2014 increased $3,167,000 to $7,173 ,000 as compared to $4,006,000 for the year ended December 31, 2013. The increase was due to increased sales, selling our products at a higher discount and the liquidation of inventory at lower margins during the year ended December 31, 2014.

Gross profit was $1,365,000 for the year ended December 31, 2014 as compared to $853,000 for the year ended December 31, 2013. The gross margin was 16.0% for the year ended December 31, 2014 as compared to 17.6% for the year ended December 31, 2013. The decrease was due to selling our products at a higher discount and the liquidation of inventory at lower margins during the year ended December 31, 2014.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2014 decreased $3,945,000 to $7,851,000 as compared to $11,796,000 for the year ended December 31, 2013. The decrease was due to decreased warrant expense of (i) $7,015,000; offset by (ii) increased payroll expense of $1,242,000; increased stock based compensation of $1,252,000; (iii) increased stock option expense of $576,000; (iv) increased legal expenses of $598,000; and (v) and increased of other general expenses of $598,000. As part of the general and administrative expenses for the year ended December 31, 2014, we recorded investor relation expenses of $627,000 and did not record any business development expenses.

The increase related to the retail stores acquired in our acquisition of Rocky Mountain Hydroponics and Evergreen Garden Center on June 7, 2013, legal expenses associated with our legal proceedings and stock based compensation related stock option grants.

Non-cash general and administrative expenses for the year ended December 31, 2014 totaled $3,583,000, with (i) depreciation and amortization of $140,000; (ii) stock based compensation of $724,000 related to stock option grants; (iii) increased common stock issued for services expenses of $2,721,000; (iv) change in inventory reserve of $13,000.

Non-cash general and administrative expenses for the year ended December 31, 2013 totaled $1,792,000, with (i) depreciation and amortization of $174,000; (ii) stock based compensation of $149,000; and (iii) increased common stock issued for services expenses of $1,469,000.

Other Income/ Expense

Other expense for the year ended December 31, 2014 was $80,140,000 as compared to other expense of $10,437,000 for the year ended December 31, 2013. The expenses for the year ended December 31, 2014 included loss on change – derivative liability warrants of $16,253,000 and interest expense of $64,074,000, offset by the realized gain on the sale of investment of $187,000. The loss on change- derivative liability is the non-cash change in the fair value and relates to our derivative instruments. The non-cash interest related to the amortization of the debt discount associated with our convertible notes, accrued interest expense related to our notes payable and the issuance of a 100,000,000 share warrant to CANX in February 7, 2014 and a 300,000,000 share warrant to CANX on July 10, 2014.

Other expense for the year ended December 31, 2013 included interest expense of $5,275,000, loss on extinguishment of debt of $961,000 and change in fair value of derivative of $3,701,000, impairment of goodwill of $280,000 and impairment of intangible assets of $262,000, offset by other income of $42,000. The loss on change- derivative liability is the non-cash change in the fair value and relates to our derivative instruments. The non-cash interest related to the amortization of the debt discount associated with our convertible notes payable and of accrued interest expense related to our notes payable.

Net (Loss)

Net loss for the year ended December 31, 2014 was $86,626 ,000 as compared to a net loss of $21,380,000 for the year ended December 31, 2013 for the reasons discussed above. Net income for the year ended December 31, 2014 non-cash expenses of $83,883,000, including (i) loss on change – derivative liability of $16,253,000; (ii) depreciation and amortization of $140,000; (iii) stock based compensation of $724,000 related to stock option grants; (iv) common stock issued for services expenses of $2,722,000; (v) change in inventory reserve of $13,000; and (vi) interest expense of $64,046,000, offset by the realized gain on the sale of investment of $187,000.

The net loss for the year ended December 31, 2013 included non-cash expenses of $19,341,000 consisting of (i) loss on change – derivative liability of $3,701,000; (ii) depreciation and amortization of $174,000; (iii) common stock issued for services expenses of $1,469,000; (iv) warrant expenses of $7,015,000; (v) amortization of debt discount of $5,106,000; (vi) stock based compensation of $149,000; (vii) impairment of goodwill of $280,000 and impairment of intangible assets of $262,000; (viii) loss on extinguishment of debt of $961,000; and (ix) other expenses of $224,000.

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

LIQUIDITY AND CAPITAL RESOURCES

We had cash of $286,000 and a net working capital deficit of approximately $(1,018,000) (excluding the derivative liability- warrants of $2,101,000 as of December 31, 2014. We expect losses to continue as we grow our business. Our cash used in operations for the year ended December 31, 2014 was $2,123,000.

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.

Transactions with TCA Global Credit Master Fund LP

Transactions with CANX, LLC and Logic Works LLC

Operating Activities

Net cash used in operating activities for the year ended December 31, 2014 was $2,123,000. This amount was primarily related to a net loss of $86,626 ,000 , offset by a reduction in account receivable of $184,000 and inventory of $317,000 and non-cash expenses of $83,899,000 consisting of (i) depreciation and amortization of $140,000; (ii) stock based compensation of $724,000 related to stock option grants; (iii) common stock issue for services of $2,722,000; (iv) $1,364,000 related to the amortization of the debt discount associated with our convertible notes payable; (v) $183,000 of accrued interest expense related to our notes payable; (vi) $62,500,000 related to the issuance of a 100,000,000 share warrant to CANX in February 7, 2014 and a 300,000,000 share warrant to CANX on July 10, 2014 ; (vii) loss on change – derivative liability of $16,253,000; and (viii) other of $13 ,000.

Investing Activities

Net cash provided by investing activities for the year ended December 31, 2014 was $184,000. This amount was primarily related to the net cash proceeds from the sale of shares in Vape Holdings, Inc. of $188,000, offset by capital expenditures of $4,000.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2014 was $394,000. This amount was primarily related to proceeds from the issuance of a convertible note of $350,000, proceeds from options exercised of $45,000, offset by repayment of debt of $1,000.

Our contractual cash obligations as of December 31, 2014 are summarized in the table below:

			Less Than						Greater Than
Contractual Cash Obligations	Total		1 Year		1-3 Years		3-5 Years		5 Years
Operating leases	$	326,950	$	175,080	$	151,870	$	-	$	-
Note payable		1,463,431		1,103,790		359,641		-		-
Capital expenditures		50,000		50,000		-		-		-
	$	1,840,381	$	1,328,870	$	511,511	$	-	$	-

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, 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 judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies (see summary of significant accounting policies more fully described in Note 3 to Form 10-K for the year ended December 31, 2014), the following policies involve a higher degree of judgment and/or complexity:

Cash and Cash Equivalents - We 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 Federal Deposit Insurance Corporation up to $250,000. We have not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit.

Accounts Receivable and Revenue - Revenue is recognized on the sale of a product when the product is shipped, which is when the risk of loss transfers to our customers, the fee is fixed and determinable, and collection of the sale is reasonably assured. A product is not shipped without an order from the customer and the completion of credit acceptance procedures. The majority of our sales are cash or credit card; however, we occasionally extend terms to our customers. Accounts receivable are reviewed periodically for collectability.

Inventories - Inventories are recorded on a first in first out basis. Inventory consists of raw materials, purchased finished goods and components held for resale. Inventory is valued at the lower of cost or market. The reserve for inventory was $50,000 and $90,725 at December 31, 2014 and 2013, respectively.

Property and Equipment - Property and equipment are stated at cost. Assets acquired held under capital leases are initially recorded at the lower of the present value of the minimum lease payments discounted at the implicit interest rate (35% for assets currently held under capital lease) or the fair value of the asset. Major improvements and betterments are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is computed using the straight-line method over an estimated useful life of five years. Assets acquired under capital lease are depreciated over the lesser of the useful life or the lease term. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations.

Goodwill and Intangible Assets - We evaluate 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, we compare 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.

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 fourth quarter of each fiscal year for impairment, or more often if indicators warrant.

Long Lived Assets – We reviews our long-lived assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.

Fair Value Measurements and Financial Instruments - ASC Topic 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The carrying value of cash, accounts receivable, investment in a related party, accounts payables, accrued expenses, due to related party, notes payable, and convertible notes approximates their fair values due to their short-term maturities.

Derivative financial instruments - We evaluate all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

As of December 31, 2013, we had outstanding unsecured 7% convertible notes for $1,850,000 that we determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. We valued the derivative liability of these notes at $9,324,000 using the Black-Scholes-Merton option pricing model.

As of December 31, 2014, we had outstanding unsecured 7% convertible notes for $500,000 that we determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. We valued the derivative liability of these notes at $1,278,878 using the Black-Scholes-Merton option pricing model.

As of December 31, 2014, we had outstanding unsecured 6% convertible notes for $350,000 that we determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. We valued the derivative liability of these notes at $822,037 using the Black-Scholes-Merton option pricing model.

Stock Based Compensation – We have 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 our common stock at the fair market value at the time of grant. Stock-based compensation cost to employees is measured by us 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, we recognize 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the information required by this Item. Nevertheless, we have no investments in any market risk sensitive instruments either held for trading purposes or entered into for other than trading purposes.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to our consolidated financial statements beginning on page F-1 of this report.

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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

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, 2014 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 is a control deficiency, or combination of 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 controls over financial 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 Sarbanes-Oxley Act of 2002. Prior to this we did not have an Audit Committee to oversee financial reporting and used external service providers to ensure compliance with the SEC requirements.

Other Weaknesses:

We lacked a centralized accounting department operating in the same location as our senior management.

We lacked an offsite backup our critical computerized data.

We lacked detailed, and written, set of company policies and procedures.

Our information systems lacks 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 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.

We lacked centralized control over bank accounts.

We lacked centralized control over sales and payroll taxes.

b) Changes in Internal Control over Financial Reporting

During the year ended December 31, 2014, we implemented the following changes in our internal controls over financial reporting during this fiscal quarter that materially affected, or is reasonably likely to have a materially affect, on our internal control over financial reporting.

During the year ended December 31, 2014, we strengthened our governance as follows: (i) appointed Mark E. Scott as a director and chairman of the Audit Committee; (ii) we formed Audit, Compensation and Nominations and Governance Committees and implemented charters; (iii) we implemented updated By-Laws; (iv) we implemented new policies, including Insider Trading, Whistleblower and a Code of Ethics; (v) we completed a significant review of our operations and filings; and (vi) we filed with the SEC numerous filings to correct any reporting deficiencies.

During the year ended December 31, 2014, we improved our internal controls and financial reporting as follows: (i) the office was moved to Seattle to have a centralized accounting department in the same location as our senior management; (ii) we strengthened our personnel with the appointment of a new consulting Chief Financial Officer and Controller; (iii) we migrated to a new financial reporting system; (iv) we implemented a new point-of-sale software system; and (v) we changed our management.

During the three months ended December 31, 2014, we did not close the books and records on a timely basis for file the Form 10-K due to a lack of cash. However, there were no changes in internal control over financing reporting.

ITEM 9B. OTHER INFORMATION

There were no disclosures of any information required to be filed on Form 8-K during the three months ended December 31, 2014 that were not filed.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following changes in directors and named executive officers occurred during the year ending December 31, 2013 and for the subsequent periods:

●	Eric Shevin was appointed Director on April 1, 2013 and resigned April 1, 2014.

●	Craig Ellins resigned as Director on April 12, 2013.

●	Justin Manns resigned as Chief Financial Officer on July 22, 2013 and as Director on December 19, 2013.

●	John Genesi was appointed Chief Financial Officer on July 22, 2013 and resigned on July 15, 2014.

●	Robert Hunt was appointed President of GrowLife Hydroponics, Inc. and Director on June 7, 2013. Mr. Hunt resigned as Executive Vice President of GrowLife, Inc. and President of GrowLife Hydroponics, Inc. effective May 23, 2014 and as a Director effective on June 3, 2014.

●	Robert Kurilko resigned as Director on November 2, 2013.

●	Marco Hegyi was appointed President on December 4, 2013 and Director on December 9, 2013.

●	Alan Hammer was appointed Director on December 17, 2013 and resigned May 6, 2014.

●	Jeff Giarraputo Director was appointed Director on December 19, 2013.

●	Anthony Ciabattoni was appointed Director on December 19, 2013.

●	Sterling C. Scott resigned as Chairman, Chief Executive Officer and Director on May 19, 2014.

●	Mark E. 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.

●	Joseph Barnes was appointed Senior Vice President of Business Development on October 1, 2015.

Directors and Executive Officers

The following table sets forth certain information about our current directors and executive officers:

Name	Age		Director/ Executive Officer

Marco Hegyi		57	Director, President and Nominations and Governance Committee Chairman

Mark E. Scott		62	Director, Secretary, Audit Committee Chairman and Consulting Chief Financial Officer (2)

Anthony J. Ciabattoni *		71	Director and Compensation Committee Chairman (1)(2)(3)

Jeff Giarraputo *		45	Director (1)(2)(3)

Joseph Barnes		43	Senior Vice President of Business Development

* Independent director

(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

(3) Member of the Nominations and Governance Committee.

All directors hold office until their successors are duly appointed or until their earlier resignation or removal.

Marco Hegyi - Mr. Hegyi joined GrowLife as its President and a Member of its Board of Directors on December 9, 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 has served as an independent director since February 14, 2008 and as Chairman of the Board since May 2011, and serves at the Chairman of the Audit and Compensation committees of Visualant, Inc. Previously, Mr. Hegyi was been a principal with the Chasm Group from 2006 to January 2014, where he has provided business consulting services. As a management consultant, Mr. Hegyi applied his extensive technology industry experience to help early-stage companies.

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 of boards, finance, compensation and audit committee chair, chief operating officer, vice-president of sales and marketing, senior director of product management, and he began his career as a systems software engineer. Mr. Hegyi holds several patents.

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.

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.

Anthony J. Ciabattoni – Mr. Ciabattoni has served on the Board since December 19, 2013 and was appointed Chairman of the Compensation Committee to the Audit and Nominations and Governance on June 3, 2014. Mr. Ciabattoni held sales and marketing management positions for two Fortune 250 companies. Since 1996, Mr. Ciabattoni’s entrepreneurial career involved start-ups, acquisitions, business operations and enterprise sales servicing Fortune 500 companies. Since 1996, Mr. Ciabattoni manages a diverse investment portfolio comprised of real estate, healthcare, technology, and satellite communications as an investor.

Mr. Ciabattoni has extensive involvement in both his community and in charities. He is the founder of Laguna Legacy, a charitable fund designed to help families and organizations of need in his community. He is a former Board of Director of Junior Achievement and a former member of Big Brothers of Orange County.

Mr. Ciabattoni is a graduate of the University of Delaware where he earned a Bachelor of Arts degree and has resided in California with his family since 1972.

Mr. Ciabattoni’s was appointed to the Board of Directors because of past experience in building, growing, and selling companies.

Jeff Giarraputo - Mr. Giarraputo has served on the Board since December 19, 2013 and was appointed to the Audit, Nominations and Goverance and Compensation Committees on June 3, 2014. In 1996, Mr. Giarraputo co-founded the global advertising agency Factory Design Labs, 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 has managed private equity investments and serves as an advisor and/or board member since 2013.

The Company added Mr. Giarraputo to its Board of Directors because of his sales and marketing, and in particular his branding experience/expertise.

Mark E. Scott – Mr. Scott was appointed to the Board of Directors and Secretary of GrowLife, Inc. on May 21, 2014 and as Chairman of the Audit Committee on June 3, 2014. On July 31, 2014, Mr. Scott appointed Consulting Chief Financial Officer. Mr. Scott has significant financial, capital market and relations experience in public microcap companies. Mr. Scott also currently serves as (i) Chief Financial Officer, Secretary and Treasurer of Visualant, Inc., a position he has held since May 2010.

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. Previously, he held executive financial positions with Digital Lightwave; Network Access Solutions; and Teltronics, Inc. He has also held senior financial positions at Protel, Inc., Crystals International, Inc., Ranks Hovis McDougall, LLP and Brittania Sportswear, and worked at Arthur Andersen. Mr. Scott is also a certified public accountant and received a Bachelor of Arts in Accounting from the University of Washington.

Mr. Scott was appointed to the Board of Directors 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. Barnes works from our Boulder, 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 which 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 healthy crops.

Barnes was a highly regarded snowboard instructor in Vail, Colorado prior to joining GrowLife. He worked with many top snowboard professionals, and also received a Level 1 certification from American Association Snowboard Instructors (AASI). Before his days on the slopes, Barnes was also a recruiting manager focusing on placing senior executives with international pharmaceutical/biotech companies. He also owned and 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 employees required to be disclosed under Item 401(c) of Regulation S-K.

Family Relationships

There are no family relationships among our directors and executive officers.

Involvement in Certain Legal Proceedings

Except for Mr. Mr. Ciabattoni, 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 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 any of the foregoing, or as an investment adviser, underwriter, broker or dealer in 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 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.

Mr. Ciabattoni entered into Administrative Proceeding File No. 3-16438 dated March 13, 2015 whereby Mr. Ciabattoni agreed to Cease and Desist Proceedings under Section 21C of the Securities and Exchange Act of 1934. The Administrative Proceeding stems from Mr. Ciabattoni’s failure to file required Schedule 13D amendments and Section 16(a) beneficial ownership reports in an entity unrelated to GrowLife.

Committees of the Board of Directors

The Board has three standing committees to facilitate and assist the Board in the execution of 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 one management director. The table below shows current membership for each of the standing Board committees.

Audit	Compensation	Nominations and Governance	Executive Committee
Mark E. Scott (Chairman)	Anthony J. Ciabattoni (Chairman)	Marco Hegyi (Chairman)	Marco Hegyi (Chairman)
Anthony J. Ciabattoni	Jeff Giarraputo	Anthony J. Ciabattoni	Anthony J. Ciabattoni
Jeff Giarraputo	Marco Hegyi	Jeff Giarraputo	Mark E. Scott

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our board of directors or our compensation committee.

Mr. Giarraputo serves as a member of our compensation committee. Mr. Giarraputo has entered into related party transactions with us. See 'Transactions with Related Persons" below.

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 our board of directors to promote transparency and integrity. The standards apply to our board of directors, executives and employees. Waivers of the requirements of our code of ethics or associated polices with respect to members of our board of directors or executive officers are subject to approval of the full board.

Section 16(a) Beneficial Ownership Reporting Compliance

Our executive officers, directors and 10% stockholders are required under Section 16(a) of the Exchange Act to file reports of ownership and changes in ownership with the SEC. 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, 2014 our executive officers, directors and 10% holders complied with all filing requirements.

				Required	Actual
			Transaction	File	File
Person	Filing Type		Date	Date	Date
Marco Hegyi		3	12/4/2013	12/18/2013	3/28/2014
Alan Hammer		3	12/17/2013	12/19/2013	3/31/2014
Anthony J. Ciabattoni		3	12/19/2013	12/23/2013	3/31/2014
Jeff Giarraputo		3	12/19/2013	12/23/2013	3/28/2014
Joseph Barnes		3	10/10/2014	10/24/2014	11/3/2014

			Required	Actual
		Transaction	File	File
Person		Date	Date	Date
Alan Hammer	4	1/13/2014	1/15/2014	1/23/2014
Robert Hunt	4	1/31/2014	2/4/2014	4/29/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Robert Hunt	4	4/3/2014	4/7/2014	4/9/2014
Sterling C. Scott	4	5/27/2014	5/29/2014	7/3/2014
Sterling C. Scott	4A	7/3/2014	7/8/2014	7/23/2014
Sterling C. Scott	4	7/3/2014	7/8/2014	7/14/2014
John Genesi	4	7/15/2014	7/17/2014	7/28/2014
Sterling C. Scott	4A	10/9/2014	10/13/2014	10/20/2014
Sterling C. Scott	4	10/9/2014	10/13/2014	10/15/2014
Sterling C. Scott	4	10/10/2014	10/14/2014	10/16/2014
Sterling C. Scott	4	10/13/2014	10/15/2014	10/16/2014
Sterling C. Scott	4	12/19/2014	12/23/2014	12/24/2014

			Required	Actual
		Transaction	File	File
Person		Date	Date	Date
Sterling C. Scott	5	12/31/2013	3/5/2014	3/28/2014
Robert Hunt	5	12/31/2013	3/5/2014	3/28/2014
John Genesi	5	12/31/2013	3/5/2014	3/28/2014
Marco Hegyi	5	12/31/2013	3/5/2014	3/28/2014
Eric Shevin	5	12/31/2013	3/5/2014	3/28/2014
Alan Hammer	5	12/31/2013	3/5/2014	3/31/2014
Anthony J. Ciabattoni	5	12/31/2013	3/5/2014	3/31/2014
Jeff Giarraputo	5	12/31/2013	3/5/2014	3/28/2014
Jeff Giarraputo	5A	12/31/2013	3/5/2014	3/28/2014

CANX, Logic Works & China West Beneficial 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.

Previously, we entered into a Joint Venture Agreement with CANX USA LLC, a Nevada limited liability company. Under the terms of the Joint Venture Agreement, the Company and CANX formed Organic Growth International, LLC (“OGI”), a Nevada limited liability company, for the purpose of expanding 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. In connection with the closing of the Agreement, CANX agreed to provide a commitment for funding in the amount of $1,300,000 for a GrowLife Infrastructure Funding Technology program transaction and provided additional funding under a 7% Convertible Note instrument for $1,000,000, including $500,000 each from Logic Works and China West III Investments LLC, entities that are unaffiliated with CANX and operate as separate legal entities. We initially owned a non-dilutive forty five percent (45%) share of OGI and the Company may acquire a controlling share of OGI as provided in the Joint Venture Agreement. In accordance with the Joint Venture Agreement, the Company and CANX entered into a Warrant Agreement whereby we delivered to CANX a warrant to purchase 140,000,000 shares of the Company common stock at a maximum strike price of $0.033 per share. Also in accordance with the Joint Venture Agreement, we issued an additional warrant to purchase 100,000,000 shares of our common stock at a maximum strike price of $0.033 per share on February 7, 2014.

In connection with the issuance of the above warrants to CANX in November 2013 and early 2014, we drafted certain beneficial ownership forms, including a Schedule 13D, for CANX’s review and filing in connection with their acquisition of a potential control position of the Company due to their holdings of the warrants which amounted to a significant derivative security position in the Company. CANX refused to file the beneficial ownership filings at that time contending that they had not received the warrants provide for under the Joint Venture Agreement from us and therefore were not beneficial owners of said securities and thus not obligated to file said forms. The ultimate responsibility for filing such beneficial ownership forms lies with the reporting person which, in this case, was CANX.

On July 10, 2014, as discussed above, CANX and the Company entered into amended agreement which provided, among other things, the re-issuance of warrants with 4.99% beneficial ownership limitation provisions. The 4.99% beneficial ownership limitation prevented CANX from acting as a control person under the terms of the amended agreements and CANX disclaims its status as a control person or a beneficial owner due to the 4.99% beneficial ownership limitation .

Accordingly, 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 and/or China West in connection with the above transactions. Therefore, CANX has not made any Section 16(a) filings. Likewise, at this time, we do not consider CANX a control party under SEC Rules.

Additionally, Logic Works and China West, parties unaffiliated with CANX that received certain convertible notes in the above transactions to which CANX was a party, do not consider themselves a control group because both Logic Works and China West have a 4.99% ownership limit, are not affiliated with CANX or each other and disclaim their status as a potential control group with CANX. Therefore, Logic Works and China West have not made any Section 16(a) filings. China West has since converted its $500,000 Note into 20,640,548 shares of our common stock on June 4, 2014 which is less than 2.5% of our issued and outstanding common stock.

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 page 36 under “Remuneration of Executive Officers” (the “Named Executive Officers”) who served during the year ended December 31, 2014. 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 that the Company may hire in the future.

The Compensation Committee of the Board has responsibility for overseeing, reviewing and approving executive compensation and benefit programs in accordance with the Compensation Committee’s charter. The members of the Compensation Committee are Anthony J. Ciabattoni (Chairman), Jeff Giarraputo and Marco Hegyi. We expect to appoint an additional independent Director to serve on the Compensation Committee during 2015.

Compensation Philosophy and Objectives

The major compensation objectives for the Company’s executive officers are as follows:


	●	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.

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 what we can afford and in a way that allows for us to meet our goals for overall performance. During 2014 and 2013, the 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 use a peer group of publicly-traded and privately-held companies in structuring the compensation packages.

Executive Compensation Components for the Year Ended December 31, 2014

The Compensation Committee did not use a formula for allocating compensation among the elements of total compensation during the year that ended December 31, 2014. The Compensation Committee believes that in order to attract and retain highly effective people it must maintain a flexible compensation structure. For the year that ended December 31, 2014, 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 and provides motivation for career development and enhancement. Base salary ensures that all employees continue to receive a basic level of compensation that reflects any acquired skills which are competently demonstrated and are consistently used at work.

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.

Performance-Based Incentive Compensation

The Compensation Committee believes incentive compensation reinforces performance objectives, rewards superior performance and is consistent with the enhancement of stockholder value. All of the Company’s Named Executive Officers are eligible to receive performance-based incentive compensation. The Compensation Committee did not recommend or approve payment of any performance-based incentive compensation to the Named Executive Officers during the year ended December 31, 2014 based on our the 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 Compensation Committee and vary among participants’ positions within the Company. Newly hired executive officers or promoted executive officers are generally awarded stock options, at the discretion of the Compensation Committee, at 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 our common stock on the date of the 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 the 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 no rights as a stockholder with respect to the shares subject to such option, including voting rights and the right to receive dividends or dividend equivalents.

The Named Executive Officers received stock option grants and warrants during the year ended December 31, 2014 as outlined below.

Retirement and Other Benefits

We have no other retirement, savings, long-term stock award or other type of plans for the Named Executive Officers.

Perquisites and Other Personal Benefits

During the year ended December 31, 2014, we provided the Named Executive Officers with medical insurance. Mr. Scott was reimbursed $15,973 for insurance and travel expenses. 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.

Employment and consulting agreements are discussed below.

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, composed entirely of independent directors in accordance with the applicable laws and regulations, 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

Anthony J. Ciabattoni (Chairman)

Jeff Giarraputo

Marco Hegyi

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, 2014 and 2013:

Summary Compensation Table

								Non-Equity Incentive
						Stock		Plan		Option		Other
		Salary		Bonus		Awards		Compensation		Awards		Compensation		Total
Principal Position		($)		($)		($) (1)		($)		($)		($)		($)
Sterling C. Scott, former Chief Executive Officer,	12/31/2014	$	55,500	$	-	$	67,614	$	-	$	-	$	-	$	123,114
President, Secretary and Director (2)	12/31/2013	$	20,000	$	-	$	58,333	$	-	$	537,600	$	-	$	615,933

Robert Hunt, former Director and President	12/31/2014	$	40,804	$	-	$	-	$	-	$	-	$	35,456	$	76,261
of GrowLife Hydroponics, Inc. (3)	12/31/2013	$	49,777	$	-	$	-	$	-	$	228,000	$	9,000	$	286,777

John Genesi, former Chief Financial Officer (4)	12/31/2014	$	62,500	$	-	$	480,000	$	-	$	-	$	41,667	$	584,167
	12/31/2013	$	79,167	$	-	$	-	$	-	$	448,000	$	-	$	527,167

Justin Manns, former Chief Financial Officer and	12/31/2014	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Director and current controller of GrowLife	12/31/2013	$	78,330	$	-	$	46,667	$	-	$	-	$	-	$	124,997
Hydroponics, Inc. (5)

Marco Hegyi, President and Director (6)	12/31/2014	$	156,906	$	-	$	-	$	-	$	-	$	14,997	$	171,903
	12/31/2013	$	10,834	$	-	$	-	$	-	$	-	$	1,825,000	$	1,835,834

Mark E. Scott, Consulting Chief Financial Officer,	12/31/2014	$	86,250	$	-	$	-	$	-	$	292,480	$	15,686	$	394,416
Director and Secretary (7)	12/31/2013	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Joseph Barnes, Senior Vice President of Business	12/31/2014	$	70,096	$	6,500	$	24,000	$	-	$	120,648	$	9,119	$	230,363
Development (8)	12/31/2013	$	15,385	$	-	$	-	$	-	$	-	$	-	$	15,385

(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) Sterling C. Scott resigned as Chairman, Chief Executive Officer and Director on May 19, 2014. Mr. Scott was paid a cash salary of $55,500 during the year ended December 31, 2014. Mr. Sterling Scott was paid a cash salary of $10,000 per month during November and December 2013. During the year ended December 31, 2013, Sterling Scott was issued 5,833,333 shares of our common stock which was valued at $0.01 per share or $58,333 in the aggregate. During the year ended December 31, 2013, Sterling Scott was issued 5,833,333 shares of our common stock which was valued at $0.01 per share or $58,333 in the aggregate. On November 3, 2013, the Board of Directors approved a stock option grant for Sterling Scott to purchase 12,000,000 shares of our common stock at an exercise price of $0.085 per share, which represents the fair value of one share of our 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. We valued the options at $537,600. On July 3, 2014, Sterling Scott exercised his option on a cashless basis and was issued 795,455 shares of our restricted common stock valued at $67,614 or $.085 per share.

(3) Robert Hunt was appointed President of GrowLife Hydroponics, Inc. and Director of GrowLife on June 7, 2013. Mr. Hunt resigned as Executive Vice President of GrowLife, Inc. and President of GrowLife Hydroponics, Inc. effective May 23, 2014 and as a Director effective on June 3, 2014. Mr. Hunt was paid a cash salary of $40,804 and severance and other expense reimbursements of $35,456 during the year ended December 31, 2014. Mr. Hunt was paid a cash salary of $49,777 and a housing allowance of $9,000 from June 7, 2013 to December 31, 2013. On November 3, 2013, the Board of Directors approved a stock option grant to Robert Hunt to purchase 12,000,000 shares of our common stock at an exercise price of $0.043 per share, which represents the fair value of one share of our common stock on June 7, 2013. The option grant was 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. We valued the options at $228,000 using the Black-Scholes option pricing model using the following assumptions. On May 30, 2014, the Company announced the resignation of Robert Hunt effective May 23, 2014 as Executive Vice President of Growlife, Inc., President of Growlife Hydroponics. On June 3, 2014, the Board of Directors accepted the resignation of Robert Hunt effective June 2, 2014 as a Director of the Company. On October 17, 2014, we entered into a Settlement Agreement and Release with Mr. Robert Hunt, whereby the Parties cancelled the Executive Services Agreement dated June 7, 2013 and his stock option grant for 12,000,000 shares. We agreed to issue 6,000,000 shares of restricted common stock under certain conditions that have not been met, pay cash severance totaling $50,000 monthly over five month starting October 25, 2014 and reimburse Mr. Hunt for health insurance benefits and other expenses monthly over five months starting October 25, 2014. The Parties entered into a release agreement.

(4) John Genesi was appointed Chief Financial Officer on July 22, 2013 and resigned on July 15, 2014. Mr. Genesi was paid a cash salary of $62,500 and severance of $41,667 during the year ended December 31, 2014. Mr. Genesi was paid a cash salary of $79,167 from July 22, 2013 to December 31, 2013. On November 3, 2013, the Board of Directors approved a stock option grant for John Genesi to purchase 10,000,000 shares of our common stock at an exercise price of $0.085 per share, which represents the fair value of one share of the our 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. We valued the options at $448,000 using the Black-Scholes option pricing model. On July 15, 2014, we entered into a Severance Agreement with Mr. Genesi whereby Mr. Genesi resigned as Chief Financial Officer and the Parties cancelled the Executive Employment Agreement dated November 3, 2013, including this 10,000,000 share stock option grant. We issued 6,000,000 shares of our common stock which we valued at $480,000 or $0.08 per share.

(5) Justin Manns resigned as Chief Financial Officer on July 22, 2013 and as Director on December 19, 2013. Mr. Manns was paid a cash salary of $78,330 during the year ended December 31, 2013. During the year ended December 31, 2013, Justin Manns was issued 4,666,667 shares of our common stock which was valued at $0.01 per share or $46,667 in the aggregate.

(6) Marco Hegyi was appointed President on December 4, 2013 and Director on December 9, 2013. Mr. Hegyi was paid a cash salary of $156,906 during the year ended December 31, 2014. The Company paid life insurance of $14,997 for Mr. Hegyi during the year ended December 31, 2014. Mr. Hegyi was paid a cash salary of $10,834 during December 2013. During the year ended December 31, 2013, an entity controlled by Mr. Hegyi received (i) $100,000 for consulting services; and (ii) on December 11, 2013, the Company issued a warrant for 25,000,000 common shares. The warrants have a five-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. We valued the warrants at $1,725,000 using the Black-Scholes option pricing model.

(7) Mark E. Scott was appointed a Director on May 24, 2014 and as consulting Chief Financial Officer on July 31, 2014. Mr. Scott was paid a cash consulting fee of $86,250 during the year ended December 31, 2014. Mr. Scott was reimbursed $15,686 for insurance and travel expenses during the year ended December 31, 2014. On July 31, 2014, the Board of Directors approved a stock option grant for Mr. Scott to purchase 16,000,000 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. The shares vest as follows:


	i	Two million of the Shares will vest immediately upon securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB (not earned);

	ii	Two million Shares will vest immediately upon the successful approval and effectiveness of the Company’s S-1 (not earned);

	iii	Two million Shares will vest immediately upon the Company’s resolution of the class action lawsuits (earned as of August 17, 2015); 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 employee 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. We valued the options at $292,480.

(8) Joseph Barnes was appointed Senior Vice President of Business Development on October 1, 2014. Mr. Barnes was paid a cash salary of $70,096, a bonus of $6,500 and expense reimbursements of $9,119 during the year ended December 31, 2014. During the year ended December 31, 2014, Mr. Barnes was issued 300,000 shares of our common stock which was valued at $0.08 per share or $24,000 in the aggregate. Mr. Barnes was paid a cash salary of $15,385 during the year ended December 31, 2013. Mr.

Barnes was granted an option to purchase eight million shares of the Company’s Common Stock under the Company’s 2011 Stock Incentive Plan at an exercise price on the date of grant. The Shares vest as follows:


	i	Two million of the Shares will vest immediately;

	iv	Six million Shares will vest on a monthly basis over a period of three years beginning on the date of grant.

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. Barnes’s continuous status as employee to the Company is terminated by the Company without Cause or Mr. Barnes terminates his employment with the Company for Good Reason as defined in the Barnes Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s Stock Incentive, then 100% of the total number of Shares shall immediately become vested.

We valued the options at $120,648.

Grants of Stock Based Awards during the year ended December 31, 2014

The Compensation Committee approved the following performance-based incentive compensation to the Named Executive Officers for the year ended December 31, 2014:

			Estimated Future Payouts Under Non-Equity Incentive Plan Awards						Estimated Future Payouts Under Equity Incentive Plan Awards
									Estimated Future Payouts Under Equity Incentive Plan Awards				All Other Stock Awards; Shares of		All Other Option Awards; Number of Securities		Exercise or Base Price of		Grant DateFair Value of Stock
Name	Grant Date		Threshold ($)		Target ($)		Maximum ($)			Threshold (#)	Target (#)	Maximum (#)	Stock or Units (#)		Underlying Options (#)		Option Awards ($/Sh) (1)		and Option Awards
Marco Hegyi		-	$	-		-	$	-		-	-	-		-		-	$	-	$	-

Mark E. Scott (2)		-	$	-		-	$	-		-	-	-		-		10,000,000	$	0.070	$	292,480

Joseph Barnes (3)		-	$	-		-	$	-		-	-	-		300,000		8,000,000	$	0.050	$	120,648

(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) Mr. Scott’s stock option grant consists of 10,000,000 shares of our common stock which vest monthly over three years beginning July 31, 2014. A further 6,000,000 of stock option grants vest upon the achievement of certain performance criteria.

(3) During the year ended December 31, 2014, Mr. Barnes was issued 300,000 shares of our common stock which was valued at $0.08 per share or $24,000 in the aggregate. Mr. Barnes stock option grant consists of 6,000,000 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.

Outstanding Equity Awards as of December 31, 2014

The Named Executive Officers had the following outstanding equity awards as of December 31, 2014:

Option Awards

Stock Awards

Number of

Market Value

Number of Unearned

Market or Payout Value of Unearned

Securities

Shares or

of Shares

Shares,

Shares,Units,

Underlying

Units

orUnits of

Units or Other

or Other

Unexercised

Option

of StockThat

Stock That

Rights That

Options

Unearned

Exercise

Option

Have Not

Exercisable

Unexerciseable

Options

Price

Expiration

Vested

Name

(#)

($) (1)

Date

(#)

($)

(#)

($)

Marco Hegyi

Mark E. Scott (2)

1,944,444

8,055,556

0.07

7/30/2019

Joseph Barnes (3)

2,500,000

5,500,000

0.05

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.

(3) Mr. Barnes stock option grant consists of 6,000,000 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.

Option Exercises and Stock Vested for the year ended December 31, 2014

Our Named Executive Officers exercised the following stock options or received stock awards for the year ended December 31, 2014.

	Option Awards (1)				Stock Awards (1)
	Number of Shares Acquired on Exercise		Value Realized on Exercise		Number of Shares Acquired on Vesting		Value Realized on Vesting
Name		(#)	($)			(#)	($)
Sterling C. Scott (2)		799,455	$	67,614		-	$	-

Robert Hunt (3)		-	$	-		-	$	-

John Genesi (4)		-	$	-		6,000,000	$	480,000

(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 July 3, 2014, Sterling Scott exercised a stock option grant on a cashless basis and was issued 795,455 shares of our restricted common stock valued at $67,614 or $.085 per share.

(3) On October 17, 2014, we entered into a Settlement Agreement and Release with Mr. Robert Hunt, whereby the Parties cancelled the Executive Services Agreement dated June 7, 2013 and his stock option grant for 12,000,000 shares. We agreed to issue 6,000,000 shares of restricted common stock under certain conditions that have not been met.

(4) On July 15, 2014, we entered into a Severance Agreement with Mr. Genesi whereby Mr. Genesi resigned as Chief Financial Officer and the Parties cancelled the Executive Employment Agreement dated November 3, 2013, including this 10,000,000 share stock option grant. We issued 6,000,000 shares of our common stock which we valued at $480,000 or $0.08 per share.

Mr. Hegyi, Scott and Barnes did not have any option exercised or stock that vested during the year ended December 31, 2014.

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 December 4, 2013, we entered into an Employment Agreement with Marco Hegyi pursuant to which we engaged Mr. Hegyi as its President from December 4, 2013 through December 4, 2016 to provide consulting and management services. Per the terms of the Hegyi Agreement, Mr. Hegyi established an office in Seattle, Washington while also maintaining operations in the Southern California area. Mr. Hegyi’s annual compensation is $150,000 for the first year of the Hegyi Agreement; $250,000 for the second year; and $250,000 for the third year. Mr. Hegyi is also entitled to receive an annual bonus equal to four percent (4%) of the Company’s EBITDA for that year. The annual bonus shall be paid no later than 31 days (i.e., by January 31st) following the end of each calendar year. Mr. 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, an entity affiliated with Mr. Hegyi received a Warrant to purchase up to 25,000,000 shares of common stock of the Company at an exercise price of $0.08 per share. The Hegyi Warrant is exercisable for five years. On June 20, 2014, the Company and Mr. Hegyi reduced the warrant life from ten to five years.

Mr. Hegyi 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. In addition, we agreed to purchase and maintain during the Term a “key manager” 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 us. The Company and Mr. Hegyi waived this $2,000,000 key manager insurance. If, prior to the expiration of the Term, we terminate 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 our 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 we terminate Mr. Hegyi’s employment at any time prior to the expiration of the Term without Cause, or if Mr. Hegyi terminates his employment at any time for “Good Reason” or due to a “Disability”, Mr. Hegyi will be entitled to receive (i) his base salary amount through the end of the Term; and (ii) his annual bonus amount for each year during the remainder of the Term, which bonus amount shall be equal to the greater of (A) the annual bonus amount for the immediately preceding year, or (B) the bonus amount that would have been earned for the year of termination, absent such termination. If there has been a “Change in Control” and we (or its successor or the surviving entity) terminate 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 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 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 Scott

On July 31, 2014, we entered into a Consulting Chief Financial Officer Letter with an entity controlled by Mark Scott pursuant to which the Company engaged Mr. Scott as its Consulting CFO from July 1, 2014 through September 30, 2014, and continuing thereafter until either party provides sixty day notice to terminate the Letter or Mr. Scott enters into a full-time employment agreement.

Per the terms of the Scott Agreement, Mr. 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 the Company’s Common Stock under the our 2011 Stock Incentive Plan at an exercise price of $0.07 per share, the fair market price on July 31, 2014. The shares vest as follows:


	i	Two million of the shares will vest immediately upon securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB (not earned as of December 31, 2014);

	ii	Two million shares will vest immediately upon the successful approval and effectiveness of the Company’s S-1 (not earned as of December 31, 2014);

	iii	Two million shares will 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.

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 employee to us 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 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, we terminate 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.

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 will basis. This Promotion Letter supersedes and cancels 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. 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. Mr. Barnes was granted an option to purchase eight million shares of our common stock under the Company’s 2011 Stock Incentive Plan at an exercise price on the date of grant. The Shares vest as follows:


	i	Two million of the shares will vest immediately;

	iv	Six million shares will vest on a monthly basis over a period of three years beginning on the date of grant.

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 the us without Cause or Mr. Barnes terminates his employment with the 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 the 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 also 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.

Executive Employment Agreement with Sterling C. Scott

On November 3, 2013, we entered into an Executive Employment Agreement with Sterling C. Scott pursuant to which the we engaged Mr. Scott as Chief Executive Officer from November 3, 2013 to November 2, 2016 to provide consulting and management services. Per the terms of the Scott Agreement, Mr. Scott received an annual salary of $120,000 and he was eligible for any benefits made generally available by us. Mr. Scott was eligible to receive any bonuses made generally available by us, and he was 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 our common stock at an exercise price equal to the fair market value of one share of our common stock on the date of grant. The options included 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 our Board of Directors accepted any offers that would when executed result in a change of control transaction involving more than 50% of the issued shares of us, 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 our Board of Directors determined to accept such offer.

On May 19, 2014, the Board of Directors ratified the resignation of Sterling Scott effective immediately as Chief Executive Officer, Chairman of the Board of Directors and a member of the Board of the Company. This resignation cancelled Mr. Scott’s Executive Employment Agreement.

On July 3, 2014, Sterling Scott exercised his option on a cashless basis and was issued 795,455 shares of our restricted common stock valued at $67,614 or $.085 per share.

Agreements with Robert Hunt

On June 7, 2013, we entered into an Executive Services Agreement with Robert Hunt, pursuant to which we engaged Mr. Hunt, from June 8, 2013 through June 7, 2015 to provide consulting and management services as the President of GrowLife Hydroponics, Inc. Upon Mr. Hunt’s employment by us, the Company paid 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 was entitled to receive an annual cash bonus (“Bonus”) as follows for its fiscal year 2013: 100% of the Base Salary in effect as of December 31 of our applicable fiscal year, if GrowLife achieves 150% of sales projections for such fiscal year; 75% of the Base Salary in effect as of December 31 of the our applicable fiscal year, if GrowLife achieves at least 125% but less than 150% of sales projections for such fiscal year; and 50% of the Base Salary in effect as of December 31 of our applicable fiscal year, if GrowLife achieves at least 100% of sales projections for such fiscal year. The Bonus, if any, was be paid to Mr. Hunt upon the earlier of (1) the completion of the preparation of our audited financial statements for such fiscal year and (2) April 1 of the Company’s next fiscal year. Mr. Hunt was entitled to receive an annual cash bonus (“Bonus”) as follows for its fiscal year 2014: 100% of the Base Salary in effect as of December 31 of the our applicable fiscal year, if GrowLife achieves 150% of sales projections for such fiscal year; 75% of the Base Salary in effect as of December 31 of our applicable fiscal year, if GrowLife achieves at least 125% but less than 150% of sales projections for such fiscal year; and 50% of the Base Salary in effect as of December 31 of our applicable fiscal year, if GrowLife achieves at least 100% of sales projections for such fiscal year. The Bonus, if any, was be paid to Mr. Hunt upon the earlier of (1) the completion of the preparation of our audited financial statements for such fiscal year and (2) April 1 of our next fiscal year. Mr. Hunt received, upon approval by our Board of Directors, non-qualified options to purchase 12,000,000 shares of our common stock, at a per share exercise price equal to the fair market value of one share of our common stock on the June 7, 2013 grant date and vested in 24 equal monthly installments on the last day of each month commencing from and after June 7, 2013. The options included a cashless exercise feature.

Mr. Hunt also entered into a NonCompetition, NonSolicitation and NonDisclosure Agreement dated June 7, 2013 whereby Mr. Hunt agreed to not compete with us for five years from June 7, 2013 or two years after any termination of employment of Mr. Hunt.

On May 30, 2014, we announced the resignation of Robert Hunt effective May 23, 2014 as Executive Vice President of Growlife, Inc., President of Growlife Hydroponics. On June 3, 2014, the Board of Directors accepted the resignation of Robert Hunt effective June 2, 2014 as a Director of the Company. On October 17, 2014, we entered into a Settlement Agreement and Release with Mr. Robert Hunt, whereby the Parties cancelled the Executive Services Agreement ("ESA") dated June 7, 2013 and his stock option grant for 12,000,000 shares. We agreed to issue 6,000,000 shares of restricted common stock under certain conditions that have not been met, pay cash severance totaling $50,000 monthly over five month starting October 25, 2014 and reimburse Mr. Hunt for health insurance benefits and other expenses monthly over five months starting October 25, 2014. The Parties entered into a release agreement.

Executive Employment Agreement with John Genesi

On November 3, 2013, we entered into an Executive Employment Agreement with John Genesi, pursuant to which we engaged Mr. Genesi as our Chief Financial Officer from November 3, 2013 through November 2, 2016 to provide consulting and management services. Per the terms of the Genesi Agreement, Mr. Genesi received an annual salary of $100,000, he was eligible for any benefits made generally available by us, he was eligible to receive any bonuses made generally available by us, and he was reimbursed for any reasonable expenses incurred while performing his duties as our Chief Financial Officer. The Genesi Agreement also granted Mr. Genesi non-qualified options to purchase 10,000,000 shares of our common stock at an exercise price equal to the fair market value of one share of our common stock on the date of grant. The options included a cashless exercise feature and vested in twenty-four (24) equal monthly installments on the last day of each month commencing on October 31, 2013. In the event that our Board of Directors excepted any offers that would when executed result in a change of control transaction involving more than 50% of the issued shares of us, 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 our Board of Directors determined to accept such offer.

On July 15, 2014, we entered into a Severance Agreement with Mr. Genesi whereby Mr. Genesi resigned as Chief Financial Officer and the Parties cancelled the Executive Employment Agreement dated November 3, 2013. We issued 6,000,000 shares of restricted common stock, pay cash severance of six months of compensation payable monthly and provide health insurance benefits for six months from the Termination Date.

Potential Payments upon Termination or Change in Control

The Company’s Employment Agreement with Marco Hegyi has provisions providing for severance payments as detailed below.

Executive	For Cause		Early or Normal		Not For Good Cause		Change in Control		Disability
Payments Upon	Termination		Retirement		Termination		Termination		or Death
Separation	on 12/31/14		on 12/31/14		on 12/31/14		on 12/31/14		on 12/31/14
Compensation:
Base salary (1)	$	-	$	-	$	500,000	$	600,000	$	-
Performance-based incentive
compensation	$	-	$	-	$	-	$	-	$	-
Stock options	$	-	$	-	$	-	$	-	$	-

Benefits and Perquisites:
Health and welfare benefits	$	-	$	-	$	-	$	-	$	-
Accrued vacation pay	$	-	$	-	$	-	$	-	$	-

Total	$	-	$	-	$	500,000	$	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. Sterling C. Scott, Robert Hunt and John Genesi resigned during 2014. 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 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 members of the Board. During year ended December 31, 2014, Ronald Erickson did not receive any compensation for his service as a director. The compensation disclosed in the Summary Compensation Table on page 36 represents the total compensation.

Director Summary Compensation

On March 31, 2014, we issued 500,000 shares to each of its four independent Board Directors (Eric Shevin, Alan Hammer, Anthony J. Ciabattoni and Jeff Giarraputo). We valued the 2,000,000 shares at $0.58 per share which was the closing price of our common stock on March 31, 2014. We recorded stock based compensation of $1,160,000 during the three months ended March 31, 2014. On April 25, 2014, we entered into four Restricted Stock Cancellation Agreements with the four independent members of our Board of Directors, pursuant to which the Directors agreed to each cancel 500,000 shares of the our restricted common stock granted to each Director on March 31, 2014. We recorded a reduction in common stock and an increase in additional paid in capital of $200 during the nine months ended September 30, 2014 are related to cancellation of the Restricted Stock Agreements.

Compensation Paid to Board Members

Our independent non-employee directors are not compensated in cash. The only compensation has been in the form of stock awards (see Director Summary Compensation just above). There is no stock compensation plan for independent non-employee directors.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information regarding the ownership of our common stock as of September 30, 2015 by:

	●	each director and nominee for director;

	●	each person known by us to own beneficially 5% or more of our common stock;

	●	each officer named in the summary compensation table elsewhere in this report; and

	●	all directors and executive officers as a group.

The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership 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 a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.

Unless otherwise indicated below, each beneficial owner named in the table has sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. The address of each beneficial owner is 500 Union Street, Suite 810, Seattle, WA 98101 and the address of more than 5% of common stock is detailed below.

	Shares Beneficially Owned
Name of Beneficial Owner	Number		Percentage (1)
Directors and Named Executive Officers-
Marco Hegyi (2)		25,000,000		2.7	%
Mark E. Scott (3)		6,722,222		*
Anthony J. Ciabattoni (4)		72,222		*
Jeff Giarraputo (5)		72,222		*
Joseph Barnes (6)		4,300,000		*
Total Directors and Officers (5 in total)		36,166,666		4.0	%

* Less than 1%.

(1) Based on 902,116,496 shares of common stock outstanding as of September 30, 2015.

(2) Reflects the shares beneficially owned by Marco Hegyi, including warrants to purchase 25,000,000 shares of our common stock.

(3) Reflects the shares beneficially owned by Mark E. Scott, including stock option grants totaling 6,722,222 shares that Mr. Scott has the right to acquire in sixty days.

(4) Reflects 72,222 shares of common shares beneficially owned by Mr. Ciabattoni for board services for the period December 19, 2013 through December 31, 2013. Mr. Ciabattoni’s shares have been issued to the Ciabattoni Living Trust, of which Mr. Ciabattoni is the Trustee.

(5) Reflects 72,222 shares of common shares beneficially owned by Mr. Giarraputo for board services for the period December 19, 2013 through December 31, 2013.

(6) Reflects the shares beneficially owned by Joseph Barnes, including stock option grants totaling 4,000,000 shares that Mr. Barnes has the right to acquire in sixty days.

	Shares Beneficially Owned
Name and Address of Beneficial Owner	Number		Percentage
Greater Than 5% Ownership -
Sterling C. Scott (1)		47,000,518		5.2%
2315 Georgia Villa Way
Silver Springs, MD 20902

CANX USA LLC (2)
410 South Rampart Blvd., Suite 350		540,000,000		37.4%
Las Vegas, NV 89145			(Capped at
				4.99%)

Logic Works LLC (3)		142,099,000		14.1%
9616 Emeraude Avenue			(Capped at
Las Vegas, NV 89147				4.99%)

(1) Reflects 47,000,518 shares beneficially owned by Sterling C. Scott, and which was confirmed in Mr. Scott’s Form 13-D/A that was filed with the SEC on December 29, 2014.

(2) 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 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.

(3) Reflects 35,714,286 shares owned by Logic Works LLC and 106,384,714 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 TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Agreement and Plan of Merger with SGT Merger Corporation

On March 21, 2012, we entered into an Agreement and Plan of Merger with SGT Merger Corporation, a Nevada corporation and the Company’s wholly-owned subsidiary, SG Technologies Corp, a Nevada corporation (“SGT”), Sterling C. Scott, and W-Net Fund I, L.P., a Delaware limited partnership and current holder of the Company’s common stock. The transaction closed on April 5, 2012. At the Closing, (i) The Merger Corporation was merged with and into SGT; (ii) SGT became the Company’s wholly-owned subsidiary; and (iii) all SGT shares of common stock were exchanged for shares of our common stock and shares of a new series of our preferred stock, which was designated Series A Preferred Stock. At the Closing, the Company issued to SGT’s former stockholders 157,000,000 shares of the Company’s common stock and 3,000,000 shares of Series A Preferred Stock in exchange for the 200 shares of SGT’s common stock outstanding immediately prior to the Merger. Sterling C. Scott was appointed to the then Company’s Board of Directors and Chief Executive Officer.

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 the Company was deemed to be the legal acquirer for accounting purposes, and the Merger was accounted for as a reverse merger and a recapitalization in accordance with GAAP. The consolidated financial statements of GrowLife and its subsidiaries reflect the historical activity of SGT, and the historical stockholders’ equity of SGT has been retroactively restated for the equivalent number of shares received in the exchange.

Acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC

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 Robert Hunt, who was appointed to the then Company’s Board of Directors and President of GrowLife Hydroponics, Inc.

Agreements with CANX USA, LLC

Waiver and Modification Agreement

Amended and Restated Joint Venture Agreement

Secured Convertible Note and Secured Credit Facility

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 requires approval in advance by Logic Works, provides for interest at 6% with a default interest of 24% per annum and requires repayment by June 26, 2016. The Note is convertible into our common stock at the lesser of $0.0070 or (B) 20% of the average of the three (3) lowest daily VWAPs occurring during the 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 our assets. We also agreed to file a registration statement on Form S-1 within 10 days of the filing of our Form 10-Q for the three months ended June 30, 2014 and have the registration statement declared effective within ninety days of the filing of our Form 10-Q for the three months ended June 30, 2014. Due to our grey sheet trading status and other issues, we have not filed the registration statement.

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. As of June 30, 2015, we have borrowed $350,000 under the Secured Convertible Note and Secured Credit Facility dated June 25, 2014 with Logic Works.

Agreements with TCA Global Credit Master Fund, LP (“TCA”)

The Debentures contain a 4.99% beneficial ownership limitation which prevents TCA from being considered a control group under SEC rules. The Company does not consider TCA a control person under SEC rules and this transaction is not a related party transaction.

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.

Related Party Transactions

Since January 1, 2013, we have 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.

Transactions with an Employee

On March 14, 2013, we entered into a Notes Payable with an employee $25,000. The Note Payable provides for interest 6% per year with a term of ninety days. On June 26, 2013, we signed an Amended Note Payable, extending the term through September 30, 2013. On September 6, 2013, we 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.

On March 20, 2013, this employee purchased 2,000,000 shares of the Company’s common stock at a price of $0.035 per share. The aggregate proceeds were $70,000. The shares were purchased as part of the Company’s Subscription Agreement dated December 2011.

Loans and Advances from Sterling C. Scott

Sterling Scott advanced various amounts to us. As of December 31, 2011, the amount due the then CEO was $183,103, and additional advances of $98,897 were made to us through April 5, 2012. On April 5, 2012, Mr. Scott converted $282,000 of these advances into a 6% senior convertible note. Mr. Scott made further advances during the year ended December 31, 2012 which were converted into the 6% senior convertible note. As of December 31, 2013, total amount owed to Mr. Scott was $453,932, which consisted of $413,680 in principal and $40,252 in accrued interest. As of September 10, 2014, the outstanding principal balance on Mr. Scott’s 6% convertible note was $413,680 and accrued interest were sold to two parties not related to us.

Investment in Vape Holdings, Inc.

In May 2013, we made an investment in the amount of $1,160 in Vape Holdings, Inc., a Nevada corporation, and received 200,428 shares.

Sterling C. Scott, our then Chief Executive Officer, also owned 257,320 shares of Vape’s common stock. Furthermore, the former President of GrowLife, Inc., Kyle Tracey, was the Chief Executive Officer of Vape. As a result, we 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 value of our investment in Vape as of December 31, 2013 was $5.60 per share, or $1,122,397. We sold 200,428 shares of Vape’s common stock during the year ended December 31, 2014 for net proceeds of $186,791 which was recorded as “other income” in the statement of operations. As of December 31, 2014, we recorded a $1,122,397 loss in the value of its investment in Vape by decreasing its “Investment in a related party” balance sheet account while also recording a corresponding decrease to “Unrealized loss on investment in a related party” in the Stockholders’ deficit section of our balance sheet.

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 the our common stock. All shares subject to the option will vest 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 Anthony J. Ciabattoni and Jeff Giarraputo are independent. 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 2015.

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 September 30, 2014, 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 August 7, 2015, we dismissed Anton and Chia, LLP as our independent registered public accounting firm. Anton and Chia LLP performed an annual audit of our financial statements for the years ended December 31, 2013 and 2012. On August 7, 2015 we engaged the services of PMB Helin Donovan LLP as our independent registered public accounting firm to audit our consolidated financial statements as of December 31, 2014 and for the year then ended.

The following is the breakdown of aggregate fees paid to Anton and Chia, LLP for the last two fiscal years:

	Year Ended		Year Ended
	December 31, 2014		December 31, 2013
Audit fees	$	31,007	$	75,197
Audit related fees		36,504		24,742
Tax fees		-		-
All other fees		6,292		33,690

	$	73,803	$	133,629

- “Audit Fees” are fees paid for professional services for the audit of our financial statements.

- “Audit-Related fees” are fees paid 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 in connection with filing US income tax returns.

- “All other fees for 2013 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

Title of Document		Page

Report of Anton and Chia, LLP		F-1

Report of PMB Helin Donovan, LLP		F-2

Consolidated Balance Sheets as of December 31, 2014 and 2013		F-3

Consolidated Statements of Operations for the years ended December 31, 2014 and 2013		F-4

Consolidated Statements of Changes in Stockholders' (Deficit) for the years ended December 31, 2014 and 2013		F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013		F-6

Notes to the Financial Statements		F-7

(b)

Exhibits

Exhibit No.		Description

3.1		Certificate of Incorporation. Filed as an exhibit to the Company’s Form 10-SB General Form for Registration of Securities of Small Business Issuers filed with the SEC on December 7, 2007, and incorporated by reference.

3.2		Amended and Restated Bylaws. Filed as an exhibit to the Company’s Form 8-K filed with the SEC on June 9, 2014, and incorporated by reference.

4.1		GrowLife, Inc. 2011 Stock Incentive Plan filed as an exhibit to the Company’s Registration Statement on Form S-1 filed with the SEC on June 9, 2011, and incorporated by reference.

10.1		Agreement and Plan of Merger dated March 21, 2012, by and between Phototron Holdings, Inc., SGT Merger Corporation, SG Technologies Corp, Sterling C. Scott and W-Net Fund I, L.P. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference.

10.2		Securities Purchase and Exchange Agreement, dated March 16, 2012, by and between Phototron Holdings, Inc., W-Net Fund I, L.P., and Europa International Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference.

10.3		Security Agreement, dated March 16, 2012, by and between Phototron Holdings, Inc., W-Net Fund I, L.P., Europa International Inc., GrowLife, Inc., and Phototron, Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference.

10.4		Intellectual Property Security Agreement, dated March 16, 2012, by and between Phototron Holdings, Inc., W-Net Fund I, L.P., Europa International Inc., GrowLife, Inc., and Phototron, Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference.

10.5		Form of 6% Senior Secured Convertible Note. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference.

10.6		Form of 7% Convertible Note. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 11, 2013, and hereby incorporated by reference.

10.7		Securities Purchase Agreement dated June 7, 2013, by and between GrowLife, Inc., GrowLife Hydroponics, Inc., Sequoia, LLC, Pressure Drop Holdings, LLC and Sachin Karia. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 7, 2013, and hereby incorporated by reference.

10.8		Revolving Promissory Note dated June 7, 2013 issued by GrowLife, Inc. in favor of W-Net Fund I, L.P. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 7, 2013, and hereby incorporated by reference.

10.9		Form of 12% Senior Secured Convertible Note. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 7, 2013, and hereby incorporated by reference.

10.10		Security Agreement dated June 7, 2013, by and between GrowLife, Inc., Sequoia, LLC, Pressure Drop Holdings, LLC, Sachin Karia and Robert E. Hunt. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 7, 2013, and hereby incorporated by reference.

10.11		Joint Venture Agreement dated November 19, 2013 by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 21, 2013, and hereby incorporated by reference.

10.12		Warrant Agreement by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 21, 2013, and hereby incorporated by reference.

10.13		7% Convertible Note by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 21, 2013, and hereby incorporated by reference.

10.14		Registration Rights Agreement by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 21, 2013, and hereby incorporated by reference.

10.15		Commercial Lease Agreement dated March 8, 2013 by and between Evergreen Garden Center LLC and William C. Rowell Family Limited Partnership for our Portland, Maine store. Filed herewith.

10.16		Lease dated October 21, 2013 by and between GrowLife Hydroponics, Inc. and Stone Creek Business Center Ltd. for our Avon (Vail), Colorado store. Filed herewith.

10.17		Retail Lease Agreement dated January 23, 2014 by and between GrowLife Hydroponics, Inc. and W-ADP Meadows VII LLC for our Boulder, Colorado store. Filed herewith.

10.18		Amended and Restated 6% Senior Secured Convertible Note dated September 10, 2014 by and between GrowLife, Inc. and Andrew J. Gentile. Filed herewith.

10.19		Amended and Restated 6% Senior Secured Convertible Note dated September 10, 2014 by and between GrowLife, Inc. and Jordan W. Scott. Filed herewith.

10.20		Warrant related to CANX USA LLC Joint Development Agreement dated November 19, 2013. Filed as an exhibit to the Company’s Form 10-K and filed with the SEC on November 21, 2014, and incorporated by reference.

10.21		Executive Services Agreement dated June 7, 2013 by and between GrowLife, Inc. and Robert Hunt. Filed as an exhibit to the Company’s Form 8-K/A2 dated June 7, 2013 and filed with the SEC on June 25, 2014, and hereby incorporated by reference.

10.22		NonCompetition, NonSolicitation and NonDisclosure Agreement dated June 7, 2013 with Robert Hunt. Filed as an exhibit to the Company’s Form 8-K/A2 dated June 7, 2013 and filed with the SEC on June 25, 2014, and hereby incorporated by reference.

10.23		Executive Employment Agreement dated November 3, 2013 by and between GrowLife, Inc. and Sterling Scott. Attached as an exhibit to the Company’s Form 8-K dated November 3, 2013 and filed with the SEC on June 25, 2014, and hereby incorporated by reference.

10.24		Executive Employment Agreement dated November 3, 2013 by and between GrowLife, Inc. and John Genesi. Attached as an exhibit to the Company’s Form 8-K dated November 3, 2013 and filed with the SEC on June 25, 2014, and hereby incorporated by reference.

10.25		Employment Agreement for Marco Hegyi dated December 4, 2013. Attached as an exhibit to the Company’s Form 8-K/A dated December 9, 2013 and filed with the SEC on June 20, 2014, and hereby incorporated by reference.

10.26		Amended Employment Agreement for Marco Hegyi dated June 20, 2014. Attached as an exhibit to the Company’s Form 8-K dated June 20, 2014 and filed with the SEC on June 20, 2014, and hereby incorporated by reference.

10.27		Restricted Stock Cancellation Agreement, dated April 25, 2014, by and between the Company and Eric Shevin. Attached as an exhibit to the Company’s Form 8-K dated April 25, 2014 and filed with the SEC on April 30, 2014, and hereby incorporated by reference.

10.28		Restricted Stock Cancellation Agreement, dated April 25, 2014, by and between the Company and Alan Hammer. Attached as an exhibit to the Company’s Form 8-K dated April 25, 2014 and filed with the SEC on April 30, 2014, and hereby incorporated by reference.

10.29		Restricted Stock Cancellation Agreement, dated April 25, 2014, by and between the Company and Tony Ciabattoni. Attached as an exhibit to the Company’s Form 8-K dated April 25, 2014 and filed with the SEC on April 30, 2014, and hereby incorporated by reference.

10.30		Consulting Letter by and between GrowLife, Inc. and Mark Scott Consulting Letter dated July 31, 2014. Filed as an exhibit to the Company’s Form 8-K filed with the SEC on August 6, 2014, and hereby incorporated by reference.

10.31		Waiver and Modification Agreement dated June 25, 2014 by and between GrowLife, Inc. and Logic Works LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference.

10.32		Amended and Restated Joint Venture Agreement dated July 1, 2013 by and between GrowLife, Inc. and CANX USA LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference.

10.33		Secured Credit Facility and Secured Convertible Note dated June 25, 2014 by and between GrowLife, Inc. and Logic Works LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference.

10.34		Closing Certificate dated July 10, 2014 by and between GrowLife, Inc. and CANX USA LLC and Logic Works LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference.

10.35		Form of Warrant by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference.

10.36		Settlement Agreement and Waiver of Default dated June 19, 2014 by and between GrowLife, Inc. and Forglen LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 18, 2014, and hereby incorporated by reference.

10.37		Severance Agreement dated July 15, 2014 by and between GrowLife, Inc. and John Genesi. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 18, 2014, and hereby incorporated by reference.

10.38		Joseph Barnes Promotion Letter dated October 10, 2014. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 14, 2014, and hereby incorporated by reference.

10.39		Settlement Agreement and Release dated October 17, 2014 by and between GrowLife, Inc. and Robert Hunt. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 21, 2014, and hereby incorporated by reference.

10.40		Notice of Settlement Agreement dated February 9, 2015. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on February 12, 2015, and hereby incorporated by reference.

10.41		Amendment 1 to Amended and Restated 6% Senior Secured Convertible Note with Andrew J. Gentile. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 8, 2015, and hereby incorporated by reference.

10.42		Amendment 1 to Amended and Restated 6% Senior Secured Convertible Note with Jordan W. Scott. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 8, 2015, and hereby incorporated by reference.

10.43		Stipulation and Agreement of Compromise, Settlement and Release of the Derivative Actions dated April 6, 2015. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 17, 2015, and hereby incorporated by reference.

10.44		Securities Purchase Agreement, dated July 9, 2015, entered into by and between GrowLife, Inc., its subsidiaries and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference.

10.45		Senior Secured, Convertible, Redeemable Debenture entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference.

10.46		Form of Security Agreement entered into by and between GrowLife, Inc. and its subsidiaries, respectively, and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference.

10.47		Form of Guaranty Agreement entered into by and between GrowLife, Inc.’s subsidiaries, respectively, and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference.

10.48		Form of Pledge Agreement entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference.

10.49		Intercreditor Agreement, dated July 9, 2015, entered into by and between GrowLife, Inc., its subsidiaries, Logic Works LLC and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference.

10.50		Form of Subordination Agreement, dated July 9, 2015, entered into by and between GrowLife, Inc., its subsidiaries, TCA Global Credit Master Fund LP and Jordan Scott and Andrew Gentile, respectively. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference.

10.51		Form of Amendment No. 2 to 6% Senior Secured Convertible Note, dated July 9, 2015, entered into by and between GrowLife, Inc. and Jordan Scott and Andrew Gentile, respectively. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference.

10.52		Investment Banking Letter dated August 27, 2014 by and between GrowLife, Inc. and D. Weckstein & Co. Inc. Filed herewith.

10.53		Securities Purchase Agreement dated August 6, 2015 and entered into by and between GrowLife, Inc., its subsidiaries and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference.

10.54		Senior Secured Convertible Redeemable Debenture dated August 6, 2015 and entered into by and between GrowLife, Inc., its subsidiaries and TCA Global Credit Master Fund LP . Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference.

10.55		Committed Equity Facility dated August 6, 2015 entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference.

10.56		Registration Rights Agreement dated August 6, 2015 entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference.

10.57		Authorization Agreement dated August 6, 2015 entered into by and between GrowLife, Inc., its subsidiaries and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference.

14.1		Code of Conduct and Ethics dated May 15, 2014. Attached as an exhibit to the Company’s Form 8-K dated June 3, 2014 and filed with the SEC on June 9, 2014, and hereby incorporated by reference.

21.1		Subsidiaries of the Registrant. Filed herewith.

99.1		Audit 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.

99.2		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		Nominations and Governance 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.

99.4		Insider Trading Policy 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 10, 2014, and hereby incorporated by reference.

101		Interactive data files pursuant to Rule 405 of Regulation S-T. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

GrowLife, Inc.:

We have audited the accompanying consolidated balance sheet of GrowLife, Inc. (the “Company”) as of December 31, 2013 and the related consolidated statement of operations, stockholders’ deficit, and cash flow for the year ended December 31, 2013. 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 audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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 audit provides 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, 2013, and the results of its consolidated operations and its cash flows for the year ended December 31, 2013 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.

Anton and Chia, LLP

/s/ Anton and Chia, LLP

March 31, 2014

Newport Beach, CA

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

GrowLife, Inc.:

We have audited the accompanying consolidated balance sheet of GrowLife, Inc. (the “Company”) as of December 31, 2014 and the related consolidated statement of operations, stockholders’ deficit, and cash flow for the year ended December 31, 2014. 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 audit.

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, 2014, and the results of its consolidated operations and its cash flows for the year ended December 31, 2014 in conformity with generally accepted accounting principles in the United States of America.

PMB Helin Donovan , LLP

/s/ PMB Helin Donovan , LLP

September 30, 2015

Seattle, WA

F-2

GROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	December 31, 2014			December 31, 2013
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	286,238		$	1,831,276
Restricted cash		-			46,400
Accounts receivable, net of allowance of $0 and $0, respectively		-			183,678
Inventory, net		883,350			1,253,721
Prepaid expenses		41,791			17,001
Other receivable		-			3,666
Deposits		33,584			46,173
Total current assets		1,244,963			3,381,915

EQUIPMENT, NET		24,042			53,758

OTHER ASSETS
Investment in related party		-			1,122,397
Intangible assets, net		353,752			460,300
Goodwill		739,000			739,000

TOTAL ASSETS	$	2,361,757		$	5,757,370

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

CURRENT LIABILITIES:
Accounts payable - trade	$	1,129,130		$	1,095,204
Accrued expenses		385,024			175,603
Deferred revenue		-			30,888
Derivative liability		2,100,915			9,324,000
Current portion of convertible notes payable		887,272			-
Related party note payable		-			1,160
Total current liabilities		4,502,341			10,626,855

LONG TERM LIABILITIES:
Convertible notes payable		98,333			974,479

COMMITMENTS AND CONTINGENCIES		-			-

STOCKHOLDERS' DEFICIT
Preferred stock - $0.0001 par value, 3,000,000 shares authorized, no shares
issued and outstanding		-			-
Common stock - $0.0001 par value, 3,000,000,000 shares authorized, 879,343,771
and 755,694,870 shares issued and outstanding at 12/31/14 and 12/31/13, respectively		87,936			75,571
Additional paid in capital		108,699,950			17,359,932
Unrealized gain on related party investment		-			1,121,237
Accumulated deficit		(111,026,803	)		(24,400,704	)
Total stockholders' deficit		(2,238,917	)		(5,843,964	)

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	2,361,757		$	5,757,370

The accompanying notes are an integral part of these consolidated financial statements.

F-3

GROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended,
	December 31, 2014			December 31, 2013

NET REVENUE	$	8,537,676		$	4,858,976
COST OF GOODS SOLD		7,172,376			4,005,863
GROSS PROFIT		1,365,300			853,113
GENERAL AND ADMINISTRATIVE EXPENSES		4,405,503			3,163,007
SHARES ISSUED FOR SERVICES RENDERED		2,721,600			1,469,184
STOCK OPTIONS EXPENSE		724,267			148,633
WARRANT EXPENSE		-			7,015,000
OPERATING LOSS		(6,486,070	)		(10,942,711	)

OTHER INCOME (EXPENSE):
Change in fair value of derivative		(16,252,823	)		(3,701,078	)
Loss on extinguishment of debt		-			(960,750	)
Interest expense, net		(64,073,997	)		(5,275,749	)
Realized gain on sale of investment		186,791			-
Other Income		-			42,269
Impairment of goodwill		-			(279,515	)
Impairment of intangible assets		-			(262,604	)
Total other (expense)		(80,140,029	)		(10,437,427	)

(LOSS) BEFORE INCOME TAXES		(86,626,099	)		(21,380,138	)

Income taxes - current benefit		-			-

NET (LOSS)	$	(86,626,099	)	$	(21,380,138	)

Basic and diluted (loss) per share	$	(0.10	)	$	(0.04	)

Weighted average shares of common stock outstanding- basic and diluted		834,503,868			593,034,653

The accompanying notes are an integral part of these consolidated financial statements.

F-4

GROWLIFE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT



	Preferred Stock						Common Stock				Unrealized Gain on Investment in Related			Additional Paid			Accumulated			Total Stockholders'
	Shares			Amount			Shares		Amount		Party			in Capital			Deficit			(Deficit)
Balance as of December 31, 2012		3,000,000		$	300			389,704,765	$	38,970	$	-		$	2,643,941		$	(3,020,566	)	$	(337,355	)
Comprehensive loss																					(2,186,304	)

Cancellation 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		-			-			-		-		-			208,000			-			208,000

Value of beneficial conversion feature related to the issuance of 12% Convertible Notes related to the acquisition of Rocky
Mountain, LLC and Evergreen Garden Center, LLC		-			-			-		-		-			114,286			-			114,286

Shares issued related to the conversion of principal and interest related to the 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

Issuance of common stock		-			-			36,981,862		3,698		-			1,290,667			-			1,294,365

Shares issued for services rendered		-			-			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

Stock based compensation for stock options		-			-			-		-		-			148,633			-			148,633

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

Net loss		-			-			-		-		-			-			(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	)
Comprehensive loss																					(21,380,138	)

Options exercised for cash		-			-			2,351,187		235		-			44,438			-			44,673

Cashless exercise of options		-			-			3,570,455		357		-			(357	)		-			-

Shares issued related to the conversion of principal and interest related to convertible notes payable		-			-			102,507,839		10,251		-			1,875,684			-			1,885,935

Shares issued for services rendered		-			-			15,219,420		1,522		-			2,720,078			-			2,721,600

Stock based compensation for stock options		-			-			-		-		-			724,267			-			724,267

Loss on investment in related party		-			-			-		-		(1,121,237	)		-			-			(1,121,237	)

Change in fair value of derivative liability		-			-			-		-		-			23,475,908			-			23,475,908

Value of warrants expensed issued to CANX USA LLC or its assignees		-			-			-		-		-			62,500,000			-			62,500,000

Net loss for the year ended December 31, 2014		-			-			-		-		-			-			(86,626,099	)		(86,626,099	)

Balance as of December 31, 2014		-		$	-			879,343,771	$	87,936	$	-		$	108,699,950		$	(111,026,803	)	$	(2,238,917	)

The accompanying notes are an integral part of these consolidated financial statements.

F-5

GROWLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended,
	December 31, 2014			December 31, 2013

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(86,626,099	)	$	(21,380,138	)
Adjustments to reconcile net loss to net cash (used in)
operating activities
Depreciation and amortization		33,641			22,229
Reserve for inventories		-			62,882
Amortization of intangible assets		106,548			151,696
Change in inventory reserve		12,711			-
Stock based compensation		724,267			-
Stock options expense		-			148,633
Common stock issued for services		2,721,600			1,469,184
Amortization of debt discount		1,363,847			5,106,072
Change in fair value of derivative liability		16,252,823			3,701,078
Fair value of warrants issued		-			7,015,000
Expense related to warrant		62,500,000			-
Loss on extinguishment of debt		-			960,750
Accrued interest on convertible notes payable		183,214			161,587
Impairment of goodwill		-			279,515
Impairment of intangible assets		-			262,604
Realized gain on sale of investment		(186,791	)		-
Changes in operating assets and liabilities:
Restricted Cash		46,400			-
Accounts receivable		183,678			(127,129	)
Inventory		357,660			(210,383	)
Prepaid expenses		(24,790	)		18,071
Other receivable		3,666			(3,666	)
Deposits		12,589			2,883
Accounts payable		33,926			468,517
Accrued expenses		209,421			102,291
Deferred revenue		(30,888	)		(2,750	)
CASH (USED IN) OPERATING ACTIVITIES		(2,122,577	)		(1,791,074	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid to acquire shares in Vape Holdings, Inc.		-			(1,160	)
Net cash proceeds from shares in Vape Holdings, Inc.		187,951			-
Cash paid to acquire Rocky Mountain Hydroponics		-			(550,000	)
Cash acquired from acquisition of Rocky Mountain Hydroponics		-			(1,398	)
Capital expenditures		(3,925	)		(5,500	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:		184,026			(558,058	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock		-			1,294,365
Proceeds from the issuance of 10% convertible note		-			156,000
Proceeds from the issuance of convertible note		350,000			1,850,000
Proceeds from options exercised		44,673			9,000
Payment of notes payable		-			1,130,000
Payments of notes payable		-			(296,719	)
Payments of notes payable - related party		(1,160	)		-
Advances from related party		-			1,160
NET CASH PROVIDED BY FINANCING ACTIVITIES		393,513			4,143,806

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(1,545,038	)		1,794,674

CASH AND CASH EQUIVALENTS, beginning of period		1,831,276			36,602

CASH AND CASH EQUIVALENTS, end of period	$	286,238		$	1,831,276

Supplemental disclosures of cash flow information:
Interest paid	$	-		$	4,865
Taxes paid	$	-		$	-

Non-cash investing and financing activities:
6% Senior secured convertible notes and interest converted into common stock	$	62,025		$	1,427,809
7% Convertible notes and interest converted into common stock	$	1,384,207		$	761,349
12% Senior secured convertible notes and interest converted into common stock	$	439,688		$	415,842
Common stock issued for cashless exercise of options	$	357		$	1,268
Common stock issued for services rendered	$	-		$	7,015,000
Fair value of warrants	$	-		$	382,068
Common stock issued to acquire Rocky Mountain Hydroponics and Evergreen
Garden Center	$	-		$	275,000
12% Senior secured convertible notes issued to acquire Rocky Mountain
Hydroponics and Evergreen Garden Center	$	-		$	800,000
Notes payable and interest for Greners acquisition converted into common stock	$	-		$	156,000
OID Note converted into common stock	$	-		$	280,000

The accompanying notes are an integral part of these consolidated financial statements.

F-6

GROWLIFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION

GrowLife, Inc. (“GrowLife” or the “Company”) was incorporated under the laws of the State of Delaware and are 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 has authorized common stock of 3,000,000,000 shares at $0.0001 par value and 3,000,000 shares of preferred stock with a par value of $0.0001 were authorized by the shareholders. There is no preferred stock issued and the terms have not been determined as of September 30, 2015.

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. In addition to the promotion and sales of GrowLife owned brands, GrowLife companies distribute and sell over 3,000 products through its e-commerce distribution channel, Greners.com, and through our regional retail storefronts. GrowLife and its business units are organized and directed to operate strictly in accordance with all applicable state and federal laws.

Past Merger and Acquisition Transactions

On June 7, 2013, GrowLife Hydroponics completed the purchase of Rocky Mountain Hydroponics, LLC, a Colorado limited liability company (“RMC”), and Evergreen Garden Center, LLC, a Maine limited liability company (“EGC”). The effective date of the purchase was June 7, 2013. The Company purchased all of the assets and liabilities of the RMH and EGC Companies, and their retail hydroponics stores, which are located in Vail and Boulder, Colorado and Portland, Maine. The Company purchased RMC and EGC from Rob Hunt, who was appointed to the then Company’s Board of Directors and President of GrowLife Hydroponics, Inc.

On July 23, 2012, the Company completed the purchase of substantially all of the assets of Donna Klauenburch and Tao Klauenburch related to the online retail business Greners.com.

On October 24, 2012, the Company’s wholly owned subsidiary GrowLife Hydroponics, Inc., a Delaware corporation, completed the purchase of all of the shares of Soja, Inc. dba Urban Garden Supplies (the “Urban Garden”) from Richard Melograno, Michael Cook, and Scott Glass (collectively the “UG Sellers”). The Company acquired all of the assets and liabilities of Urban Garden which included the inventory of the store located at 22516 Ventura Blvd., Woodland Hills, CA 91364.

Agreement and Plan of Merger with SGT Merger Corporation

On March 21, 2012, the Company entered into an Agreement and Plan of Merger with SGT Merger Corporation, a Nevada corporation and the Company’s wholly-owned subsidiary, SG Technologies Corp, a Nevada corporation (“SGT”), Sterling C. Scott, and W-Net Fund I, L.P., a Delaware limited partnership and current holder of the Company’s common stock. The transaction closed on April 5, 2012. At the Closing, (i) The Merger Corporation was merged with and into SGT; (ii) SGT became the Company’s wholly-owned subsidiary; and (iii) all SGT shares of common stock were exchanged for shares of our common stock and shares of a new series of our preferred stock, which was designated Series A Preferred Stock. At the Closing, the Company issued to SGT’s former stockholders 157,000,000 shares of the Company’s common stock and 3,000,000 shares of Series A Preferred Stock in exchange for the 200 shares of SGT’s common stock outstanding immediately prior to the Merger. Sterling C. Scott was appointed to the then Company’s Board of Directors and Chief Executive Officer.

Restatement of Previously Issued Unaudited Consolidated Financial Statements

In connection with the review of the Form 10-Q for the Company for the three months ended March 31, 2014, management determined that previously issued unaudited consolidated financial statements issued for the three months ended March 31, 2014 contained an error which was non-cash in nature. The Company reviewed the impact of this error and determined that the impact

F-7

of this error for the three months ended March 31, 2014 consolidated financial statements was material. On June 19, 2014, after review by the Company’s independent registered public accounting firm and legal counsel, the Audit Committee of the Company’s Board of Directors concluded that we should restate our unaudited interim financial statements for the three months ended March 31, 2014 to reflect the correction of the previously identified error in the unaudited consolidated financial statements for this period.

The Company filed Form 10Q/A on June 27, 2014 and restated the consolidated balance sheet as of March 31, 2014, and the consolidated statements of operations and consolidated cash flows for the three months ended March 31, 2014 to reflect the correcting book entry described below. There was no impact to our actual cash balances as a result of these errors, and these errors do not change net cash flows from financing activities. There was no impact of this error on net cash flows from operating activities.

Transaction with CANX USA LLC

On November 19, 2013, the Company entered into a Joint Venture Agreement with CANX, a Nevada limited liability company. Under the terms of the 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 facilitate additional funding for commercially financeable transactions of up to $40,000,000. In connection with closing of the Agreement, CANX agreed to provide a commitment to provide funding in the amount of $1,300,000 for a GrowLife Infrastructure Funding Technology program transaction and provide additional funding of $1,000,000 under a 7% Convertible Note instrument. The Company initially owns 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.

In accordance with the Agreement, the Company and CANX entered into a Warrant Agreement whereby the Company delivered to CANX or its assignees a warrant to purchase 140,000,000 shares of the Company common stock at a maximum strike price of $0.033 per share. This transaction was properly recorded in the Company’s 2013 audited consolidated financial statements.

In accordance with the Agreement, the Company was required to deliver to CANX or its assignees an additional warrant to purchase 100,000,000 shares of the Company’s common stock at a maximum strike price of $0.033 per share. The warrant was earned by CANX upon completion of the Company’s increase in the number of authorized common shares from 1 billion to 3 billion shares. This increase in authorized shares was effective with the shareholder approval on February 7, 2014. This warrant was not booked at March 31, 2014.

After a detailed review of the facts, the Company concluded that the warrant to purchase 100,000,000 shares of the Company’s common stock was earned as of February 7, 2014, and should have been recorded in the consolidated financial statements for the three months ended March 31, 2014.

The following tables present the restated items for the applicable date.

For the Three Months Ended	As Originally			Amount of
March 31, 2014	Presented			Restatement			As Restated

Interest expense	$	(799,631	)	$	(33,700,000	)	$	(34,499,631	)
Net loss		(37,773,949	)		(33,700,000	)		(71,473,949	)
Net loss per share	$	(0.05	)	$	(0.04	)	$	(0.09	)

	As Originally			Amount of
March 31, 2014	Presented			Restatement			As Restated

Additional paid-in capital	$	35,690,082		$	33,700,000		$	69,390,082
Accumulated deficit		(62,174,653	)		(33,700,000	)		(95,874,653	)

Suspension of Trading of the Company’s Securities

On April 10, 2014, the Company received notice from the SEC that trading of the Company’s 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.” The Company did not receive notice from the SEC that it was being formally investigated.

F-8

The suspension of trading eliminated the Company’s market makers, resulted in our trading on the grey sheets, resulted in legal proceedings and restricted the Company’s access to capital. On April 25, 2014, shares of the Company’s common stock resumed trading on the “grey sheets” and are not formally quoted or listed on any stock exchange at this time.

SEC Charges of Manipulating Our Securities

On August 5, 2014, the SEC charged four promoters with ties to the Pacific Northwest for manipulating the Company’s open market and conducted pre-arranged, manipulative matched orders and wash trades to create the illusion of an active market in these stocks. The promoters then sold their shares in coordination with aggressive promotional campaigns that urged investors to buy the stocks because the prices were on the verge of rising substantially.

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 $86,626,099 and $21,380,138 for the years ended December 31, 2014 and 2013, respectively. Our net cash used in operating activities was $2,122,577 and $1,791,074 for the years ended December 31, 2014 and 2013, respectively.

The Company anticipates that it will record losses from operations for the foreseeable future. As of December 31, 2014, our accumulated deficit was $111,026,803 . 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, 2014 and filed with the SEC on September 30, 2015 includes an explanatory paragraph expressing 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 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-9

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.

Equity Investments – The Company classifies all highly-liquid investments with stated maturities of greater than three months from the date of purchase and remaining maturities of less than one year as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such investments are viewed as being available to support current operations. The Company classifies and accounts for short-term investments as available-for-sale and reflect realized gains and losses using the specific identification method. Changes in market value, if any, excluding other-than-temporary impairments, are reflected under stockholders’ deficit as unrealized gain/loss on related party investment.

Long Lived Assets – The Company reviews its long-lived assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.

Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Derivative financial instruments - The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

As of December 31, 2013, the Company had outstanding unsecured 7% convertible notes for $1,850,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $9,324,000 using the Black-Scholes-Merton option pricing model.

F-10

As of December 31, 2014, the Company had outstanding unsecured 7% convertible notes for $500,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $1,278,878 using the Black-Scholes-Merton option pricing model.

Sales Returns - We allow customers to return defective products when they meet certain established criteria as outlined in our sales terms and conditions. It is our practice to regularly review and revise, when deemed necessary, our estimates of sales returns, which are based primarily on actual historical return rates. We record estimated sales returns as reductions to sales, cost of goods sold, and accounts receivable and an increase to inventory. Returned products which are recorded as inventory are valued based upon the amount we expect to realize upon its subsequent disposition. As of December 31, 2014 and 2013, there was no reserve for sales returns, which are minimal based upon our historical experience.

Shipping and Handling Fees and Cost - For the years December 31, 2014 and 2013, shipping and handling fees billed to customers totaled $128,351 and $242,779, respectively, and were included in revenue.

Stock Based Compensation - The Company has share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options and warrants to purchase shares of Company common stock at the fair market value at the time of grant. Stock-based compensation cost to employees is measured by the Company at the grant date, based on the fair value of the award, over the requisite service period under ASC 718. For options issued to employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit. Grants of stock to non-employees and other parties are accounted for in accordance with the ASC 505.

Advertising Costs - Advertising costs are expensed as incurred and are recorded in general and administrative expenses. For the years ended December 31, 2014 and 2013, advertising costs of $141,369 and $220,514, respectively, were included in general and administrative expenses.

Net Income (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, 2014, there were stock options outstanding for the purchase of 40,720,000 common shares, warrants for the purchase of 565,000,000 common shares, 209,061,571 shares related to convertible debt and 6,000,000 of shares which we may have to issue under a settlement agreement which could potentially dilute future earnings per share. As of December 31, 2013, there were stock options outstanding for the purchase of 40,851,187 common shares, warrants for the purchase of 165,000,000 common shares and 160,626,377 shares related to convertible debt which could potentially dilute future earnings per share.

Dividend Policy - The Company has never paid any cash dividends and intends, for the foreseeable future, to retain any future earnings for the development of our business. Our future dividend policy will be determined by the board of directors on the basis of various factors, including our results of operations, financial condition, capital requirements and investment opportunities.

Use of Estimates - In preparing these 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 the Company’s 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 our consolidated financial statements.

In August 2014, FASB issued ASU 2014-15—Presentation of Financial Statements—Going Concern (ASC Subtopic 205-40): “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. The update requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. All entities are required to apply the new requirements in annual periods ending after December 15, 2016, and interim periods thereafter. Early application is permitted. As such, GrowLife, Inc. is required to adopt these provisions for the annual period

F-11

ending December 31, 2016. The Company is currently evaluating the impact of FASB ASU 2014-15 but does not expect the adoption thereof to have a material effect on GrowLife’s financial statements.

In May 2014, FASB issued ASU 2014-09—Revenue from Contracts with Customers (Topic 606): “Section A—Summary and Amendments That Create Revenue from Contracts with Customers, (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40), Section B—Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables, Section C—Background Information and Basis for Conclusions”. The guidance in this update affects any entity that enters into contracts with customers to transfer goods or services and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. As such, GrowLife, Inc. is required to adopt these provisions as of December 31, 2016. The Company is currently evaluating the impact of FASB ASU 2014-09 but does not expect the adoption thereof to have a material effect on GrowLife’s financial statements.

In July 2013, FASB issued ASU 2013-11—Income Taxes (ASC Topic 740): “ Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)”. The amendments in this update provide explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of FASB ASU 2013-11 did not have a material effect on GrowLife’s financial statements.

New Accounting Standards Issued But Not Yet Adopted

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for us on January 1, 2016, with early adoption permitted. The Company does not believe that this pronouncement will have an impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) . The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 is effective for the Company on January 1, 2016, with early adoption permitted. The Company is currently evaluating the potential changes from this ASU to the Company’s future financial reporting and disclosures.

NOTE 4 – PURCHASE – ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER

On June 7, 2013, GrowLife Hydroponics completed the purchase of Rocky Mountain Hydroponics, LLC, a Colorado limited liability company (“RMC”), and Evergreen Garden Center, LLC, a Maine limited liability company (“EGC”). The effective date of the purchase was June 7, 2013. The purchase included all of the assets and liabilities of the RMH and EGC Companies, and their retail hydroponics stores, which are located in Vail and Boulder, Colorado and Portland, Maine. The Company purchased RMC and EGC from Rob Hunt, who was appointed to the Company’s Board of Directors and was appointed President of GrowLife Hydroponics, Inc.

The Company paid the former owners of the RMH and EGC Companies $550,000 in cash, $800,000 in 12% Secured Convertible Notes, and $275,000 (7,857,141 shares at $0.035/share) in shares of the Company’s common stock.

The purchase price was allocated to specific identifiable tangible and intangible assets at their fair value at the date of the purchase in accordance with Accounting Standards Codification 805, “Business Combinations”, as follows:

Allocation	$
Assets	$	907,614
Intangible assets		366,000
Goodwill		739,000
Total		2,012,614
Less fair value of liabilities		(387,614	)
Purchase price	$	1,625,000

The Company is amortizing the $366,000 of intangible assets at the rate of $6,100 per month over 5 years, with the Company recording $73,200 and $42,700 of non-cash amortization expense related to these intangible assets during the years ended December 31, 2014 and 2013, respectively.

The Company consolidated the results from operations from June 7, 2013. The following are unaudited pro-forma results of operations as if the acquisition had occurred on January 1, 2013 for the period ending June 7, 2013:

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	Six Months Ended June 30, 2013,
				RMH/ EGC		Combined
	As Reported			As Reported		Pro-Forma

Net revenue	$	1,625,625		$	1,635,143	$	3,260,768

Cost of goods sold		1,196,277			1,127,113		2,323,390

Gross profit		429,348			508,030		937,378

General and administrative		2,007,464			475,839		2,483,303

Loss from operations		(1,578,116	)		32,191		(1,545,925	)

Other income (expense):
Warrant expense		(250,000	)		-		(250,000	)
Loss on extinguishment of debt		(2,750	)		-		(2,750	)
Change in fair value of derivative		(169,753	)		-		(169,753	)
Interest expense, net		(799,310	)		-		(799,310	)

Net loss	$	(2,799,929	)	$	32,191	$	(2,767,738	)

Net loss per share - (basic and diluted)	$	(0.01	)	$	0.00	$	(0.01	)

Weighted average shares outstanding - (basic and diluted)		500,801,583			6,815,310		507,616,893

NOTE 5 – TRANSACTIONS WITH CANX USA, LLC AND LOGIC WORKS LLC

Transactions with CANX, LLC and Logic Works LLC

On July 10, 2014, the Company closed a Waiver and Modification Agreement, Amended and Restated Joint Venture Agreement, Secured Credit Facility and Secured Convertible Note with CANX, and Logic Works LLC, a lender and shareholder of the Company. The Agreements require the filing of a registration statement on Form S-1 within 10 days of the filing of the Company’s Form 10-Q for the period ended June 30, 2014. Due to the Company’s grey sheet trading status and other issues, the Company has not filed the registration statement.

Previously, the Company entered into a Joint Venture Agreement with CANX USA LLC, a Nevada limited liability company. Under the terms of the Joint Venture Agreement, the Company and CANX formed Organic Growth International, LLC (“OGI”), a Nevada limited liability company, for the purpose of expanding the 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 the closing of the Agreement, CANX agreed to provide a commitment for funding in the amount of $1,300,000 for a GrowLife Infrastructure Funding Technology program transaction and provided additional funding under a 7% Convertible Note instrument for $1,000,000, including $500,000 each from Logic Works and China West III Investments LLC, entities that are unaffiliated with CANX and operate as separate legal entities. The Company initially owned a non-dilutive forty five percent (45%) share of OGI and the Company may acquire a controlling share of OGI as provided in the Joint Venture Agreement. In accordance with the Joint Venture Agreement, the Company and CANX entered into a Warrant Agreement whereby the Company delivered to CANX a warrant to purchase 140,000,000 shares of the Company common stock at a maximum strike price of $0.033 per share. Also in accordance with the Joint Venture Agreement, the Company issued an additional warrant to purchase 100,000,000 shares of the Company’s common stock at a maximum strike price of $0.033 per share on February 7, 2014.

On April 10, 2014, as a result of the suspension in the trading of the Company’s securities, the Company went into default on its 7% Convertible Notes Payable for $500,000 each from Logic Works and China West III. As a result, the Company accrued interest on these notes at the default rate of 24% per annum. Furthermore, as a result of being in default on these notes, the Holders could have, at their sole discretion, called these notes.

Waiver and Modification Agreement

The Company entered into a Waiver and Modification Agreement dated June 25, 2014 with Logic Works LLC whereby the 7% Convertible Note with Logic Works dated December 20, 2013 was modified to provide for (i) a waiver of the default under the 7%

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Convertible Note; (ii) a conversion price which is the lesser of (A) $0.025 or (B) twenty percent (20%) of the average of the three (3) lowest daily VWAPs occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date on which the Holder elects to convert all or part of this Note; (iii) the filing of a registration statement on Form S-1 within 10 days of the filing of the Company’s Form 10-Q for the period ended June 30, 2014; and (iv) continuing interest of 24% per annum. China West III converted its Note into common stock on June 4, 2014. Due to the Company’s grey sheet trading status and other issues, the Company has not filed the registration statement.

Amended and Restated Joint Venture Agreement

The Company entered into an Amended and Restated Joint Venture Agreement dated July 1, 2014 with CANX whereby the Joint Venture Agreement dated November 19, 2013 was modified to provide for (i) up to $12,000,000 in conditional financing subject to review by GrowLife and approval by OGI for business growth development opportunities in the legal cannabis industry for up to six months, subject to extension; (ii) up to $10,000,000 in working capital loans, with each loaning requiring approval in advance by CANX; (iii) confirmed that the five year warrants, subject to extension, at $0.033 per share for the purchase of 140,000,000 and 100,000,000 were fully earned and were not considered compensation for tax purposes by the Company; (iv) granted CANX five year warrants, subject to extension, to purchase 300,000,000 shares of common stock at the fair market price of $0.033 per share as determined by an independent appraisal; (v) warrants as defined in the Agreement related to the achievement of OGI milestones; (vi) a four year term, subject to adjustment and (vi) the filing of a registration statement on Form S-1 within 10 days of the filing of the Company’s Form 10-Q for the period ended June 30, 2014. Due to the Company’s grey sheet trading status and other issues, the Company has not filed the registration statement.

Secured Convertible Note and Secured Credit Facility

The Company entered into a Secured Convertible Note and Secured Credit Facility dated June 25, 2014 with Logic Works whereby Logic Works agreed to provide up to $500,000 in funding. Each funding requires approval in advance by Logic Works, provides for interest at 6% with a default interest of 24% per annum and requires repayment by June 26, 2016. The Note is convertible into common stock of the Company at the lesser of $0.0070 or (B) twenty percent (20%) of the average of the three (3) lowest daily VWAPs occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable conversion date on which Logic Works elects to convert all or part of this 6% Convertible Note, subject to adjustment as provided in the Note. The 6% Convertible Note is collateralized by the assets of the Company. The Company also has agreed to file a registration statement on Form S-1 within 10 days of the filing of the Company’s Form 10-Q for the three months ended September 30, 2014 and have the registration statement declared effective within ninety days of the filing of the Company’s Form 10-Q for the three months ended June 30, 2014. Due to the Company’s grey sheet trading status and other issues, the Company has not filed the registration statement.

On July 10, 2014, the Company closed a Waiver and Modification Agreement, Amended and Restated Joint Venture Agreement, Secured Credit Facility and Secured Convertible Note with CANX, and Logic Works LLC, a lender and shareholder of the Company. As of September 30, 2014, the Company has borrowed $350,000 under the Secured Convertible Note and Secured Credit Facility dated June 25, 2014 with Logic Works.

OGI was incorporated on January 7, 2014 in the State of Nevada and had no business activities as of December 31, 2014.

NOTE 6 – TERMINATED AGREEMENTS WITH WISE PHOENIX, LLC AND AJOA HOLDINGS, LLC RELATED TO CEN BIOTECH, INC. AND R.X.B.N. INC.

On January 24, 2014, 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 OGI, 25% of the fully diluted outstanding equity of CEN Biotech, Inc., a corporation organized under the laws of Canada (“CEN”). The Company was obligated to issue shares of common stock to the Sellers. 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.

On January 24, 2014, the Company entered into a Shareholder Agreement with the shareholders of CEN. 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% were expected to sign the Shareholder 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.

On April 10, 2014, the Company received notice from both R.X.N.B., Inc. and CEN Biotech, Inc. that both companies were rescinding and/or voiding their respective Interest Purchase Agreements with the Company because the SEC had suspended the

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Company’s trading in securities due to potential issues of accuracy and adequacy of information in the marketplace. There were no penalties related to the rescinding of the Agreements.

NOTE 7 – INVENTORY

Inventory as of December 31, 2014 and December 31, 2013 consists of the following:

	December 31, 2014			December 31, 2013
	(Audited)			(Audited)

Raw materials	$	-		$	94,681
Finished goods		923,565			1,028,037
Inventory in transit		-			221,728
Inventory reserve		(40,215	)		(90,725	)
Total	$	883,350		$	1,253,721

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. Inventory in transit relates to product purchased by the Company but which had not been received as of December 31, 2014.

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 8 – PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 2014 and 2013 consists of the following:

	December 31,			December 31,
	2014			2013
	(Audited)			(Audited)

Machines and equipment	$	63,172		$	63,172
Furniture and fixtures		49,787			49,787
Computer equipment		52,304			52,304
Leasehold improvements		56,965			53,040
Total property and equipment		222,228			218,303
Less accumulated depreciation and amortization		(198,186	)		(164,545	)
Net property and equipment	$	24,042		$	53,758

Fixed assets, net of accumulated depreciation, were $24,042 and $53,758 as of December 31, 2014 and 2013, respectively. Accumulated depreciation was $198,186 and $164,545 as of December 31, 2014 and 2013, respectively. Total depreciation expense was $33,641 and $22,229 for the years ended December 31, 2014 and 2013, respectively. All equipment is used for selling, general and administrative purposes and accordingly all depreciation is classified in selling, general and administrative expenses.

NOTE 9 – INVESTMENT IN VAPE HOLDINGS, INC.

In May 2013, the Company made an investment in the amount of $1,160 in Vape Holdings, Inc., a Nevada corporation, and received 200,428 shares.

Sterling C. Scott, the Company’s then Chief Executive Officer, also owned 257,320 shares of Vape’s common stock. Furthermore, the former President of GrowLife, Inc., Kyle Tracey, was the Chief Executive Officer of Vape. As a result, the Company deemed Vape to be a related party and therefore has recorded the Company’s investment in Vape as an “Investment in a related party” on its balance sheet.

The value of the Company’s investment in Vape as of December 31, 2013 was $5.60 per share, or $1,122,397. The Company sold 200,428 shares of Vape’s common stock during the year ended December 31, 2014 for net proceeds of $186,791 which was recorded as “other income” in the statement of operations. As of December 31, 2014, the Company recorded a $1,122,397 loss in the value of its investment in Vape by decreasing its “Investment in a related party” balance sheet account while also recording a corresponding decrease to “Unrealized loss on investment in a related party” in the Stockholders’ deficit section of the Company’s balance sheet.

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NOTE 10 – INTANGIBLE ASSETS

Intangible assets as of December 31, 2014 consisted of the following:

Intangible Assets:	Estimated Useful Lives	Cost		Accumulated Amortization			Net Book Value
RMH/EGC acquisition- customer contracts	5 years	$	366,000	$	(115,900	)	$	250,100
Greners acquisition- customer contracts	5 years		230,000		(129,948	)		100,052
Phototron acquisition- customer contracts	5 years		215,000		(215,000	)		-
Soja, Inc. (Urban Garden Supply) acquisition- customer contracts	5 years		60,000		(60,000	)		-
Trademarks			3,600		-			3,600
Total intangible assets		$	874,600	$	(520,848	)	$	353,752

Total amortization expense was $106,548 and $108,966 for the years ended December 31, 2014 and 2013, respectively.

The fair value of the assets acquired detailed above, estimated by using a discounted cash flow approach based on future economic benefits associated with agreements with customers, or through expected continued business activities with its customers. In summary, the estimate was based on a projected income approach and related discounted cash flows over five years, with applicable risk factors assigned to assumptions in the forecasted results.

NOTE 11 – 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 reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of these requirements can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions). For example, warrants or conversion features with such provisions are no longer recorded in equity. Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price.

7% Convertible Notes

As of December 31, 2013, the Company had outstanding 7% convertible notes for $1,850,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company had valued the derivative liability of these notes at $9,324,000 using the Black-Scholes-Merton option pricing model. As of December 31, 2014, the Company had outstanding unsecured 7% convertible notes for $500,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $1,278,878 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 157.1%; (iii) risk free rate of 0.78%, (iv) stock price of $0.02, (v) per share conversion price of $0.007, and (vi) expected term of .50-.75 years, as the Company estimates that these notes will be converted by June 30, 2015 to September 30, 2015.

6% Convertible Notes

As of December 31, 2014, the Company had outstanding unsecured 6% convertible notes for $350,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $822,037 using the Black-Scholes-Merton option pricing model. which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions (i) dividend yield of 0%; (ii) expected volatility of 157.1%; (iii) risk free rate of 0.78%, (iv) stock price of $.02, (v) per share conversion price of $0.007, and (vi) expected term of 1.46 years.

The risk-free rate of return reflects the interest rate for the United States Treasury Note with similar time-to-maturity to that of the warrants.

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							Carrying
	Fair Value Measurements Using Inputs						Amount at
Financial Instruments	Level 1		Level 2		Level 3		December 31, 2014

Liabilities:
Derivative Instruments - Warrants	$	-	$	2,100,915	$	-	$	2,100,915

Total	$	-	$	2,100,915	$	-	$	2,100,915

For the year ended December 31, 2014, the Company recorded a non-cash gain of $7,223,085 related to the “change in fair value of derivative” expense related to its 6% and 7% convertible notes.

NOTE 12 – RELATED PARTY TRANSACTIONS

Since January 1, 2013, 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.

Transactions with an Employee

On March 14, 2013, the Company entered into a Notes Payable with an employee $25,000. The Note Payable provides for interest 6% per year with a term of ninety days. On June 26, 2013, the Company signed an Amended Note Payable, extending the term through September 30, 2013. 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.

Loans and Advances from Sterling C. Scott

Sterling Scott advanced various amounts to us. As of December 31, 2011, the amount due the former CEO was $183,103, and additional advances of $98,897 were made to us through April 5, 2012. On April 5, 2012, Mr. Scott converted $282,000 of these advances into a 6% senior convertible note. Mr. Scott made further advances during the year ended December 31, 2012 which were converted into the 6% senior convertible note. As of December 31, 2013, total amount owed to Mr. Scott was $453,932, which consisted of $413,680 in principal and $40,252 in accrued interest. As of September 10, 2014, the outstanding principal balance on Mr. Scott’s 6% convertible note was $413,680 and accrued interest were sold to two parties not related to us.

Investment in Vape Holdings, Inc.

See Note 9 for additional details.

Agreement with Jeff Giarraputo

On February 26, 2014, the Company engaged Jeff Giarraputo, a member of the Board of Directors, as an advisor to the Company 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, the Company 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 the our common stock. All shares subject to the option will vest 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 this stock option was not issued.

NOTE 13 – CONVERTIBLE NOTES PAYABLE

Convertible notes payable as of December 31, 2014 consists of the following:

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	Principal		Accrued Interest		Debt Discount			Balance As of December 31, 2014
6% Senior secured convertible notes (2012)	$	413,680	$	71,669	$	(20,486	)	$	464,863
6% Secured convertible note (2014)		350,000		9,641		(261,308	)		98,333
7% Convertible note ($850,000)		250,000		43,973		(93,753	)		200,220
7% Convertible note ($1,000,000)		250,000		74,468		(102,279	)		222,189
	$	1,263,680	$	199,751	$	(477,826	)	$	985,605

On April 10, 2014, as a result of the SEC suspension in the trading of our securities, the Company went into default on its 6% Senior Secured Convertible Notes Payable and 7% Convertible Notes Payable. As a result, the Company accrued interest on these notes at the default rate of 12% and 24% per annum, respectively. Furthermore, as a result of being in default on these notes, the Holders could, at their sole discretion, call these notes. Although no such action has been taken by the Holders, the Company classified these notes as a current liability rather than long-term debt as of March 31, 2014.

During July 2014, the Company reached settlement agreements with the holders of the 7% Convertible Notes Payable and the Company is not in default under any of our convertible notes payable. The Company is accruing interest at the interest rate in the settlement agreements or convertible notes.

6% Senior Secured Convertible Notes Payable (2012)

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 Exchange Agreement provided for the issuance of new 6% Senior Secured Convertible Notes that replaced the 6% Senior Secured Convertible Notes that were previously issued during 2012. The 6% Notes accrued interest at the rate of 6% per annum and had a maturity date of April 15, 2015. No cash payments were required; however, accrued interest is due at maturity. In the event of a default the Investors may declare the entire principal and accrued interest to be due and payable. Default interest will accrue at the rate of 12% per annum. The 6% Notes were secured by substantially all of the assets of the Company and are convertible into common stock at the rate of $0.007 per share. The Company determined that the conversion feature was a beneficial conversion feature and determined its value to be $102,096 as of December 31, 2013, which the Company recorded as a debt discount to the 6% Notes. As of December 31, 2013 the Company owed principal of $468,680 and accrued interest of $46,196 on these 6% Notes.

On January 3, 2014, Carla Badaracco converted $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 of the $30,000 of principal, the Company recorded $6,535 of non-cash interest expense to fully amortize the remaining debt discount associated with the $30,000 of principal that was converted on January 3, 2014.

On July 3, 2014, Robert Shapero, a Holder of the Company’s 6% Convertible Notes Payable, converted $25,000 of principal and $4,136 of accrued interest into 4,162,623 shares of the Company’s common stock at a per share conversion price of $0.007.

As of September 10, 2014, the outstanding principal balance on Mr. Scott’s 6% convertible note of $413,680 and accrued interest were sold to two parties not related to us. On April 27, 2015, the Company entered into Amendment One of the Amended and Restated 6% Senior Secured Convertible Note, which increased the interest rate to 12% effective April 8, 2014 and extended the maturity to September 15, 2015.

On July 9, 2015, the two investors each entered into Amendment Two of the Amended and Restated 6% Senior Secured Convertible Note which provide for an increase in the interest rate from 6% to 10% and the default interest rate from 12% to 20% on the 6% Senior Secured Convertible Notes for so long as the Company remains in technical default on said notes due to its delisting from its Primary Trading Market April 2014. The Company further agreed that said 20% default interest will be applied to the date of default on April 10, 2014 and continuing through the present.

During the year ended December 31, 2014, the Company recorded interest expense of $32,498 and $81,610 of non-cash interest expense related to the amortization of the debt discount associated with these 6% convertible notes, respectively. As of December 31, 2014, the outstanding principal on these 6% convertible notes was $413,680, accrued interest was $71,669, and unamortized debt discount was $20,486, which results in a net amount of $464,683. The Company accrued interest on these notes at the default rate of 12% from April 10, 2014 to July 10, 2014.

6% Secured Convertible Note and Secured Credit Facility (2014)

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convertible into common stock of the Company at the lesser of $0.0070 or (B) twenty percent (20%) of the average of the three (3) lowest daily VWAPs occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable conversion date on which Logic Works elects to convert all or part of this 6% Convertible Note, subject to adjustment as provided in the Note. The 6% Convertible Note is collateralized by the assets of the Company. The Company also has agreed to file a registration statement on Form S-1 within 10 days of the filing of the Company’s Form 10-Q for the three months ended June 30, 2014 and have the registration statement declared effective within ninety days of the filing of the Company’s Form 10-Q for the three months ended June 30, 2014. Due to the Company’s grey sheet trading status and other issues, the Company has not filed the registration statement.

During the year ended December 31, 2014, the Company recorded interest expense of $9,641 and $88,692 of non-cash interest expense related to the amortization of the debt discount associated with these 6% convertible notes, respectively. As of December 31, 2014, the Company has borrowed $350,000 under the Secured Convertible Note and Secured Credit Facility, accrued interest was $9,641 and the unamortized debt discount was $261,308, which results in a net amount of $98,333.

7% Convertible Note Payable

On October 11, 2013, the Company issued 7% Convertible Notes in the aggregate amount of $850,000 to Europa International, Inc., Myli Burger, Adam Liebross and Forglen LLC. The original principal balance is due September 30, 2015 and the annual rate of interest is 7%, which increases to 24% per annum, or the maximum rate permitted under any applicable law, in the event of default. Subject to certain limitations, the Holders can, at its sole discretion, convert the outstanding and unpaid principal and interest into 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 closing prices 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.

During July 2014, the Company reached settlement agreements with the holders of the 7% Convertible Notes Payable and the Company is not in default under any of our convertible notes payable. We continue to accrue interest at the interest rate in the settlement agreements.

Due to the “reset” clause in these 7% Notes relating to the conversion price, the Company determined that the conversion feature is considered a beneficial conversion feature and created a derivative. On the date of issuance of the $850,000 of 7% convertible notes, 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 bifurcation of the embedded conversion options of these notes.

On December 20, 2013, the Company issued 7% Convertible Notes for $1,000,000, including $500,000 each from Logic Works and China West III Investments LLC. 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. On the date of issuance of the $1,000,000 of 7% convertible notes, 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

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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 bifurcation of the embedded conversion options of these notes.

At December 31, 2013, the outstanding principal balance on these 7% convertible notes was $1,850,000, the accrued and unpaid interest totaled $15,668, and the related debt discount totaled $1,698,292, for a net value of $167,376.

On March 7, 2014, the Company issued 2,000,000 shares of its common stock to Adam Liebross related to the conversion of $50,000 of principal at a per share conversion price of $0.025 of the Company’s 7% Convertible Notes Payable. Upon the conversion of the $50,000, the Company recorded $39,583 of non-cash interest expense to fully amortize the remaining portion of the debt discount related to the $50,000 of principal.

On March 18, 2014, the Company issued 22,727,668 shares of its common stock to Adam Liebross (8,300,260 shares), Myli Burger Holdings LLC (4,122,248 shares) and Europa International Inc. (10,304,800 shares) related to the total conversion of $550,000 of principal and $18,192 of accrued and interest at a per share conversion price of $0.025 of the Company’s 7% Convertible Notes Payable. Upon the conversion of the $550,000, the Company recorded $435,412 of non-cash interest expense to fully amortize the remaining portion of the debt discount related to the $550,000 of principal.

On April 9, 2014, the Company issued 5,347,032 shares of its common stock to Forglen LLC related to the conversion of $125,000 of principal and $8,676 of accrued interest at a per share conversion price of $0.025 of the Company’s 7% Convertible Notes Payable. Upon the conversion of the $125,000, the Company recorded $197,915 of non-cash interest expense to fully amortize the remaining portion of the debt discount related to the $125,000 of principal. 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. The Company recorded a non-cash interest credit $67,703 to record this transaction.

On April 9, 2014, the Company issued 5,347,032 shares of its common stock to Forglen LLC related to the conversion of $125,000 of principal and $8,676 of accrued interest at a per share conversion price of $0.025 of the Company’s 7% Convertible Notes Payable. On July 14, 2014, the Board of Directors approved a Settlement Agreement and Waiver of Default dated June 19, 2014 with Forglen related to the 7% Convertible Note. The Company cancelled the April 9, 2014 conversion as a result of the SEC suspension in the trading of the Company’s securities and Forglen has $250,000 of principal and interest outstanding on his note payable.

On June 4, 2014, the Company issued 20,640,548 shares of the Company’s common stock to China West III Investments LLC related to the conversion of $500,000 of principal and $16,014 of accrued interest at a per share conversion price of $0.033 of the Company’s 7% Convertible Notes Payable. Upon the conversion of the $500,000, the Company recorded $363,640 of non-cash interest expense to fully amortize the remaining portion of the debt discount related to the $500,000 of principal.

On July 31, 2014, Logic Works, a Holder of the Company’s 7% Convertible Notes Payable, converted $250,000 of principal into 35,714,286 shares of the Company’s common stock at a per share conversion price of $0.007. Upon the conversion of the $250,000, the Company recorded $181,820 of non-cash interest expense to fully amortize the remaining portion of the debt discount related to the $250,000 of principal. The principal balance due to Logic Works as of December 31, 2014 is $250,000 is due September 30, 2015. The current annual rate of interest is 24% per annum. The conversion price is $0.007 per share.

During the year ended December 31, 2014, the Company recorded interest expense of $136,980 and $1,502,260 of non-cash interest expense related to the amortization of the debt discount associated with these 7% convertible notes, respectively. As of March 31, 2015, the outstanding principal on these 7% convertible notes was $500,000, accrued interest was $118,441, and unamortized debt discount was $196,032, which results in a net amount of $422,409.

12% Senior Secured Convertible Notes Payable

On June 7, 2013, the Company issued $800,000 of 12% Senior Secured Convertible Notes to the former owners of RMH/EGC. These 12% Convertible Notes have a two year term, with the expiration date of June 8, 2015. The 12% Convertible Notes are secured by substantially all of the Company’s assets. Interest accrues daily on the outstanding principal amount at an annual rate of 12%. 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 was $0.035 per share, which was subject to adjustment in the event of any stock splits, stock dividends, and similar events. In the event of a default by the Company, the outstanding principal amount of these 12% Convertible Notes, plus accrued interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the holder’s sole discretion, immediately due and payable in cash. In addition, in the event of a default, the rate of interest will increase to 18% and will be calculated in the same manner described above.

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At December 31, 2013, the outstanding principal balance on these 12% convertible notes was $408,000 with accrued interest totaling $27,608, 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, which was recorded as a debt discount. As of December 31, 2013, the unamortized debt discount related to these 12% convertible notes was $41,825.

On January 31, 2014, the Company issued 12,562,518 shares of its common stock related to the conversion of $408,000 of principal and $31,688 of accrued interest at a per share conversion price of $0.035 of the Company’s 12% Senior Secured Convertible Notes Payable. During the three month period ended March 31, 2014, the Company recorded $4,080 of interest expense and $41,825 of non-cash interest expense related to the amortization of the $41,285 of debt discount. As of March 31, 2014, these 12% convertible notes had been satisfied in full and all related debt discount had been fully amortized as non-cash interest expense.

NOTE 14 – EQUITY

Common Stock

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, 2014, the Company had had the following sales of unregistered sales of equity securities:

On January 3, 2014, the Company issued 4,700,196 shares of its common stock to Carla Badaracco related to the conversion of $30,000 of principal and $2,901 of accrued interest at a per share conversion price of $0.007 of the Company’s 6% Senior Secured Convertible Notes Payable.

On January 31, 2014, the Company issued 2,351,187 shares of its common stock to Doug Braun related to the exercise of a stock option granted in fiscal year 2011. The Company received $44,673 or $0.019 per share.

On February 13, 2014, the Company issued 29,420 shares of its common stock to Alby Segall, a third party consultant and non-accredited investor, as payment in full for services rendered. The shares were valued at the fair market price of $0.3399 per share.

On February 16, 2014, the Company issued 1,250,000 shares of its common stock to Integrity Media, Inc. related to a November 16, 2013 Service Agreement for investor relations. The shares were valued at the fair market price of $0.38 per share.

On March 20, 2014, the Company issued 2,775,000 shares of its common stock to Doug Braun related to the cashless exercise of a stock option granted in fiscal year 2011 to purchase 4,500,000 shares of the Company’s common stock at $0.23 per share.

On March 31, 2014, the Company issued 500,000 shares to each of its four independent Board Directors, The Company valued the 2,000,000 shares at $0.58 per share which was the closing price of the Company’s common stock on March 31, 2014. The Company recorded stock based compensation of $1,160,000 during the three months ended March 31, 2014. On April 25, 2014, the Company entered into four Restricted Stock Cancellation Agreements with the four independent members of the Company’s Board of Directors, pursuant to which the Directors agreed to each cancel 500,000 shares of the Company’s restricted common stock granted to each Director on March 31, 2014. The Company recorded a reduction in common stock and an increase in additional paid in capital of $200 during the nine months ended September 30, 2014 are related to cancellation of the Restricted Stock Agreements.

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On July 1, 2014, Horwitz and Armstrong LLP converted debt of $100,000 debt into 500,000 shares of the Company’s common stock at a per share conversion price of $0.11 and a cash payment of $35,000.

On July 3, 2014, Sterling Scott exercised his option on a cashless basis and was issued 795,455 shares of restricted common stock at $.085 per share. Mr. Scott was awarded a stock option grant on November 3, 2013 for 12,000,000 shares and had vested 3,500,000 shares as of his resignation on May 19, 2014. The shares were valued at the fair market price of $0.085 per share.

On July 15, 2014, the Company entered into a Severance Agreement with Mr. Genesi whereby Mr. Genesi resigned as Chief Financial Officer and the Parties cancelled the Executive Employment Agreement dated November 3, 2013. The Company agreed to issue 6,000,000 shares of restricted common stock. The shares were valued at the fair market price of $0.08 per share.

On August 1, 2014, the Company issued 300,000 shares of its common stock to Joseph Barnes pursuant to an Manager Services Agreement with Mr. Barnes dated August 1, 2013. The shares were valued at the fair market price of $0.08 per share.

On August 15, 2014, the Company issued 300,000 shares of its common stock to Dennis Kuznetsov pursuant to an Employment Agreement with Mr. Kuznetsov dated August 15, 2013. The shares were valued at the fair market price of $0.06 per share.

On August 27, 2014, the Company issued 5,000,000 shares of its common stock to D. Weckstein and Co., Inc. pursuant to an Investment Banking Letter. The shares were valued at the fair market price of $0.08 per share.

On September 15, 2014, the Company issued 80,000 shares of its common stock to Josh Nash pursuant to an Employment Agreement with Mr. Nash dated September 15, 2013. The shares were valued at the fair market price of $0.07 per share.

On October 1, 2014, the Company issued 100,000 shares of its common stock to Jeremy Belmont pursuant to an Employment Agreement with Mr. Belmont dated October 1, 2013. The shares were valued at the fair market price of $0.06 per share.

On October 8, 2014, Fifth Avenue Law Group PLLP converted debt of $68,000 debt into 1,360,000 shares of the Company’s common stock at a per share conversion price of $0.05.

On October 31, 2014, the Company issued 100,000 shares of its common stock to Frank Hariton pursuant to a Legal Agreement with Mr. Hariton dated August 14, 2014. The shares were valued at the fair market price of $0.05 per share.

On December 10, 2014, the Company issued 200,000 shares of its common stock to Velomedia, Inc. pursuant to a debt conversion. The shares were valued at the fair market price of $0.05 per share.

Warrants

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

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On February 7, 2014, the Company issued a warrant for 100,000,000 common shares to CANX or its assignees in accordance with the Joint Venture Agreement. The warrants have a five-year term with an original exercise price of $0.033 per share The warrant was earned by CANX upon completion of the Company’s increase in the number of authorized common shares from 1 billion to 3 billion shares. This increase in authorized shares was effective with the shareholder approval on February 7, 2014. The Company valued the warrants at the time of issuance using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 200%; (iii) risk free rate of 0.78% and (iv) an expected term of five years. The Company expensed the entire $33,700,000 at the time of issuance because the warrants vested immediately and were also exercisable immediately.

The Company entered into an Amended and Restated Joint Venture Agreement dated July 1, 2014 with CANX and granted on July 10, 2014 CANX five year warrants, subject to extension, to purchase 300,000,000 shares of common stock at the fair market price of $0.033 per share as determined by an independent appraisal; The warrants vest immediately and are exercisable in whole, or in part, at any time and from time to time on or after the issue date and on or before the termination date. The Company valued the warrants at the time of issuance using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 161.0%; (iii) risk free rate of 0.78% and (iv) an expected term of five years. The Company expensed the entire $28,800,000 at the time of issuance because the warrants vested immediately and were also exercisable immediately.

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

A summary of the warrants issued as of December 31, 2014 were as follows:

	December 31, 2014
			Weighted
			Average
			Exercise
	Shares		Price
Outstanding at beginning of period		165,000,000	$	0.040
Issued		400,000,000		0.033
Exercised		-		-
Forfeited		-		-
Expired		-		-
Outstanding at end of period		565,000,000	$	0.035
Exerciseable at end of period		565,000,000

A summary of the status of the warrants outstanding as of December 31, 2014 is presented below:

	December 31, 2014
	Weighted		Weighted				Weighted
	Average		Average				Average
Number of	Remaining		Exercise		Shares		Exercise
Warrants	Life		Price		Exerciseable		Price
540,000,000		4.31	$	0.033		540,000,000	$	0.033
25,000,000		3.94		0.080		25,000,000		0.080


565,000,000		4.27	$	0.035		565,000,000	$	0.035

Warrants totaling 565,000,000 shares of common stock have an intrinsic value of $0 as of December 31, 2014.

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NOTE 15 – 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 40,720,000 shares as of December 31, 2014. All grants are non-qualified as the plan was not approved by the shareholders within one year of its adoption.

Determining Fair Value under ASC 505

The Company records compensation expense associated with stock options and other equity-based compensation using the Black-Scholes-Merton option valuation model for estimating fair value of stock options granted under our plan. The Company amortizes the fair value of stock options on a ratable basis over the requisite service periods, which are generally the vesting periods. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company estimates the volatility of our common stock based on the historical volatility of its own common stock over the most recent period corresponding with the estimated expected life of the award. The Company bases the risk-free interest rate used in the Black Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid any cash dividends on our common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model and adjusts share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed.

Stock Option Activity

During the year ended December 31, 2013, the Company had the following stock option activity:

On November 3, 2013, the Company’s Board of Directors granted Sterling Scott, the Company’s then 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 over the 24-month vesting term of the option. On July 3, 2014, Sterling Scott exercised his option on a cashless basis and was issued 795,455 shares of restricted common stock at $.085 per share. Mr. Scott was awarded a stock option grant on November 3, 2013 for 12,000,000 shares and had vested 3,500,000 shares as of his resignation on May 19, 2014.

On November 3, 2013, the Company’s Board of Directors granted John Genesi, the Company’s then 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 over the 24-month vesting term of the option. On July 15, 2014, the Company entered into a Severance Agreement with Mr. Genesi whereby Mr. Genesi resigned as Chief Financial Officer and the Parties cancelled the Executive Employment Agreement dated November 3, 2013, including this 10,000,000 share stock option grant.

On November 3, 2013, the Company’s Board of Directors approved a stock option grant to Rob Hunt, a then 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

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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 over the 24-month vesting term of the option. On October 17, 2014, the Company entered into a Settlement Agreement and Release with Mr. Robert Hunt, whereby the Parties cancelled the Executive Services Agreement ("ESA") dated June 7, 2013 and his stock option grant for 12,000,000 shares.

During the year ended December 31, 2014, the Company had the following stock option activity:

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

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

On June 3, 2014, the Company’s Board of Directors granted four employees, a stock option via the Company’s 2011 Stock Incentive Plan to purchase a total 9,000,000 shares of the Company’s common stock at an exercise price of $0.150 per share, which represents the fair value 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 starting August 1, 2013 to October 1, 2013. The term was five years, and the options could be exercised on a cashless basis. The Company valued the options at $608,724 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 200.0%; (iii) risk free rate of 0.78%, (iv) expected term of 3 years, and a per share market price of $0.15, which was the closing price of the Company’s shares on June 3, 2014. Beginning in June 2014 and ending October 2015, the Company will expense the $608,724 over the 24-month vesting term of the option. The four employees cancelled the stock option grants as of September 30, 2014.

On July 3, 2014, Sterling C. Scott exercised his option on a cashless basis and was issued 795,455 shares of our restricted common stock valued at $67,614 or $.085 per share.

On July 31, 2014, the Company’s Board of Directors granted Mr. Scott an option to purchase 16,000,000 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. The shares vest as follows:


	i	Two million shares will vest immediately upon securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB (not earned as of December 31, 2014);

	ii	Two million shares will vest immediately upon the successful approval and effectiveness of the Company’s S-1 (not earned as of December 31, 2014);

	iii	Two million shares will vest immediately upon the Company’s resolution of the class action lawsuits (not earned as of December 31, 2014); 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. The Company valued the grant for 10,000,000 shares at $292,480 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 200.0%; (iii) risk free rate of 0.78%, (iv) expected term of 3 years, and a per share market price of $0.07, which was the closing price of the Company’s shares on July 1, 2014. Beginning in August 2014 and ending five years from issuance, the Company will expense the $292,480 over the 36-month vesting term of the option.

On October 10, 2014, the Company’s Board of Directors granted three employees, a stock option grant via the Company’s 2011 Stock Incentive Plan to purchase a total 17,500,000 shares of the Company’s common stock at an exercise price of $0.05 per share, which represents the fair value of the Company’s common stock on the date of grant. Per the terms of the stock option agreement, the shares (i) stock option grants for 4,400,000 shares vested immediately; and (ii) stock option grants for 14,100,000 shares vest quarterly over thirty six months starting October 10, 2014 to October 9, 2017. The term was five years, and the options could be exercised on a cashless basis. The Company valued the options at $263,908 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 161.5%; (iii) risk free rate of 0.78%, (iv) expected term of 3 years, and a per share market price of $0.04, which was below the $0.05 per share closing price of

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the Company’s shares on October 10, 2014. The Company expensed $69,996 during the year ended December 31, 2014. Beginning in January 2015 and ending October 2017, the Company will expense the $194,922 over the 33-month remaining vesting term of the option.

On December 10, 2014, the Company’s Board of Directors granted 23 employees, a stock option grant via the Company’s 2011 Stock Incentive Plan to purchase a total 7,220,000 shares of the Company’s common stock at an exercise price of $0.05 per share, which represents the fair value of the Company’s common stock on the date of grant. Per the terms of the stock option agreement, the shares vest (i) stock option grants for 1,000,000 shares vested immediately; and (ii) stock option grants for 6,220,000 shares vest over thirty six months starting December 10, 2014 to December, 2017. The term was five years, and the options could be exercised on a cashless basis. The Company valued the options at $102,286 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 149.8%; (iii) risk free rate of 0.78%, (iv) expected term of 3 years, and a per share market price of $0.04, which was below the $0.05 per share closing price of the Company’s shares on December 10, 2014. The Company expensed $7,098 during the year ended December 31, 2014. Beginning in January 2015 and ending December 2017, the Company will expense the $95,187 over the 35-month remaining vesting term of the option.

On October 17, 2014, the Company entered into a Settlement Agreement and Release with Mr. Robert Hunt, whereby the Parties cancelled the Executive Services Agreement dated June 7, 2013 and his stock option grant for 12,000,000 shares.

As of December 31, 2014, there are 40,720,000 options to purchase common stock at an average exercise price of $0.058 per share outstanding under the 2011 Stock Incentive Plan. The Company recorded $724,267 and $146,633 of compensation expense, net of related tax effects, relative to stock options for the years ended December 31, 2014 and 2013 in accordance with ASC 505. Net loss per share (basic and diluted) associated with this expense was approximately ($0.00). At December 31, 2014, there is approximately $541,011 of total unrecognized costs related to employee granted stock options that are not vested. These costs are expected to be recognized over a period of approximately 4.71 years.

Stock option activity for the years ended December 31, 2014 and 2013 was as follows:

	Weighted Average
	Options			Exercise Price			$
Outstanding as of December 31, 2012		12,851,187		$	0.098		$	1,259,781
Granted		34,000,000			0.070			2,386,000
Exercised		-			-			-
Forfeitures		(6,000,000	)		(0.030	)		(180,108	)
Outstanding as of December 31, 2013		40,851,187			0.085			3,465,673
Granted		49,720,000			0.075			3,706,000
Exercised		(5,126,187	)		(0.13	)		(682,923	)
Forfeitures		(44,725,000	)		(0.092	)		(4,132,751	)
Outstanding as of December 31, 2014		40,720,000		$	0.058		$	2,356,000

The following table summarizes information about stock options outstanding and exercisable at December 31, 2014:

				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		24,720,000		4.80	$	0.050		5,758,333	$	0.050
	0.07		16,000,000		4.58		0.070		1,944,444		0.070
			40,720,000		4.71	$	0.058		7,702,777	$	0.056

Stock option grants totaling 40,720,000 shares of common stock have an intrinsic value of $0 as of December 31, 2014.

NOTE 16 – 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.

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Class Actions Alleging Violations of Federal Securities Laws

Beginning on April 18, 2014, three class action lawsuits alleging violations of federal securities laws were filed against the Company in United States District Court, Central District of California (the “Court”). At a hearing held on July 21, 2014, the three class action lawsuits were consolidated into one case with Lawrence Rosen as the lead plaintiff (the “Consolidated Class Action,” styled Romero et al. vs. GrowLife et al.). On May 15, 2014 and August 4, 2014, respectively two shareholder derivative lawsuits were filed against the Company with the Court (the “Derivative Actions”). On October 20, 2014, AmTrust North America, the Company’s insurer, filed a lawsuit contesting insurance coverage on the above legal proceedings. The Company made a general appearance in this action. On January 20, 2015, the Court ordered all of the above actions stayed pending completion of mediation of the dispute.

On June 1, 2015, the Court preliminarily approved the proposed settlement of the Derivative Actions pursuant to a proposed stipulated settlement agreement.

On August 17, 2015, the Court entered a Final Order and Judgment resolving the Derivative Actions in their entirety. The Derivative Actions were thereby dismissed in their entirety with prejudice.

As a result of the foregoing, all litigation discussed herein is resolved in full at this time.

The Company is obligated to issue $2 million in common stock or approximately 115.1 million shares related 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.

Section 16(b) Claims

The Company received four demand letters from potential plaintiffs regarding alleged Section 16(b) short-swing violations by Sterling Scott in July 2014. The Company believes the claims are without merit and has responded to the Section 16(b) claims accordingly. Two of the four claims have acknowledged our position and have been withdrawn. There has been no response to the Company’s position from the remaining two potential plaintiffs.

Sales and Payroll Tax Liabilities

As of September 30, 2015, the Company owes approximately $87,000 in sales tax and $20,000 in payroll taxes primarily from early 2014. The Company is currently negotiating or operating under payment plans on these liabilities.

Other Legal Proceedings

The Company is in default on our Portland, Maine and Boulder, Colorado store leases for non-payment of lease payments and the Company is negotiating with the landlords. The Company is currently subject to legal actions with various vendors.

It is possible that additional lawsuits may be filed and served on the Company.

Operating Leases

Current Operating Leases

Upon the Company’s acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC, the Company assumed the lease for the RMH/EGC retail hydroponics store located in Portland, Maine. The lease commencement date was May 1, 2013 with an expiration date of April 30, 2016. The monthly rent for year one of the lease was $4,917, with monthly rent of $5,065 in year two, and monthly rent of $5,217 in year three of the lease. The Company has an option to extend the lease for two three year terms as long it is not in default under the lease.

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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 January 23, 2014, the Company entered into a lease agreement for retail space for its hydroponics store in Boulder, Colorado. The lease commenced on February 1, 2014 and expires on May 31, 2017. Monthly rent for year one of the lease was $4,051, with monthly rent of $4,173 in year two, $4,298 in year three, and $4,427 for month 37 through 39. The Company has an option to extend the lease for one three year terms as long it is not in default under the lease.

On June 18, 2014, the Company rented space at 500 Union Street, Suite 810, Seattle, Washington for its corporate office. The Company rents the space on a month to month basis for $1,700 per month.

Terminated Operating Leases

In May 2011, the Company entered into a lease for its Phototron business unit to rent a warehouse facility in Gardena, California. The terms of the lease provide for monthly rental expense of $4,065 with annual rent increases through the expiration of the lease on May 31, 2014. During the last twelve months of the lease the monthly rent was $4,313. The Company terminated this lease as of May 31, 2014.

Upon the Company’s acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, the Company assumed the lease for the RMH/EGC retail hydroponics store located in Plaistow, New Hampshire. The lease commencement date was May 1, 2013 with an expiration date of January 31, 2016. The monthly rent throughout the term of the lease is $2,105. The Company vacated this store and expect to terminate this lease during 2015.

On June 5, 2013, the Company entered into a lease to rent office space in Woodland Hills, California for the Company’s corporate headquarters. The landlord was 20259 Ventura Blvd LP, which was a previous affiliate of a stockholder of our company. The term was for ninety days and can be renewed, or terminated, by either party with thirty days written notice. The monthly rent was $6,758. The Company terminated this lease as of June 30, 2014.

On May 30, 2013, the Company entered into a lease to rent retail space in Woodland Hills, California for its Urban Garden Supply (Soja, Inc.) hydroponics store. The term was for ninety days and can be renewed, or terminated, by either party with ninety days written notice. The monthly rent was $3,257. The Company terminated this lease as of June 1, 2015.

On August 26, 2013, the Company entered into a lease agreement for warehouse and retail space for its Greners (Business Bloom, Inc.) business unit in Santa Rosa, California. The lease commencement date was September 1, 2013 with an expiration date of August 31, 2015. The monthly rent is $3,000. The Company terminated this lease as of November 25, 2014.

On September 23, 2013, the Company entered into an Assignment and Assumption and Amendment of Lease Agreement for the Company’s retail hydroponics store in Peabody, Massachusetts. The original lease between the landlord and Evergreen Garden Center, LLC was assigned from Evergreen Garden Center, LLC to GrowLife Hydroponics, Inc. In addition, the term of the lease was extended from the original expiration date of October 31, 2013 to October 31, 2014. The monthly rent remained at $4,500 through October 31, 2014. The Company’s lease expired on October 31, 2014.

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
2015	$	175,080
2016		101,432
2017		50,438
2018		-
2019		-
Beyond		-
Total	$	326,950

Employment and Consulting Agreements

Employment Agreement with Marco Hegyi

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On December 4, 2013, the Company entered into an Employment Agreement with Marco Hegyi pursuant to which the Company engaged Mr. Hegyi as its President from December 4, 2013 through December 4, 2016 to provide consulting and management services. Per the terms of the Hegyi Agreement, Mr. Hegyi established an office in Seattle, Washington while also maintaining operations in the Southern California area. Mr. Hegyi’s annual compensation is $150,000 for the first year of the Hegyi Agreement; $250,000 for the second year; and $250,000 for the third year. Mr. Hegyi is also entitled to receive an annual bonus equal to four percent (4%) of the Company’s EBITDA for that year. The annual bonus shall be paid no later than 31 days (i.e., by January 31st) following the end of each calendar year. Mr. 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, an entity affiliated with Mr. Hegyi received a Warrant to purchase up to 25,000,000 shares of common stock of the Company at an exercise price of $0.08 per share. The Hegyi Warrant is exercisable for five years. On June 20, 2014, the Company and Mr. Hegyi reduced the warrant life from ten to five years.

Mr. Hegyi was 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 agreed to purchase and maintain during the Term a “key manager” 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. The Company and Mr. Hegyi waived this $2,000,000 key manager insurance. If, prior to the expiration of the Term, the Company terminates Mr. 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 terminates Mr. Hegyi’s employment at any time prior to the expiration of the Term without Cause, or if Mr. Hegyi terminates his employment at any time for “Good Reason” or due to a “Disability”, Mr. Hegyi will be entitled to receive (i) his base salary amount through the end of the Term; and (ii) his annual bonus amount for each year during the remainder of the Term, which bonus amount shall be equal to the greater of (A) the annual bonus amount for the immediately preceding year, or (B) the bonus amount that would have been earned for the year of termination, absent such termination. If there has been a “Change in Control” and the Company (or its successor or the surviving entity) terminates Mr. 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 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 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 Scott

On July 31, 2014, the Company entered into a Consulting Chief Financial Officer Letter with an entity controlled by Mark Scott pursuant to which the Company engaged Mr. Scott as its Consulting CFO from July 1, 2014 through September 30, 2014, and continuing thereafter until either party provides sixty day notice to terminate the Letter or Mr. Scott enters into a full-time employment agreement.

Per the terms of the Scott Agreement, Mr. 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. The shares vest as follows:


	i	Two million shares will vest immediately upon securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB (not earned as of December 31, 2014);

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	ii	Two million shares will vest immediately upon the successful approval and effectiveness of the Company’s S-1 (not earned as of December 31, 2014);

	iii	Two million shares will 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.

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 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 the Company engaged Mr. Barnes as its Senior Vice-President of Business Development from October 1, 2014 on an at will basis. This Promotion Letter supersedes and cancels 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. Mr. Barnes received a bonus of $6,500 and is also entitled to receive a quarterly bonus based on growth of the Company’s growth margin dollars. Mr. Barnes was granted an option to purchase eight million shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at an exercise price on the date of grant. The shares vest as follows:


	i	Two million shares vested immediately;

	iv	Six million shares will vest on a monthly basis over a period of three years beginning on the date of grant.

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. Barnes’s continuous status as employee to the Company is terminated by the Company without Cause or Mr. Barnes terminates his employment with the Company for Good Reason as defined in the Barnes Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s Stock Incentive, then 100% of the total number of shares shall immediately become vested.

Mr. Barnes was entitled to participate in all group employment benefits that are offered by the Company to the 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. Finally, Mr. Barnes is entitled to fifteen days of vacation annually and also has certain insurance and travel employment benefits.

Mr. Barnes may receive severance benefits and the Company’s obligation under a termination by the Company without Cause or Mr. Barnes terminates his employment for Good Reason are discussed above.

Executive Employment Agreement with Sterling C. Scott

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On November 3, 2013, the Company entered into an Executive Employment Agreement with Sterling C. Scott pursuant to which the Company engaged Mr. Scott as Chief Executive Officer from November 3, 2013 to November 2, 2016 to provide consulting and management services. Per the terms of the Scott Agreement, Mr. Scott received an annual salary of $120,000 and he was eligible for any benefits made generally available by the Company. Mr. Scott was eligible to receive any bonuses made generally available by the Company, and he was 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 included 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 accepted 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.

On July 3, 2014, Sterling Scott exercised his option on a cashless basis and was issued 795,455 shares of our restricted common stock valued at $67,614 or $.085 per share.

Agreements with Robert Hunt

On June 7, 2013, the Company entered into an Executive Services Agreement with Robert Hunt, pursuant to which the Company engaged Mr. Hunt, from June 8, 2013 through June 7, 2015 to provide consulting and management services as the President of GrowLife Hydroponics, Inc. Upon Mr. Hunt’s employment by the Company, the Company paid 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 was entitled to receive an annual cash bonus (“Bonus”) as follows for its fiscal year 2013: 100% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves 150% of sales projections for such fiscal year; 75% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves at least 125% but less than 150% 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 100% of sales projections for such fiscal year. The Bonus, if any, was 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 was entitled to receive an annual cash bonus (“Bonus”) as follows for its fiscal year 2014: 100% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves 150% of sales projections for such fiscal year; 75% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves at least 125% but less than 150% 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 100% of sales projections for such fiscal year. The Bonus, if any, was 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 received, upon approval by the Company’s Board of Directors, non-qualified options to purchase 12,000,000 shares of the Company’s common stock, at a per share exercise price equal to the fair market value of one share of the Company’s common stock on the June 7, 2013 grant date and vested in 24 equal monthly installments on the last day of each month commencing from and after June 7, 2013. The options included a cashless exercise feature.

Mr. Hunt also entered into a NonCompetition, NonSolicitation and NonDisclosure Agreement dated June 7, 2013 whereby Mr. Hunt agreed to not compete with the Company for five years from June 7, 2013 or two years after any termination of employment of Mr. Hunt.

On May 30, 2014, the Company announced the resignation of Robert Hunt effective May 23, 2014 as Executive Vice President of Growlife, Inc., President of Growlife Hydroponics. On June 3, 2014, the Board of Directors accepted the resignation of Robert Hunt effective June 2, 2014 as a Director of the Company. On October 17, 2014, the Company entered into a Settlement Agreement and Release with Mr. Robert Hunt, whereby the Parties cancelled the Executive Services Agreement ("ESA") dated June 7, 2013 and his stock option grant for 12,000,000 shares. The Company agreed to issue 6,000,000 shares of restricted common stock under certain conditions that have not been met, pay cash severance totaling $50,000 monthly over five month starting October 25, 2014 and reimburse Mr. Hunt for health insurance benefits and other expenses monthly over five months starting October 25, 2014. The Parties entered into a release agreement.

Executive Employment Agreement with John Genesi

On November 3, 2013, the Company entered into an Executive Employment Agreement with John Genesi, pursuant to which the Company engaged Mr. Genesi as our Chief Financial Officer from November 3, 2013 through November 2, 2016 to provide consulting and management services. Per the terms of the Genesi Agreement, Mr. Genesi received an annual salary of $100,000, he was eligible for any benefits made generally

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available by the Company, he was eligible to receive any bonuses made generally available by the Company, and he was 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 included a cashless exercise feature and vested 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 excepted 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.

On July 15, 2014, the Company entered into a Severance Agreement with Mr. Genesi whereby Mr. Genesi resigned as Chief Financial Officer and the Parties cancelled the Executive Employment Agreement dated November 3, 2013, including the stock option grant for 10,000,000 shares. The Company agreed to issue 6,000,000 shares of restricted common stock, pay cash severance of six months of compensation payable monthly and provide health insurance benefits for six months from the Termination Date.

Promotion Letter with Jeremy Belmont

On October 10, 2014, the Company entered into a Promotion Letter with Jeremy Belmont which was effective October 1, 2014 pursuant to which the Company engaged Mr. Belmont as Vice President of Sales from October 1, 2014 on an at will basis. This Promotion Letter supersedes and cancels the Manager Services Agreement with Mr. Belmont dated October 1, 2013.

Per the terms of the Belmont Agreement, Mr. Belmont’s compensation is $72,000 on an annual basis. Mr. Belmont received a bonus of $6,500 and is also entitled to receive a quarterly bonus based on growth of the Company’s growth margin dollars. Mr. Barnes was granted an option to purchase five million shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at an exercise price on the date of grant. The Shares vest as follows:


	i	One million four hundred thousand shares vested immediately;

	iv	Three million six hundred thousand shares will vest on a monthly basis over a period of three years beginning on the date of grant.

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. Belmont’s continuous status as employee to the Company is terminated by the Company without Cause or Mr. Belmont terminates his employment with the Company for Good Reason as defined in the Belmont Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s Stock Incentive, then 100% of the total number of Shares shall immediately become vested.

Mr. Belmont 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. Finally, Mr. Belmont is entitled to fifteen days of vacation annually and also has certain insurance and travel employment benefits.

Mr. Belmont may receive severance benefits and the Company’s obligation under a termination by the Company without Cause or Mr. Belmont terminates his employment for Good Reason are discussed above.

Promotion Letter with Adam Edwards

On October 10, 2014, the Company entered into a Promotion Letter with Adam Edwards which was effective October 1, 2014 pursuant to which the Company engaged Mr. Edwards as Vice President of Sales from October 1, 2014 on an at will basis.

Per the terms of the Edwards Agreement, Mr. Edwards’s compensation is $72,000 on an annual basis. Mr. Edwards received a bonus of $6,500 and is also entitled to receive a quarterly bonus based on growth of the Company’s growth margin dollars. Mr. Edwards was granted 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 an exercise price on the date of grant. The shares vested quarterly over thirty six months.

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. Edwards’s continuous status as employee to the Company is terminated by the Company without Cause or Mr. Edwards terminates his employment with the Company for Good Reason as defined in the Edwards Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s Stock Incentive, then 100% of the total number of shares shall immediately become vested.

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Mr. Edwards 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. Finally, Mr. Edwards is entitled to fifteen days of vacation annually and also has certain insurance and travel employment benefits.

Mr. Edwards may receive severance benefits and the Company’s obligation under a termination by the Company without Cause or Mr. Edwards terminates his employment for Good Reason are discussed above.

Mr. Edwards resigned July 11, 2015.

Offer Letter with Tina Qunell

On November 20, 2014, the Company entered into an Offer Letter with Tina Qunell which was effective November 24, 2014 pursuant to which the Company engaged Ms. Qunell as Vice President of Marketing on an at will basis.

Per the terms of the Qunell Agreement, Ms. Qunell’s compensation is $72,000 on an annual basis. Ms. Qunell was granted an option to purchase seven million shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at an exercise price on the date of grant. One million of the shares vested immediately and six million vest quarterly over thirty six months.

All options 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 Ms. Qunell’s continuous status as employee to the Company is terminated by the Company without Cause or Mr. Qunell terminates her employment with the Company for Good Reason as defined in the Qunell Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s Stock Incentive, then 100% of the total number of shares shall immediately become vested.

Ms. Qunell 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. Finally, Ms. Qunell is entitled to fifteen days of vacation annually and also has certain insurance and travel employment benefits.

Ms. Qunell may receive severance benefits and the Company’s obligation under a termination by the Company without Cause or Ms. Qunell terminates her employment for Good Reason are discussed above.

Ms. Qunell resigned July 2, 2015.

Investment Banking Letter with D. Weckstein and Co. Inc.

NOTE 17 – 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 $86,626,099 and $21,380,138 for the years ended December 31, 2014 and 2013, respectively.

The Company has net operating loss carryforwards of approximately $11,964,000, which expire in 2022-2033. Because it is not more likely than not that sufficient tax earnings will be generated to utilize the net operating loss carryforwards, a corresponding valuation allowance of approximately $4,785,742 was established as of December 31, 2014. Additionally, under the Tax Reform Act of 1986, the amounts of, and benefits from, net operating losses may be limited in certain circumstances, including a change in control.

Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. There can be no assurance that the Company will be able to utilize any net operating loss carryforwards in the future.

For the year ended December 31, 2014, 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 principal components of the Company’s deferred tax assets at December 31, 2014 and 2013 are as follows:

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	2014			2013
U.S. operations loss carry forward and state at statutory rate of 40%	$	4,785,742		$	3,612,736
Less valuation allowance		(4,785,742	)		(3,612,736	)
Net deferred tax assets		-			-
Change in valuation allowance	$	(4,785,742	)	$	(3,612,736	)

A reconciliation of the United States Federal Statutory rate to the Company’s effective tax rate for the years ended December 31, 2014 and 2013 is as follows:

	2014			2013
Federal statutory rate		-34.0	%		-34.0	%
State income tax rate		-6.0	%		-6.0	%
Change in valuation allowance		40.0	%		40.0	%
Effective tax rate		0.0	%		0.0	%

NOTE 18 – 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, 2014, the following material transactions occurred:

Equity Issuance

On June 16, 2015, the Company issued 7,772,725 shares of its common stock to Horwitz + Armstrong LLP pursuant to a conversion of debt for legal services rendered to the Company in the amount of $171,000. The shares were valued at the fair market price of $0.022 per share.

Class Actions Alleging Violations of Federal Securities Laws

On June 1, 2015, the Court preliminarily approved the proposed settlement of the Derivative Actions pursuant to a proposed stipulated settlement agreement.

On August 17, 2015, the Court entered a Final Order and Judgment resolving the Derivative Actions in their entirety. The Derivative Actions were thereby dismissed in their entirety with prejudice.

As a result of the foregoing, all litigation discussed herein is resolved in full at this time.

Sales and Payroll Tax Liabilities

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Other Legal Proceedings

Terminated Operating Leases

Secured Convertible Debenture Transaction with TCA Global Credit Master Fund LP

On July 9, 2015, the Company closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP, an accredited investor, whereby the Company agreed to sell and TCA agreed to purchase up to $3,000,000 of senior secured convertible redeemable debentures, of which $700,000 was purchased on July 9, 2015 and up to $2,300,000 may be purchased in additional closings. The closing of the Transaction occurred on July 9, 2015.

Securities Purchase Agreement

As set forth above, the Company entered into the Securities Purchase Agreement on July 9, 2015 with the Purchaser whereby the Purchaser agreed to purchase up to $3,000,000 of the Debentures of which $700,000 was purchased at Closing. In connection with the Securities Purchase Agreement, the Company, at the discretion of Purchaser, may request in writing at any time after the Closing that Purchaser purchase additional Debentures at agreed upon time periods and amounts.

The Securities Purchase Agreement also provides that the Company shall, within ninety days of Closing, file any and all periodic reports with the SEC required under the Exchange Act to become current with the Company’s reporting requirements under the Securities Exchange Act of 1934 and shall use its best efforts to obtain approval for the listing and quotation of the Company’s common stock on the OTC Bulletin Board, or another Principal Trading Market more senior and established than the OTC Pink Sheets and approved by Purchaser, and to have such Common Stock trading in such Principal Trading Market.

In consideration for advisory services provided by Purchaser to the Company prior to the Closing, the Company paid to Purchaser a fee by issuing to Purchaser 10,000,000 shares of Common Stock at $0.02 per share equal to $200,000. The Advisory Fee Shares were valued at a price equal to the lowest volume weighted average price for the Common Stock for the five (5) Business Days immediately prior to the Effective Date, as reported by Bloomberg (the “VWAP”). The Advisory Fee Shares are subject to adjustment as provided in the Securities Purchase Agreement. The Company also paid certain transaction, due diligence and document review and legal fees to the Purchaser in connection with the Transaction.

Senior Secured, Convertible, Redeemable Debenture

The Company entered into an initial Debenture dated July 9, 2015 with the Purchaser whereby the Purchaser purchased $700,000 in senior secured, convertible, redeemable debentures in exchange for $700,000 in immediately available and lawful money of the United States of America. The Company promised to pay Purchaser, by no later than October 9, 2016 the outstanding principal together with interest on the outstanding principal amount under the Debenture, at the rate of 18% per annum simple interest. The Company shall make monthly payments of principal and interest on the Debenture to Purchaser, while this Debenture is outstanding, until the Maturity Date, based on the payment, amortization and redemption premium schedule attached as Schedule A to the Debenture.

The indebtedness evidenced by this Debenture is also secured by a first priority lien and security interest in all of the assets and property of the Company and various other instruments as set forth in the Transaction Documents, subject to the terms and conditions of the Intercreditor Agreement described below.

At any time while the Debenture is outstanding on or after the Closing, (i) if mutually agreed upon by the parties or (ii) at the sole option of the Purchaser upon the occurrence of an Event of Default, the Purchaser may convert all or any portion of the outstanding principal, accrued and unpaid interest redemption premium and any other sums due and payable hereunder or under

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any of the other Transaction Documents into shares of Common Stock of the Company at a price equal to: (i) the Conversion Amount (the numerator); divided by (ii) 90% of the lowest of the average daily volume weighted average price of the Company’s Common Stock during the 5 trading days immediately prior to the Conversion Date (the denominator).

Security Agreement(s)

In connection with the Securities Purchase Agreement and Debenture, the Company entered into a Security Agreement dated July 9, 2015 with the Purchaser whereby the Company agreed to grant to Purchaser an unconditional and continuing, first priority security interest in all of the assets and property of the Company to secure the prompt payment, performance and discharge in full of all of Company’s obligations under the Debentures, the Purchase Agreement and the other Transaction Documents, subject to the terms and conditions of the Intercreditor Agreement set forth below.

In addition, each of the Company’s operating subsidiaries also agreed to grant to Purchaser an unconditional and continuing, first priority security interest in all of the assets and property of each of the subsidiaries to further secure the prompt payment, performance and discharge in full of all of Company’s obligations under the Debentures, the Purchase Agreement and the other Transaction Documents.

Guaranty Agreement(s)

In connection with the Securities Purchase Agreement and Debenture, each of the Company’s operating subsidiaries entered into Guaranty Agreements dated July 9, 2015 with the Purchaser whereby the subsidiaries agreed to guarantee and become surety to Purchaser for the full, prompt and unconditional payment of the Liabilities and payment and performance of the Company’s obligations and the full, prompt and unconditional performance of each term and condition to be performed by Company under the Debentures and the other Transaction Documents.

Pledge Agreement(s)

In connection with the Securities Purchase Agreement and Debenture, the Company entered into Pledge Agreements dated July 9, 2015 with the Purchaser whereby the Company agreed to pledge to Purchaser its shares in each of its operating subsidiaries as further security for the payment and performance of the Company’s obligations and the full, prompt and unconditional performance of each term and condition to be performed by Company under the Debentures and the other Transaction Documents.

Intercreditor Agreement and Related Creditor Documentation

On July 9, 2015, the Company, each of its subsidiaries, Purchaser and Logic Works LLC (an existing senior secured creditor) entered into an Intercreditor Agreement whereby Purchaser and Logic Works agreed that their outstanding senior secured loans to the Company be secured on a pari passu basis with respect to all assets and property of the Company and its subsidiaries. As a result of the Intercreditor Agreement, all sums secured or owing to Purchaser and Logic Works shall be held by them on a pari passu and pro-rata basis between them, in proportion to such party’s outstanding principal amount owing under their respective loan documents.

In addition, the Company, each of its subsidiaries, Purchaser and Jordan Scott and Andrew Gentile, respectively, each entered into Subordination Agreements dated July 9, 2015 whereby Scott and Gentile agreed to subordinate their existing 6% Senior Secured Convertible Notes, dated March 16, 2012, as amended, all of their indebtedness, obligations and security interests to the Purchaser’s security interests as more fully set forth in the Transaction Documents.

On July 9, 2015, Jordan Scott and Andrew Gentile each entered into Amendment Two of the Amended and Restated 6% Senior Secured Convertible Note which provide for an increase in the interest rate from 6% to 10% and the default interest rate from 12% to 20% on the 6% Senior Secured Convertible Notes for so long as the Company remains in technical default on said notes due to its delisting from its Primary Trading Market April 2014. The Company further agreed that said 20% default interest will be applied to the date of default on April 10, 2014 and continuing through the present.

Committed Equity Facility Transaction with TCA Global Credit Master Fund LP

On August 6, 2015, the Company closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP, whereby the Company agreed to sell and TCA agreed to purchase a $100,000 senior secured convertible redeemable debenture and the Company agreed to issue and sell to TCA, from time to time, and TCA agreed to purchase from the Company up to $3,000,000 of the Company’s common stock pursuant to a Committed Equity Facility. The closing of the Transaction occurred on August 6, 2015.

In consideration for advisory services provided by Purchaser to the Company prior to the, the Company paid to Purchaser a fee by issuing to Purchaser 5,000,000 shares of Common Stock at $0.02 per share equal to $100,000. The Advisory Fee Shares were valued at price equal to the lowest volume weighted average price for the Common Stock for the five (5) Business Days

F-36

immediately prior to the issuance. The Advisory Fee Shares are subject to adjustment as provided in the Securities Purchase Agreement. The Company also paid certain transaction, due diligence and document review and legal fees in connection with the Transaction.

The Company entered into a Debenture dated August 6, 2015 with the Purchaser whereby the Purchaser purchased $100,000 in a senior secured, convertible, redeemable debenture from the Company in exchange for $100,000. The Company promised to pay Purchaser, by no later than August 6, 2016 the outstanding principal together with interest on the outstanding principal amount under the Debenture, at the rate of 18% per annum simple interest. The Debenture is convertible only at the option of Purchaser upon an event of default at a conversion price of 90%)of the lowest of the average daily volume weighted average price of the Company’s Common Stock during the 5 trading days immediately prior to the conversion date.

In addition, the Company entered into a Committed Equity Facility, dated August 6, 2015, with the Purchaser in which the Company agreed to issue and sell to the Purchaser, from time to time, and the Purchaser agreed to purchase from the Company up to $3,000,000 of the Company’s common stock. At any time during the duration of the agreement and after the Company has an effective registration statement outstanding, the Company can require the Purchaser to purchase shares of its common stock which will be sold by Purchaser with the net proceeds provided to the Company, subject to the terms and conditions set forth in the Committed Equity Facility.

To facilitate the Committed Equity Facility, the Company has granted the Purchaser certain registration rights pursuant to a Registration Rights Agreement dated August 6, 2015 whereby the Company will file a registration statement no later than seventy-five (75) days from the date of the Committed Equity Facility to facilitate the purchase and sale of the common stock under the Committed Equity Facility.

The Company’s obligation to repay the Debenture disclosed herein as well as the Debenture entered into by and between the Company and Purchaser on July 9, 2015, are secured by security agreements, guaranty agreements and pledge agreements previously disclosed on the Company’s Current Report on Form 8-K filed July 16, 2015 and incorporated herein by reference. The Company has additionally entered into an Authorization Agreement, dated August 6, 2015, with Purchaser whereby scheduled re-payments to the Purchaser will be debited from the Company’s account according to the payment schedule of both the Debenture disclosed herein and the Debenture previously entered into on July 9, 2015.

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 due to the fact that the Company has moved its headquarters to Seattle, Washington and is no longer required to register as a foreign entity in California.

Enactment of Heightened Corporate Governance Measures Pursuant to Derivative Action Settlement

In connection with the settlement of the Derivative Actions related to alleged violations of federal securities laws, the Company agreed to expansive corporate governance measures.

During October 2015, the Company expects to enact heightened corporate governance measure pursuant to the Derivative Action Settlement.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and 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 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.

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The effectiveness of our internal control over financial reporting as of December 31, 2014 has not been audited by PMB Helin Donovan, LLP, an independent registered public accounting firm.



/s/ Marco Hegyi		/s/ Mark E. Scott
Marco Hegyi		Mark E. Scott
President		Chief Financial Officer

Seattle, WA

September 30, 2015

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, GrowLife, Inc. (the "Registrant") has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	GROWLIFE, INC.

Date: September 30, 2015	By:	/s/ Marco Hegyi
		Marco Hegyi
		President and Director (Principal Executive Officer)

	By:	/s/ Mark E. Scott
		Mark Scott
		Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

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 and in the capacities and on the dates indicated:

SIGNATURES	TITLE	DATE

/s/ Marco Hegyi	President and Director	September 30, 2015
Marco Hegyi	(Principal Executive Officer)

/s/ Mark E. Scott	Chief Financial Officer and Secretary	September 30, 2015
Mark E. Scott	(Principal Financial/Accounting Officer)

/s/ Anthony Ciabattoni	Director	September 30, 2015
Anthony Ciabattoni

/s/ Jeff Giarraputo	Director	September 30, 2015
Jeff Giarraputo

Exhibit 10.15

MAINE COMMERCIAL ASSOCIATION OF REALTORS®

COMMERCIAL LEASE (GROSS/MODIFIED GROSS)

PARTIES

William C. Rowell Family Limited Partnership with a mailing address of One Monument Way, Portland, Maine 04101 ("LANDLORD"), hereby leases to Evergreen Garden Center, LLC, with a mailing address of 301 Forest Avenue, Portland, Maine 04101, ("TENANT"), and the TENANT hereby leases from LANDLORD the following described premises:

PREMISES

The Premises are deemed to contain 4,000 +/- square feet. The Premises are located at 301 Forest Avenue, Portland, Maine 04101 together with the right to use in common, with others entitled thereto, the hallways, stairways and elevators necessary for access to said leased premises, and lavatories nearest thereto. The leased premises are accepted in "as is" condition except if specifically set forth to the contrary in this lease.

TERM

The term of this lease shall be for Three (3) Years, unless sooner terminated as herein provided, commencing on May 1 , 2013, and ending on April 30, 2016.

RENT

The TENANT shall pay to the LANDLORD the following base rent:

Lease Year(s)	Annual Base Rent		Monthly Rent
One	$	59,007.26	$	4,917.27
Two	$	60,777.48	$	5,064.79
Three	$	62,600.80	$	5,216.73

payable in advance in equal monthly installments on the first day of each month during the term, said rent to be prorated for portions of a calendar month at the beginning or end of said term, all payments to be made to LANDLORD or to such agent and at such place as LANDLORD shall from time to time in writing designate, the following being now so designated:

Joseph Keaney,

One Monument Way, Portland, Maine 04101.

If TENANT does not pay base rent, supplemental and additional rents, or other fees and charges when due pursuant to the terms of this Lease, then LANDLORD, in its sole discretion, may charge, in addition to any other remedies it may have, a late charge for each month or part thereof that TENANT fails to pay the amount due after the due date. The late charge shall be equal to four percent (4%) of the amount due LANDLORD each month in addition to the rent then due.

5.	RENEWAL OPTION

So long as TENANT has not been in default of this lease during the term hereof, TENANT shall have the option to renew this lease for Two (2) Three (3) Year terms. In order to exercise TENANT's option, TENANT shall Notify LANDLORD in writing by Certified or Registered Mail of its intention to exercise its option on or before six (6) months prior to the end of the then current term, said renewal to be upon the same terms and conditions set forth in this Lease except for base rent which shall be as follows:

Lease Year(s) Rent	Annual Base Rent		Monthly

Four	$	64,478.82	$	5,373.24

Five	$	66,413.18	$	5.534.43

Six	$	68,405.58	$	5.700.47

Seven	$	70,457.75	$	5.871.48

Eight	$	72,571.48	$	6,047.62

Nine	$	74,748.63	$	6,229.05

In the event that TENANT fails to perform its obligations under this Section, time being of the essence, the option shall be deemed not to have been exercised.

6.	SECURITY DEPOSIT

Upon the execution of this lease, the TENANT shall pay to the LANDLORD the amount of Four Hundred Dollars ($400) making the total security deposit Four Thousand Nine Hundred Dollars ($4,900), which shall be held as a security for the Tenant's performance as herein provided and refunded to the TENANT without interest at the end of this lease subject to the TENANT's satisfactory compliance with the conditions hereof.

7.	RENT ADJUSTMENT

(a)	TAX ESCALATION

If in any tax year commencing with the fiscal year 2013, the real estate taxes on the land and buildings, of which the leased premises are a part, are in excess of the amount of the real estate taxes thereon for the fiscal year 2013 (hereinafter called the "Base Year"), TENANT will pay to LANDLORD as additional rent hereunder, in accordance with subparagraph B of this Article, 25.16 percent of such excess that may occur in each year of the term of this lease or any extension or renewal thereof and proportionately for any part of a fiscal year in which this lease commences or ends. If the LANDLORD obtains an abatement of any such excess real estate tax, a proportionate share of such abatement, less the reasonable fees and costs Incurred in obtaining the same, if any, shall be refunded to the TENANT.

(b)	OPERATING COST ESCALATION

The TENANT shall pay to the LANDLORD as additional rent hereunder in accordance with subparagraph B of this Article, 25 .16 percent of any increase in operating expenses over those incurred during the calendar year 2013. Operating expenses are defined for the purposes of this agreement as operating expenses per annum of the building and its appurtenances and all exterior

areas, yards, plazas, sidewalks, landscaping and the like then (i.e. as of said last day of the calendar year concerned) located outside of the building but related thereto and the parcels of land on which they are located (said building, appurtenances, exterior areas, and land hereinafter referred to in total as the "building"). Operating expenses include, but are not limited to: (i) all costs of furnishing electricity, heat, air-conditioning, and other utility services and facilities to the building, (ii) all costs of any insurance carried by LANDLORD related to the building, (iii) all costs of common area cleaning and janitorial services, (iv) all costs of maintaining the building including the operation and repair of heating and air-conditioning equipment and any other common building equipment, noncapital roof repairs and all other repairs, improvements and replacements required by law or necessary to keep the building in a well maintained condition, (v) all costs of snow and ice removal, landscaping and grounds care, ( vi ) all other costs of the management of the building, including, without limitation, property management fees, and (vii) all other reasonable costs relating directly to the ownership, operation, maintenance and management of the building by LANDLORD. This increase shall be prorated should this lease be in effect with respect to only a portion of any calendar year.

During each year of the term of this lease TENANT shall make monthly estimated payments to LANDLORD, as additional rent, for TENANT's share of such increases in real estate taxes and operating expenses for the then current year. Said estimated monthly payments shall be made along with base rent payments and shall be equal to one twelfth (1/12) of TENANT's annualized share of LANDLORD's projected increases for the current year. After the end of each calendar year, LANDLORD shall deliver to TENANT a statement showing the amount of such increases and also showing the TENANT's share of the same. The TENANT shall, within thirty (30) days after such delivery, pay the TENANT's share to the LANDLORD, as additional rent, less any estimated payments. If the estimated payments exceed TENANT's share, then the excess shall be applied to the next year's monthly payments for estimated increases.

UTILITIES

The TENANT shall pay, as they become due, all bills for electricity and other utilities (whether they are used for furnishing heat or other purposes) that are furnished to the leased premises and presently separately metered, all bills for fuel furnished to a separate tank servicing the leased premises exclusively and all charges for telephone and other communication systems used at, and supplied to, the leased premises. The LANDLORD agrees to furnish water for ordinary drinking, cleaning, lavatory and toilet facilities and reasonable heat and air conditioning, if installed as part of the structure of the building (except to the extent that the same are furnished through separately metered utilities or separate fuel tanks as set forth above), so as to maintain the leased premises and common areas of the building at comfortable levels during normal business hours on regular business days of the heating and air conditioning seasons of each year, to furnish elevator service, if installed as part of the structure of the building, and to light passageways and stairways during business hours, and to furnish such cleaning service as is customary in similar buildings in said city or town, all subject to interruption due to any accident, to the making of repairs, alterations or improvements, to labor difficulties, to trouble in obtaining fuel, electricity, service, or supplies from the sources from which they are usually obtained for said building, or to any cause beyond the LANDLORD's control.

LANDLORD shall have no obligation to provide utilities or equipment other than the utilities and equipment within the leased premises as of the commencement date of this lease. In the event TENANT requires additional utilities or equipment, the installation and maintenance thereof shall be the TENANT's sole obligation, provided that such installation shall be subject to the written consent of the LANDLORD. LANDLORD shall incur no liability to TENANT whatsoever should any utility or service become unavailable from any public utility company, public authority or any other person, firm or corporation, including LANDLORD, supplying, distributing or responsible for such utility or service. LANDLORD shall under no circumstances be liable to TENANT in uninsured damages or otherwise for any interruption in service or failure to function of water, electricity, waste lines, sprinkler system, heating, ventilation, air-conditioning or other utilities and services caused by an unavoidable delay, by the making of any necessary repairs or improvements or by any cause other than the gross negligence of LANDLORD or LANDLORD's employees, contractors or invitees.

9.	USE OF LEASED PREMISES

(a)

The TENANT shall use the leased premises only for the purpose of Retail Space. TENANT shall be responsible for the provision, maintenance, repair, replacement and inspection of all alarm systems and safety equipment (including but not limited to fire extinguishers, and eye wash stations) that are required for TENANT'S use of the Leased Premises under applicable law (including but not limited to laws relating to life safety and worker safety).

(b)

TENANT shall not suffer or permit the Leased Premises or any part thereof to be used in any manner, or anything to be done therein, or suffer or permit anything to be brought into or kept in the Leased Premises that would in any way (i) cause damage to the Leased Premises or any part thereof, (ii) overload or exceed the capacity of the heating, air-conditioning, ventilating, structural capability, plumbing (including septic) or other mechanical or electrical systems of the Building or facilities installed therein, (iii) constitute a public or private nuisance, or (iv) alter the appearance of the exterior of the Building or any portion of the interior thereof except as otherwise permitted hereunder, or (v) disrupt the use of adjacent areas of the Building.

(c)

TENANT shall use the Leased Premises in a careful and safe manner. TENANT shall keep the Leased Premises in a secure, neat and sanitary condition. TENANT shall dispose of all debris, trash and waste in compliance with all applicable laws and regulations. TENANT shall, at TENANT'S own expense clear snow, ice and debris from its entrance and exit doors, any walkways, the sidewalk in front of the Premises, and from the parking area. TENANT shall coordinate such removal of snow, ice, and debris with any other tenants of the building, and they may come to agreement on sharing costs of same, but the removal described herein shall remain TENANT's responsibility.

(d)

TENANT, at TENANT's expense, shall comply with all laws and ordinances, and all rules, orders and regulations of all governmental authorities and of all insurance policies, at any time duly issued or in force, applicable to the Leased Premises or any part thereof or to TENANT's use thereof. TENANT shall be responsible for all occupancy permits and other governmental approvals applicable to its occupancy or use of the Leased Premises or, to the extent permitted by LANDLORD, the performance of TENANT changes thereto.

(e)

TENANT shall observe and comply with all reasonable rules and security regulations now or hereafter made by LANDLORD for the care and use of the Leased Premises, the Building and balance of LANDLORD's Property by TENANT and any other tenants of the LANDLORD's Property. Without limiting the generality of the preceding sentence, LANDLORD shall have the right to adopt signage standards applicable to all exterior portions of the Building and elsewhere in LANDLORD's Property. TENANT shall comply with such policy and effect changes in or replacements to its exterior signage accordingly.

(f)

In the event that TENANT fails to comply with this Article 9, then, without affecting LANDLORD's other remedies under this Lease, LANDLORD and its agents shall have the right, but not the obligation, to enter the Leased Premises to effect a cure of such non-compliance. Any violation of this Article 9 may be restrained by injunction, and TENANT shall be liable for all damages resulting from any violation of any of the provisions of Article 8.

10.	COMPLIANCE WITH LAWS

TENANT agrees to conform to the following provisions during the entire term of this lease: (i) TENANT shall not injure or deface the leased premises or building; (ii) No auction sale. inflammable fluids, chemicals, nuisance, objectionable noise or odor shall be permitted on the leased premises; (iii) TENANT shall not permit the use of the leased premises for any purpose other than set forth herein or any use thereof which is improper, offensive, contrary to law or ordinance, or liable to invalidate or increase the premiums for any insurance on the building or its contents or liable to render necessary any alterations or additions to the building; and (iv) TENANT shall not obstruct in any manner any portion of the building not hereby demised or the sidewalks or approaches to said building or any inside or outside windows or doors. TENANT shall observe and comply with all reasonable rules and security regulations now or hereafter made by LANDLORD for the care and use of the leased premises, the building, its facilities and approaches. TENANT agrees to keep the leased premises equipped with all safety appliances and make all accessibility alterations, improvements or installations to the building, and/or accommodations in TENANT's use thereof required by law or any public authority as a result of TENANT's use or occupancy of the premises or TENANT's alterations or additions thereto, which alterations, improvements and installations shall be subject to LANDLORD's consent as provided in this lease.

11.	MAINTENANCE

(a)	TENANT'S OBLIGATIONS

TENANT acknowledges by entry thereupon that the leased premises are in good and satisfactory order, repair and condition, and accepts the premises as is, where is, with all faults, except as expressly provided for herein for Landlord's Work and other express provisions of this lease allocating Landlord's responsibilities, and covenants during said term and further time as the TENANT holds any part of said premises to keep the leased premises in as good order, repair and condition as the same are in at the commencement of said term, or may be put in thereafter, damage by fire or unavoidable casualty and reasonable use and wear only excepted. Notwithstanding anything to the contrary herein, if TENANT has leased ground floor space, TENANT covenants to keep all plate glass windows in good repair and condition and to carry adequate insurance to provide for the replacement of any such plate glass that is damaged or destroyed. . TENANT shall also be wholly responsible for removal and disposal of garbage, trash and other wastes from the Leased Premises. LANDLORD shall have the right to approve the location and appearance of any exterior dumpster, exterior trash receptacle or other storage facility used by TENANT in the exterior portions of LANDLORD's Property. TENANT expressly acknowledges here its responsibility for snow, ice and debris removal as set forth above in Article 9.

(b)	LANDLORD’S OBLIGATIONS

The LANDLORD agrees to maintain and repair the roof, exterior walls and structure of the building of which the leased premises are a part in the same condition as they are at the commencement of the term or as it may be put in during the term of this lease, reasonable wear and tear, damage by fire and other casualty only excepted, unless such maintenance or repair is made necessary by fault or neglect of the TENANT or the employees, contractors, agents or invitees of TENANT, in which case such maintenance or repair shall be at the expense of the TENANT and TENANT shall pay all costs therefor.

12.	ALTERATIONS - ADDITIONS

(a)	The TENANT shall not make any alterations or additions, or permit the making of any holes in any part of said building, or paint or place any signs, drapes, curtains, shades, awnings, aerials or

flagpoles or the like, visible from outside of the leased premises, that is, from outdoors or from any corridor or other common area within the building; or permit anyone except the TENANT to use any part of the leased premises for desk space or for mailing privileges without on each occasion obtaining prior written consent of the LANDLORD. TENANT shall not suffer or permit any lien of any nature or description to be placed against the building, the premises or any portion thereof, and in the case of any such lien attaching by reason of the conduct of the TENANT to immediately pay and remove the same; this provision shall not be interpreted as meaning that the TENANT has any authority or power to permit any lien of any nature or description to attach to or to be placed upon the LANDLORD's title or interest in the building, the premises, or any portion thereof.

(b)

All fixtures (other than trade fixtures), improvements, installations and appurtenances attached to or built into the Leased Premises on the Commencement Date or, with LANDLORD's prior approval which it may grant or withhold in LANDLORD's discretion, during the Term shall be and remain a part of the Leased Premises, as of the expiration or earlier termination of this Lease, shall be deemed the property of LANDLORD without compensation, allowance, or credit to TENANT and shall not be removed by TENANT, except as hereinafter in this Article expressly provided.

(c)

Prior to expiration or earlier termination of this Lease, all non-structural improvements, security systems, movable partitions, communications equipment and office equipment, other machinery and equipment, trade fixtures and signs that are installed in or on the Leased Premises by or for the account of TENANT, and all furniture, furnishings and other articles of movable personal property owned by TENANT and located on the Leased Premises (all of which are sometimes hereinafter called "TENANT's Property") shall be removed by TENANT at the expiration or earlier termination of this Lease. TENANT shall repair any damage to the Leased Premises or to the Building resulting from such removal. Unless otherwise agreed by LANDLORD, TENANT shall not remove any HVAC elements, plumbing improvements, or electrical or lighting improvements without replacing the same with new equipment and materials of the same quality and first obtaining LANDLORD's approval.

13.	ASSIGNMENT SUBLEASING

The TENANT shall not by operation of Jaw or otherwise, assign, mortgage or encumber this lease, or sublet or permit the demised premises or any part thereof to be used by others, without LANDLORD's prior express written consent in each instance [which consent shall not be unreasonably withheld]. In any case where LANDLORD shall consent to such assignment or subletting, TENANT named herein shall remain fully liable for the obligations of TENANT hereunder, including, without limitation, the obligation to pay the rent and other amounts provided under this lease. For purposes of this lease, the sale of stock of a corporate TENANT or the change of a general partner of a partnership TENANT shall constitute an assignment of this lease.

14.	SUBORDINATION

This lease shall be subject and subordinate to any and all mortgages, deeds of trust and other instruments in the nature of a mortgage, now or at any time hereafter a lien or liens on the property of which the leased premises are a part and the TENANT shall, when requested, promptly execute and deliver such written instruments as shall be necessary to show the subordination of this lease to said mortgages, deeds of trust or other such instruments in the nature of a mortgage. Provided the Tenant performs all of its obligations under this lease, the Tenant shall be entitled to the quiet enjoyment of the leased Premises.

15.	LANDLORD'S ACCESS

The LANDLORD or agents of the LANDLORD may, at all reasonable times during the term of this lease, enter the leased premises (i) to examine the leased premises and, if LANDLORD shall so elect, to make any repairs or additions LANDLORD may deem necessary and, at TENANT's expense, to remove any alterations, additions, signs, drapes, curtains, shades, awnings, aerials or flagpoles, or the like, not consented to in writing, (ii) to show the leased premises to prospective purchasers and mortgagees, and (iii) to show the leased premises to prospective tenants during the six (6) months preceding the expiration of this lease. LANDLORD also reserves the right at any time within six (6) months before the expiration of this lease to affix to any suitable part of the leased premises a notice for letting or selling the leased premises or property of which the leased premises are a part and to keep the same so affixed without hindrance or molestation. LANDLORD shall also have the right to enter on and/or pass through the Leased Premises, or any part thereof, at such times as such entry shall be required by circumstances of emergency affecting the Leased Premises or the Building. LANDLORD shall have the right in its discretion to erect or install demising walls and any other improvements that LANDLORD deems necessary to separate the Leased Premises from the remainder of the Building.

16.	INDEMNIFICATION AND LIABILITY

TENANT will defend and, except to the extent caused by the gross negligence or willful conduct of LANDLORD, will indemnify LANDLORD and its employees, agents and management company, and save them harmless from any and all Injury, loss, claim, damage, liability and expense (including reasonable attorneys' fees) in connection with the loss of life, personal injury or damage to property or business, arising from, related to, or in connection with the occupancy or use by TENANT of the leased premises or any part of LANDLORD's property or the building, or occasioned wholly or in part by any act or omission of TENANT, its contractors, subcontractors, subtenants, licensees or concessionaires, or its or their respective agents, servants or employees and any person or property while on or about the leased premises. TENANT shall also pay LANDLORD's expenses, including reasonable attorneys' fees, incurred by LANDLORD in enforcing any obligation, covenant or agreement of this lease. The provisions of this paragraph shall survive the termination or earlier expiration of the term of this lease. Without limitation of any other provision herein, neither the LANDLORD, its employees, agents nor management company shall be liable for, and TENANT hereby releases them from all claims for, any injuries to any person or damages to property or business sustained by TENANT or any person claiming through TENANT due to the building or any part thereof (including the premises), or any appurtenances thereof, being in need of repair or due to the happening of any accident in or about the building or the leased premises or due to any act or neglect of any tenant of the building or of any employee or visitor of TENANT. Without limitation, this provision shall apply to injuries and damage caused by nature, rain, snow, ice, wind, frost, water, steam, gas or odors in any form or by the bursting or leaking of windows, doors, walls, ceilings, floors, pipes, gutters, or other fixtures; and to damage caused to fixtures, furniture, equipment and the like situated at the leased premises, whether owned by the TENANT or others.

17.	TENANT'S LIABILITY INSURANCE

TENANT shall (i) insure TENANT and LANDLORD, as their interests appear, with general public liability coverage on the leased premises, in such amounts and with such companies and against such risks as the LANDLORD shall reasonably require and approve but in amounts not more than One Million Dollars ($1,000,000.00) combined single limit with deductibles of not more than $5,000 per occurrence, and (ii) insure LANDLORD and TENANT, as their interests appear, against loss of the contents and improvements of the leased premises under standard Maine form policies, against fire and standard extended coverage risks, in such amounts and with such companies as the LANDLORD shall reasonably require and approve, with waiver of subrogation if such waiver can be obtained without charge. The TENANT shall deposit with the LANDLORD certificates for such insurance at or prior to the commencement of the term, and thereafter within thirty (30) days prior to the expiration of any such policies. All such insurance certificates shall provide that such policies shall not be cancelled without at least thirty (30) days prior written notice to each assured named therein.

18.	PROPERTY INSURANCE

Tenant will have a minimum of $300,000 of Property Insurance. TENANT represents that the wholesale value of TENANT's inventory will be approximately $300,000 at the commencement of this Lease. TENANT agrees to increase TENANT's Property Insurance coverage appropriately should the wholesale value of TENANT’s inventory increase beyond ordinary ebb and flow of the amount of TENANT’s inventory after commencement of this Lease. Upon inquiry from LANDLORD, not more than quarterly, TENANT shall advise LANDLORD of the wholesale value of TENANT's inventory, and, if at such time, the wholesale value exceeds $300,000, TENANT shall increase its Property Insurance coverage to the new amount, which shall then become the minimum of Property Insurance to be maintained by TENANT.

19.	FIRE CASUALTY - EMINENT DOMAIN

Should a substantial portion of the leased premises, or of the property of which they are a part, be damaged by fire or other casualty, or be taken by eminent domain, the LANDLORD may elect to terminate this lease. When such fire, casualty, or taking renders the leased premises unfit for use and occupation and the LANDLORD does not so elect to terminate this lease, a just and proportionate abatement of rent shall be made until the leased premises, or in the case of a partial taking what may remain thereof, shall have been put in proper condition for use and occupation. LANDLORD reserves and excepts all rights to damages to the leased premises and building and the leasehold hereby created, accrued or subsequently accruing by reason of anything lawfully done in pursuance of any public, or other, authority; and by way of confirmation, TENANT grants to LANDLORD all TENANT's rights to such damages and covenants to execute and deliver such further instruments of assignment thereof as LANDLORD may from time to time request. LANDLORD shall give TENANT notice of its decision to terminate this lease or restore said premises within ninety (90) days after any occurrence giving rise to LANDLORD's right to so terminate or restore. Notwithstanding anything to the contrary, LANDLORD's obligation to put the leased premises or the building in proper condition for use and occupation shall be limited to the amount of the proceeds from any insurance policy or policies or of damages which accrue by reason of any taking by a public or other authority, which are available to LANDLORD for such use. All proceeds under the insurance policies maintained by LANDLORD in respect of the Buildings or Leased Premise ("LANDLORD Insurance Proceeds" ) shall be paid to LANDLORD. The LANDLORD Insurance Proceeds shall remain the property of LANDLORD.

If the destruction or damage to the Building is such that LANDLORD shall not have the right to terminate this Lease under the provisions contained in this Article or in the event that LANDLORD, having such right, shall elect not to terminate this Lease as aforesaid, TENANT shall proceed forthwith to repair and restore TENANT's Property and the portions of the Leased Premises for which it has maintenance and repair responsibility in a good and workman-like fashion, and LANDLORD shall proceed to restore the remaining portions of the Building. LANDLORD shall have sole access to the LANDLORD Insurance Proceeds available for such purposes. In the event of a partial destruction of or damage to the Leased Premises by fire or other casualty as aforesaid, and during the period of restoration or repair, a just and equitable portion of the Rent shall abate based on the nature and extent of the damage to the Leased Premises.

20.	DEFAULT AND BANKRUPTCY

In the event that:

(a)	The TENANT shall default in the payment of any installment of rent or other sum herein specified when due which default is not corrected within Ten (10) days thereof; or

(b)	The TENANT shall default in the observance or performance of any other of the TENANT's covenants, agreements, or obligations hereunder and such default shall not be corrected within three (3) days thereof; or

(c)	The leasehold hereby created shall be taken on execution, or by other process of law; or

(d)

Any assignment shall be made of TENANT's property for the benefit of creditors, or a receiver, guardian, conservator, trustee in bankruptcy or similar officer shall be appointed by a court of competent jurisdiction to take charge of all or any part of TENANT' s property, or a petition is filed by TENANT under any bankruptcy, insolvency or other debtor relief law,

then and in any of said cases (notwithstanding any license of any former breach of covenant or waiver of the benefit hereof or consent in a former instance), LANDLORD shall be entitled to all remedies available to LANDLORD at law and equity, including without limitation, the remedy of forcible entry and detainer, and LANDLORD lawfully may, immediately or at any time thereafter, and without demand or notice, mail a notice of termination to the TENANT, or enter into and upon the leased premises or any part thereof in the name of the whole and repossess the same as of its former estate, and expel TENANT and those claiming through or under it and remove it or their effects without being deemed guilty of any manner of trespass, and without prejudice to any remedies which might otherwise be used for arrears of rent or preceding breach of covenant, and upon such mailing or entry as aforesaid, this lease shall terminate; and TENANT covenants and agrees, notwithstanding any entry or re-entry by LANDLORD, whether by summary proceedings, termination, or otherwise, that TENANT shall, as of the date of such termination, immediately be liable for and pay to LANDLORD the entire unpaid rental and all other balances due under this Lease for the remainder of the term. In addition, TENANT agrees to pay to LANDLORD, as damages for any above described breach, all costs of reletting the Leased Premises including real estate commissions and costs of renovating the Premises to suit any new tenant.

21.

NOTICE

Any notice from the LANDLORD to the TENANT relating to the leased premises or to the occupancy thereof, shall be deemed duly served, if left at the leased premises addressed to the TENANT, or if mailed to the leased premises, registered or certified mail, return receipt requested, postage prepaid, addressed to the TENANT, or if delivered to Tenant by an established local or national courier service. Any notice from the TENANT to the LANDLORD relating to the leased premises or to the occupancy thereof, shall be deemed duly served, if mailed to the LANDLORD by registered or certified mail, return receipt requested, postage prepaid, addressed to the LANDLORD at LANDLORD'S address set forth in Article 1, or at such other address as the LANDLORD may from time to time advise in writing.

22.

SURRENDER

The TENANT shall at the expiration or other termination of this lease peaceably yield up the leased premises and all additions, alterations and improvements thereto in good order, repair and condition, damage by fire, unavoidable casualty, and reasonable wear and tear only excepted, first moving all

goods and effects not attached to the leased premises, repairing all damage caused by such removal, and leaving the leased premises clean and tenantable. If LANDLORD in writing permits TENANT to leave any such goods and chattels at the leased premises, and the TENANT does so, TENANT shall have no further claims and rights in such goods and chattels as against the LANDLORD or those claiming by, through or under the LANDLORD.

23.	HAZARDOUS MATERIALS

TENANT covenants and agrees that, with respect to any hazardous, toxic or special wastes, materials or substances including asbestos, waste oil and petroleum products (the "Hazardous Materials") which TENANT, its agent or employees, may use, handle, store or generate in the conduct of its business at the leased premises TENANT will: (i) comply with all applicable laws, ordinances and regulations which relate to the treatment, storage, transportation and handling of the Hazardous Materials; (ii) that TENANT will in no event permit or cause any disposal of Hazardous Materials in, on or about the leased premises and in particular will not deposit any Hazardous Materials in, on or about the floor or in any drainage system or in the trash containers which are customarily used for the disposal of solid waste; (iii) that with respect to any off-site disposal, shipment, storage, recycling or transportation of any Hazardous Materials, TENANT shall properly package the Hazardous Materials and shall cause to be executed and duly filed and retain all records required by federal, state or local law; (iv) that TENANT will at all reasonable times permit LANDLORD or its agents or employees to enter the leased premises to inspect the same for compliance with the terms of this paragraph and will further provide upon five (5) days' notice from LANDLORD copies of all records which TENANT may be obligated to obtain and keep in accordance with the terms of this paragraph; (v) that upon termination of this lease, TENANT will, at its expense, remove all Hazardous Materials from the leased premises and comply with applicable state, local and federal laws as the same may be amended from time to time; and (\ii) TENANT further agrees to deliver the leased premises to LANDLORD at the termination of this lease free of all Hazardous Materials. The terms used in this paragraph shall include, without limitation, all substances, materials, etc., designated by such terms under any laws, ordinances or regulations, whether federal, state or local. TENANT further agrees to hold harmless and indemnify LANDLORD for and against any and all claims, loss, costs, damages and expenses, including attorneys' fees, which may arise in the event that TENANT fails to comply with any of the provisions contained in this Article. The terms of this Article shall expressly survive the expiration or earlier termination of this lease.

24.	LIMITATION OF LIABILITY

TENANT agrees to look solely to LANDLORD's interest in the building for recovery of any judgment from LANDLORD, it being agreed that LANDLORD is not personally liable for any such judgment. The provision contained in the foregoing sentence shall not limit any right that TENANT might otherwise have to obtain an injunctive relief against LANDLORD or LANDLORD’s successors in interest, or any other action not involving the personal liability of LANDLORD.

25.	LANDLORD DEFAULT

LANDLORD shall in no event be in default in the performance of any of its obligations hereunder unless and until LANDLORD shall have failed to perform such obligations within thirty (30) days or such additional time as is reasonably required to correct any such default after notice by the TENANT to the LANDLORD properly specifying wherein the LANDLORD has failed to perform any such obligation. Further, if the holder of the mortgage on the building of which the leased premises are apart notifies TENANT that such holder has taken over the LANDLORD's rights under this lease, TENANT shall not assert any right to deduct the cost of repairs or any monetary claim against LANDLORD from rent thereafter due and accruing, but shall look solely to the LANDLORD for satisfaction of such claim.

26.	WAIVER OF RIGHTS

No consent or waiver, express or implied, by either party to or of any breach of any covenant, condition, or duty of the other, shall be construed as a consent or waiver to or of any other breach of the same or other covenant, condition or duty.

27.	SUCCESSORS AND ASSIGNS

The covenants and agreements of LANDLORD and TENANT shall run with the land and be binding upon and inure to the benefit of them and their respective heirs, executors, administrators, successors and assigns, but no covenant or agreement of LANDLORD, express or implied, shall be binding upon any person except for defaults occurring during such person's period of ownership nor binding individually upon any fiduciary, any shareholder or any beneficiary under any trust.

28.

HOLDOVER

If TENANT fails to vacate the leased premises at the termination of this lease, then the terms of this lease shall be applicable during said holdover period, except for base rent, which shall be increased to two (2) times the then current base rent for the period just preceding such termination; but this provision shall not be interpreted as consent or permission by the LANDLORD for TENANT to holdover at the termination of this lease and terms of this holdover provision shall not preclude LANDLORD from recovering any other damages which it incurs as a result of TENANT's failure to vacate the leased premises at the termination of this lease. Tenant further agrees that, as a holdover, TENANT shall not acquire any tenancy at will, but shall at all times during any holdover be, and remain, a tenant at sufferance only.

29.	MISCELLANEOUS

If TENANT is more than one person or party, TENANT's obligations shall be joint and several. Unless repugnant to the context. "LANDLORD" and "TENANT" mean the person or persons, natural or corporate, named above as LANDLORD and TENANT respectively, and their respective heirs, executors, administrators, successors and assigns. LANDLORD and TENANT agree that this lease shall not be recordable but each party hereto agrees, on request of the other, to execute a Memorandum of Lease in recordable form and mutually satisfactory to the parties. If any provision of this lease or its application to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this lease or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby and each provision of this lease shall be valid and enforceable to the fullest extent permitted by law. The submission of this lease or a summary of some or all of its provisions for examination by TENANT does not constitute a reservation of or option for the premises or an offer to lease said premises, and this document shall become effective and binding only upon the execution and delivery hereof by both LANDLORD and TENANT. Employees or agents of LANDLORD have no authority to make or agree to make a lease or any other agreement or undertaking in connection herewith. All negotiations, considerations, representations and understandings between LANDLORD and TENANT are incorporated herein and no prior agreements or understandings, written or oral, shall be effective for any purpose. No provision of this Lease may be modified or altered except by agreement in writing between LANDLORD and TENANT, and no act or omission of any employee or agent of LANDLORD shall alter, change, or modify any of the provisions hereof. This lease shall be governed exclusively by the provisions hereof and by the laws of the State of Maine. The headings herein contained are for convenience only, and shall not be considered a part of this lease.

30.

BROKERAGE

TENANT warrants and represents to LANDLORD that it has not dealt with any broker, finder or similar person concerning the leasing of the leased premises, other than Cardente Real Estate ("BROKER"), and in the event of any brokerage claims against LANDLORD predicated upon dealings with TENANT other than by the BROKER, TENANT agrees to defend the same and indemnity LANDLORD against any such claim. LANDLORD does not owe any brokerage a commission for this lease transaction.

31.

SIGNAGE

Tenant, at Tenant's option, can install signage on the front fa9ade of the building. Signage will be at Tenant's cost and subject to Complex Standards and to the City of Portland's Signage Ordinance.

32.

PARKING

Tenant is allocated four (4) "in common" parking spaces and access to the shared "in common" parking spaces located in the front parking lot of the demised premises (Forest Avenue Parking lot). Parking excludes six (6) "in common" parking spaces allocated to the other Tenants. Excluding reasonable deliveries, Tenant agrees to not use the front parking lot for the parking or storage of box trucks or other vehicles that require more then one parking space.

33.	NO SET-OFF.

TENANT waives any right to set-off, offset or deduct any claims against LANDLORD from any Base Rent, Additional Rent or any other amount payable hereunder. Nothing contained in this Article shall be deemed to constitute a waiver by TENANT of any other rights (other than those of set-off, offset or deduction or any other waiver expressly set forth herein) with respect to any breach by LANDLORD hereunder.

DISCLAIMER: THIS IS A LEGAL DOCUMENT. IF NOT FULLY UNDERSTOOD, CONSULT AN ATTORNEY.

IN WITNESS THEREOF, the said parties hereunto set their hands and seals this 8 th day of March , 2013.

TENANT	LANDLORD

SIGNATURE:	SIGNATURE:

/s/ Brian Patrick Gillespie	/s/ Joseph Keaney

LEGAL NAME OF TENANT:	LEGAL NAME OF LANDLORD:

Evergreen Garden Center, LLC	William C. Rowell Family Limited Partnership

NAME/TITLE:	NAME/TITLE:

Brian Patrick Gillespie, Partner	Joseph Keaney

WITNESS TO TENANT	WITNESS TO TENANT


SIGNATURE:	SIGNATURE:

GUARANTY

For value received, and in consideration for, and as an inducement to LANDLORD to enter into the foregoing lease with TENANT, Brian Gillespie ("GUARANTOR") does hereby unconditionally guaranty to LANDLORD the complete and due performance of each and every agreement, covenant, term and condition of the Lease to be performed by TENANT, including without limitation the payment of all sums of money stated in the lease to be payable by TENANT. The validity of this guaranty and the obligations of the GUARANTOR hereunder shall not be terminated, affected, or impaired by reason of the granting by LANDLORD of any indulgences to TENANT. This guaranty shall remain and continue in full force and effect as to any renewal, modification, or extension of the lease, whether or not GUARANTOR shall have received any notice of or consented to such renewal, modification or extension. The liability of GUARANTOR under this guaranty shall be primary, and in any right of action that shall accrue to LANDLORD under the lease, LANDLORD may proceed against GUARANTOR and TENANT, jointly or severally, and may proceed against GUARANTOR without having commenced any action against or having obtained any judgment against TENANT. All of the terms and provisions of this guaranty shall inure to the benefit of the successors and assigns of LANDLORD and shall be binding upon the successors and assigns of GUARANTOR.

IN WITNESS WHEREOF, GUARANTOR has executed this Guaranty this 8 th day of March , 2013.

GUARANTOR:

SIGNATURE: Brian Patrick Gillespie

LEGAL NAME OF GUARANTOR:

/s/ Brian Patrick Gillespie

NAME/TITLE:

Partner

WITNESS TO TENANT:

Exhibit 10.16

LEASE

FOR

STONE CREEK BUSINESS CENTER

This lease is made by and between STONE CREEK BUSINESS CENTER, LTD., a Colorado limited partnership ("Landlord "), and GROWLIFE HYDROPONICS, INC . ("Tenant").

1. LEASE: For and in consideration of and upon the agreements, at the rental, and for the Term set forth in this lease (the "Lease"), Landlord leases to Tenant and Tenant .leases from Landlord the premises (the "Premises ") located in the building (the "Building") in the County of Eagle, Colorado, commonly known as STONE CREEK BUSINESS CENTER. LLLP (the "Project") and highlighted in red on attached Schedule I, which is hereby incorporated herein by reference.

(a) 81620; Units 5&6 , 40800 Highway 6, Avon, Colorado,

(b) Square feet (2502):

The approximate square footage of the Premises, as set forth herein, is accepted by both Landlord and Tenant as the size and square footage of the Premises for all purposes under this Lease and shall not be subject to challenge at a later date, it being recognized that there are different methods by which square footage can be measured and that no two individuals measuring the size of the Premises are likely to come up with the same number.

2. PROJ ECT LEGA L : Lot 5, Eagle Vail Commercial Service Center first amendment, a re-subdivision of Lots 2 through 6, Block 2, Eagle-Vail Commercial Service Center, Eagle County, Colorado.

3. LEASE TERM :

1. The term of the Lease (the "Term") and the right of Tenant to take possession of and to occupy the Premises shall commence at twelve o'clock noon on October 21, 2013 (the "Commencement Date"), and, unless extended or sooner terminated pursuant to the Lease, shall terminate at twelve o'clock noon on the last day of September, 2018 .

2. Subject to the conditions hereinafter set forth, Tenant is hereby granted an option (the "Option") for a 0 year extension of the Term (the "Renewal Term"). If Tenant intends to exercise the Option, then, at least one hundred and eighty (180) calendar days prior to the expiration of the Term, Tenant shall give Landlord written notice that it thereby exercises the Option. Notwithstanding the service of such notice, it shall be a condition precedent to the effective exercise of the Option that, at both the time of service of the written notice and at the time of the commencement of the extension of the Term, Tenant shall not be in default under the Lease. All terms and provisions of the Lease shall apply and be in full force and effect during any Renewal Term resulting from this paragraph 3.02. No additional options for further

full force and effect during any Renewal Term resulting from this paragraph 3.02. No additional options for further extensions of the Term are created by this paragraph. The foregoing notwithstanding, Landlord may, at Landlord's sole option, upon the giving of written notice to Tenant, terminate and declare null and void the Option described in this paragraph 3.02 in the event that, during the Term of this Lease, Tenant fails to pay Rent when due on more than two (2) occasions or otherwise is declared, in writing, to be in default of any provisions of the Lease. The foregoing notwithstanding, in the event of the exercise by Tenant of any Option to extend the term of the Lease, as provided for herein, Landlord shall, until sixty (60) calendar days prior to the effective date of any such Renewal Term, have the sole and absolute right to modify the terms and conditions of this Lease, but not the "Fixed Minimum Rent" amount or Term of the Lease, but only so as to include in the Lease any standard Lease provisions which, since the date hereof, Landlord has incorporated into its standard lease form for the Project. Upon receipt of any such modification, presented by Landlord to Tenant by way of a new lease agreement or an amendment to this Lease, Tenant shall, prior to thirty (30) calendar days after Tenant's receipt of such new lease agreement or amendment, execute and deliver, or cause to be delivered, to Landlord such new lease agreement or amendment to this Lease. In the event that Tenant fails to execute and deliver to Landlord the new lease agreement or amendment, as described in the preceding sentence, Tenant's notice of having exercised the Option to extend the Term of the Lease shall be void and of no effect, and the Term of the Lease shall end on the date set forth in Section 3.01 above. In the event that Tenant exercises the Option, as allowed by this Lease, the word "Term," as used herein, shall include the "Renewal Term" created by such Option.

4. USE OF PREMISES

1. Tenant shall occupy and use the Premises for the purpose of conducting thereon the business of Wholesale & Retail sales of indoor agricultural hydroponics equipment and supplies and for no other purpose whatsoever.

2. Tenant shall not use or occupy the Premises, or permit the use or occupation of the Premises, or any part thereof, by any person other than Tenant, for any purpose other than the one specified in paragraph 4.01 herein or for any purpose which (a) constitutes waste or a public or private nuisance, including, but not by way of limitation, the outside storage, display or sales of any items or materials, construction, assembly, or work of any kind, (b) transmits light outside of the Premises (excluding signs allowed pursuant to the Lease), sound, odor or vibrations which are obnoxious or offensive to any one or more of the other Tenants of the Building or to Landlord, (c) violates any governmental (State, Federal or Local) laws, ordinances or regulations, (d) is contrary to any leases, restrictive covenants, agreements or limitations of record, or (e) renders the Building or the Premises, or any part of either, uninsurable with standard insurance at ordinary rates.

3. Tenant shall not obtain from any governmental entity, or maintain, any license to distill, manufacture, sell, dispense, or serve malt, vinous, or spirituous liquors, or to operate any retail gaming establishment, as may otherwise be obtained within the State of Colorado pursuant to Colorado Law, except that, with the express written consent of Landlord, which consent may be withheld for any reason, Tenant may obtain a license to operate a package "Retail Liquor Store", as defined by C.R.S. § 12-47-103 (31) or a "Restaurant", as defined in C.R.S. § 12-47- 103 (30) provided, however, that, in the event that Landlord gives written permission for Tenant

to operate a licensed "Restaurant'', pursuant to C.R.S. § 12-47-101 et seq., Landlord may impose restrictions pertaining to the nature of such Restaurant operation to ensure that alcoholic beverages are served only in conjunction with, and as part of, the service of food, and specifically prohibiting the inclusion and operation of any bar, nightclub, live or recorded entertainment, amusement devices, floor shows, and so forth from operating as a part of such "Restaurant".

4. Tenant, its successors, assigns or sub-tenants, shall not use all or any portion of the Premises for any one or more of the following activities:

(a) A wholesale or retail commercial establishment which devotes at least ten percent (10%) of its stock-in-trade or interior floor space to, or receives at least ten percent (10%) of its revenues from, the sale, rental or viewing of books, magazines, periodicals or other printed matter, or photographs, films, motion pictures, video cassettes, compact discs, slides, or other visual representations which are characterized by the depiction or description of "specified sexual activities" or "specified anatomical areas" or sexual accessories or any items for sale primarily of a sexual nature. "Specified sexual activities" shall mean and include (i) human genitals in a state of sexual stimulation or arousal; (ii) actual or simulated acts of human masturbation, sexual intercourse or sodomy; and (iii) actual or simulated fondling or other erotic touching of human genitals, pubic region, buttocks or female breasts. "Specified anatomical areas" shall mean: (i) less than completely and opaquely covered human genitals, pubic region, buttocks, anus, or female breasts below a point immediately above the areola; or (ii) human male genitals in a discernibly turgid state, even if completely and opaquely covered.

(b) A nightclub, bar, club, restaurant, concert hall, auditorium or other establishment which features, allows, permits, or conducts live adult entertainment. "Adult entertainment" is defined as any exhibition, display or dance which involves the exposure to view of any portion of the female breasts below the top of the areola, male genitals, female genitals, or the pubic hair, anus, or cleft of the buttocks of any person or male genitals in a discernibly turgid state, even if completely and opaquely covered.

(c) Tenant, Tenant's employees, customers, patrons and all other persons on the Premises shall not, without the express written consent of Landlord, which consent may be withheld for any reason, sell, use, consume, purchase, produce, manufacture, grow, or otherwise possess cannabis or marijuana, or any derivative thereof, or any product intended for use in the manufacturing, growing, using or consuming thereof.

5. RENT :

1. Subject to the same being increased pursuant to paragraph 5.05 herein, during the Term and any extension thereof, Tenant shall pay Landlord a fixed minimum rent (the "Fixed Minimum Rent") computed at the rate of:

(a)		$	31,275.00		per year, which equates to
(b)		$	2,606.25		per month.

Notes: 1. Landlord rent concession of $1,303.12.00 for the months of Nov. & Dec, 2013

3. Landlord rent concession of $ 521.25.00 for the months of Jan. & Feb, 2014

2. Except as is expressly provided for in the Lease, the Fixed Minimum Rent shall be paid in twelve equal installments of monthly rent as provided for in paragraph 5.01 herein, in advance, on the first day of each calendar month during the Term and during any Renewal Term, if applicable, at the office of Landlord, or such other place as Landlord may designate, without any set-off, deduction or counterclaim whatsoever.

3. If the Commencement Date shall fall on a day other than the first day of a calendar month, then the installment of the Fixed Minimum Rent due for the calendar month during which the Commencement Date falls shall be prorated so that, as the installment of the Fixed Minimum Rent for such month, Tenant shall pay an amount which bears the same ratio to a regular monthly installment of the Fixed Minimum Rent as the number of days from and including the Commencement Date through the end of such month bears to the total number of days in such month.

4. Landlord hereby acknowledges the receipt from Tenant of $ 1,617 . 96 ($7.76/sf) to be applied toward the payment of the first installments of the Fixed Additional Rent (CAM) coming due pursuant to the Lease from November 1st, 2013 through the last day of November, 2013.

5. Commencing with the fiscal year beginning on the first day of the calendar month during which the First (1st) anniversary of the Commencement Date occurs and on the first day of each such fiscal year thereafter, the Fixed Minimum Rent set forth in paragraph 5.01.herein shall be increased by 3.5 % percent

6. Other than the Fixed Minimum Rent and Security Deposit (defined in paragraph 6.01 herein), all sums, costs and expenses which Tenant assumes or agrees to pay to Landlord pursuant to the Lease shall be deemed to be additional rent (the "Additional Rent") for the Premises. The total rent payable to Landlord by Tenant (the "Rent") during the Term shall be the sum of the Fixed Minimum Rent for the Term and the Additional Rent which accrues or will accrue during the Term.

7. The Additional Rent provided for in paragraph 5.06 herein shall be prorated between Landlord and Tenant in accordance with the number of days of the applicable accounting period during which the Premises were subject to the Lease and not subject to the Lease.

8. It is recognized that Landlord will incur additional costs, the exact amount of which may be difficult to ascertain, as a result of and in handling any payment of Rent which is not received by Landlord on or within the three (3) business day period following its due date;

therefore, in order to reimburse Landlord for such costs, and not as a penalty, if Tenant fails to timely pay any Rent and/or Additional Rent, and the Rent and Additional Rent are not received by the Landlord on or within the three (3) business day period following its due date, in addition to and with such Rent, Tenant shall pay Landlord an amount equal to fifteen(15%) percent of such Rent and/or Additional Rent, as a Late Charge which shall be added to the total balance due. A business day shall be defined as Monday through Friday of each week, except official Federal or State holidays resulting in the closure of either banks in Colorado and/or the U.S. Post Office.

6. SECURITY DEPOSIT :

1. To secure the timely and faithful performance of all of Tenant's obligations under the Lease, Tenant has deposited with Landlord the sum of $ 11,163.09 as a security deposit (the "Security Deposit"), the receipt of which is acknowledged. At any time, if Tenant shall be in default in the performance of any of Tenant's obligations under the Lease, at Landlord's option, Landlord may use all or so much of the Security Deposit as Landlord deems necessary to cure any such default without being under any obligation to do so. Upon notification thereof, Tenant shall forthwith pay Landlord the amount of the Security Deposit so expended so that Landlord will at all times have the full amount of the Security Deposit as security. The Security Deposit and the use thereof shall not be considered as liquidated damages in the event of default but only as an application toward actual damages. Within sixty (60) days after the termination of the Lease, Landlord shall return the unused portion of the Security Deposit to Tenant without interest. Landlord is under no obligation to segregate the Security Deposit and may commingle the same with other funds of Landlord.

2. If Landlord conveys its interest in the Premises and assigns the Lease, Landlord shall transfer the Security Deposit, or so much thereof as remains, to the grantee of such interest and the Lease and, thereupon, Landlord shall be released from all liability for the return of the Security Deposit to Tenant or for the subsequent use of the Security Deposit pursuant to paragraph 6.01 herein.

7. AVAILABILITY OF THE PREMISES :

1. Landlord shall not be liable for any damages sustained or costs or expenses incurred by Tenant on account of Tenant's failure to obtain possession of the Premises on or before the Commencement Date and Tenant shall have no right to rescind, cancel or terminate this Lease because of such failure.

2. Occupancy of all or part of the Premises by Tenant shall be deemed possession and acceptance thereof by Tenant in good and suitable condition in full accordance with the provisions of the Lease.

3. At the expense of Tenant, Tenant shall fully comply with all provisions and standards of the Occupational Safety and Health Act of 1970 (Chapter XVII, Title XIX of the United States Code) and any applicable federal or state statute or regulation adopted pursuant thereto, in lieu thereof, or in conjunction therewith, as the same relate to the Premises, as such may be amended or reenacted from time to time. Tenant shall in indemnify and hold Landlord harmless from all obligations, liability, damages, costs, and expenses, including attorney's fees, concerning any failure to so comply.

8. COMMON AREAS :

1. At its option, Landlord may provide Common Areas (hereinafter defined) for the non-exclusive use of Tenant, its employees and customers in common with other Tenants and customers of other portions of the Building.

2. At all times all common facilities, if any, furnished by Landlord in or near the Building and all such other accommodation areas as Landlord may provide and designate (collectively, the "Common Areas"), including, but not by way of limitation, pedestrian sidewalks, parking areas, landscaped areas, stairways, lamps, restrooms, elevator, and driveways and similar areas and improvements shall be subject to the exclusive control and management of Landlord. From time to time, Landlord may establish, modify, and enforce rules and regulations with respect to the Common Areas to be used by Tenant and its employees, customers, guests and invitees and Tenant agrees to abide by and conform to such rules and regulations and obtain the abidance by its employees, customers, guests and invitees thereto.

3. Landlord reserves the right to change the area, location, and arrangement of and to restrict or eliminate the use of any and all Common Areas and to do such other acts in and to the Common Areas as Landlord deems advisable.

4. Tenant agrees and acknowledges that Tenant does not have any right of access to any part or portion of the roof of the Building and that neither Tenant, Tenant's employees, agents, guests, or invitees shall at any time enter upon the roof of the Building without the express written approval of Landlord.

9. UTILITIES :

1. All charges for utilities, including, but not by way of limitation, electricity, natural gas, water, sewer, cable service, and telephone pertaining to the Premises shall be paid when due by Tenant. All utility charges that are separately metered and/or charged solely to the Premises, and which are not shared by any other tenant in the Project, shall be paid solely and exclusively by Tenant when due, whether billed directly to Tenant or to Landlord. The second floor leasable office/commercial space, excluding Common Area hall, restrooms, utility closet, elevator, and stairway, consists of approximately 4,706 total square feet, which is metered separately from the balance of the Building for natural gas and electricity. The Tenant's Premises consists of approximately -0- square feet, or -0- %, of the total second floor leasable space. Tenant shall be billed and shall pay for said percentage of natural gas and electricity costs for the second floor as provided for by the provisions of paragraph 12.01.

2. Tenant shall not install any electrical equipment which overloads the lines or interferes with other equipment in or on the Building, or any part thereof, and, if said lines are overloaded by such installation, Tenant shall immediately remedy the same at its own expense.

3. Unless caused by the acts or omissions of Landlord, Tenant shall not allow the temperature inside the Premises to become so low as to cause damage to the improvements, specifically including, but not limited to, water pipes and other plumbing in or about the Premises and the Building.

10. TAXES : Tenant shall pay when due all personal property taxes levied or imposed against the personal property, Trade Fixtures and/or leasehold improvements placed by Tenant in or about the Premises.

11. INSURANCE :

1. At Tenant's sole expense, Tenant shall obtain and maintain, during the Term, public liability insurance naming Tenant, and Landlord and it's agents, as co-insured against any and all claims for injury to or death of persons or loss or damage to property occurring upon, in, or about the Premises and the said Common Areas and facilities provided by Landlord, and all portions of the Project used or accessible for use by Tenant and its employees, agents, contractors, subcontractors, invitees and customers. Such insurance shall afford minimum protection of a single limit of liability of $2,000,000.00.

2. At Tenant's sole expense, Tenant shall obtain and maintain, during the Term, adequate insurance which insures its fixtures, Trade Fixtures and contents against loss by fire and causes covered by standard extended coverage endorsements. Tenant shall cause Landlord, and it's agents, to be named as a co-insured on all such policies to the extent of its interest in such insured property and shall cause such insurance to be written in a manner so as to provide that the insurance carrier waives all right of recovery by way of subrogation against Landlord, and it's agents, in connection with any loss or damage covered by any such policies.

3. All policies of insurance to be obtained by Tenant pursuant to the provisions of the Lease shall be obtained through reputable carriers, authorized to issue insurance policies in the State of Colorado, and acceptable to Landlord; copies of all such policies shall be delivered to Landlord at least three (3) business days prior to the Commencement Date, and a certificate of insurance, as proof that such policies remain in full force and effect, shall be delivered to Landlord on each anniversary of the Commencement Date thereafter, and at any other time within ten (10) business days after written request of Landlord. Such policies shall provide that they may not be cancelled without at least thirty days prior written notice to Landlord. In the event any policy of insurance required to be obtained by Tenant pursuant to the Lease is terminated, cancelled, expires, or is replaced, a copy of the replacement policy shall be immediately delivered to Landlord. Said Certificates shall include, in the "Description of Operations/Special Provisions" section, a statement that Charles C. Murphy, Charles C. Murphy & Associates, Inc, and Stone Creek Business Center, LTD are included as Additionally Insured on General Liability, but only as the Owner/Lessor of the Premises.

4. During the Term, Landlord may maintain insurance, with a carrier authorized to do business in the State of Colorado, (a) insuring the Premises and the Building against loss by fire and causes covered by standard extended coverage endorsements, earthquake insurance, boiler insurance, loss of rents insurance, and such other coverage as is deemed appropriate by Landlord from time to time (the "Fire Insurance") and (b) insuring Landlord and its agents

against all claims for injury to or death of persons or loss or damage to property occurring upon, in or about the Project (the "Landlord's Liability Insurance") in amounts determined by Landlord in its sole discretion. In such event, Tenant agrees to do all things, and to conduct its business in a manner, reasonably requested or required by Landlord's insurer in order to lessen or minimize risk of loss by any casualty, regardless of whether such casualty is covered by such insurance.

12. OTHER TENANT EXPENSES :

1. As is hereinafter provided, Tenant shall pay Landlord a sum equal to 14.5 % percent of all costs and expenses (collectively, the "Common Area Expenses" or "C.A.M.") of owning, operating, maintaining, and repairing the Building, the Project, the Common Areas and the real property upon which they are located, which are allocable to the period during the Tenn. The Common Area Expenses shall include, but shall not be limited to, the cost and expense of trash disposal and/or hauling; parking lot sweeping and maintenance and replacement of Common Area pavement and line striping; maintenance and replacement of exterior lighting and interior Common Area lighting; installation and maintenance of exterior signs; landscape maintenance, repair, painting, replacements and plantings; snow removal; utilities pertaining to the Common Areas; all water and sewer charges; acquisition and maintenance costs of replacement and/or rents for the leasing of any machinery or equipment used in connection with operations, management or maintenance; professional fees (i.e. legal, accounting, engineering, architectural, etc.); repair and/or replacement of roofs, utility meters, on-site water or sewer lines; repair and/or maintenance of the Building and Project, or any part thereof; any costs incurred by Landlord in making capital improvements or other modifications to the Building and Project, or any part thereof, which costs shall be amortized over the useful life of such improvement or modification with interest at the rate of twelve (12) percent per annum, in accordance with such reasonable life and amortization schedules which shall be determined by Landlord in accordance with generally accepted accounting practices and principles, to the extent that other tenants are not liable for the payment thereof; the Project's real property taxes, personal property taxes, and any special assessments, taxes, liens and/or charges of any kind; all costs of challenging real property tax assessments, to include legal and professional assistance; insurance premiums pertaining to fire and extended coverage, loss of rent, Landlord's liability insurance and other insurance deemed necessary by Landlord; and professional management fees, which shall not exceed six percent (6%) of the gross rents, from all sources, received from the Project. Common Area Expense shall not include: (a) leasing commissions; (b) costs and repairs or other work to the extent that such is insured and insurance proceeds are received therefore; (c) costs, including permits, license and inspection costs, incurred with respect to the installation of tenant or other occupancy improvements in the Building or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants of the Building; (d) depreciation, amortization and interest payments as determined in accordance with generally accepted accounting principles; (e) Landlord's marketing costs; (f) costs incurred by Landlord due to violation by Landlord or any tenant of the terms and conditions of any lease of space in the Building; (g) Landlord's general corporate overhead and administrative expenses, except that a 6% of gross rents management fee, as stated above, will be included as a Common Area Expense, as well as any on-site management office gas and electricity expenses for such office being connected to the C.A.M. meters; (h) rentals and other related expenses incurred in renting HVAC systems, elevators, or other building structural equipment, ordinarily considered to be capital equipment; (i) Landlord's advertising and

promotional expenses; (j) tax penalties incurred as a result of Landlord's negligence, inability or unwillingness to make payments; (k) any and all costs arising from the presence of hazardous materials or substances in or about the Building; (1) Landlord's charitable or political contributions; (m) costs arising from latent defects in the base shell or core of the Building; (n) Landlord's or Manager's entertainment, dining or travel expenses; and (o) Landlord's or Manager's in-house legal or accounting fees, not associated with the operation or management of the Building.

2. From time to time, Landlord shall make reasonable projections of the annualized Common Area Expenses allocable to the period during the Term; and, based upon such projections, with each payment of the Fixed Minimum Rent, Tenant shall pay Landlord installments in an amount equal to one-twelfth (1/12) of the amount payable annually pursuant to paragraph 12.01 herein. Following the end of each calendar year during the Term and following the end of the Term, Landlord shall compute the amount of the actual Common Area Expenses for the preceding calendar year, or part thereof, as is appropriate, and Tenant shall pay Landlord any shortages and Landlord shall pay Tenant any overages in the amount of such Common Area Expenses actually paid with respect to the amount payable pursuant to the provisions of paragraph 12.01 herein.

3. No delay in the payment of the Common Area Expenses or such installments or in the making of any demand for such payment shall constitute a waiver of the right of Landlord to receive payment of same from Tenant pursuant to the provisions of the Lease.

4. The percentage of C.A.M. to be paid by Tenant to Landlord, as described in paragraph 12.01, represents the percentage of the approximate square footage of the Leased Premises ( 2,502square feet) to the total approximate square feet of all leasable floor area in the Project (17,256) square feet, which total does not include the floor area leased to Sherwin - Williams. In the event of an increase or decrease in either the square footage of the Premises or in the square footage of all leased premises in the Project subject to the payment of C.A.M., Landlord shall adjust the percentage of C.A.M. to be paid by Tenant to reflect the then current percentage of the size of the Premises to the total square feet of all leased premises in the Project subject to the payment of C.A.M., which adjustment shall constitute an amendment to this Lease, and shall notify Tenant, in writing, as to the new percentage of C.A.M. to be paid by Tenant to Landlord from the date of such adjustment forward.

5. Tenant shall have the right to have Tenant's accountant, lawyer, or other independent professional (non-company employee), review in Landlord's office, at Tenant's expense, all documents necessary to substantiate Common Area Expenses (C.A.M.) upon reasonable written request and the scheduling of an appointment with Landlord. Tenant's right to review documentation substantiating the actual Common Area Expenses imposed for each calendar year, pursuant to this paragraph 12, shall be deemed waived by Tenant unless Tenant delivers to Landlord a written request for such review within fifteen days after Landlord's written notification to Tenant of such actual Common Area Expenses. Tenant's right to question, challenge, contest or object to Landlord's computation of actual Common Area Expenses for any preceding calendar year shall be deemed waived by Tenant unless Tenant delivers to Landlord a written objection of Landlord's computation of actual Common Area Expenses, specifying the nature and reason for such objection, within thirty days after Landlord's notification to Tenant of such actual Common Area Expenses.

13. MAINTENANCE, REPAIRS AND ALTERATIONS :

01. Except for repairs which become necessary by reason of the improper conduct, carelessness, negligence or act of omission by Tenant, it's employees, agents, servants, customers, guests, invitees, visitors or licensees, within a reasonable time after notice of the necessity of such repairs, Landlord shall repair the roof, foundation and exterior walls, other Common Area and Building facilities of the Premises, except for glass and other breakable materials used in structural portions thereof. All such repair costs involved shall be considered as Common Area Expenses and shall be billed in accordance with the provisions of paragraph 12. Except for repairs which become necessary by reason of the improper conduct, carelessness, negligence or act of omission by Tenant, its employees, agents, servants, customers, guests, invitees, visitors or licensees, within a reasonable time after notice of the necessity of such repairs, Landlord shall repair the roof, foundation and exterior walls, other Common Area and Building facilities of the Premises, except for glass and other breakable materials used in structural portions thereof. Any repairs, service, or work contracted for by Tenant without specific written approval by the Landlord, shall be paid for by the Tenant at its sole expense, even if repair/work would normally be a Common Area Expense.

2. Except as otherwise specifically provided in this Lease, Tenant is accepting the herein described Premises in its "AS IS" condition, without representation from either Landlord, and/or Charles C. Murphy & Associates, Inc., and any and all additional improvements, maintenance, repairs, changes in conditions or alterations shall be at the sole cost and expense of Tenant.

3. Except as is provided specifically in paragraph 13.01 herein, at its own expense Tenant shall maintain, repair, and replace, as necessary, the interior of the Premises regardless of the cause of the maintenance or repair, including, specifically, all plate glass, exterior and

interior glass surfaces, interior distribution of heating systems and HVAC systems, overhead and entry doors, interior walls, ceilings, plumbing and electrical fixtures, floors, walls and finishes. The foregoing notwithstanding, Landlord reserves the right, at its option, to contract for the work described in the preceding sentence and pass the costs thereof through to Tenant as Additional Rent. In addition, Tenant shall keep the walks, porches, decks, and docks adjacent to the Premises, plus a minimum of four (4) feet into the parking lot and inside any fenced or walled areas immediately adjacent to the Premises, .free of dirt, litter, snow and ice, and shall further be responsible for the proper maintenance of the automobile tire stops within such area.

4. Tenant shall make no additions, improvements or alterations in or about the Premises, nor shall Tenant install or attach any Trade Fixture, without first presenting to Landlord copies of plans and specifications, created and stamped by a licenses engineer and or architect, detailing the desired additions, improvements, alterations or Trade Fixtures, which plans and specifications shall include, but shall not be limited to, structural, electrical, and mechanical detailing (loading, circuitry, and distribution), walls, doors, flooring, fixtures and finishes. Such plans and specifications shall clearly identify any addition, improvement, alteration, thing, item or device which Tenant desires to classify as a Trade Fixture (see

paragraph 16.02), and no such addition, improvement, alteration, thing, item, or device shall be deemed a Trade Fixture unless and until Landlord agrees, in writing, to such classification. The Tenant must, prior to the start of any such work, obtain the written consent of Landlord for the making of such additions, improvements or alterations, and shall provide Landlord written notice of Tenant's intention to start such work at least five (5) days prior to the actual start of such work, and shall also provide Landlord with the names, address, and telephone numbers of all contractors, subcontractors, laborers, and material suppliers (collectively "Lienors") that will provide either labor or material for all such additions, improvements, alterations, and installations. Prior to Tenant making any additions, improvements or alterations in or about the Premises, Tenant shall obtain and pay for all necessary city or county approvals, building permits, and obtain the endorsements of the insurance referred to in paragraph numbered eleven (11) herein to extend Tenant's coverage during the course of and pertaining to the construction of such additions, improvements or alterations. All such additions, improvements, and alterations shall comply with all applicable building and fire codes and shall be constructed only by contractors and subcontractors approved by Landlord prior to the commencement of such construction. All improvements which are made in or about the Premises shall become property of the Landlord unless specifically agreed otherwise in writing, executed by both Landlord and Tenant, prior to the commencement of the making of such improvements.

5. In the event that Tenant makes any improvements to the Premises without first obtaining Landlord's written permission for same, in accordance with paragraph 13.04 above, all such improvements of every kind and nature shall, at Landlord's option, become property of Landlord.

6. Landlord shall have the absolute right to send to Lienors and to post at the Premises a notice that Landlord's interest in the Premises shall not be subject to any lien for work or materials performed or supplied by Lienors, and Tenant shall fully cooperate with such efforts.

7. Repairs and replacements of any portion of the Project, other than the Premises, which become necessary by reason of the improper conduct, carelessness, negligence, or act of omission by Tenant, its employees, agents, servants, customers, guests, invitees, visitors or licensees shall be repaired by Landlord, with the cost and expense of such repairs to be paid by Tenant as Additional Rent.

14. SIGNS AND AWNINGS :

1. Tenant shall not install, paint, display, inscribe, place or affix any sign, picture, advertisement, notice, lettering or direction in the interior of the Premises, without Landlord's written consent. All of Tenant's exterior signs and identifications will conform to the sign criteria outlined by Landlord on Schedule II (Sign Criteria) attached hereto and made a part hereof. Tenant agrees to keep all interior and exterior signs in good repair. Landlord reserves the right to alter Schedule II (Sign Criteria) at such times as is necessary due to a change in events such as, but not limited to, changes in the city or county sign ordinance or a redevelopment of the Project.

2. Tenant shall comply with all ordinances, laws, statutes and regulations applicable to the Premises and concerning signage.

3. If Landlord so desires to install, at Landlord's sole expense, an exterior or interior "FOR LEASE" sign (banner, broker, etc.), during the one hundred eighty (180) days prior to the expiration of this lease, Tenant shall fully cooperate, and shall agree to sign, in Tenants name, any permit applications then required by the city or county. Any applicable application and permit fees shall be paid by Landlord.

4. Attached Exhibits As show the approved unit 5&6 sign panel locations for the front and rear of the project. On the front there are 2 options designated as follows:

Option #1: The upper full panel as shown in both drawing and picture. NOTE: Trees will be trimmed properly annually after leaves fall, in order to fully expose the panel.

a. Since Landlord will be providing the blank sign panel for this option, the Tenant shall be responsible for the cost and replacing the old panel upon expiration and vacation of the lease.

●	All panel fabrication and install for either option shall be done by "Sign Design" of Eagle Vail (Contact Monte).

On the rear panel, the tenant has expressed a desire to use the adjacent panel area to the west. That is acceptable; however, in that event, the blank panel shall we moved adjacent to east, and the tenant shall be responsible for purchasing, fabrication, and installation of the new panel in the west location.

15. MECHANICS' LIENS :

1. Tenant shall pay when due for all work performed on, for the benefit of, and for materials furnished to, the Premises by any person at Tenant's request and shall indemnify, defend and hold harmless Landlord and its property from all liability and expenses, including attorney fees, resulting from any lien or claim of lien arising from such work, labor or materials. Tenant shall have the right to contest the validity of any such lien or claim of lien.

2. Upon Landlord's request, Tenant shall, within 21 days of such request, cause any mechanic's lien filed against the Premises for work or materials supplied to or on behalf of the Tenant to be released by following the procedure outlined in C.R.S. §§ 38-22-101 et seq., or shall post a cash bond with Landlord, in an amount acceptable to Landlord, sufficient to satisfy such lien.

16. FIXTURES :

1. Unless removed by Tenant pursuant to the provisions of this paragraph sixteen (16), upon the expiration of the Term, the termination of the Lease by Landlord, or the vacation of or removal from the Premises by Tenant, all fixtures, Trade Fixtures, additions, improvements, and installations placed in or about the Premises by Tenant shall be the sole and

absolute property of Landlord and Tenant warrants title to the same free and clear of all liens and encumbrances except those liens and encumbrances arising out of the actions of Landlord.

2. The term "Trade Fixture," as used in this Lease, is defined as a fixture which is attached to or made a part of any improvement to the Premises which is unique to the Tenant's business and which may be removed from the Premises by Tenant during or at the end of the Term of the Lease, provided that all damage to the remainder of the Premises is removed and/or repaired and the Premises is restored by Tenant in such a manner that the installation and subsequent removal of such Trade Fixture is not visible or evident. The foregoing notwithstanding, no improvement or fixture installed by Tenant shall be deemed to be a Trade Fixture unless Landlord agrees, in writing, to classify such improvement or fixture as a Trade Fixture prior to its installation.

3. Upon the expiration of the Term, the termination of the Lease by Landlord, or the vacation of the Premises by Tenant and upon written notice by Landlord, and only in such event, Tenant shall promptly remove any fixtures, Trade Fixtures, additions, improvements, and installations placed in or about the Premises by Tenant and designated in such notice and shall repair any damage occasioned by such removals at Tenant's expense. If Tenant shall fail to promptly remove such items or repair such damage, or both, Landlord may, at its option, effect such removals and repairs and Tenant shall pay Landlord the cost thereof together with interest

at the rate of eighteen (18) percent per annum from the date of payment of such costs by Landlord.

17. EXCULPATION OF LANDLORD : Landlord and its agents, servants, employees and contractors shall not be liable to Tenant or any other person, and Tenant hereby releases all claims for damages arising out of the death or of injury to any person or damage to or loss of any property or business sustained by Tenant or any person claiming through Tenant and resulting from any fire, explosion, theft, accident, occurrence or condition of any nature whatsoever in or upon the Premises, the Building, or the Project, including, but not by way of limitation, (a) any defect in or failure of plumbing, heating or air conditioning equipment, electric wiring or installation thereof, gas lines, fixtures or equipment or installation thereof, water pipes, plumbing, stairs, railings, walks or elevators, (b) any equipment or appurtenances becoming out of repair, (c) the bursting, leaking or running of any pool, tank, washstand, water closet, waste pipe, drain or other pipe or tank, (d) the backing up of any sewer pipe or downspout, (e) the escape of steam or hot water, (f) water, snow or ice being upon or coming through the roof, parking areas, common areas or facilities or any other place in or near the Building, (g) the falling of any fixture, plaster or other building material, (h) broken glass and (i) any act or omission of co-tenants or other tenants of the Building or of adjoining or contiguous property or buildings and their agents, employees and contractors.

18. INDEMNITY TO LANDLORD :

1. Tenant shall indemnify and save harmless Landlord and its agents, employees and contractors and the owners of the fee title of the Project and all mortgages thereof from and against any and all claims, liens, actions, proceedings, judgments, liabilities, damages, costs, attorneys fees and any and all expenses in connection with (a) the use, occupancy, management or control of the Premises, (b) from any injury to or death of any person or damage to any

property or business upon the Premises, the Building, the Project, or to or upon adjacent property or to or upon the adjoining street, avenue or sidewalk which was caused in whole or in part by Tenant, its employees, servants, agents, contractors, subcontractors, guests, customers or invitees, (c) from any lien or claim or other matter arising from any construction, addition, repair, maintenance or improvements on the Premises or from any work done in or about the Premises or the Building or the Project by, at the instigation of, or for Tenant, (d) from any use of the Premises for any illegal trade, manufacture or business or for any purpose or in any manner prohibited by law, ordinance, government regulation, regulations of Landlords insurance Company or lender, or the provisions of the Lease, (e) from any failure of Tenant to observe or perform the terms, covenants or conditions of the Lease and from any act or omission by Tenant, its agents, employees, servants, contractors, subcontractors, customers or invitees during the Term, and (f) from the installation , operation, maintenance, repair, removal or replacement of any sign, awning, antenna or other exterior or interior improvement made by Tenant on, in or about the Premises, the Building and the Project.

2. Unless defense is actually provided by an insurance carrier, upon demand from time to time, Tenant shall pay for the defense of any action or proceeding brought against Landlord or its agents, employees and contractors or the said fee owners or mortgages, upon any such claims categorized in this paragraph 18.

19. DAMAGE BY FIRE OR OTHER CASUALTY :

1. If the Premises are damaged by fire or other casualty, but not so as to render the same untenable, after being notified of such damage by Tenant, Landlord shall forthwith repair the damage. The Rent and Additional Rent shall not be abated under such circumstances.

2. If the Premises are damaged by fire or other casualty so that any part thereof is untenable and, after Landlord is notified of such damage by Tenant, if any architect selected by Landlord certifies that, in his opinion, such damage can be reasonably expected to be repaired within ninety (90) days of the occurrence of such damage, Landlord shall forthwith repair the damage. Until such repairs are completed, all Rent charges shall be apportioned each month according to that part of the Premises which remains untenable and there shall be no other abatement.

3. If the Premises are damaged by fire or other casualty so that any part thereof is untenable and, if an architect selected by Landlord certifies that, in his opinion, such damage cannot reasonably be expected to be repaired within ninety (90) days of the occurrence of such damage, Landlord, at its option, may do any one of the following three things:

(a) Give notice to Tenant that the Lease is terminated and, in such event, all future obligations and rights hereunder shall cease.

(b) Give notice to Tenant that Landlord intends to raze and rebuild the Premises, according to plans and specifications which are either substantially similar to those for the Premises so damaged or which are mutually agreed upon by Landlord and Tenant, and complete such rebuilding . Until the Premises are completed and a temporary or permanent certificate for occupancy is issued, all Rent shall abate.

(c) Give notice to Tenant that it intends to repair the Premises and proceed to repair the Premises. Until such repairs are completed, all Rent charges shall be apportioned each month according to that part of the Premises which remains untenable and there shall be no other abatement.

20. CONDEMNATION : Tenant waives any loss or damage to Tenant as the result of the exercise of the power of eminent domain by any governmental body and the right to receive any portion of any condemnation award, as a participant in the condemnation proceeding or otherwise, whether such loss or damage results from condemnation of part or all the Premises or any portion of the Building Project, Common Areas or facilities or service entrances and exits. Should any power of eminent domain be exercised after Tenant is in possession, such exercise shall not void or impair the Lease unless the Premises shall be substantially taken and, upon the happening of such event, all Rent charges shall proportionately abate as of the date that possession is required by the condemning authority.

21. ESTOPPEL, SUBORDINATION AND ATTORNMENT :

1. Tenant agrees that this Lease shall be subordinate to any encumbrance affecting the Premises now of record or recorded after the date of this Lease. Such subordination is and shall be effective without further act of Tenant. In the event of foreclosure by the holder or beneficiary of any encumbrance recorded after the date of this Lease, Tenant's right to possession of the Premises pursuant to the terms of this Lease shall continue, provided that Tenant is not in default and all rent payments are Current and provided further that Tenant shall attorn to such holder or beneficiary as may take title to the Premises through foreclosure.

2. This Lease is and shall be subordinate to any condominium declaration, or amendment thereto, affecting the Premises regardless of when the condominium declaration or amendment is recorded and such subordination shall be effective without any action by Tenant. All provisions, terms, conditions, covenants and obligations of this Lease shall be subject to such condominium declaration and all other governing documents of the condominium association created in conjunction with the recording of the condominium declaration. In the event of an inconsistency between this Lease and the condominium declaration, articles or bylaws the latter shall control.

3. Tenant agrees, at any time and from time to time, to execute, acknowledge and deliver to Landlord upon Landlord's request any documents and instruments which may reasonably be required by Landlord or by the holder or beneficiary of a mortgage or deed of trust to evidence or effectuate such subordination. Tenant further agrees, at any time and from time to time, to execute, acknowledge and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect, or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications, and the dates to which any rent or other payments due hereunder from Tenant have been paid in advance, if any, and stating such other reasonable information about the Lease as may be requested, including, but not limited to, whether or not, to the best of the knowledge and information of the Tenant, the Landlord is in default in the performance of any covenant or condition of the Lease and, if so, specifying each such default. It is intended that such a statement will be relied upon by the

holder or beneficiary, or prospective holder or beneficiary, of a mortgage or deed of trust, by assignees of such holder or beneficiary or by prospective purchasers and that the Tenant shall be estopped from asserting claims contrary to that which is set forth in such a statement. If Tenant fails to execute and deliver any such documents, instruments or statements, Tenant irrevocably appoints Landlord as Tenant's special attorney-in-fact to execute and deliver such documents, instruments and statements, and, at Landlord's election, such failure shall be a material breach of this Lease.

22. SALE OF PREMISES :

1. If Landlord shall sell its right, title and interest in and to the Premises, Landlord shall notify Tenant of the identity and address of the purchaser thereof.

2. If Landlord shall sell its right, title and interest in and to the Premises, Landlord shall be, and is hereby, released and discharged of all liability under any and all of the covenants and obligations contained in or derived from the Lease arising out of any act, occurrence or omission occurring after the transfer of its title to the Premises by Landlord.

23. ACCESS TO PREMISES :

1. Upon reasonable notice to Tenant, Landlord shall have the right to enter the Premises at reasonable times for the purpose of inspecting the Premises or exhibiting it to the holder of any mortgage or deed of trust encumbering Landlord's interest in the Project to prospective mortgages, to prospective assignees of any such mortgages or deeds of trust, to prospective purchasers, or to prospective lessees of the Premises and for the purpose of making such repairs, alterations, improvements or additions as may be provided for by the Lease, or as may be agreed upon by Landlord and Tenant, or as may be required by any law, ordinance or regulation. Unless an emergency exists, at least twenty four hours prior notice shall be given to Tenant prior to Landlord's entry into the Premises pursuant to this paragraph 23.01.

2. During the 180 days prior to the expiration of the Term, Landlord may exhibit the Premises to prospective lessees.

3. For the purpose of attending to any emergency or presumed emergency which

may tend to damage the property of Landlord or that of other tenants in the Building, or endanger the lives of anyone, Landlord shall have the right of immediate access to the Premises without notice to Tenant.

24. ASSIGNMENT AND SUBLETTING : Tenant shall not assign or in any manner transfer or encumber this Lease or any estate or interest therein, or sublet the Premises or any part thereof, or grant any license, concession or other right to occupy any portion of the Premises without the prior written consent of Landlord, which consent, subject to the terms and conditions set forth herein, shall not be unreasonably withheld. This prohibition includes, without limitation: (i) any subletting or assignment which would otherwise occur by operation of law, merger, consolidation, reorganization, transfer or other change of Tenant's corporate or proprietary structure; (ii) an assignment or subletting to or by a receiver or trustee in any Federal or State bankruptcy, insolvency or other proceedings; (iii) the sale, assignment or transfer of all

or substantially all of the assets of Tenant, with or without specific assignment of this Lease; (iv) the sale, encumbrance or other disposition of stock in a corporate Tenant, or ownership in a limited liability company Tenant, which results in the present shareholders or members therein owning or controlling less than fifty-one percent (51%) of the stock or ownership thereof; (v) the change in control in a Tenant partnership, directly or through a change or changes in the ownership of fifty percent (50%) or more of the stock or ownership of one or more corporate or limited liability company general partners; (vi) the change in control in a Tenant limited liability company through a change or changes in the ownership of fifty percent (50%) or more of the stock or one or more corporate members or of a corporate general partner of a partnership member; or (vii) the death of any individual Tenant or guarantor. Consent by Landlord to one or more assignments or sub-lettings shall not operate as a waiver of Landlord's rights as to any subsequent assignments and sub-lettings. Any attempted assignment or sub-lettings by Tenant in violation of the terms and covenants of this paragraph 24 shall be void. Notwithstanding any approved assignment or subletting, Tenant and any guarantor of Tenant's obligations under this Lease shall at all times remain fully responsible and liable for the payment of the Rent herein specified and for compliance with all of Tenant's or any assignee's or subtenant's other obligations under this Lease.

In the event that Tenant desires to assign this Lease, or sublet the Premises, or any part thereof, Tenant shall give written notice of such desire to Landlord, and shall provide Landlord with a proposed agreement for assignment or subletting, as the case may be, together with all information and documentation required by paragraphs (a) through (f) of this paragraph 24, together with a written agreement to the effect that Tenant will reimburse Landlord for all of Landlord's expenses incurred as the result of Tenant's written notice and request of Landlord to approve such assignment or subletting. In order to properly consider Tenants request for assignment or subletting, Landlord shall require that the following conditions are met:

(a) Tenant shall not be in default under any of the terms or provisions of the Lease.

(b) Any proposed new business use for the Premises shall have been approved by Landlord in Landlord's sole and absolute discretion.

(c) Any assignee or sublessee shall agree faithfully to perform and to be bound by all of the terms and provisions of the Lease, the same as if such assignee or sublessee were the original Tenant under the Lease.

(d) If any assignee or sub-lessee, or any stockholder, general partner, member thereof or venturer therein, is a corporation or a limited liability company (other than a corporation the outstanding voting stock of which is listed on a "national securities exchange" as defined in the Securities Exchange Act of 1934), the owners of at least seventy five percent (75%) of the issued and outstanding shares of stock in that corporation, or owners of at least seventy five percent (75%) of the interests of the ownerships in that limited liability company, shall personally and unconditionally guarantee the performance of all Lease obligations, with such guarantee to be in form and substance reasonably satisfactory to Landlord, or, at the sole option of Landlord, shall personally execute an agreement in a form acceptable to Landlord so as

to make themselves co-tenants under the Lease, jointly and severally liable to Landlord for all obligations arising under the Lease.

1. Any assignee or sub-lessee, and all required guarantors, shall submit financial statements in a form acceptable to Landlord which establish to Landlord's reasonable satisfaction their financial ability to perform Tenant's Lease obligations and otherwise to succeed in their proposed business.

2. Any assignee or sub-lessee shall reasonably satisfy Landlord: (1) that it is a high quality retailer or other legitimate business operation; (2) that it has adequate prior experience in the type of business proposed for the Premises; and (3) that a good reputation and credit standing have been established in connection with such prior experience.

3. Tenant shall pay to Landlord a sum necessary to reimburse Landlord for all costs and expenses, including accounting and/or legal fees, incurred by Landlord as the result of Tenant's request to allow an assumption or subletting of the Premises.

25. SURRENDER OF PREMISES :

1. Unless otherwise required by Landlord, as provided in this paragraph twenty-five, upon the expiration or other termination of the Lease, Tenant shall quit and surrender to Landlord the Premises in good order, condition, and repair, ordinary wear and tear and damage by fire or other casualty which is insured against with standard extended coverage endorsements excepted, and, except as otherwise provided in the Lease, shall remove all of Tenant's personal property and Trade Fixtures from the Premises.

2. Unless otherwise required by Landlord, as provided in this paragraph twenty-five, upon the expiration or other termination of the Lease, Landlord, ten (10) days after written notice to Tenant, may, at Landlord's election, retain, sell, convey, or otherwise dispose of any or all improvements, furniture, fixtures or other tangible personal property left remaining upon the Premises upon termination or expiration of the term. Tenant expressly waives and releases all claims against Landlord for any damage or loss to Tenant resulting from Landlord’s retention or disposition of such property. In such event, Landlord shall have no obligation to inventory or account for such tangible personal property. Tenant shall be liable to Landlord for Landlord's costs for storing, removing and disposing of any or all of Tenant's property.

3. All other provisions of the Lease notwithstanding, at Landlord's option, upon the expiration of the Lease term and upon written notice from Landlord to Tenant, given at least thirty (30) days prior to the expiration of the Lease term, Tenant shall, at Tenant's cost and expense, quit and surrender the Premises to Landlord in "Lease Ready Condition," as described and defined paragraph 25.06 hereof. In order to insure that all work required by this paragraph 25.03 is performed to Landlord's requirements and specifications, all such work, demolition, construction, reconstruction, repair, replacement, painting, and so forth required in order to place the Premises in Lease Ready Condition shall be performed by reputable, professional contractors approved by Landlord, with all electrical and plumbing work to be performed by Colorado

licensed electricians and plumbers. Furthermore, all such work, demolition, construction, reconstruction, repair, replacement, painting and so forth, required to place the Premises in Lease Ready Condition shall be inspected and approved by Landlord prior to acceptance by Landlord, and if such work does not meet Landlord's requirements and specifications, such work shall be brought to Landlord's requirements and specifications, at Tenant's sole cost and expense, prior to being accepted by Landlord.

4. All other provisions of the Lease notwithstanding, at Landlord's option, upon written notice from Landlord to Tenant at any time within sixty (60) days after Landlord takes possession of the Premises as the result of any default or breach of the Lease by Tenant, Landlord may, at Tenant's cost and expense, place the Premises in "Lease Ready Condition," and Tenant shall reimburse Landlord for all costs and expenses of such work within ten (10) days of Landlord's invoice to Tenant there for.

5. In addition to the foregoing, Tenant shall, upon the expiration or other termination of the Lease, or upon the Tenant's vacation of the Premises, whichever first occurs, cause all exterior panel signage to be removed by a Landlord approved sign company, with such company to then replace, at Tenant's sole cost and expense, the sign panels so removed with new blank panels which comply with the Sign Criteria for the Building so that the next tenant using that sign area has new panels with which to fabricate such tenant's new sign. Further, where such signage is attached directly to the building itself, rather than as a sign panel, all such signage shall be removed and all areas of the building where the sign was attached shall be properly cleaned, repaired, patched, and, if necessary, painted or stained in order to fully repair any damage cause by the installation, maintenance and removal of such sign.

6. "Lease Ready Condition," as that term is used in the Lease, shall entail returning the Premises to as close to the condition as the Premises were in as originally constructed as is reasonably possible, with no interior improvements other than restrooms, dropped grid ceiling system with industry standard drop in lighting, perimeter walls to current electrical code, freshly painted interior walls, and a clean, smooth and flat concrete floor ready for new tenant finishes. "Lease Ready Condition" shall also mean and include the following:

(a) All fixtures, furnishings, equipment, plumbing and electrical that are not part of the original demising walls, ceilings, or restrooms, shall be removed.

(b) All interior partition walls, excluding only restroom walls, shall be removed and all damage resulting from such removal shall be patched and otherwise repaired.

(c) All flooring materials shall be removed and the concrete floor shall be cleaned, repaired and returned to a flat and smooth condition.

(d) All demising walls and drywall shall be returned to good, sound, clean and patched condition, and shall be painted.

(e) All demising wall knock out panels shall be in place, fully reconditioned, repaired, and patched, as necessary, and painted.

(f) All electrical circuitry throughout the Premises shall be certified by a Colorado licensed electrician to meet current electrical codes.

(g) All plumbing throughout the Premises shall be certified by a Colorado licensed plumber to meet current plumbing codes.

(h) The Premises shall contain a complete and fully functional dropped grid ceiling, or other ceiling acceptable to Landlord, with industry standard lighting included.

(i) All interior walls shall be freshly painted with a paint approved by Landlord and all windows shall be cleaned.

7. If Tenant fails to surrender the Premises to Landlord within the time, and in the condition, as provided for herein, Tenant shall reimburse, indemnify and hold Landlord harmless from all damages and costs incurred by Landlord and resulting from Tenant's failure to surrender the Premises as required herein, including, without limitation, all costs and expenses incurred by Landlord in completing the work required by this paragraph 25 as well as all claims made by a succeeding tenant resulting from Tenant's failure to surrender the Premises as required.

8. Tenant's obligation to observe and perform the provisions of this paragraph twenty-five shall survive the expiration of the Lease term, shall survive any other termination of the Lease, and shall survive Landlord's possession of the Premises pursuant to any provision of this Lease or as otherwise allowed by law.

26. HOLDING OVER : I f , after the expiration Term or other termination of the Lease, Tenant shall remain in possession of the Premises without a written agreement as to such possession, then such holding over shall be deemed to be a holding over upon a month-to-month tenancy under the same agreements and provisions as the Lease and for a Fixed Minimum Rent equal to one hundred fifty percent of the Fixed Minimum Rent under the Lease. However, nothing contained herein shall give Tenant the right to hold over at any time, and Landlord may exercise any and all remedies at law or equity to recover possession of the Premises, as well as to collect any damages incurred by Landlord due to failure by Tenant to vacate the Premises in accordance herewith.

27. COVENANT OF QUIET ENJOYMENT : Upon Tenant paying the Rent herein reserved and observing and performing all of the agreements and provisions of the Lease which are to be observed and performed by Tenant, subject to the agreements and provisions of the Lease, Tenant may peaceably and quietly hold, occupy and enjoy the Premises for the Term of the Lease.

28. DEFAULTS BY TENANT AND REMEDIES OF LANDLORD :

1. Subject to the other provisions of this paragraph twenty-eight, each of the following events shall constitute a default by Tenant and a breach of the Lease and the occurrence of any one of them shall give Landlord the rights and remedies set forth in this paragraph twenty-eight, to wit:

(a) If the Fixed Minimum Rent, or any part thereof, shall be unpaid when due.

(b) If any Additional Rent or charges, or any part thereof, shall be unpaid when due.

(c) If Tenant does not comply with any provision of the Lease which imposes an obligation on Tenant, other than obligations for the payment of Rent or other charges, and shall not cure such failure within three (3) days after written notice thereof from Landlord, and thereafter refrain from further violations of such provision.

(d) If Tenant should violate or fail to comply with any of the statutes, ordinances, rules, orders, regulations and requirements of the federal government or any state, county or city government, or any other governmental body having jurisdiction over the Project, or any pm1thereof, or any of their departments and bureaus applicable to the Premises heretofore or hereafter established, and shall not cure such violation of failure within three (3) days after written notice thereof from Landlord, and thereafter refrain from further violations of the same or similar nature.

(e) If the Premises should be abandoned or vacated.

(f) If Tenant should attempt to sell, assign or mortgage all or any pai1of or interest in the Lease or sublet all or any part of the Premises without the prior written consent of Landlord having been first had and obtained.

(g) If by operation of law the Lease should be transferred to, or pass to, or devolve upon any person other than Tenant except, if Tenant is a corporation, by merger or consolidation.

(h) If Tenant is a corporation, if ( I ) Tenant should dissolve its corporate existence or (II) an action or proceeding for the dissolution or liquidation of Tenant should be commenced.

(i) If Tenant should be adjudicated a bankrupt or insolvent and such adjudication should not be vacated within fifteen (15) days.

G) If Tenant should file a petition of bankruptcy or make a general assignment for the benefit of creditors.

(k) If Tenant should file a petition or answer seeking reorganization or readjustment under federal bankruptcy laws.

(1) If a receiver or trustee should be appointed with respect to all or substantially all property of Tenant in any suit or proceeding against Tenant or in any bankruptcy proceeding.

(m) If any execution or attachment shall be issued against Tenant or any of Tenant's property whereupon someone other than Tenant shall take or occupy the Premises.

2. Upon the occurrence of any of the events of default set forth in paragraph 28.01 herein, Landlord shall have the option to pursue any one or more of the following remedies without any prior notice or demand whatsoever:

(a) Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in Rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying such Premises or any part thereof, provided that such action can be taken without a breach of the peace, without being liable for prosecution of any claim of damages therefor and Tenant hereby specifically waives any and all claims for damages that may otherwise result therefrom.

(b) Without terminating this Lease, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying such Premises or any part thereof, provided that such action can be taken without a breach of the peace, without being liable for prosecution or any claim for damages therefore, and Tenant hereby specifically waives any and all claims for damages that may otherwise result therefrom; and re-let the Premises and receive the rent therefor.

(c) Enter upon the Premises, provided that such action can be taken without a breach of the peace, without being liable for prosecution or any claim for damages therefore, and Tenant hereby specifically waives any and all claims for damages that may otherwise result therefrom; and do whatever Tenant is obligated to do under the terms of this Lease; and Tenant agrees to reimburse Landlord on demand for any expenses which Landlord my incur in thus effecting compliance with Tenant's obligations under this Lease and Tenant further agrees that Landlord shall not be liable for any damages resulting to Tenant from such action, and Tenant hereby specifically waives any and all claims for damages that may otherwise result therefrom, whether caused by the negligence of Landlord or otherwise.

(d) Alter all locks and other security devices at the Premises without terminating this Lease.

(e) Take any action allowed by law.

3. In the event Landlord serves or causes to be served upon Tenant a notice to pay/for compliance or for possession pursuant to C.R.S. § 13-40-104 ("Demand Notice"), such Demand Notice shall not be construed as an election on Landlord's part to terminate the Lease. Further, Tenant's delivery of the Premises in compliance with a Demand Notice, or Tenant's forfeiture or Landlord's lawful reentry of the Premises, shall not serve to terminate the Lease or relieve Tenant's obligations under this Lease for any Rents or other amounts currently due hereunder, or which may become due after service of the Demand Notice until the end of the Term.

4. Exercise by Landlord of any one or more of the remedies herein granted or otherwise available shall not be deemed to be an acceptance of surrender of the Premises by

Tenant, whether by agreement or by operation of law, it being understood that such surrender can be effected only by the written agreement of Landlord and Tenant. No such alteration of locks or other security devices and no removal or other exercise of dominion by Landlord over the property of Tenant or others at the Premises shall be deemed unauthorized or constitute a conversion, Tenant hereby consenting, after any event of default, to the aforesaid exercise of dominion over Tenant's prope11y within the Premises. All claims for damages by reason of such reentry and/or repossession and/or alteration of locks or other security devices are hereby waived, as all claims for damages by reason of any distress warrant, forcible detainer proceedings, sequestration proceedings or other legal process, to the extent permitted by law. Tenant agrees that any reentry by Landlord may be pursuant to judgment obtained in forcible detainer proceedings or other legal proceedings or without the necessity for any legal proceedings, as Landlord may elect, and Landlord shall not be liable in trespass or otherwise.

5. In the event Landlord elects to terminate the Lease by reason of an event of default then, notwithstanding such termination, Tenant shall be liable for and shall pay to Landlord, at the address specified for notice to Landlord herein, the sum of all Rent and other indebtedness accrued to date of such termination, plus, as damages for loss of the bargain and not as a penalty, an aggregate sum which, at the time of such te1mination of this Lease, represents the excess, if any, of (a) the aggregate of all Rent and other sums payable by Tenant hereunder that would have accrued for the balance of the Lease Term, or extension thereof, over (b) the aggregate rental value of the Premises for the balance of the Lease Term, or extension thereof, both discounted to present value at the rate of 8% per annum.

6. In the event that Landlord elects to repossess the Premises without terminating the Lease, whether by legal process or otherwise, then Tenant shall be liable for and shall pay to Landlord, at the address specified for notice to Landlord herein, all Rent and other indebtedness accrued to the date of such repossession, all plus Rent required to be paid by Tenant to Landlord during the remainder of the Lease Term until the date of expiration of the Term as stated herein, all of which Rent, including future Rent, shall be immediately due and payable. Provided that Tenant pays all such Rent, including future Rent, Landlord shall, on an annual basis beginning twelve months after Tenant has paid all such Rent, pay to Tenant all rental income, if any, Landlord has received for the Premises during the remainder of the Term of the Lease, less Landlord's costs and expenses in re-letting the Premises, including any and all management fees and expenses incurred by Landlord. However, in no event shall Tenant be entitled to any excess of any rental obtained by re-letting over and above the rental herein reserved.

7. In the event of any default or breach by Tenant or threatened or anticipatory breach or default, Tenant shall also be liable and shall pay to Landlord, in addition to any sums provided to be paid above, broker's fees and all other expenses incurred by Landlord in connection with re-letting the whole or any part of the Premises; the costs of removing and storing Tenant's or other occupants' property; the costs of repairing, altering, remodeling or otherwise putting the Premises into condition acceptable to a new tenant or tenants; and all reasonable expenses incurred by Landlord in enforcing or defending Landlord's rights and/or remedies, including reasonable attorney fees and related expenses, whether suit was actually filed or not.

8. In the event of termination of the Lease, or the retaking of possession of the Premises for any event of default, whether through legal process or otherwise, or breach of the Lease on the part of Tenant, Tenant hereby waives and releases Landlord from any obligation that Landlord may otherwise have to mitigate Landlord's damages resulting from Tenant's default or breach of Lease, and Landlord shall not have any obligation to re-let or attempt to re let the Premises or any portion thereof or to collect rental after re-letting; and in the event or re letting, Landlord may re-let the whole or any portion of the Premises for any period to any Tenant and for any use or purpose.

9. If Tenant shall fail to make any payment or cure any default hereunder within the time herein permitted, Landlord, without being under any obligation to do so and without thereby waiving such default, may make such payment and/or remedy such other default for the account of Tenant (and enter the Premises for such purpose) and thereupon Tenant shall be obligated to and hereby agrees to pay Landlord upon demand all costs, expenses and disbursements,

including reasonable attorney fees, and other expenses related thereto, incurred by Landlord in taking such remedial action.

10. Landlord is entitled to accept, receive in cash or deposit any payment made by Tenant for any reason or purpose or in any amount whatsoever and apply the same at Landlord's option to any obligation of Tenant and the same shall not constitute payment of any amount owed except that to which Landlord has applied the same. No endorsement, restrictive endorsement, or statement on any check or letter of Tenant shall be deemed an accord and satisfaction or recognized for any purpose whatsoever. The acceptance of any such check or payment shall be without prejudice to Landlord's rights to recover any and all amounts owed by Tenant hereunder and shall not be deemed to cure any other default nor prejudice Landlord's rights to pursue any other available remedy.

29. LANDLORD'S RIGHT TO CURE : Landlord shall not be in breach or default under any term or provision of this Lease unless and until Tenant has first given to Landlord written notice of such breach or default and Landlord has failed or refused to cure such breach or default within thirty (30) days of Landlord's receipt of such notice, except where such failure or refusal constitutes a threat to Tenant's ability to conduct normal business operations, in which event such breach or default shall be cured or corrected as promptly as is reasonably possible after receipt by Landlord of such written notice.

30. RIGHT TO CURE DEFAULTS : If at any time Tenant should be in default in the performance of any covenant or condition of the Lease, other than the payment of Rent, in addition to any other remedies Landlord may have, Landlord may cure any such default at the expense of Tenant after giving Tenant three (3) day’s notice of Landlord's intention to take curative action. All costs and expenses incurred by Landlord in taking such curative action, including attorney fees, and related expenses, shall be deemed to be Additional Rent due upon demand of Landlord.

31. RELATIONSHIP OF PARTIES : Landlord and Tenant are lessor and lessee, respectively, and are not, nor shall they become by virtue of the Lease or any actions taken pursuant hereto, anything other than lessor and lessee. Landlord and Tenant are not joint ventures, partners, employed by one and the other or agents of one and the other.

32. NOTICES: All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been sufficiently given or served if delivered in person, if delivered by a nationally recognized delivery service, such a Federal Express, United Parcel Service, or if deposited for mailing with the United States Postal Service, registered or certified, return receipt requested, postage prepaid and addressed as follows:

If to Landlord :

Stone Creek Commercial Center, Ltd.

% Charles C. Murphy & Associates,

P.O. Box 769,

Littleton CO. 80160-0769

8151 So. Peninsula Dr.

Littleton, CO 80120

If to Tenant :

GrowLife Hydroponics, Inc. 20301 Ventura Blvd, Suite 126 Woodland Hills, CA 91364

33. ATTORNEY FEES : If Tenant shall be in violation or breach of any provision of this Lease, Tenant shall pay to Landlord all attorney fees incurred by Landlord in connection with such violation or breach, or Landlord's enforcement of any of Tenant's obligations hereunder, or all of them, and in addition Tenant shall pay all costs and attorney fees incurred by Landlord and associated with any litigation commenced by Landlord against Tenant, or commenced by Tenant against Landlord, including, but not limited to, all costs, expenses and attorney fees incurred in enforcing any judgment obtained by Landlord against Tenant and Tenant's guarantors.

34. BROKERAGE : Both Landlord and Tenant represent to each other that no broker was influential in negotiating the Lease or was a procuring cause thereof except for NAI Mountain Commercial, representing Stone Creek Commercial Center, LTD

35. INTEREST : Any delinquent payments of Rent or any other sum or amounts due from Tenant to Landlord pursuant to the terms of the Lease, including any Late Charges specified above, shall accrue interest at the rate of eighteen percent (18%) per annum, compounded monthly, from the date such Rent, Late Charge, or other sum or amount became due. The provisions of this paragraph 35 shall in no way relieve Tenant of the obligation to pay Rent, Late Charges, and all other sums and amounts due on or before the date on which such are due, or affect Landlord's remedies under paragraph 28, but shall be in addition thereto.

36. AUCTIONS : Tenant shall not conduct or permit to be conducted any sale by auction on the Premises, whether said auction is voluntary, involuntary, pursuant to any assignment for the payment of creditors, or pursuant to any bankruptcy or other insolvency proceeding.

37. JOINT O BLIGATION : If there shall be more than on Tenant, the obligations of Tenant hereunder imposed shall be the joint and several obligations of all Tenants.

38. MARGINAL HEADINGS : The marginal headings and titles to the paragraphs of this Lease are not a part of the Lease and shall have no effect upon the construction or interpretation of any part hereof.

39. TIME : Time is of the essence with respect to all obligations set forth in this Lease and each and all of its provisions in which performance is a factor.

40. INABILITY TO PERFORM : This Lease and the obligations of the Tenant hereunder shall not be affected, waived, delayed, or impaired because Landlord is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of strike, labor troubles, acts of God, or any other cause beyond the reasonable control of the Landlord.

41. AUTHORITY OF TENANT : If Tenant is a corporation, limited liability company, or other similar entity, each individual executing this Lease on behalf of such entity represents and warrants that (i) he is duly authorized to execute and deliver this Lease on behalf of said entity, in accordance with the governing documents of said entity; (ii) this Lease is binding upon said entity; and (iii) an appropriate entity resolution to that effect in form reasonably acceptable to Landlord shall be provide immediately upon request.

42. LANDLORD EXCULPATION : Landlord and all partners, shareholders, or members of Landlord, as the case may be, shall have absolutely no personal liability with respect to any provision of this Lease, or any obligation or liability arising in connection herewith. Tenant shall look solely to the equity in the Premises for the satisfaction of any remedies of Tenant in the event of a breach by the Landlord of any of its obligations or in the event of any claim of Tenant arising in law or equity. Such exculpation of liability shall be absolute without any exception whatsoever.

43. LANDLORD'S LIEN : Tenant hereby grants to Landlord a lien against and a security interest in and to any and all of Tenant's furniture, fixtures, Trade Fixtures, equipment and inventory whenever acquired, their proceeds and the proceeds of any and all insurance policies carried thereon as and for additional security for the faithful performance by Tenant of all of its obligations hereunder. Tenant agrees to execute and deliver to Landlord, upon request, such additional documents as Landlord may require to establish and perfect such security interest including, without limitation, a security agreement and/or financing statement in forms satisfactory to Landlord, which are to be executed and delivered by Tenant to Landlord. The exercise by Landlord of any rights in and to such furniture, fixtures, Trade Fixtures, equipment and inventory upon default hereunder shall be governed by Article 9 of the Colorado Uniform Commercial Code, as in effect at the time of such default, but such exercise shall not preclude Landlord from exercising any or all other rights and remedies hereunder or as provided by law or herein.

44. NO R ECORDATION : Without the prior written consent of Landlord, which consent may be withheld in Landlord's sole discretion, Tenant shall not record this Lease or any evidence of this Lease. Any recordation of this Lease in violation hereof shall constitute an Event of Default under paragraph 28 of this Lease.

45. WAIVER OF JURY TRIAL : LANDLORD AND TENANT HEREBY MUTUALLY WAIVE ANY AND ALL RIGHTS WHICH EITHER PARTY MIGHT OTHERWISE HAVE TO REQUEST A TRIAL BY JURY IN ANY PROCEEDING AT LAW OR IN EQUITY IN ANY COURT OF COMPETENT JURISDICTION IN ANY ACTION ARISING FROM OR PERTAINING TO THIS LEASE.

46. TIME : In computing any period of time prescribed or allowed by this Lease, the day of the act or triggering event from which the designated time begins to run shall not be included and all references to days shall be calendar days.

47. COUNTERPART SIGNATURES : This Lease may be executed simultaneously in two or more counterparts, each of which shall be deemed an original and all of which, when taken together, constitute one and the same document. The signature, including facsimile signatures, of any party to any counterpart shall be deemed a signature to, and may be appended to, any other counterpart

48. ENTIRE AGREEMENT : The Lease, with all Schedules and addendum's annexed hereto, contains the entire understanding and agreement between Landlord and Tenant and supersedes and incorporates all prior understandings, discussions, agreements, representations and other communications between Landlord and Tenant concerning the subject matter hereof and any agreement hereafter made between Landlord and Tenant shall be ineffective to change, waive, release, discharge, terminate or effect an abandonment of the Lease, in whole or in part, unless such agreement is in writing and signed by the party against whom it is sought to be enforced.

49. SEVERABILITY : If any provision, sentence, phrase, or word of the Lease or application thereof to any person or circumstance shall be held invalid, the remainder of the Lease or the application of such provision, sentence, phrase or word to persons or circumstance other than those as to which it is held invalid shall not be affected thereby.

50. INTERPRETATION : When necessary for proper construction, the masculine of any word used in the Lease shall include the feminine and neuter gender, and the singular shall include the plural and vice versa.

51. BINDING EFFECT : Except as is otherwise provided for herein, the Lease shall be binding upon and inure to the benefit of the heirs, devisees, personal representatives, successors and assigns of Tenant and the successors and assigns of Landlord.

52. DUMPSTER USE : Tenant agrees not to place equipment, furniture, cabinetry, or other large items in, near, at, or about any dumpster serving the Project, the Building, or the Premises. All trash must be cut up or broken down into pieces with maximum measurements of 3'x 5' and placed in an appropriate dumpster. Under no circumstance shall any trash of any kind be placed outside the dumpster containers. Tenant shall not transport and dump Tenant's offsite project trash into Project Common Area dumpster containers. The Landlord, at its sole discretion, may assess a charge up to $500.00 against Tenant for each violation of this paragraph 52, which charge Tenant acknowledges is imposed in order to reimburse Landlord for time and expenses incurred by Landlord in enforcing this provision of the Lease, and not as a penalty.

Landlord, the County of Eagle, the waste management provider servicing the Project, or other governmental agency may require Tenant to obtain and use one or more special use dumpsters or waste receptacles. In such event, all cost associated with such special use dumpster or waste receptacle shall be borne by Tenant, and such dumpster or receptacle shall be placed and maintained in a manner and location as reasonably required by the Landlord. In such event, and so long as Tenant is still permitted by Landlord to use the Project Common Area dumpsters, Tenant shall remain responsible for C.A.M. dumpster fees.

53. OVERNIGHT PARKING : No outside, overnight parking or storage of any vehicle, product, trash, and/or equipment under the control of Tenant or Tenant's employees, agents, guests, customers, or invitees is allowed. The Landlord, at its sole discretion, may assess a charge up to $500.00 for each violation of this paragraph 53, which charge Tenant acknowledges is imposed in order to reimburse Landlord for time and expenses incurred by Landlord in enforcing this provision of the Lease, and not as a penalty. Said charge shall be accompanied by pictures of vehicle, and license plate with date and time attached.

54. TENANT/EMPLOYEE PARKING : All Tenants and their employees shall park their vehicles in the designated Tenant/Employee parking spots as shown on the attached "Schedule I". No vehicle shall be larger than a standard size SUV, or 3/4 ton pick-up. The Landlord, at its sole discretion, may assess a charge of up to $500.00 for each violation of this paragraph 54, which charge Tenant acknowledges is imposed in order to reimburse Landlord for time and expenses incurred by Landlord in enforcing this provision of the Lease, and not as a penalty.

55. LANDLORDS RESPONSIBILITY TO COMPLETE :

56. NO PETS ALLOWED ON PREMISES : Tenant may make provisions to allow for Tenant's customers to enjoy a dog friendly (canine only) atmosphere allowing such customers to temporarily, and for short periods of time to bring their canines onto the Property and into the Premises. No canine shall, however, be left on the Property or Premises overnight. The foregoing notwithstanding, neither, Tenant nor Tenant's employees shall be allowed to bring or keep any pet (canine, feline, reptile, rodent, marsupials, birds, amphibians, or any other domestic or wild animals) on or about the Premises or Property.

57. ACCORD AND SATISFACTION . No payment by Tenant or receipt by Landlord of a lesser amount than any and all rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord shall accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy provided in this Lease. TENANT HEREBY EXPRESSLY WAIVES AND RELINQUISHES ANY AND ALL RIGHTS IT MIGHT HAVE TO CLAIM AN ACCORD AND SATISFACTION UNDER OR PURSUANT TO C.R.S. ' 4-3-311.

58. GOVERNING LAW; JURISDICTION . The laws of the State of Colorado shall govern the interpretation, validity, performance and enforcement of this Lease. Tenant and Landlord understand and agree that the State Courts of the State of Colorado located in the County of Eagle, State of Colorado shall have sole and exclusive subject matter jurisdiction to

entertain any action brought to enforce this Lease or with respect to any dispute arising herefrom and, by execution hereof, Tenant and any guarantors of this Lease voluntarily submit to the personal jurisdiction of such Courts.

59. BUILDING CONDOMINIUMIZATION . Landlord reserves the right to condominimise the Building and/or the Project at any time and without notice to Tenant so as to create two or more condominium units. In such event, the Premises may become one or more condominium units, or portions of one or more condominium units, as defined and described in the condominium declaration and condominium map. In the event that the Building and/or the Project is condominimised, all assessments of every kind, nature and description imposed upon the condominium unit or units making up the Premises shall, at the option of Landlord, be paid by Tenant as Additional Rent, it being recognized that such assessments may take the place of some, but not all, other charges due hereunder as Additional Rent as the result of some expenses being converted from Landlord expenses to condominium association expenses. In the event that the Premises, or any portion thereof, is a part of, but not all of, a condominium unit, Tenant shall pay a pro-rata share of the assessments for such condominium unit based upon the ratio of the area of the Premises to the area of the condominium unit. The foregoing notwithstanding, Landlord may, in the event of the condominimisation of the Building and/or the Project, adjust the Rent and or additional rent (Common Area Expense or C.A.M.), due under this Lease so as to insure that such total Rent due hereunder does not increase or decrease solely as the result of such condominimisation process, and the assessments due resulting there from. Also, in no way, shall the use of this provision cancel any additional lease extensions herein grated.

Landlord : Stone Creek Commercial Center LLP			Tenant : GrowLife Hydroponics, Inc.

By /s/ Charles C. Murphy			By /s/ Sterling Scott

Charles C. Murphy			/s/ Sterling Scott
as agent for Landlord			President and CEO

Date: October 21, 2013			Date: October 21, 2013

SCHEDULE I

Stone Creek Business Center

Avon, Colorado

Floor Plan

SCHEDULE II

Stone Creek Business Center

Avon, Colorado

Sign Criteria

I. INTENT:

These criteria are established on the principle that the success of the center, as a whole, benefits the individual merchant. Their purpose is to establish an appearance of orderliness and neatness associated with any successful business. Architectural coordination of signs also adds an element of professionalism to the entire center for the benefit of all concerned. In the interest of maintaining quality standards, proper illumination, and good contemporary design, signs must be manufactured in accordance with these criteria. Conformance will be strictly enforced and all non-conforming or unapproved signs will be brought into conformance at the expense of the tenant.

II. GENERAL REQUIREMENTS :

a. Tenant shall be responsible for the fulfillment of all requirements of these criteria.

b. Tenant shall submit or cause to be submitted to the Landlord for approval, prior to fabrication, at least two (2) copies of detailed shop drawings indicating size, layout, location, design, construction, and color of the proposed signs, including all lettering, logos and/or graphics.

c. All permits, if any or required, for signs and their installation shall be obtained and paid for by the tenant or it's designated representative prior to fabrication and installation.

d. All signs shall be constructed and installed, including electrical hook-up (when applicable), at Tenant's expense. Every effort should be made to have sign(s) fabricated and installed prior to Tenant's opening. TEMPORARY BANNERS WILL NOT BE PERMITTED .

e. The sign contractor, for the Center shall have to be approved by the Landlord, prior to any construction.

f. No signage shall be permitted on the East and West ends of the building.

g. Any willful deviation from these criteria that is not corrected immediately upon written notification by the Landlord shall be considered a default under the default provisions of the lease.

III. SPECIFIC REQUIREMENTS:

A. WHERE SIGN BAND IS PROVIDED:

1. Stone Creek Business Center will provide the sign band including all electrical components.

2. The sign band will be powered from the house meter and the cost for electricity will be included into the C.A.M. charges.

3. Elevation drawings are attached. The portion of the sign band designated for the Tenant will be redlined.

4. Each Tenant will be required to provide the sign face panels, after Landlord's approval of design, at Tenant's expense. The sign face will be, .125 aluminum, paint color and specifications to be determined by the Landlord. Copy will be routed and backed with 3/16" Plexiglas. Copy color will be Tenant's option. If Landlord has provided the sign face panels, Landlord shall be re-reimbursed the cost of said panels in the amount of $ Cost as provided by Sign Design located on Highway 6 . Eagle Vail, CO, option #'2 paragraph of the l e a s e .

5. The horizontal dimension of the copy may not exceed 75% of the sign band area designated for the Tenant space. Vertical dimension of the copy may not exceed 21".

B. WHERE SIGN BAND IS NOT PROVIDED (Single story north and south exposure only)

1. All signs are to be individual pan channel letters, internally illuminated with remote transformers.

2. The horizontal dimension of the Tenant's sign shall not exceed 40% of the leased storefront (including logo cabinets).

3. Overall sign height shall not exceed 30".

4. Letters shall be constructed of 22-gage Paint Loe sheet metal or equivalent strength aluminum and shall have 5" returns. Channel me or similar materials will not be permitted.

5. All letters shall have 3/16" Plexiglas faces with l" Jewel Late trim.

6. All letters shall be illuminated by neon on 60 MA transformers, or by red neon on 30 MA transformers .

7. Letter style and color shall be selected by Tenant.

8. Logo cabinets will be permitted. Logo cabinets shall not exceed 30"x30" and will be illuminated by neon (see number 6 above).

9 . Raceways will not be permitted.

10. Approval or disapproval sl1all remain the sole right of the Landlord.

11. All signs must be constructed to meet UL standards and must carry UL labels.

C. EXTERIOR TENANT SOFFIT IDENTIFICATION SIGNS.

1. All Tenants shall be required to have an exterior walkway soffit identification sign mounted contiguous to the Tenant's entry.

2. All soffit signs will be fabricated, installed, and maintained by the Landlord.

3. All costs of fabrication, installation, and maintenance shall be included in Common Area Charges (C.A.M.).

Exhibit 10.17

RETAIL LEASE AGREEMENT

This RETAIL LEASE AGREEMENT (this “ Agreement ” ) made this 23 rd day of January, 2014 (the “ Effective Date ” ), by and between W-ADP MEADOWS VII, L.L.C., a Delaware limited liability company ( “ Landlord ” ), and GROWLIFE HYDROPONICS, INC., a Delaware corporation ( “ Tenant ” ).

1. Leased P remises .

(a) Landlord, for and in consideration of the Rent (as defined below) and other conditions and covenants to be observed, satisfied, fulfilled and performed by Tenant, demises and leases to Tenant, and Tenant leases from Landlord, the space depicted on the site plan attached hereto as Exhibit A-1 , comprising approximately 3,24l rentable square feet, identified on the site plan as Space E-106 and having a physical address of 4880 Baseline Road, Building E, Suite 106, Boulder, CO 80303 (the “Leased Premises” ) , in the shopping center known as Meadows on the Parkway, upon the terms and conditions set forth herein. The “Shopping Center” shall be hereinafter defined as those portions of Meadows on the Parkway which are owned by Landlord from time to time, which portions shall be deemed to be the Shopping Center for purposes of this Agreement only during the time of such ownership. The current Shopping Center is depicted on Exhibit A attached hereto.

(b) Rentable square footage for purposes of this Agreement shall be measured from the outside face of exterior walls and the center of interior common demising walls. Landlord and Tenant acknowledge that Landlord may cause the square footage of the Leased Premises to be re-measured (the “Certified Area” ) . If the Certified Area varies from the area specified in this Agreement, this Agreement shall be modified accordingly.

2. Term. The term of this Agreement shall be for a period of thirty-nine (39) full calendar months, commencing on the Rent Commencement Date (as defined below) and expiring on the last day of the thirty-ninth (39th) full calendar month thereafter (the “Term” ) , unless earlier terminated pursuant to any other provision of this Agreement. The parties hereto acknowledge that all provisions of this Agreement other than those relating to the payment of Rent (as defined below), apply prior to the Term, and the parties agree to be bound by those provisions immediately upon execution of this Agreement. Tenant shall have the option(s) to extend the Term pursuant to Addendum 1 attached to this Agreement.

3. Rent.

(a) Commencing on the date which is the earlier of: (i) the date Tenant opens for business in the Leased Premises; or (ii) sixty (60) days after Landlord's delivery of the Leased Premises to Tenant (collectively, the “ Rent Commencement Date ” ), Tenant agrees to pay Landlord Minimum Rent, as follows:

	MONTHS			RATE/S.F.		ANNUAL RENT		MONTHLY RENT

Primary Term		1 - 12	*	$	15.00	$	48,615.00	$	4,051.25
Primary Term		13 - 24		$	15.45	$	50,073.45	$	4,172.79

Primary Term			25 - 36			$	15.91			$	51,564.31			$	4,297.97
Primary Term			37 - 39			$	16.39			$	53,122.92			$	4,426.91

* First full three (3) calendar months during the Term are subject to rent abatement as provided in this paragraph below.

Minimum Rent shall be payable in advance, on or before the first day of each and every calendar month during the Term. All Rent shall be payable, without setoff or deduction, without notice or demand, in lawful money of the United States of America, at Landlord's address or at such other address as Landlord may from time to time designate in writing. “ Rent ” shall mean Minimum Rent, and all other charges payable by Tenant under this Agreement, including without limitation, Tenant's Proportionate Share of Operating Expenses (as defined below). Minimum Rent for any period which is less than one ( 1 ) month shall be a prorated portion of the monthly installment herein based upon the actual days in the month. Provided Tenant is not then in default under this Agreement, Minimum Rent shall be abated for the first three (3) full calendar months following the Rent Commencement Date; provided however, that during any such period of rent abatement, Tenant shall pay Tenant's Proportionate Share of Operating Expenses. If the Rent Commencement Date occurs on a date other than the first day of a calendar month, Tenant shall pay Minimum Rent for the period of time between the Rent Commencement Date and the first day of the succeeding calendar month, and rent abatement shall commence on the first day of the first full calendar month of the Lease Term.

(b) Within ten (10) days after the end of each calendar month, Tenant shall deliver to Landlord: (i) a written statement, in the form of Exhibit C attached hereto, certified by Tenant, setting forth the amount of Gross Sales made during the preceding calendar month or partial month at the beginning of the Term; and (ii) copies of sales receipts and state sales tax records.

(c) The term “ Gross Sales ” is defined as the total amount in dollars of the actual price charged, whether for cash or on credit, for all sales or receipts of whatever kind from all business conducted by Tenant from the Leased Premises. Gross Sales shall not include any sums collected and paid out for any retail sales on retail excise tax which is separately stated and paid to the taxing authority.

(d) Tenant shall keep for at least one (1) year after the expiration of this Agreement, all books and records showing Gross Sales. Landlord shall have the right, at any time, upon forty-eight (48) hours' prior written notice, to audit all Gross Sales and to examine Tenant's books and records, and Tenant shall make all such records available at the Leased Premises for such examination.

4. Trade Name and Permitted U se . Tenant shall use and occupy the Leased Premises solely for the purpose of operating a retail store selling hydroponic horticulture products ( “ Permitted Use ” ) and for no other purpose, without the prior written consent of Landlord, which Landlord may withhold in its sole discretion. Tenant shall not use the Leased Premises in any manner that violates any exclusive or prohibited use restriction shown on Exhibit D attached to this Agreement. From time to time, Landlord may request that Tenant

provide reasonable evidence of its compliance with such restrictions, and Tenant shall deliver the same within fifteen (15) days thereafter. Tenant shall operate its business in the Leased Premises solely under the trade name of GrowLife Hydroponics ( ” Tenant ’ s Trade Name ” ) and under no other name, without the prior written consent of Landlord, which Landlord may withhold in its sole discretion.

5. Hours of O peration . Tenant shall open on or before the date which is ninety (90) days after the Effective Date fully fixtured, stocked and staffed for the Permitted Use (the “ Initial Opening Date ” ) and shall thereafter, continuously during the Term, conduct and carry on Tenant's business in the Leased Premises during the usual business hours of each and every business day as is customary for businesses of like character in the area in which the Shopping Center is located. If Tenant violates this paragraph 5 by failing to open for more than sixty (60) consecutive days after the Initial Opening Date, then Landlord shall have the right to terminate this Agreement, upon such termination Tenant shall reimburse Landlord for the unamortized portion of the Tenant Improvement Allowance within five (5) days after Landlord's request for such amount; provided, however, that this provision shall not apply if the Leased Premises should be closed and the business of Tenant temporarily discontinued therein on account of remodeling or renovation which is completed within ninety (90) days after the closure or if the Leased Premises are closed during any casualty or Force Majeure event and if closure of the Leased Premises does not continue beyond one hundred eighty (180) days after the occurrence of such casualty or Force Majeure event. Upon termination under this paragraph 5, both parties shall be automatically released from any further liability or obligation whatsoever arising out of or based upon this Agreement, except for all surviving obligations arising prior to or after termination, including, without limitation, indemnities under paragraphs 22 and 24 below, leasing commission under paragraph 30 below and Tenant's obligations for any unpaid bills and liens attributable to work performed by Tenant; provided, however, Tenant shall not be released from its obligations under this Agreement if it has not paid the amounts provided in this paragraph within the five (5) day period set forth above. Tenant's obligations under this paragraph 5 shall survive termination of this Agreement.

6. Common Areas; Operating Expenses; Other F ees.

(a) “ Common Areas ” shall mean all areas of the Shopping Center which are available for the common use of tenants, as designated by Landlord from time to time, and which are not leased or held for the exclusive use of Landlord or other tenants, including without limitation parking areas, driveways, sidewalks, loading areas, access roads, landscaping and planted areas, and signs. Landlord may from time to time change the size, location, nature and use of any of the Common Areas. Tenant, its agents, employees, customers, licensees and subtenants shall have the non-exclusive right to use the Common Areas for the entire Term for ingress or egress, automobile parking and any other purpose for which the Common Areas were designed; provided, however, that Tenant shall use commercially reasonable efforts to cause its employees to park in any on- or off-site employee parking area promulgated by Landlord for employees of the Shopping Center.

(b) “ Operating Expenses ” shall mean all direct and indirect costs incurred by Landlord to insure, maintain, repair, replace, operate and manage the Shopping Center to the

extent not maintained by other tenants of Landlord in the Shopping Center. Operating Expenses may include, without limitation, costs and expenses for, among other things, the following: (i) utilities (to the extent not separately metered); (ii) Real Property Taxes (as defined below); (iii) the cost of Landlord's Insurance (as defined below); (iv) property management fees (not to exceed four percent (4%) of gross rents); (v) fees for supervision and administration paid to a third party, which may be an affiliate of Landlord, not exceeding fifteen percent (15%) of all other Operating Costs; (vi) costs and expenses paid by Landlord pursuant to any documents which are currently recorded or which are recorded in the future against the Shopping Center in the Office of the Clerk and Recorder of the County of Boulder, except for any mortgage, deed of trust or other lien presently existing or hereafter placed upon any portion of the Shopping Center by Landlord ( “Matters of Record” ); and (vii) capital improvement costs, provided the same are amortized on a straight line basis over the useful life of the capital item being replaced and/or repaired. Tenant shall pay Tenant's proportionate share (which shall be calculated by dividing the rentable area of the Leased Premises by the rentable area of all of the buildings located and owned by Landlord in the Shopping Center) (“Tenant’s Proportionate Share” ) of all Operating Expenses in advance, on or before the first of each calendar month during the Term. By April 30th of each year, Landlord shall endeavor to give Tenant a statement showing the total Operating Expenses for the prior calendar year, as well as an estimate of the Operating Expenses for the current year (which estimate may be revised by Landlord at any time). In the event the total of the monthly payments which Tenant has made for the prior calendar year is less than Tenant's actual share of such Operating Expenses, then Tenant shall pay the difference to Landlord in a lump sum within ten (10) days after receipt of such statement. Any over-payment by Tenant shall be credited to Tenant's next payments of Tenant's Proportionate Share of Operating Expenses becoming due and payable. Tenant shall have the right, at any time within ninety (90) days after a statement of actual Operating Expenses, but upon ten (10) business days' prior written notice and during normal business hours, to examine Landlord's books and records relating to such Operating Expenses. Unless Tenant objects to the rental adjustment within said ninety (90) day period, such statement and adjustment shall be deemed conclusively binding upon Tenant.

(c) “Real Property Taxes” shall mean the following: (i) any fee, license fee, license tax, business license fee, commercial rental tax, levy, charge, assessment and/or tax imposed by any taxing authority against the land and buildings comprising the Shopping Center attributable to the Term; (ii) any charge or fee replacing any tax previously included within the definition of Real Property Taxes, in whole or in part; and (iii) any assessments or charges levied now or in the future against the Shopping Center by any district or other entity formed in connection with any public financing mechanism for the development of the Shopping ( “District”). “Real Property Taxes” do not, however, include Landlord's federal or state income, franchise, inheritance or estate taxes.

(d) Notwithstanding anything else in this Agreement to the contrary, Landlord at anytime and from time to time shall have the right to combine or separate the calculation and allocation of some or all Operating Expenses among any portion of or tenant grouping within the Shopping Center, and, in such event, Tenant's Pro Rata Share with respect to said Operating Expense(s) shall be equitably adjusted to reflect such allocation.

7. S ignage . The size, design and manner of installation of all signs by Tenant shall be subject to: (a) the prior written approval of Landlord and applicable governmental and private authorities; and (b) Landlord's signage criteria for the Shopping Center, which have been previously provided to Tenant.

8. D isplays . Tenant may not display or sell merchandise or allow grocery carts or other similar devices within the control of Tenant to be stored or to remain outside the defined exterior walls and permanent doorways of the Leased Premises, nor allow any advertising medium that may be heard or seen outside the Leased Premises.

9. U tilities . Commencing on the Rent Commencement Date, Tenant shall pay, when due, all charges for water, sewer, electricity, gas, telephone service and other utilities supplied to the Leased Premises directly to the applicable utility provider. Landlord shall not be liable to Tenant for damages or otherwise if the utilities are interrupted or tern1inated for any cause.

10. Insurance .

(a) Commencing on the date upon which Landlord first delivers the Leased Premises to Tenant and at all times thereafter, Landlord shall carry and maintain, or cause to be carried and maintained, the following insurance ( “Landlord’s Insurance” ): (i) a "Special Form" property insurance policy insuring the Shopping Center in an amount required by Landlord or Landlord's lender; and (ii) any other policy(ies) of insurance which Landlord deems necessary and/or which Landlord's lender requires to be kept in force.

(b) Commencing on the date upon which Landlord first delivers the Leased Premises to Tenant and at all times thereafter, Tenant shall carry and maintain, at its sole cost and expense:

(i) Commercial General Liability Insurance (ISO 00 01 occurrence form or equivalent acceptable to Landlord) naming Tenant as the named insured and Landlord and (at Landlord's request) Landlord's mortgagee (and managing agent) or any other person or entity as requested by Landlord, if any, as additional insureds, protecting Tenant and the additional insureds against liability for bodily injury, death and property damage occurring upon or in the Leased Premises, with a minimum combined single limit of $1,000,000.00 and a general aggregate limit of $2,000,000.00. If the policy also covers locations other than the Leased Premises, the policy shall include a provision to the effect that the aggregate limit of $2,000,000.00 shall apply separately at the Leased Premises;

(ii) “Special Form” property insurance covering all alterations made by Tenant and all of Tenant's property in, on or about the Leased Premises, and written for at least the full replacement cost with a deductible of not more than $10,000.00 per occurrence;

(iii) Plate glass insurance covering all plate glass in the Leased Premises which Tenant may elect to self insure. Tenant shall be and remain liable for the repair and restoration of all such plate glass;

(iv) Automobile liability insurance on ISO form CA 00 01 or an equivalent acceptable to Landlord covering any auto (including owned, hired and non-owed autos), with a limit of not less $1,000,000 each accident; and

(v) Workers compensation and employers liability insurance for all Tenant's employees. The workers compensation insurance must fulfill applicable statutory requirements. The employers liability insurance must have limits of not less than $1,000,000 each accident for bodily injury by accident, $1,000,000 each employee for bodily injury by disease, and $1,000,000 policy limit for bodily injury by disease.

(vi) Business interruption, loss of income and extra expense insurance in amounts sufficient to insure and pay not less than a twelve-months of Tenant's expenses and loss of income.

(c) Tenant shall deliver certificates of such insurance to Landlord before occupying the Leased Premises or installing any of its property, and in any event, within 10 days after the signing of this Agreement, and at any date the prior policy expires. All such policies shall include a provision that Landlord shall receive at least 30 days' advance written notice prior to material changes or cancellation thereof. Tenant's Insurance shall be issued by an insurance company of recognized standing, authorized to do business in the State of Colorado and having a Best's Insurance Guide rating of at least A:X. All public liability property damage, liability and casualty policies maintained by Tenant shall be written as primary policies, not contributing with and not supplemental to coverage that Landlord may carry.

11. Subrogation . Tenant hereby waives any and all rights of recovery against Landlord and against the officers, employees, agents or representatives of Landlord for loss of or damage to property, if such loss or damage is covered by any insurance policy in force (or required to be in force) at the time of such loss or damage. Landlord hereby waives any and all rights of recovery against Tenant, and against the officers, employees, agents or representatives of Tenant, for loss of or damage to property, if such loss or damage is covered by any insurance policy in force (or required to be in force) at the time of such loss or damage. Landlord and Tenant, from time to time, shall cause their respective insurers to issue appropriate endorsements to all policies of insurance carried in connection with the Shopping Center or the Leased Premises or the contents of the Leased Premises, which endorsements waive such insurer's subrogation rights under such policies against the beneficiaries of this waiver.

12. Delivery of the Leased Premises and A lterations .

(a) Tenant acknowledges and agrees that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Leased Premises or with respect to the suitability of any part of the same for the conduct of Tenant's business. The taking of possession of the Leased Premises by Tenant shall conclusively establish that the Leased Premises were at such time in a good and sanitary order, condition and repair acceptable to Tenant. Tenant shall be conclusively deemed to have accepted the Leased Premises "AS IS" in the condition existing on the date Tenant first takes possession, and to have waived all claims relating to the condition of the Leased Premises. Landlord shall deliver the Leased Premises to Tenant upon the mutual execution of this Agreement.

(b) “Tenant’s Work” shall mean those items which are the responsibility of Tenant as set forth on Exhibit B attached hereto. Tenant shall commence Tenant's Work within ten (10) days after Landlord's delivery of the Leased Premises to Tenant and shall diligently prosecute such installation to completion. Tenant shall cause any Contractors (as defined in Exhibit B-1 to comply with the insurance requirements set forth on Exhibit B-1 .

(c) Landlord agrees to contribute $10.00 per rentable square foot of the Leased Premises ( “Tenant Improvement Allowance” ) toward the cost of Tenant's Work. Upon Tenant's written request to Landlord, Landlord shall pay such sum to Tenant within forty-five (45) days after the later to occur of the following: (i) Landlord has received Tenant's payment of Tenant's Proportionate Share of Operating Expenses for the first month of the Term;

(ii) Tenant has opened for business to the public for the Permitted Use in the entire Leased Premises; and (iii) Tenant has delivered to Landlord all mechanics' lien releases or other lien releases on account of Tenant's Work, which are notarized, unconditional and in recordable form or in such form as Landlord shall have approved, and all invoices Tenant's Work.

(d) Tenant shall not make any alterations, improvements, changes, modifications or installments in, on or about the Leased Premises without the prior written approval of Landlord. Tenant shall complete all improvements in compliance with all Applicable Laws (as defined below) and insurance requirements applicable thereto, including, without limitation, the insurance requirements set forth on Exhibit B -1 . During the course of all alterations, additions and/or improvements to the Leased Premises, Tenant shall post and keep posted (until completion of the same), in a conspicuous place upon the Leased Premises, and shall personally serve upon all contractors and subcontractors performing any of the alterations, additions and/or improvements, a notice consistent with Colorado Revised Statute Section 38-22- 105, stating that Landlord's interest in the Leased Premises shall not be subject to any lien for said work.

13. Maintenance of Leased P remises .

(a) Tenant shall keep and maintain the Leased Premises (including, without limitation, the store front, doors, window casements, plate glass, glazing, plumbing, pipes, electrical wiring and conduits) and the surrounding area, including any equipment and improvements installed therein, neat, clean, free of debris and trash, and in good order and repair, consistent with the general character of the Shopping Center. In addition, (i) Tenant shall keep and maintain the heating and air conditioning ( “HVAC” ) system serving the Leased Premises in good order and repair and (ii) Tenant shall obtain a service contract for repairs and maintenance of the HVAC system which conforms to the requirements under the warranty, if any, on such system. Tenant shall comply with all rules and regulations promulgated by Landlord or the District from time to time. Landlord reserves the right to enter upon the Leased Premises at all reasonable hours for the purpose of inspecting the same, or for making emergency repairs. The exercise by Landlord of any of its rights herein shall not be deemed an eviction or disturbance of Tenant's use and possession of the Leased Premises.

(b) Notwithstanding the provisions of subparagraph (a) above, Landlord shall repair and maintain the Common Areas and the structural portions of the building of which the Leased Premises are a part (the “ Building ” ), including the exterior walls (excluding plate glass), slab floor, sidewalks, loading docks, utility lines not exclusively used by and located within the Leased Premises, utilities lines located outside of the Leased Premises, and roof, unless such maintenance and repairs are caused in part or in whole by the act, neglect, fault or omission of any duty by Tenant, its agents, servants, employees, invitees, or any damage caused by breaking and entering, in which case Tenant shall pay to Landlord the actual cost of such maintenance and repairs. Landlord shall not be liable for any failure to make such repairs or to perform any maintenance unless such failure persists for an unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. There shall be no abatement or rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Leased Premises or in or to fixtures, appurtenances and equipment therein. Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect.

14. L iens . Should any liens be filed or recorded against the Leased Premises and/or any portion of the Shopping Center arising out of any work performed, materials furnished or obligations incurred by or on behalf of Tenant, or should any action affecting the title thereto be commenced, Tenant shall cause such liens to be removed of record within five (5) days. If Tenant desires to contest any claim of lien, Tenant may do so only if, within such five (5) day period, Tenant posts adequate security with a court of competent jurisdiction and obtains an order discharging the lien of record, as then provided by the Colorado mechanics' lien statute. If a final judgment is entered establishing the validity or existence of any lien for any amount which lien has not been discharged or bonded off as required above, Tenant shall pay and satisfy the same at once.

15. Governmental A pprovals . Tenant shall: (a) obtain, at its own cost and expense, all necessary municipal and governmental approvals, licenses, permits and certificates required for its occupation of the Leased Premises and Tenant's Work; (b) comply with all laws, statutes, ordinances, rules and regulations ( “ Applicable Laws ” ) and all Matters of Record; and (c) pay before delinquency all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant or imposed upon its business operations and/or sale of goods and services and which become payable during the Term.

16. Interest and Administrative C osts . If (a) Tenant fails to make any payment under this Agreement when due; (b) Landlord performs any obligation of Tenant under this Agreement; or (c) Landlord incurs any costs or expenses as a result of Tenant's default under this Agreement, then Tenant shall pay, upon demand, interest, (i) with respect to payments due to Landlord pursuant to clause (a) above, from the date such payment was due, or (ii) from the date Landlord incurs such costs or expenses relating to the performance of any such obligation or Tenant's default, as the case may be, until the applicable amount is paid, at the rate of eighteen percent (18%) per annum, plus the payment due under (a), or the amount of such costs and expenses incurred under (b) or (c), and Landlord's administrative costs in connection therewith

in the amount of five percent (5%) of the applicable amount, regardless of whether or not otherwise expressly provided for in this Agreement.

17. Surrender of Leased Premises . At the expiration of the Term or earlier termination of this Agreement, Tenant shall quit and surrender the Leased Premises and the alterations therein (unless Landlord elects to have Tenant remove the same) in good order and condition, wear and tear thereof excepted, and shall remove Tenant's trade fixtures, equipment and other personal property, and repair any and all damages caused by such removal. Any trade fixtures, equipment or other personal property not removed shall be deemed abandoned, but Tenant shall remain liable for the cost of removal and disposal.

18. Assignment and Subletting . Without Landlord's prior written consent Tenant shall not assign, mortgage or pledge this Agreement, or enter into any sublease, concession or license of the Leased Premises, it being understood that a change in the management of Tenant or the transfer, directly and/or indirectly, such as through the transfer of proxy rights or interests in intermediary entities that indirectly own Tenant, of thirty percent (30%) or more of the voting interests in Tenant, shall be deemed an assignment.

19. Estoppel C ertificates . Tenant, upon not less than ten (10) days' prior written notice from Landlord, agrees to execute and deliver to Landlord an estoppel certificate in the form provided by Landlord.

20. Notices . All notices and demands provided herein shall be delivered by hand delivery or sent by a nationally recognized overnight courier service or by prepaid certified mail, return receipt requested, to the parties at the addresses set forth below. If service shall be made by certified mail, such service shall be deemed completed as of the third day following the mailing of such notice in the manner aforesaid. If service shall be made by overnight courier, such service shall be deemed completed as of the next business day following the deposit with the overnight courier.

If to Landlord:

W-ADP Meadows VII, L.L.C.

c/o Alberta Development Partners, LLC 5750 DTC Parkway, Suite 210 Greenwood Village, CO 80111 Attention: Lease Administration

Copy:

W-ADP Meadows VII, L.L.C.

Alberta Development Partners, LLC 5750 DTC Parkway, Suite 210 Greenwood Village, CO 80111

Attention: Meadows on the Parkway Property Management

Copy:

Brownstein Hyatt Farber Schreck, LLP 410 17th Street, Suite 2200

Denver, Colorado 80202 Attention: Robert Kaufmann

If to Tenant:

GrowLife Hydroponics, Inc.

4880 Baseline Road, Building E, Suite 106 Boulder, CO 80303

Attention: John Genesi, Chief Financial Officer

Copy:

GrowLife Hydroponics, Inc.

4880 Baseline Road, Building E, Suite 106 Boulder, CO 80303

Attention: Justin Manns, Controller

21. D efault . If Tenant shall: (a) fail to pay when due any installment of Rent or other sum of money when due without the necessity of demand therefor or notice thereof; (b) fail to perform or comply with any other term, condition or covenant on the part of Tenant to be observed herein and shall fail to cure same within five (5) days after written notice to Tenant; or

(c) vacate, abandon or cease to continuously operate the Leased Premises as set forth herein, in any such event, Tenant shall be in breach hereunder and Landlord, at its option, any time thereafter, may:

(i) Terminate this Agreement by written notice to Tenant and, upon service of said notice, Tenant shall immediately vacate the Leased Premises in accordance with the provisions of this Agreement, and Landlord, in addition to its other remedies, may recover from Tenant all damages incurred by Landlord as a result of such breach (all of which shall be immediately due and payable), including, but not limited to, (A) the cost of recovering possession of the Leased Premises; (B) expenses of reletting, including repairs, renovation and alteration of the Leased Premises; (C) reasonable attorneys' fees; (D) the unpaid amount of all monetary obligations payable under this Agreement which had been earned at the time of termination; ( E ) the worth at the time of award of the amount by which the unpaid amount of all monetary obligations payable under this Agreement for the balance of the Term after the time of such award exceeds the amount of such loss for the same period that Tenant proves could be reasonably avoided; (F) that portion of any leasing commissions paid by Landlord and applicable to the unexpired Term; and (G) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this

Agreement or which in the ordinary course of things would be likely to result therefrom; Landlord shall be required to use reasonable efforts to mitigate its damages, but efforts by Landlord to mitigate damages caused by the default shall not waive Landlord's right to recover all or any part thereof in a separate suit;

(ii) Landlord may, without terminating the Term, re-enter and take possession of the Leased Premises or any part thereof, without being liable for prosecution on account thereof or being deemed guilty of any manner of trespass. Landlord reserves the right, following any reentry or reletting, to exercise its right to terminate this Agreement by giving Tenant written notice thereof. No such reentry or taking possession of the Leased Premises by Landlord shall be construed as an election by Landlord to terminate this Agreement unless a written notice of such intention is given to Tenant. No notice from Landlord hereunder or under a forcible entry and detainer statute or similar law shall constitute an election by Landlord to terminate this Agreement unless such notice specifically so states. After recovering possession of the Leased Premises, Landlord may, from time to time, but shall not be obligated to, relet the Leased Premises, or any part thereof, for the account of Tenant, for such term or terms and on such conditions and upon such other terms as Landlord, in its discretion, may determine. Landlord may make such repairs, alterations or improvements as Landlord may consider reasonably appropriate to accomplish such reletting, and Tenant shall reimburse Landlord upon demand for all reasonable costs and expenses (including but not limited to the costs of such repairs, alterations or improvements, leasing commissions and attorneys' fees) which Landlord may incur in connection with such reletting. Notwithstanding Landlord's recovery of possession of the Leased Premises, Tenant shall continue to pay on the dates herein specified, the Rent and all additional amounts which would be payable hereunder if such repossession had not occurred, less a credit for the net amounts, if any, actually received by Landlord through any reletting of the Leased Premises; and

(iii) Upon a breach by Tenant hereunder, Landlord shall also have all other rights available to it at law or in equity, including without limitation, seeking specific performance or injunctive relief, or performing Tenant's obligations hereunder and getting reimbursed the reasonable cost and expenses therefor upon demand. All rights and remedies of Landlord herein created or otherwise existing at law or equity are cumulative and may be exercised concurrently, whenever and as often as deemed desirable, and the exercise of one shall not be taken to exclude or waive the right to the exercise of any other.

22. Indemnity and Release; Limitation on Right of Recovery Against L andlord .

(a) Except in the case of the gross negligence or willful misconduct of Landlord, Tenant shall indemnify, save harmless and, at Landlord's option, defend Landlord, from and against all claims, actions, damages, liability and expense, fines, penalties, suits, proceedings, actions and causes of action of every kind or nature, including without limitation reasonable attorneys' fees and expenses incurred by Landlord arising out of or in any way connected with Tenant's operations, or the condition, use, or occupancy of the Leased Premises, or in any way arising out of the activities in the Common Areas or other portions of the Shopping Center, of Tenant or its, employees, servants or contractors.

(b) To the maximum extent permitted by law, Landlord, its partners and members, and their respective shareholders, partners, members, trustees, agents, representatives, directors, officers, employees and mortgagee(s) shall not be liable for, and Tenant waives all claims for, loss or damage to Tenant's business or injury or damage to person or property sustained by Tenant, or any person claiming by, through or under Tenant, resulting from any accident or occurrence in, on, or about the Shopping Center, including, without limitation, claims for loss or damage resulting from: (i) any equipment or appurtenances being or becoming out of repair; (ii) wind or weather; (ii i ) any defect in or failure to operate any sprinkler, HVAC equipment, electric wiring, gas, water or steam pipe, stair, railing or walk; (iv) broken glass; (v) the backing up of any sewer pipe or downspout; (vi) the escape of gas, steam or water; (vii) water, snow or ice being upon the Shopping Center or coming into the Leased Premises; (viii) the falling of any fixture, plaster, tile, stucco or other material; or (ix) any act, omission or negligence of other tenants or the public.

(c) Moreover, Tenant agrees that, in the event Tenant shall have any claim against Landlord under this Agreement arising out of the subject matter of this Agreement, Tenant's sole recourse shall be against Landlord's interest in the Shopping Center, for the satisfaction of any claim, judgment or decree requiring the payment of money by Landlord as a result of a breach hereof or otherwise in connection with this Agreement, and no other property or assets of Landlord, its officers, directors, employees, successors or assigns, shall be subject to the levy, execution or other enforcement procedure for the satisfaction of any such claim, judgment, injunction or decree. MOREOVER, TENANT AGREES THAT LANDLORD SHALL IN NO EVENT AND UNDER NO CIRCUMSTANCES BE RESPONSIBLE FOR ANY LOST PROFITS AND/OR ANY CONSEQUENTIAL, SPECIAL, INCIDENTAL OR PUNITIVE DAMAGES INCURRED OR SUSTAINED BY TENANT, OR ITS EMPLOYEES, AGENTS, CONTRACTORS OR INVITEES AS A RESULT OF OR IN ANY WAY CONNECTED TO TENANT'S OCCUPANCY OF THE LEASED PREMISES. In connection therewith, Tenant assumes all risk of, and waives any and all right to assert claims against, or obtain any damages from, Landlord, with respect to, loss, injury, or damages which may be sustained by the person, goods, wares, merchandise or property of Tenant and/or any other person or entity in or about the Leased Premises from any cause whatsoever, whether such damage or injury results from conditions arising within the Leased Premises or from other sources and whether known, unknown, foreseen, unforeseen, patent or latent. Tenant understands and acknowledges the significance and consequence of such specific assumption of risk and waiver.

(d) Landlord shall not be in default hereunder unless Landlord fails to perform the obligations required of Landlord within a reasonable time, but in no event later than thirty

(30) days after written notice by Tenant to Landlord specifying wherein Landlord has failed to perfom1 such obligation; provided, however, if the nature of Landlord's obligation is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion.

23. Holding O ver . If Tenant, or any person claiming through Tenant, shall continue to occupy the Leased Premises after the expiration or earlier termination of the Term, such

occupancy shall be deemed to be on a day-to-day basis under the same terms and conditions set forth in this Agreement; provided, however, that Rent during such continued occupancy shall be double the amount in effect immediately prior to expiration or earlier termination. In addition, Tenant shall pay any damages and hold Landlord harmless from any liability incurred m connection with any claims made by any succeeding occupant based on delay of possession.

24. Hazardous Substances . No Hazardous Substances (as hereafter defined) shall be used, generated, stored, treated, released, disposed or otherwise managed by or on behalf of Tenant or any invitee at the Leased Premises or the Shopping Center with the exception of minor amounts of Hazardous Substances customarily and lawfully used in conjunction with the Permitted Use in a manner that complies with Applicable Laws and all manufacturers' instructions. Tenant shall immediately notify Landlord upon discovery of any Hazardous Substance release affecting the Leased Premises and, at its sole expense and at Landlord's option, remediate to Landlord's satisfaction or reimburse Landlord's costs of investigation or remediation of any release of Hazardous Substances arising from any act or omission of Tenant, its employees, agents, contractors or invitees. In any remediation or cleanup Tenant shall be the generator of any such Hazardous Substances, shall sign all manifests with respect thereto and take responsibility therefor. Tenant shall cooperate with Landlord and provide Landlord with access to the Leased Premises from time to time for inspections and assessments of environmental conditions and shall remove all Hazardous Substances from the Leased Premises upon expiration or termination of this Agreement. Tenant agrees to indemnify, defend and hold Landlord harmless from and against all liabilities, obligations, damages, judgments, penalties, claims, costs, charges and expenses, including all remediation or cleanup costs or expenses, reasonable architects' and attorneys' fees, which may be imposed upon, incurred by or asserted against Landlord arising, directly or indirectly, out of or in connection with the presence of Hazardous Substances at or affecting the Shopping Center due to any act of Tenant, its agents, servants, employees or contractors. As used herein, “Hazardous Substances” shall mean:

(a) hazardous or toxic substances, wastes, materials, pollutants and contaminants which are included in or regulated by any federal, state or local law, regulation, rule or ordinance, including, without limitation CERCLA, Superfund Amendments and Reauthorization Act of 1986, the Resource Conservation and Recovery Act, and the Toxic Substances Control Act, as any of the foregoing may be amended from time to time; (b) petroleum products; (c) asbestos; (d) polychlorinated biphenyls; (e) substances known to cause cancer and/or reproductive toxicity, and/or mold; (f) halogenated and non-halogenated solvents; and (g) all other regulated chemicals, materials and solutions which, alone or in combination with other substances, are potentially harn1ful to the environment, public health or safety or natural resources.

25. Security D eposit . Upon Tenant's execution and delivery of this Agreement to Landlord, Tenant shall deposit with Landlord the sum of $5,590.73 as security for the performance by Tenant of all of the terms, covenants, and conditions required to be performed by it hereunder (the “Security Deposit” ). Such sum shall be returned to Tenant after a reasonable period following the expiration of the Term if, at such time, Tenant has fully performed all such terms, covenants and conditions. Tenant shall not be entitled to any interest on the Security Deposit. In the event of default by Tenant in performing any of its obligations under this Agreement, Landlord may, in addition to any other right or remedy available to Landlord hereunder, use, apply, or retain all or any part of this Security Deposit for the payment

of any unpaid Rent or for any other amount which Landlord may be required to expend by reason of the default of Tenant. If a portion of the Security Deposit is used or applied by Landlord during the Term, Tenant shall, upon five (5) days' written demand, deposit with Landlord an amount sufficient to restore the Security Deposit to its original amount.

26. Waiver of Jury Trial . Landlord and Tenant each hereby waives any and all rights to a trial by jury of any and all issues arising in any claim, action, proceeding, or counterclaim between Landlord and Tenant (or their successors, assigns, personal or legal representatives or heirs) under or in connection with this Agreement, any of its provisions, the use or occupancy of the Leased Premises, the relationship of Landlord and Tenant, and/or any claim for injury or damage. If either Landlord or Tenant are a partnership, this waiver shall be binding upon the parties of each as well.

27. Governing Law, Entirety of Agreement and Partial I nvalidity . This Agreement shall be governed by the State of Colorado. If any provision in the Agreement is held by any court to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force and effect.

28. Attorneys' F ees . In the event of any litigation or arbitration between Landlord and Tenant to enforce any provision of this Agreement or any right of either party hereto, the unsuccessful party to such litigation or arbitration consents to pay to the successful party all costs and expenses, including reasonable attorneys' fees, incurred therein.

29. Entire Agreement . This Agreement contains the entire agreement between the parties, and all prior understandings and agreements between the parties are merged into this Agreement. This Agreement may be changed or modified only by a writing executed by the party against whom enforcement thereof is sought. Notwithstanding anything in this Agreement to the contrary, Landlord does not represent or warrant the accuracy or completeness of the tenants and occupants or the dimensions of the premises and properties shown on any site plan attached hereto as an exhibit, and the same may change from time to time.

30. Broker's Commission . Except for WalderaScott Real Estate Partners Dean Callan and Company, Inc., whose commissions will be paid by Landlord in accordance with a separate commission agreement, Landlord and Tenant each warrants and represents to the other that no broker, finder or agent has acted for or on its behalf in connection with the negotiation, execution or procurement of this Agreement. Landlord and Tenant each agrees to indemnify and hold the other harmless from and against all liabilities, obligations and damages arising, directly or indirectly, out of or in connection with a claim from a broker, finder or agent with respect to this Agreement or the negotiation thereof, including costs and attorneys' fees incurred in the defense of any claim made by a broker alleging to have performed services on behalf of the indemnifying party.

31. Force Majeure . “ Force Majeure ” shall mean any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain labor or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other non-financial causes beyond the reasonable control of the party obligated to perform.

32. Waiver . One or more waivers of any covenant, term or condition of this Agreement by either party shall not be construed as a waiver of a subsequent breach of the same covenant, term or condition. The consent or approval by either party shall not be construed as a waiver of a subsequent breach of the same covenant, term or condition.

33. S ubordination . Tenant accepts this Agreement subject and subordinate to any mortgage, deed of trust or other lien presently existing or hereafter placed upon any portion of the Shopping Center, which includes the Leased Premises, and to any renewals and extensions thereof. Tenant further agrees to attorn to any mortgagee, ground lessor, trustee under a deed of trust, or purchaser at a foreclosure sale or trustee's sale as landlord under this Agreement (as the case may be, “ Morgagee ” ); provided, however, as part of such attornment, Tenant agrees for the benefit of any Mortgagee that if such Mortgagee succeeds to Landlord's (or any successor's) interest in this Agreement, such Mortgagee will have no liability for any act or omission of any prior landlord under this Agreement that occurs prior to the date such Mortgagee succeeds to Landlord's (or any successor's) interest in this Agreement nor any liability for claims, offsets, or defenses that Tenant might have had against Landlord (or any successor). Tenant agrees that any Mortgagee has the right at any time to subordinate its mortgage, deed of trust or other lien to this Agreement; provided, however, whether or not this Agreement may be (or be made to be) superior to a mortgage, deed of trust or other lien, the Mortgagee will not be liable for prepaid rentals, security deposits and claims accruing during Landlord's ownership; further provided that the provisions of a mortgage, deed of trust or other lien relative to the rights of the Mortgagee with respect to proceeds arising from an eminent domain taking (including a voluntary conveyance by Landlord) and provisions relative to proceeds arising from insurance payable by reason of damage to or destruction of the Leased Premises will be prior and superior to any contrary provisions contained in this instrument with respect to the payment or usage thereof. Landlord is hereby irrevocably vested with full power and authority to subordinate this Agreement to any mortgage, deed of trust or other lien hereafter placed upon the Leased Premises or the Shopping Center as a whole, and Tenant agrees upon demand to execute such further instruments subordinating this Agreement (or evidencing the subordination of this Agreement pursuant to the terms hereof) as Landlord may request; provided, however, that upon Tenant's written request and notice to Landlord, Landlord must use good faith efforts to obtain from any such Mortgagee a written agreement that after a foreclosure (or a deed in lieu of foreclosure) the rights of Tenant will remain in full force and effect during the term of this Agreement, except as otherwise provided in this paragraph and as may be required by Mortgagee, so long as Tenant recognizes and performs all of the covenants and conditions of this Agreement. Tenant agrees to execute a non-disturbance, attornment and subordination agreement if requested by Landlord and to return the san1e within ten (10) days following receipt of written request therefor.

34. Successors and A ssigns . Subject to the terms of paragraph 18, the covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto. In the event of any sale of the Leased Premises by Landlord, Landlord shall be and is hereby entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or derived from this Agreement arising out of any act, occurrence or omission occurring after the consummation of such sale.

35. Relocation . Landlord reserves the right to relocate the Leased Premises to other space in the Shopping Center comparable to the original Leased Premises in size and tenant finish. Landlord will give Tenant at least forty-five (45) days' prior written notice of Landlord's exercise of this right of relocation, and designate in such notice a proposed effective date for such relocation. Landlord shall pay the reasonable costs of moving Tenant's fixtures, furniture and equipment to the new Leased Premises, and any other reasonable business expense incurred in connection with such relocation up to a maximum of $1,000.00. Prior to the relocation, but effective upon the date the actual relocation is completed, Landlord and Tenant will execute an amendment to this Agreement deleting the description of the original Leased Premises and inserting a description of the new Leased Premises.

36. Inducement Recapture . If this Agreement provides for any rent concession, then, for purposes of this paragraph 36, any such rent concession is called the “ Abated Rent ” . If this Agreement provides for Landlord's payment of any form of tenant improvement allowance to Tenant, then, for purposes of this subsection, such allowance is called the “ Allowance ” . Tenant shall be credited with having paid all of the Abated Rent on the expiration of the Tem1 only if Tenant has fully, faithfully and punctually performed all of Tenant's obligations hereunder, including the payment of all Rent (other than the Abated Rent) and all other monetary obligations, and Tenant surrenders the Leased Premises in the physical condition required by this Agreement.Tenant acknowledges that its right to receive credit for the Abated Rent is absolutely conditioned upon Tenant's full, faithful, and punctual performance of its obligations under this Agreement.Tenant further acknowledges that its right to receive the Allowance is absolutely conditioned upon Tenant's full, faithful and punctual performance of its obligations under this Agreement.If Tenant defaults and does not fully cure such default pursuant to the provisions of this Agreement, the Abated Rent shall immediately become due and payable in full, the amount of any Allowance paid to (and/or on behalf of) Tenant shall immediately be returned (and/or repaid, as applicable) to Landlord, and this Agreement shall be enforced as if there were no such rent abatement, other rent concession or Allowance. In such case, Abated Rent shall be calculated based on the full initial Rent payable under this Agreement.

37. Casualty/Reconstruction .

(a) In the event that the Leased Premises are partially or totally destroyed by fire or any other peril covered by insurance maintained by Landlord, Landlord shall, within a period of one hundred eighty (180) days after the occurrence of such destruction (but only to the extent that: (i) Landlord can restore the Leased Premises to the condition in which it existed prior to the casualty within three hundred sixty-five (365) days following the casualty; (ii) proceeds of such insurance are available to Landlord for such purpose; (iii) the damage and/or destruction was not due to the acts or omissions of Tenant, its agents, employees or contractors; and (iv) Landlord is not restricted by any governmental authority), commence reconstruction and restoration of the Leased Premises and prosecute the same diligently to completion, in which event this Agreement shall continue in full force and effect. In the event either: (A) insurance proceeds are not sufficient to pay the cost of such reconstruction; (B) if the damage or destruction is due to the acts or omissions of Tenant, its agents, employees or contractors (in which case Tenant, at its sole cost and expense, shall cause the Leased Premises and the Shopping Center to be reconstructed, restored and repaired); (C) Landlord is restricted by any

governmental authority; or (D) the reconstruction and restoration of the Leased Premises would take longer than three hundred sixty-five (365) days from the date of the casualty, Landlord may elect to either terminate this Agreement or pay the cost of such reconstruction. If Landlord elects to or is obligated to reconstruct and repair the Leased Premises, such reconstruction shall be only to the extent necessary to restore the Lease Premises in substantially the same condition as of the Effective Date and Tenant shall be obligated for the restoration of all other leasehold improvements, trade fixtures and other personal property in the Leased Premises.

(b) In the event that the Leased Premises are partially or totally destroyed as a result of any casualty or peril not covered by Landlord's insurance, Landlord may within a period of one hundred eighty (180) days after the occurrence of such destruction: (i) commence reconstruction and restoration of the Leased Premises and prosecute the same diligently to completion, in which event this Agreement shall continue in full force and effect; or (ii) notify Tenant in writing that it elects not to so reconstruct or restore the Leased Premises, in which event this Agreement shall cease and terminate as of the date of service of such notice, unless Tenant is unable to continue the operation of its business after the occurrence of such destruction, in which event this Agreement shall cease and terminate as of the date of such destruction. In the event of any reconstruction of the Leased Premises by Landlord following destruction as a result of any casualty or peril not covered by Landlord's insurance, such reconstruction shall be only to the extent necessary to restore the Lease Premises in substantially the same condition as of the Effective Date and Tenant shall be obligated for the restoration of all of all other leasehold improvements, trade fixtures and other personal property on the Premises.

(c) Notwithstanding anything to the contrary herein contained, in the event of a total destruction of the Building or the Shopping Center or a partial destruction of the Building or the Shopping Center, the cost of restoration of which would exceed one third (1/3) of the then replacement value of the Building or the Shopping Center, by any cause whatsoever, whether or not insured against and whether or not the Leased Premises are partially or totally destroyed, Landlord may, within a period of one hundred eighty (180) days after the occurrence of such destruction, notify Tenant in writing that it elects not to so reconstruct or restore the Building or the Shopping Center, as applicable, in which event this Agreement shall cease and terminate as of the date of such destruction.

(d) Notwithstanding the foregoing, in the event that the Leased Premises are partially or totally destroyed during the last year of the Term, Landlord and Tenant each shall have the option to terminate this Agreement by giving written notice to the other of the exercise of such option within thirty (30) days after such destruction, in which event this Agreement shall cease and terminate as of the date of service of such notice. For the purposes of this subparagraph, partial destruction shall be deemed to be a destruction to an extent of at least one third (1/3) of the full replacement cost of the Leased Premises as of the date of destruction.

(e) In the event of any termination of this Agreement in accordance with this paragraph 37, the parties shall be released thereby without further obligation to the other party coincidental with the surrender of possession of the Leased Premises to Landlord except for the obligations that expressly survive termination.

(f) In the event of reconstruction and restoration as herein provided, and provided Tenant has maintained the business interruption or loss of income insurance required under this Agreement, to the extent that the proceeds of such business interruption or loss of income insurance may be exhausted during the period of reconstruction and restoration, Minimum Rent payable hereunder shall be thereafter abated proportionately with the degree to which Tenant's use of the Leased Premises is impaired during the remainder of the period of reconstruction and restoration; provided, however, the amount of Minimum Rent abated shall in no event exceed the amount of loss of rental insurance proceeds actually received by Landlord. Tenant shall continue the operation of its business on the Leased Premises during any such period to the extent reasonably practicable from the standpoint of prudent business management, and the obligation of Tenant all other charges, except the entire Minimum Rent, shall remain in full force and effect. Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Leased Premises, Tenant's personal property or any inconvenience or annoyance occasioned by such destruction, reconstruction or restoration. Tenant hereby waives any statutory rights of termination, which may arise by reason of any partial or total destruction of the Leased Premises, which Landlord is obligated to restore or may restore under any of the provisions of this Agreement.

38. Eminent D omain .

If all or substantially all of the Leased Premises is condemned or taken in any manner for public or quasi public use, including but not limited to, a conveyance or assignment in lieu of the condemnation or taking (collectively, a “ Condemnation ” ), this Agreement shall automatically tem1inate as of the earlier of the date on which actual physical possession is taken by the condemnor or the date of dispossession of Tenant as a result of such Condemnation. If less than all or substantially all of the Leased Premises is so condemned, taken, or conveyed or assigned in lieu thereof, this Agreement shall automatically terminate only as to the portion of the Leased Premises so taken as of the earlier of the date on which actual physical possession is taken by, or conveyed or assigned to the condemnor or the date of dispossession of Tenant as a result of such Condemnation. If a portion of the Building not including the Leased Premises is condemned, taken, or otherwise conveyed or assigned in lieu thereof so as to require, in the opinion of Landlord, a substantial alteration or reconstruction of the remaining portions thereof, this Agreement may be terminated by Landlord, as of the date on which actual physical possession is taken by the condemnor or dispossession of Tenant as a result of such Condemnation, by written notice to Tenant delivered within sixty (60) days following notice to Landlord of the date on which such physical possession is taken or dispossession will occur.

(a) Landlord shall be entitled to the entire award in any proceeding for a Condemnation for public or quasi public use, including, without limitation, any award made for the value of the leasehold estate created by this Agreement. No award for any partial or total taking shall be apportioned, and Tenant hereby assigns to Landlord any award that may be made in such Condemnation, together with any and all rights of Tenant now or hereafter arising in or to the same or any part thereof. Although all damages in the event of any Condemnation are to belong to Landlord whether such damages are awarded as compensation for diminution in value of the leasehold or to the fee of the Leased Premises, Tenant shall have the right to claim and

recover from the condemnor, but not from Landlord, such compensation as may be separately awarded or recoverable by Tenant in Tenant's own right on account of damages to Tenant's business by reason of the Condemnation and for or on account of any cost or loss incurred by Tenant in connection with removal of Tenant's merchandise, furniture and other personal property, fixtures, and equipment or for the interruption of or damage to Tenant's business, so long as such recovery does not diminish Landlord's award.

(b) In the event of a partial Condemnation that does not result in a termination of this Agreement as to the entire Leased Premises, Minimum Rent and all other charges shall abate in proportion to the portion of the Leased Premises taken by, or conveyed or assigned in lieu of such Condemnation. If this Agreement is terminated, in whole or in part, pursuant to any of the provisions of this paragraph 38, all charges payable by Tenant to Landlord hereunder and attributable to the Leased Premises taken shall be paid up to the date upon which actual physical possession shall be taken by, or assigned or conveyed to the condemnor. Landlord shall be entitled to retain all of the security Deposit until such time as this Agreement is terminated as to all of the Leased Premises.

(d) If all or any portion of the Leased Premises is condemned or taken for public or quasi public use, or conveyed or assigned in lieu thereof, for a limited period of time, this Agreement shall remain in full force and effect and Tenant shall continue to perform all terms, conditions and covenants of this Agreement; provided, however, Minimum Rent and all other charges payable by Tenant to Landlord hereunder shall abate during such limited period in proportion to the portion of the Leased Premises that is rendered untenantable and unusable as a result of such condemnation or other taking. Landlord shall be entitled to receive the entire award made in connection with any such temporary condemnation or other taking. Tenant shall have the right to claim and recover from the condemnor, but not from Landlord, such compensation as may be separately awarded or recoverable by Tenant in Tenant's own right on account of damages to Tenant's business by reason of the condemnation and for or on account of any cost or loss incurred by Tenant in connection with removal of Tenant's merchandise, furniture and other personal property, fixtures and equipment or for the interruption of or dan1age to Tenant's business, so long as such recovery does not diminish Landlord's award.

(e) Landlord may, without any obligation to Tenant, agree to sell and/or convey to the condemner the Leased Premises, the Building, the Shopping Center or any portion thereof, sought by the condemnor, free from this Agreement and the rights of Tenant hereunder, without first requiring that any action or proceeding be instituted or, if instituted, pursued to a judgment.

39. Counterparts . This Agreement may be executed in any number of counterparts each of which shall be an original and all of which taken together shall constitute one and the same agreement. Executed copies hereof may be delivered by PDF or email, and, upon receipt, shall be deemed originals and binding upon the parties hereto.

40. C onfidentiality . Tenant agrees that the terms of this Agreement are confidential and constitute proprietary information of the parties and that disclosure of the terms could adversely affect the ability of Landlord to negotiate with other tenants of the Shopping Center.

Tenant agrees that Tenant, and its partners, officers, directors, members, managers, employees, contractors, agents, attorneys, and other representatives, will not disclose the terms of this Agreement to any other person or entity without the prior written consent of Landlord, except by order of a court of competent jurisdiction.

[SIGNATURES FOLLOW ON NEXT PAGE]

IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, hereby have executed this Agreement under their respective hands and seals as of the day and year first above written.

LANDLORD:

W-ADP MEADOWS VII, L.L.C.,

a Delaware limited liability company

By: W-ADP HOLDINGS VII, L.L.C.,

a Delaware limited liability company,

its Sole Member

By: W-ADP INVESTORS VII, L.L.C.,

a Delaware limited liability company,

its Member

By: Walton Acquisition REOC Holdings VII, L.L.C.,

a Delaware limited liability,

its Sole Member

By: Walton Street Real Estate Fund VII-Q, L.P.,

a Delaware limited partnership,

its Managing Member

By: Walton Street Managers VII, L.P.,

a Delaware limited partnership,

its General Partner

By: WSC Managers VII, Inc.,

a Delaware corporation,

its General Partner

By: W-ADP MEADOWS VII, L.L.C.,

Name: W-ADP MEADOWS VII, L.L.C.,

Title: Manager

TENANT:

GROWLIFE HYDROPONICS, INC.,

a Delaware corporation

By: /s/ John Genesi

Name: John Genesi

Title: CFO

EXHIBIT A

SITE PLAN OF SHOPPING CENTER

A-1

EXHIBIT A-1

SITE PLAN OF LEASED PREMISES

A-1-1

EXHIBIT B

CONSTRUCTION PROVISIONS

I.	TENANT AGREES to complete the Leased Premises m the following manner (“Tenant’s Work”):

I.	To contract for the construction of (and pay for) all work and to also pay for any additional expenses (e.g., revisions to plans to architect, changes to the Building occasioned by Tenant or governmental codes, etc.) not included as part of Landlord's original contract cost for said Building.

To provide fixtures for the Leased Premises in a manner comparable with stores of a similar nature, including installation of all interior fixtures and appropriate floor covering and wall treatment. Tenant hereby agrees that it shall build the most current design prototype consistent with the "flagship" or "A Level" retail stores being operated under Tenant's Trade Name

3.	To provide, install, connect and maintain all signs at Tenant's expense prior to the Rent Commencement Date. Said sign plans shall be approved by Landlord prior to fabrication and installation of signs and shall conform to the sign criteria of the Shopping Center provided by Landlord.

4.	To meet all other requirements necessary to open said Leased Premises for the business herein authorized.

5.	Plan Approvals - Tenant's Plans and D rawings.

(i)

Preliminary Plans. Tenant shall submit its preliminary, schematic or design development level plans for Tenant's Work (the “ Tenant’s Preliminary Plans ”) to Landlord for review and approval. Within ten (10) days after Landlord’s receipt of the Tenant's Preliminary Plans, Landlord shall either approve or disapprove the same in writing.

(ii)

Construction Drawings. Within ten (10) days after Tenant's receipt of Landlord's approval of the Tenant's Preliminary Plans, Tenant shall submit construction drawings and any other supplementary documents reasonably required by Landlord for the Tenant's Work (collectively, the “ Tenant’s Construction Drawings ” ) to Landlord for Landlord's review and approval. Within ten (10) days after Landlord’s receipt of the Tenant’s Construction Drawings, Landlord shall either approve or disapprove the Tenant's Construction Drawings in writing. Tenant shall not commence Tenant's Work until Tenant has provided to Landlord a copy of its building permit.

(iii)

Deemed Approval. If Landlord fails to approve or disapprove the applicable plans or drawings within the timeframes set forth in subparagraphs (i) and (ii) above, then the applicable plans or drawings shall be deemed approved by such Landlord.

B-1

Tenant agrees to execute a contract(s) for Tenant's Work (the " Contract") with contractors and subcontractors reasonably satisfactory to Landlord (collectively, the “ Tenant ’ s Contractors ” ). Prior to execution of the Contract, Tenant will provide a copy to Landlord for its review and approval. Landlord will review the Contract for compliance with the requirements of this Exhibit B (the “ Requirements ” ) within five (5) business days after receipt thereof and advise Tenant of any objections thereto. If Landlord objects to the Contract, Tenant will cause the same to be corrected, so that it is in compliance with the Requirements and resubmit the same to Landlord for approval. The parties will continue the procedure set fo11h above until Landlord's approval is obtained. Following such approval, Tenant will promptly commence and proceed diligently to complete Tenant ’ s Work.

7.	Landlord has no obligation to Tenant or Tenant's Contractors in connection with Tenant's Work except as set forth herein.

Tenant will cause Tenant's Contractors to: (i) cooperate with contractors employed by Landlord who are completing work anywhere in the Shopping Center ( “ Landlord ’ s Contractors ” ) so as to not interfere with Landlord's Contractors; (ii) conduct work so as not to unreasonably interfere with other tenants in the Shopping Center; (iii) reach agreement with Landlord or Landlord's Contractors as to the terms and conditions for hoisting, systems interfacing, and use of temporary utilities; and (iv) deliver to Landlord such evidence of compliance with the provisions of this paragraph as Landlord may reasonably request.

Tenant assumes full responsibility for Tenant's Contractors' performance of all work including, without limitation, compliance with all Applicable Laws and for all Tenant's Contractors' property, equipment, materials, tools or machinery placed or stored in the Leased Premises during the completion thereof. All such work is to be perfo1med in a good and workmanlike manner consistent with first class standards. Tenant shall require its general contractor to place a refundable security deposit in the amount of $5,000.00 with the Landlord. Such deposit shall be used only to repair any damage done by the Tenant's Contractors to the Landlord's property, or, to complete any Landlord issued punch-list items not completed by Tenant.

10.	In the event Tenant's Work includes any work involving in any manner the roof, fire sprinkler and/or fire alarm, Tenant agrees to only use Landlord's Contractors for any such work at Tenant's cost.

11.	Tenant will indemnify, defend and hold harmless Landlord, Landlord's mortgagee, Shopping Center and/or Building manager, and Landlord's Contractors from and against any and all liabilities, claims demands, damages,

B-2

expenses, fees (including without limitation, attorneys' fees), fines, penalties, suits, proceedings, actions and causes of action of any and every kind or nature arising out of, or resulting from the performance of the Tenant's Work, including, but not limited to, mechanics' or other liens or claims (and all costs associated therewith). Notwithstanding the preceding and without diminishing Tenant's obligations set forth above, Landlord reserves the right to select its own counsel in defending any such lien, claim, action or proceeding, and Tenant shall immediately reimburse Landlord upon demand for all fees and expenses incurred in connection therewith. Tenant will also immediately repair or cause to be repaired, at its expense, all damage caused to the Leased Premises and/or the Shopping Center by Tenant's Contractors. Further, Landlord shall have the right to post and maintain any notices of non-liability.

12.	Following construction of the Tenant's improvements, Tenant will submit a black-line translucent bond set and two disks of Adobe .PDF "As-Built" drawings to the Landlord for its records.

13.	Tenant shall require Tenant's Contractors to execute lien waivers acceptable to Landlord, contemporaneously with their receipt of payment, copies of which will be immediately delivered to Landlord.

14.	Tenant designates and authorizes John Nash , E-Mail: jnash@growlifehydro.com , Phone #: 720-627-9032, to act for Tenant in connection with construction matters concerning this Exhibit B .

15.	Tenant designates and authorizes John Nash , E-Mail: jnash@growlifehydro.com , Phone #: 720-627-9032, to act for Tenant in connection with architectural matters concerning this Exhibit B .

16.	Landlord designates and authorizes Jeb Boshart, E-mail: jeb@albdev.com, Phone #: 303-771-4004 to act for Landlord in connection with matters concerning this Exhibit B.

17.	All notices required hereunder will be in writing in accordance with the terms and provisions for notices set forth in the Agreement between Landlord and Tenant.

18.	Capitalized terms used but not defined herein shall have the respective meanings assigned to them in the Agreement between Landlord and Tenant.

B-3

EXHIBIT B-1

CONTRACTOR INSURANCE PROVISIONS

1. Required I nsurance . Tenant acknowledges and agrees that it shall cause any contractor, including Tenant's Contractors (each a “Contractor” ) constructing the Tenant's Work or any alterations or improvements to the Leased Premises (as permitted under this Agreement) (the “Work” ) shall to maintain the following insurance without interruption through final completion, at any time thereafter when the Contractor enters the Leased Premises to perform the Work, and during any additional periods specified herein:

(a) Commercial general liability insurance written on the current ISO CG 00 01 occurrence form or an equivalent acceptable Landlord (the “CGL” ), (i) covering liability arising from premises, operations, independent contractors, products-completed operations, personal and advertising injury, and liability assumed under an insured contract (including the tort liability of another assumed in a business contract), (ii) with limits of not less than $1,000,000 each occurrence, $1,000,000 personal and advertising injury, $2,000,000 general aggregate and a separate $2,000,000 products-completed operations aggregate, (iii) including the Additional Insureds (as defined in Section 6 of this Exhibit B-1 ) as additional insureds, using one or more additional insured endorsements that provides coverage for both ongoing and completed operations and is acceptable to Landlord, (iv) that applies as primary and non contributing insurance with respect to any other insurance or self-insurance program afforded to the Additional Insureds, (iv) that provides that any general aggregate limit applies separately to the Work on a "per project" basis, (v) that does not limit the scope of coverage for liability arising from "XCU" (explosion, collapse, or underground) hazards, and (vi) that includes a standard ISO separation of insureds provision or a substantially similar provision. The Contractor shall maintain its products-completed operations coverage for at least three years after substantial completion of the Work or the earlier termination of this Agreement.

(b) Business automobile liability insurance to cover liability arising out of any auto (including owned, hired and non-owned autos), with a limit of not less than $1,000,000 each accident. The Contractor waives all rights against the Additional Insureds for recovery of damages to the extent such damages are covered under any applicable auto physical damage coverage.

(c) Workers compensation and employers liability insurance, for all persons the Contractor employs in carrying out any Work. The workers compensation insurance must fulfill applicable statutory requirements. The employers liability insurance must have limits of not less than $1,000,000 each accident for bodily injury by accident, $1,000,000 each employee for bodily injury by disease, and $1,000,000 policy limit for bodily injury by disease. The Contractor waives all rights against the Additional Insureds for recovery of damages covered by the workers compensation and employers liability insurance obtained by the Contractor pursuant to this Section l(c) , and shall obtain an endorsement to allow this waiver.

B-4

(d) Follow form excess or umbrella liability insurance with respect to the Contractor's CGL, employers liability and business automobile liability insurance for the Project, with a limit of not less than $2,000,000 each occurrence. Such insurance must provide that aggregate limits of liability apply separately with respect to the Leased Premises on a "per project" basis.

2. Insurance Carried by Subcontractors and Consultants of the Contractor . Tenant shall cause each Contractor by written agreement to require each of its subcontractors and consultants of every tier ( “Subcontractors” ) to maintain as if they were “Contractor" the same insurance required in Section 1 (including naming the Additional Insureds as additional insureds), except that the amount of excess or umbrella liability insurance will be mutually agreed on a case-by-case basis by Contractor and Landlord, based on the type of Work or services performed.

3. Design Services or Design-Build S ervices . If the Work includes any design services or design-build work, the entity providing the design services shall provide professional liability insurance with a limit of not less than $1,000,000 each claim and $1,000,000 aggregate. Such insurance must be retroactive to the date of the commencement of the design services, and must be kept in force for three (3) years after substantial completion of the Work or the earlier termination of this Agreement.

4. General Requirements . Each insurance policy required under this Exhibit B-1 (the “Required Insurance”) must, unless otherwise agreed in writing by Landlord, be issued by reputable insurance carriers having a Best's rating of at least A:X. Each policy and certificate will be subject to reasonable approval by Landlord and the Contractor shall make available to Landlord copies of policies within 15 days after the Landlord's request. The cost (including deductibles and self-insured retentions) of the Required Insurance, as well as the cost of any other insurance carried by the Contractor with respect to the Work, will be borne solely by the Contractor.

5. Evidence of Insurance . Prior to commencement of any Work at the Leased Premises, Tenant shall provide to Landlord (i) an insurance certificate evidencing the Required Insurance, and (ii) an endorsement to Contractor's CGL adding the Additional Insureds as additional insureds. Tenant shall cause the Contractor to ensure that the Landlord is notified at least 30 days prior to the cancellation or non-renewal of any Required Insurance, or 10 days prior in the case of cancellation due to non-payment. Tenant shall cause the Contractor to provide an updated certificate of insurance before the expiration of the term of any Required Insurance. The Tenant's failure to require the Contractor to provide evidence of Required Insurance, or the Landlord's acceptance of evidence that indicates insurance that fails to satisfy the requirements of this Section, will not constitute a waiver of such requirements.

6. Additional Insureds. The “Additional Insureds” are as follows: Landlord, any mortgagee of Landlord, Tenant, and each of their respective affiliates, subsidiaries, parent corporations, owners, members (direct or indirect), managers, trustees, directors, officers, partners, shareholders, employees, and agents.

B-5

EXHIBIT C

GROSS SALES STATEMENT FORM

Please mail to:

W-ADP MEADOWS VII, L.L.C.

c/o Alberta Development Partners, LLC

5750 DTC Parkway, Suite 210

Greenwood Village, Colorado 80111

Attention: Lease Administration

Tenant Name:

Property:

Date:

I hereby certify that, to the best of my knowledge, Gross Sales as defined in the Agreement for the above location are as follows:

Month:

Sales Amount:

Signature: [ Tenant ]

Name and Title (print):

Phone No.:

Email:

C-1

EXHIBIT D

LIST OF EXCLUSIVE AND PROHIBITED USES

D-1

ADDENDUM l

OPTION TO EXTEND

Tenant shall have the option ( “Option” ) to extend the Term of the Agreement for one (1) additional period of thirty-six (36) full calendar months (“Option Period” ), subject to the following terms and conditions:

A. Tenant may exercise an Option by giving Landlord written notice of its intent to exercise such Option ( “Exercise Notice” ) at least one hundred twenty (120) days prior to the expiration of the original Term.

B. At the time of exercise, Tenant: (i) is not in default under the Agreement; and (ii) is operating a business in the Leased Premises in accordance with the Permitted Use.

C. If within any twelve (12) month period during the Term or any Option Period, Tenant shall have been in default under the Agreement in the payment of Rent thereunder more than two (2) times, and Landlord shall have served Tenant within said twelve (12) month period two (2) or more notices of Tenant's failure to pay Rent, Landlord may, at Landlord's sole and absolute discretion, cancel and void the applicable Exercise Notice by delivering written notice of such cancellation to Tenant, in which event the applicable Option shall be void and canceled, and the Agreement shall terminate at the end of the original Term or the then current Option Period.

D. All other terms and conditions of the Agreement shall remain unchanged and apply during any Option Period, except that Minimum Rent shall be as set forth below:

	MONTHS		RATE/S.F.		ANNUAL RENT		MONTHLY RENT
Option Period		1 - 12	$	16.88	$	54,716.61	$	4,559.72
		13 - 24	$	17.39	$	56,358.11	$	4,696.51
		25 - 36	$	17.91	$	58,048.85	$	4,837.40

E. If an Option is not timely exercised, Tenant's right to extend shall expire and the Agreement shall terminate at the end of the original Tenn.

Addendum 1-1

Exhibit 10.18

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE BUT HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

Original Issue Date: March 16, 2012, amended September 10, 2014

Original Conversion Price (subject to adjustment herein): $0.007

$150,000

GROWLIFE, INC.

(FORMERLY PHOTOTRON HOLDINGS, INC.)

AMENDED AND RESTATED

6% SENIOR SECURED CONVERTIBLE NOTE

THIS AMENDED AND RESTATED 6% SENIOR SECURED CONVERTIBLE NOTE (this “ Note ”) is one of a series of duly authorized and validly issued Amended and Restated 6% Senior Secured Convertible Notes (the “ Notes ”) of GrowLife, Inc. (formerly Phototron Holdings, Inc.), a Delaware corporation (the “ Company ”), having its principal place of business at 500 Union Street, Suite 406, Seattle, WA 98101.

FOR VALUE RECEIVED, the Company promises to pay to Andrew J Gentile or its registered assigns (the “ Holder ”), or shall have paid pursuant to the terms hereunder, the principal sum of $150,000 on April 15, 2015 (the “ Maturity Date ”) or such earlier date as this Note is required or permitted to be repaid as provided hereunder, or such later date as may be permitted by the Holder as set forth in Section 2 hereof, and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note in accordance with the provisions hereof. This Note amends, supplements, modifies and completely restates and supersedes the 6% Senior Secured Convertible Note, dated as of the Original Issue Date, issued by the Company to the Holder with an original principal amount of $413,680 .

The Company’s obligations under this Note and the other Transaction Documents are secured by the Collateral (as defined in the Security Agreement) pursuant to the terms of the Security Documents.

This Note is subject to the following additional provisions:

1. Definitions . For the purposes hereof, in addition to the terms defined elsewhere in this Note (a) capitalized terms not otherwise defined herein shall have the meanings set forth in the Purchase Agreement and (b) the following terms shall have the following meanings:

“ Bankruptcy Event ” means any of the following events: (a) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Significant Subsidiary thereof; (b) there is commenced against the Company or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within sixty (60) days after commencement; (c) the Company or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) the Company or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within sixty (60) calendar days after such appointment; (e) the Company or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors; (f) the Company or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (g) the Company or any Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.

“ Business Day ” means any day except any Saturday, any Sunday, any day which shall be a federal legal holiday in the United States or any day on which banking institutions in the State of California are authorized or required by law or other governmental action to close.

“ Common Stock Equivalents ” means any securities of the Company or its subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

“ Conversion Shares ” means, collectively, the shares of Common Stock issued or issuable upon conversion of this Note in accordance with the terms hereof, including, without limitation, shares of Common Stock issued or issuable as interest hereunder or as damages under the Transaction Documents.

“ Exchange Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

“ Exempt Issuance ” means the issuance of (a) shares of Common Stock or options to employees, officers or directors of the Company pursuant to any stock or option plan duly adopted for such purpose by the Company’s board of directors or a committee of the Company’s board of directors established for such purpose and (b) securities exercisable or exchangeable for

or convertible into shares of Common Stock issued and outstanding on the Original Issue Date, provided that such securities have not been amended since the Original Issue Date to directly or indirectly effectively increase the number of such securities or to decrease the exercise, exchange or conversion price of such securities.

“ Original Issue Date ” means the date of the first issuance of this Note, regardless of any transfers of this Note and regardless of the number of instruments which may be issued to evidence this Note.

“ Purchase Agreement ” means the Securities Purchase and Exchange Agreement, dated as of March 16, 2012, among the Company and the original Holders, as amended, modified or supplemented from time to time in accordance with its terms.

“ Securities Act ” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“ Transaction Documents ” shall have the meaning set forth in the Purchase Agreement.

2. Interest; Prepayment .

(a) Interest Rate . Interest shall accrue daily on the outstanding principal amount of this Note at a rate per annum equal to six percent (6%), subject to Section 2(d) hereof, based on the original lending dates set forth on Annex B attached hereto and incorporated herein by reference.

(b) Payment of Interest . On the Maturity Date, the Company shall pay to the Holder any accrued but unpaid and unconverted interest hereunder on the aggregate unconverted and then outstanding principal amount of this Note, and on each Conversion Date (as defined herein), the Company shall pay to the Holder any accrued but unpaid and unconverted interest hereunder on that portion of the principal amount then being converted. The amount of interest payable on each Conversion Date and the Maturity Date (the “ Interest Amount ”) may be added to, and included with, the principal amount being so converted on such date.

(c) Interest Calculations . Interest shall be calculated on the basis of a three hundred sixty (360)-day year, consisting of twelve (12) thirty (30) calendar day periods, and shall accrue daily commencing on the Original Issue Date, or an applicable original lending date set forth on Annex B , until payment in full of the outstanding principal, together with all accrued and unpaid interest, liquidated damages and other amounts which may become due hereunder, has been made. Interest hereunder will be paid to the Person in whose name this Note is registered on the records of the Company regarding registration and transfers of this Note (the “ Note Register ”). Except as otherwise provided herein, if at any time the Company pays interest partially in cash and partially in shares of Common Stock to the holders of the Notes, then such payment of cash shall be distributed ratably among the holders of the then-outstanding Notes based on their (or their predecessor’s) initial purchases of Notes pursuant to the Purchase Agreement.

(d) Default Interest . After the occurrence and during the continuance of any Event of Default, the interest rate on this Note shall accrue at an interest rate equal to the lesser of twelve percent (12%) per annum, compounded daily, or the maximum rate permitted under applicable law.

(e) Prepayment . The Company may prepay this Note in cash at any time prior to the Maturity Date without penalty upon ten (10) days’ prior written notice to the Holder.

3. Registration of Transfers and Exchanges .

(a) Investment Representations . This Note has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations.

(b) Reliance on Note Register . Prior to due presentment for transfer to the Company of this Note, the Company and any agent of the Company may treat the Person in whose name this Note is duly registered on the Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.

(c) Transfer Restrictions . Any transfer of this Note shall also be subject to the applicable restrictions and requirements of Sections 3.2 and 4.1 of the Purchase Agreement and other provisions of the Transaction Documents.

4. Conversion .

(a) Voluntary Conversion . At any time after the Original Issue Date until this Note is no longer outstanding, this Note shall be convertible, in whole or in part, into shares of Common Stock at the option of the Holder, at any time and from time to time (subject to the conversion limitations set forth in Section 4(c) hereof). The Holder shall effect conversions by delivering to the Company a Notice of Conversion, the form of which is attached hereto as Annex A (a “ Notice of Conversion ”), specifying therein the principal amount of this Note and any accrued but unpaid interest thereon to be converted and the future date (which may be the same date as the date such notice is deemed effective pursuant to Section 7(a) hereof) on which such conversion shall be effected (such date, the “ Conversion Date ”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion is deemed delivered hereunder. To effect conversions hereunder, the Holder shall not be required to physically surrender this Note to the Company unless the entire principal amount of this Note, plus all accrued and unpaid interest thereon, has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Note in an amount equal to the applicable conversion. The Holder and the Company shall maintain records showing the principal amount(s) converted and the date of such conversion(s). In the event of any dispute or discrepancy, the records of the Company shall be controlling and determinative in the absence of manifest error. The Holder, and any assignee by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this Section 4(a) , following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note may be less than the amount stated on the face hereof.

(b) Conversion Price . The conversion price shall be equal to $0.007, subject to adjustment herein (the “ Conversion Price ”).

(i) Holder’s Restriction on Conversion . The Company shall not effect any conversion of this Note, and a Holder shall not have the right to convert any portion of this Note, to the extent that after giving effect to the conversion set forth on the applicable Notice of Conversion, the Holder (together with the Holder’s Affiliates, and any other person or entity acting as a group together with the Holder or any of the Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon conversion of this Note with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (A) conversion of the remaining, unconverted principal amount of this Note beneficially owned by the Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitation contained herein (including, without limitation, any other Notes) beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(c) , beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. Notwithstanding the foregoing, in the event that the Holder (together with the Holder’s Affiliates, and any other person or entity acting as a group together with the Holder or any of the Holder’s Affiliates) owns, immediately prior to giving effect to the conversion set forth on the applicable Notice of Conversion, more than 9.9% of the outstanding shares of Common Stock, then the limitation contained in this Section 4(c) shall not apply to such conversion. To the extent that the limitation contained in this Section 4(c) applies, the determination of whether this Note is convertible (in relation to other securities owned by the Holder together with any Affiliates) and of which principal amount of this Note is convertible shall be in the sole discretion of the Holder, and the submission of a Notice of Conversion shall be deemed to be the Holder’s determination of whether this Note may be converted (in relation to other securities owned by the Holder together with any Affiliates) and which principal amount of this Note is convertible, in each case subject to the Beneficial Ownership Limitation. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this Section 4(c) and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 4(c) , in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (A) the Company’s most recent periodic or annual report, as the case may be; (B) a more recent public announcement by the Company; or (C) a more recent notice by the Company or the Company’s transfer agent setting forth the number of shares of Common Stock outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “ Beneficial Ownership Limitation ” shall be 9.9% of the number of

shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder. By written notice to the Company, the Holder may at any time and from time to time increase or decrease the Beneficial Ownership Limitation to any other percentage specified in such notice (or specify that the Beneficial Ownership Limitation shall no longer be applicable), provided, however, that (A) any such increase (or inapplicability) shall not be effective until the sixty-first (61st) day after such notice is delivered to the Company, and (B) any such increase or decrease shall apply only to the Holder and not to any other holder of Notes. The provisions of this Section 4(c) shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 4(c) to correct this Section 4(c) (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this Section 4(c) shall apply to a successor holder of this Note.

(ii) Unless otherwise approved in writing by the Company, any individual conversion under Section 4(a) hereof must be for at least an amount equal to the greater of (A) Thirty-Five Thousand Dollars ($35,000) of the principal amount of this Note and any accrued but unpaid interest thereon and (B) Five Million (5,000,000) Conversion Shares (such number to be appropriately adjusted for any stock splits, stock dividends and similar events ).

(d) Mechanics of Conversion .

(i) Conversion Shares Issuable Upon Conversion of Principal Amount . The number of Conversion Shares issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (A) the outstanding principal amount of this Note to be converted plus any accrued but unpaid interest thereon, by (B) the Conversion Price.

(ii) Delivery of Certificate Upon Conversion . Not later than five (5) Business Days after each Conversion Date (the “ Share Delivery Date ”), the Company shall deliver, or cause to be delivered, to the Holder a certificate or certificates representing the Conversion Shares representing the number of Conversion Shares being acquired upon the conversion of this Note.

(iii) Failure to Deliver Certificates . If in the case of any Notice of Conversion such certificate(s) or shares are not delivered to or as directed by the applicable Holder by the fifth (5 th ) Business Day after the Conversion Date, the Holder shall be entitled to elect by written notice to the Company at any time on or before its receipt of such certificate or certificates, to rescind such conversion, in which event the Company shall promptly return to the Holder any original Note delivered to the Company and the Holder shall promptly return to the Company the Common Stock certificates representing the principal amount of the Note unsuccessfully tendered for conversion to the Company.

(iv) Partial Liquidated Damages . If the Company fails for any reason to deliver to the Holder such certificate(s) or shares pursuant to Section 4(d)(ii) hereof by the fifth (5 th ) Business Day after the Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000.00 of principal amount being converted, $7.00 per Business Day (increasing to $12.50 per Business Day on the fifth (5 th ) Business Day after such liquidated damages begin to accrue) for each Business Day after the Share Delivery Date until such certificates are delivered. Nothing herein shall limit the Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 6 hereof for the Company’s failure to deliver Conversion Shares within the period specified herein and the Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other section hereof or under applicable law. Notwithstanding any portion of the foregoing to the contrary, if the Company fails to deliver to the Holder such certificate(s) or shares by the Share Delivery Date pursuant to Section 4(d)(ii) hereof because (A) the conversion by the Holder is delivered in connection with a proposed sale by the Holder of the Conversion Shares under Rule 144 promulgated under the Securities Act, and (B) in connection with such sale, the Holder has failed to deliver customary representation letters, as prepared by the brokerage firm of Holder in the ordinary course of its business, appropriate to evidence compliance with such rule, then the liquidated damages provisions herein shall not begin to accrue until the Business Day immediately following the date that the Holder has delivered such representation letters.

(v) Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion . In addition to any other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate(s) or shares by the Share Delivery Date pursuant to Section 4(d)(ii) hereof, and if after such Share Delivery Date the Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise), or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Conversion Shares which the Holder was entitled to receive upon the conversion relating to such Share Delivery Date (a “ Buy-In ”), then the Company shall (A) pay in cash to the Holder (in addition to any other remedies available to or elected by the Holder) the amount by which (1) the Holder’s total purchase price (including any brokerage commissions) for the Common Stock so purchased exceeds (2) the product of (a) the aggregate number of shares of Common Stock that the Holder was entitled to receive from the conversion at issue multiplied by (b) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B) at the option of the Holder, either reissue (if surrendered) this Note in a principal amount equal to the principal amount of the attempted conversion or deliver to the Holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements under Section 4(d)(ii) hereof. For example, if the Holder purchases Common Stock having a total purchase price of $11,000.00 to cover a Buy-In with respect to an attempted conversion of this Note with respect to which the actual sale price of the Conversion Shares (including any brokerage commissions) giving rise to such purchase obligation was a total of $10,000.00 under clause (A) of the immediately preceding sentence, the Company shall be required to pay the Holder $1,000.00. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the

Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon conversion of this Note as required pursuant to the terms hereof.

(vi) Reservation of Shares Issuable Upon Conversion . The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon conversion of this Note and payment of interest on this Note, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of Persons other than the Holder (and the other holders of the Notes), not less than such aggregate number of shares of the Common Stock as shall (subject to the terms and conditions set forth in the Purchase Agreement) be issuable (taking into account the adjustments of Section 5 hereof) upon the conversion of the outstanding principal amount of this Note and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable.

(vii) Fractional Shares . No fractional shares or scrip representing fractional shares shall be issued upon the conversion of this Note. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such conversion, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share.

(viii) Transfer Taxes . The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without charge to the Holder hereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of this Note and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

5. Certain Adjustments .

(a) Stock Dividends and Stock Splits . If the Company, at any time while this Note is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon conversion of, or payment of interest on, the Notes); (ii) subdivides outstanding shares of Common Stock into a larger number of shares; (iii) combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number of shares; or (iv) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Company, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of the Company) outstanding immediately before such event and of which the

denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section 5(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification.

(b) Fundamental Transaction . If, at any time while this Note is outstanding, (i) the Company effects any merger or consolidation of the Company with or into another Person, (ii) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (iii) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (iv) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (each, a “ Fundamental Transaction ”), then, upon any subsequent conversion of this Note, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction, the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of one (1) share of Common Stock (the “ Alternate Consideration ”). For purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one (1) share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Note following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new Note consistent with the foregoing provisions and evidencing the Holder’s right to convert such Note into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 5(b) and insuring that this Note (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. Notice of any such proposed Fundamental Transaction and of such election shall be given to the Holder at least fifteen (15) calendar days before such closing. In connection with such purchase, the Holder shall assign this Note to the Company or its assignee, free and clear of any liens, claims or encumbrances other than transfer restrictions under applicable securities laws.

(c) Calculations . All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 5 , the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

(d) Notice to the Holder .

(i) Adjustment to Conversion Price . Whenever the Conversion Price is adjusted pursuant to any provision of this Section 5 , the Company shall promptly deliver to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

(ii) Notice to Allow Conversion by Holder . If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of this Note, and shall cause to be delivered to the Holder at its last address as it shall appear upon the Note Register, at least twenty (20) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. The Holder is entitled to convert this Note during the twenty (20)-day period commencing on the date of such notice through the effective date of the event triggering such notice.

6. Events of Default .

(a) “ Event of Default ” means, wherever used herein, any of the following events (whatever the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body), provided that an event specified in clauses (i), (ii), or (iii) below will not become an Event of Default unless and until it is not cured, if possible to cure, within the earlier to occur of (y) five (5) Business Days after notice of such failure sent by the Holder or by any other Holder and (z) ten (10) Business Days after the Company has become or should have become aware of such failure :

(i) any default in the payment of (A) the principal amount of any Note or (B) interest, liquidated damages and other amounts owing to a Holder on any Note, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration or otherwise);

(ii) the Company shall fail to observe or perform any other covenant or agreement contained in the Notes ;

(iii) a default or event of default (subject to any grace or cure period provided in the applicable agreement, document or instrument) shall occur under any of the Transaction Documents;

(iv) any representation or warranty made in this Note, any other Transaction Documents, any written statement pursuant hereto or thereto or any other report, financial statement or certificate made or delivered to the Holder or any other Holder shall be untrue or incorrect in any material respect as of the date when made or deemed made;

(v) the Company or any Significant Subsidiary shall be subject to a Bankruptcy Event; or

(vi) the Company shall provide at any time notice to the Holder, including by way of public announcement, of the Company’s intention to not honor requests for conversions of any Notes in accordance with the terms hereof.

(b) Acceleration Upon Event of Default . If any Event of Default occurs, the outstanding principal amount of this Note, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the Holder’s election (which the Holder shall not make more than the later of thirty (30) calendar days after the date (i) such Event of Default is cured or otherwise resolved and (ii) the Holder is aware of such cure or resolution), immediately due and payable in cash. After the occurrence and during the continuance of any Event of Default, the interest rate on this Note shall accrue as set forth in Section 2(d) hereof. If there is such an acceleration, then upon the payment in full of the outstanding principal amount of this Note, plus accrued but unpaid interest and other amounts owing in respect thereof, the Holder shall promptly surrender this Note to or as directed by the Company. In connection with such acceleration described herein, the Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a holder of the Note until such time, if any, as the Holder receives full payment pursuant to this Section 6(b) . No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.

7. Miscellaneous .

number or address as the Company may specify for such purpose by notice to the Holder delivered in accordance with this Section 7(a) . Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number or address of the Holder appearing on the books of the Company, or if no such facsimile number or address appears, at the principal place of business of the Holder. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission or delivery, if such notice or communication is delivered via facsimile at the facsimile number, or delivered by a U.S. nationally recognized overnight courier service to the address, set forth on the signature pages attached hereto prior to 5:30p.m. (Los Angeles time) on a Business Day, (b) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number, or delivered by such courier service to the address, set forth on the signature pages attached hereto on a day that is not a Business Day or later than 5:30 p.m. (Los Angeles time) on any Business Day, or (c) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature pages attached hereto.

(b) Absolute Obligation . Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest, as applicable, on this Note at the time, place, and rate, and in the coin or currency, herein prescribed. This Note is a direct debt obligation of the Company. This Note ranks pari passu with all other Notes now or hereafter issued under the terms set forth herein.

(c) Lost or Mutilated Note . If this Note shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such Note, and of the ownership hereof, reasonably satisfactory to the Company.

(d) Governing Law . All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflict of laws thereof. Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the County of Los Angeles (the “ Los Angeles Courts ”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the Los Angeles Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such Los Angeles Courts, or such Los Angeles Courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to

process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Note, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorneys’ fees and other costs and expenses reasonably incurred in the investigation, preparation and prosecution of such action or proceeding.

(e) Waiver . Any waiver by the Company or the Holder of a breach of any provision of this Note shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Note. The failure of the Company or the Holder to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note. Any waiver by the Company or the Holder must be in writing.

(f) Severability . If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law.

(g) Next Business Day . Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.

(h) Headings . The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof.

(i) Assumption . Any successor to the Company or any surviving entity in a Fundamental Transaction shall (i) assume, prior to such Fundamental Transaction, all of the obligations of the Company under this Note and the other Transaction Documents pursuant to written agreements in form and substance satisfactory to the Holder (such approval not to be unreasonably withheld or delayed) and (ii) issue to the Holder a new Note of such successor entity evidenced by a written instrument substantially similar in form and substance to this Note, including, without limitation, having a principal amount and interest rate equal to the principal amount and the interest rate of this Note and having similar ranking to this Note, which shall be satisfactory to the Holder (any such approval not to be unreasonably withheld or delayed). The

provisions of this Section 7(i) shall apply similarly and equally to successive Fundamental Transactions and shall be applied without regard to any limitations of this Note.

(j) Usury . This Note shall be subject to the anti-usury limitations contained in the Purchase Agreement.

*********************

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized officer as of the date first above indicated.

GROWLIFE, INC.

(FORMERLY PHOTOTRON HOLDINGS, INC.)

By: /s/ Marco Hegyi

Name: Marco Hegyi

Title: President

Address for Notice:

500 Union Street, Suite 406

Seattle, WA 98101

ANNEX A

NOTICE OF CONVERSION

The undersigned hereby elects to convert principal under the 6% Senior Secured Convertible Note (the “ Note ”) due April 15, 2015 of GrowLife, Inc. (formerly Phototron Holdings, Inc.), a Delaware corporation (the Company ”), into shares of common stock (the “ Common Stock ”) of the Company according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.

By the delivery of this Notice of Conversion, the undersigned represents and warrants to the Company that (check one):

________ its ownership of the Common Stock does not exceed the amounts specified under Section 4 of this Note, as determined in accordance with Section 13(d) of the Exchange Act.

________ immediately prior to giving effect to this Notice of Conversion, it owns more than 9.9% of the outstanding shares of Common Stock, as determined in accordance with Section 4 of the Note.

The undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock pursuant to any prospectus.

Conversion calculations: Date to Effect Conversion:

Principal Amount of Note to be Converted:

Interest Accrued on Account

of Conversion at Issue:

Number of shares of Common Stock to be issued (not less than an amount equal to the greater of (A) $35,000 of the Principal Amount the Note and any accrued but unpaid interest thereon and (B) 5,000,000 shares):

Signature:

Name:

Address for Delivery of Common Stock Certificates:

DWAC Instructions:

Broker No:

Account No:

A-1

ANNEX B

ORIGINAL LENDING DATES

None

B-1

Exhibit 10.19

Original Issue Date: March 16, 2012, amended September 10, 2014

Original Conversion Price (subject to adjustment herein): $0.007

$263,680

GROWLIFE, INC.

(FORMERLY PHOTOTRON HOLDINGS, INC.)

AMENDED AND RESTATED

6% SENIOR SECURED CONVERTIBLE NOTE

FOR VALUE RECEIVED, the Company promises to pay to Jordan W. Scott or its registered assigns (the “ Holder ”), or shall have paid pursuant to the terms hereunder, the principal sum of $263,680 on April 15, 2015 (the “ Maturity Date ”) or such earlier date as this Note is required or permitted to be repaid as provided hereunder, or such later date as may be permitted by the Holder as set forth in Section 2 hereof, and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note in accordance with the provisions hereof. This Note amends, supplements, modifies and completely restates and supersedes the 6% Senior Secured Convertible Note, dated as of the Original Issue Date, issued by the Company to the Holder with an original principal amount of $413,680 .

The Company’s obligations under this Note and the other Transaction Documents are secured by the Collateral (as defined in the Security Agreement) pursuant to the terms of the Security Documents.

This Note is subject to the following additional provisions:

“ Exchange Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

“ Securities Act ” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“ Transaction Documents ” shall have the meaning set forth in the Purchase Agreement.

2. Interest; Prepayment .

(e) Prepayment . The Company may prepay this Note in cash at any time prior to the Maturity Date without penalty upon ten (10) days’ prior written notice to the Holder.

3. Registration of Transfers and Exchanges .

4. Conversion .

(b) Conversion Price . The conversion price shall be equal to $0.007, subject to adjustment herein (the “ Conversion Price ”).

shares of Common Stock outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “ Beneficial Ownership Limitation ” shall be 9.9% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder. By written notice to the Company, the Holder may at any time and from time to time increase or decrease the Beneficial Ownership Limitation to any other percentage specified in such notice (or specify that the Beneficial Ownership Limitation shall no longer be applicable), provided, however, that (A) any such increase (or inapplicability) shall not be effective until the sixty-first (61st) day after such notice is delivered to the Company, and (B) any such increase or decrease shall apply only to the Holder and not to any other holder of Notes. The provisions of this Section 4(c) shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 4(c) to correct this Section 4(c) (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this Section 4(c) shall apply to a successor holder of this Note.

(d) Mechanics of Conversion .

5. Certain Adjustments .

(d) Notice to the Holder .

6. Events of Default .

(ii) the Company shall fail to observe or perform any other covenant or agreement contained in the Notes ;

(iii) a default or event of default (subject to any grace or cure period provided in the applicable agreement, document or instrument) shall occur under any of the Transaction Documents;

(v) the Company or any Significant Subsidiary shall be subject to a Bankruptcy Event; or

7. Miscellaneous .

(a) Notices . Any and all notices or other communications or deliveries to be provided by the Holder hereunder, including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight courier service, addressed to the Company, at the address set forth above, or such other facsimile number or address as the Company may specify for such purpose by notice to the Holder delivered in accordance with this Section 7(a) . Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number or address of the Holder appearing on the books of the Company, or if no such facsimile

number or address appears, at the principal place of business of the Holder. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission or delivery, if such notice or communication is delivered via facsimile at the facsimile number, or delivered by a U.S. nationally recognized overnight courier service to the address, set forth on the signature pages attached hereto prior to 5:30p.m. (Los Angeles time) on a Business Day, (b) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number, or delivered by such courier service to the address, set forth on the signature pages attached hereto on a day that is not a Business Day or later than 5:30 p.m. (Los Angeles time) on any Business Day, or (c) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature pages attached hereto.

(g) Next Business Day . Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.

(h) Headings . The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof.

provisions of this Section 7(i) shall apply similarly and equally to successive Fundamental Transactions and shall be applied without regard to any limitations of this Note.

(j) Usury . This Note shall be subject to the anti-usury limitations contained in the Purchase Agreement.

*********************

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized officer as of the date first above indicated.

GROWLIFE, INC.

(FORMERLY PHOTOTRON HOLDINGS, INC.)

By: /s/ Marco Hegyi

Name: Marco Hegyi

Title: President

Address for Notice:

500 Union Street, Suite 406

Seattle, WA 98101

ANNEX A

NOTICE OF CONVERSION

By the delivery of this Notice of Conversion, the undersigned represents and warrants to the Company that (check one):

________ its ownership of the Common Stock does not exceed the amounts specified under Section 4 of this Note, as determined in accordance with Section 13(d) of the Exchange Act.

________ immediately prior to giving effect to this Notice of Conversion, it owns more than 9.9% of the outstanding shares of Common Stock, as determined in accordance with Section 4 of the Note.

Conversion calculations: Date to Effect Conversion:

Principal Amount of Note to be Converted:

Interest Accrued on Account

of Conversion at Issue:

Signature:

Name:

Address for Delivery of Common Stock Certificates:

DWAC Instructions:

Broker No:

Account No:

A-1

ANNEX B

ORIGINAL LENDING DATES

None

B-1

Exhibit 10.52

D. WECKSTEIN & Co., INC.

230 PARK AVENUE.SUITE 1516

NEW YORK. NEW YORK 10169

FAX (212} 986-8593 (212) 986-3422 (800) 366-1250

TRADING@WECKSTEIN.COM

August 27, 2014

Growlife, Inc.

500 Union Street, Suite 406

Seattle, WA 98101

Attn: Mr. Marco Hegyi

Gentlemen:

This will confirm and constitute our agreement, whereby Growlife, Inc. (PHOT) (the company) employs us as a financial consultant and investment banker in seeking to obtain equity or debt financing through public or private offering of debt or equity securities and in seeking mergers and acquisition candidates.

As compensation for our services under this agreement, D. Weckstein & Co., Inc. ("we", "us" “our"), shall receive Five Million (5,000,000) investment shares in Growlife, Inc. (PHOT) common shares.

As part of our services we will also provide you with strategic planning to help the Company meet its short-term objectives, including, but not limited to, strategic planning, meeting in our offices between our principals and representatives of the Company as requested.

You further agree that if in connection with financial transaction in which the Company may be involved, such as mergers, acquisitions, joint ventures, debt or lease placements and similar or other on balance or off-balance sheet corporate finance transactions, where we shall first introduce to the Company to any other party or entity and that as a result of such introduction a transaction between such party or entity and the Company is consummated ("a consummated transaction"), then the Company shall pay us a fee of 10% (ten percent) of the consideration paid to the Company or the value of the consummated transaction, in cash, upon the closing of the consummated transaction, irregardless of whether the consideration to the Company is received on current basis or in installments. By way of example, if the consummated transaction involved securities of the acquiring entity (whether securities of the Company, if the Company is the acquiring party or securities of another entity if the Company is the selling party) having a value of $5,000,000.00, the consideration paid us in cash at the closing shall be $500,000.00. Where we have introduced a party to the Company and a transaction is consummated within three

years of such introduction, it shall be presumed, for purposes of this agreement that the transaction resulted from our introduction.

This agreement shall remain in effect through August 31, 2019. Notwithstanding anything herein to the contrary, if you shall, at any time prior to one year following the termination of this agreement conclude a consummated transaction with a party introduced by us to you during the term of this agreement, you shall pay us the fees set forth in the preceding paragraph.

If the foregoing letter meets with your approval and correctly states our agreement, kindly so signify by signing a copy of this letter where indicated below and returning it to me.

Very truly yours,

D. Weckstein & Co., Inc.

By: /s/ Donald E. Weckstein

_______________________

Donald E. Weckstein, President

ACCEPTED AND AGREED TO:

GrowLife, Inc.

By: /s/ Marco Hegyi

_________________

Marco Hegyi, President and CEO

EXHIBIT 21.1

SUBSIDIARIES

As of December 31, 2014*, the following were the Registrant's significant active operating Subsidiaries:

Name: GrowLife Hydroponics, Inc.

Country of Organization: Registered in Delaware and active in California, Delaware, Maine, Colorado and New Hampshire

Percent Ownership by Registrant: 100.0% by GrowLife, Inc.

Name: Rocky Mountain Hydroponics, LLC

Country of Organization: Registered in Delaware and active in Colorado

Percent Ownership by Registrant: 100.0% by GrowLife Hydroponics, Inc.

Name: Evergreen Garden Center, LLC

Country of Organization: Registered in Delaware and active in Delaware and Maine

Percent Ownership by Registrant: 100.0% by GrowLife Hydroponics, Inc.

As of December 31, 2014, the following were the Registrant's significant non-active operating Subsidiaries:

Name: Phototron, Inc.

Country of Organization: Registered in California and is expected to be deactivated in California

Percent Ownership by Registrant: 100.0% by GrowLife, Inc.

Name: SG Technologies Corporation

Country of Organization: Registered in Nevada and is expected to be deactivated in Nevada and California

Percent Ownership by Registrant: 100.0% by GrowLife, Inc.

Name: Business Bloom, Inc.

Country of Organization: Registered in California and is expected to be deactivated in California

Percent Ownership by Registrant: 100.0% by GrowLife, Inc.

Name: Soja, Inc.

Country of Organization: Registered in California

Percent Ownership by Registrant: 100.0% by GrowLife Hydroponics, Inc.

Name: GrowLife Productions, Inc.

Country of Organization: Registered in California and is expected to be deactivated in California

Percent Ownership by Registrant: 100.0% by GrowLife, Inc.

*See Note 18 on Subsequent Events regarding “Dissolution of Certain Non-Operating Subsidiaries.” Certain subsidiaries set forth on this Exhibit 21.1 are being dissolved subsequent to December 31, 2014.

EXHIBIT 31.1

SECTION 302 CERTIFICATIONS

I, Marco Hegyi, certify that:

1. I have reviewed this annual report on Form 10-K of GrowLife, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant’s other certifying officer(a) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: September 30, 2015

/s/ Marco Hegyi

Marco Hegyi

President

EXHIBIT 31.2

SECTION 302 CERTIFICATIONS

I, Mark E. Scott, certify that:

1. I have reviewed this annual report on Form 10-K of GrowLife, Inc.:

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: September 30, 2015

/s/ Mark E. Scott

Mark E. Scott

Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of GrowLife, Inc. (the "Company") on Form 10-K for the fiscal year ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Marco Hegyi, President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the dates and periods covered by the Report.

This certificate is being made for the exclusive purpose of compliance by the Chief Executive and Financial and Accounting Officer of the Company with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be disclosed, distributed or used by any person or for any reason other than as specifically required by law.

/s/ Marco Hegyi

President

September 30, 2015

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of GrowLife, Inc. (the "Company") on Form 10-K for the fiscal year ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark E. Scott, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

/s/ Mark E. Scott

Chief Financial Officer

September 30, 2015