Grassroots Reseach - GrowLIfe, Inc Report

7/28/2019 Grassroots Reseach - GrowLIfe, Inc Report

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Grass Roots Research and Distribut ion, Inc.

Copyright2013byGrassRootsResearchandDistribution,Inc.Allrightsreserved.Thisreportmaynotbereproduced.Page2of55

The Cohen Price Target is calculated by 25% equal weighting of four different valuation methodologies. We use

an industry average PE, an industry average price/capital employed (P/CE), a Cohen Performance Index, and the

fundamentally driven Cohen DCF.

allfiguresin$million;unless

otherwisementioned 2012 2013F 2014F 2015F 2016F 2017F 2018F 2019F

Revenues 1.5 5.4 10.9 19.0 30.5 45.7 61.7 77.1%growth 275.0% 100.0% 75.0% 60.0% 50.0% 35.0% 25.0%

EBITDA (1.3) (0.8) 0.2 2.1 5.1 9.4 14.2 18.7

EBITMargin 87.1% 14.4% 1.7% 11.0% 16.6% 20.6% 23.0% 24.2%

NetProfit (2.2) (1.1) (0.4) 1.0 3.2 6.5 8.8 13.5

NetProfitMargin 150.8% 21.0% 3.7% 5.3% 10.5% 14.2% 14.3% 17.5%

EarningsPerShareDiluted (0.01) (0.00) (0.00) 0.00 0.01 0.01 0.02 0.03

FreeCashFlowtoFirm (1.8) (4.0) (3.9) (0.6) 0.0 1.5 4.1 9.0

PricetoEarnings(P/E) in$

EarningsPerShare2016Forecasts 0.01IndustryAverageFutureP/ERatio 41.35DiscountFactor 0.72PricebasedonP/ERatio 0.21

PricetoCapitalEmployed(P/CE) in$

CapitalEmployed 0.07IndustryAverageP/CERatio 6.19DiscountFactor 0.72PricebasedonP/CERatio 0.32

CohenDiscountedCashFlowModel in$

CohenDCFValue BaseCase 0.29

CohenPerformanceIndex in$

CohenPricePerformance IndexValue 82.5%CurrentStockPrice 0.04PricebasedonCohenPerformanceIndex 0.07

CohenPriceIndexTarget 0.22

CurrentPrice 0.04Upside/(Downside)Potential 456.2%

SALES AND MARGINS ANALYSIS

THE COHEN PRICE TARGETTMSUMMARY


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GrowLife, Inc. (OTC OB: PHOT), based in California, operates as a holding Company with a focus onproviding legal products to the specialty urban gardening market and the legal medical marijuana market. We

believe the Company is somewhat protected to the extent the state and federal regulatory landscape allows.

2012 was a year of transformation for PHOT. In the last year, the Company grew from a single product line tomultiple operative businesses with strong revenue growth potential. This was achieved through attractive

mergers and acquisitions.

The GrowLife family of companies now includes the online distribution hub Greners, the pioneering grow lightproduct line Stealth Grow LED and a retail supply location, Urban Garden, all of which were acquired during

2012.

SGSensors.com and its wireless automation products for grow rooms is a prominent example of our productdevelopment and brand extension. SG Sensors products are expected to be available for commercial sale in late

2013.

Further, GrowLife also controls premier industry portal www.cannabis.org, which will serve as another widelyrecognized and authoritative social channel for branded product promotion, sales and information. The

Company also launched business units that are active in industry events, media and consulting services for the

urban gardening and legal marijuana industry.

GrowLife is actively engaged in improving and expanding its lineup of branded products through organicdevelopment, business alliances and acquisition. GrowLife is also actively engaged in building upon its direct

to customers sales business by expansion and promotion of Phototron products to a wider consumer market.

There is significant potential expansion for all companies involved in the marijuana space. We believe,management has grown the business despite numerous legalization issues faced by the industry and well

positioned to leverage the benefits from legalization of marijuana. Risks: Legal issues, political pressure, executing multi divisional subsidiaries, pricing, black market, Federal

Laws, controversial industry group.

Financial Highlights and Valuation

We project revenues of approximately $5.4 million in 2013 and $77.1 million by 2019. Margins are likely toexpand with the Company increasing its production capacity and distribution reach. The Company will have to

raise additional capital during our forecast period to meet our estimates.

The Cohen Price Target is calculated using market-based multiple valuation, Discounted Cash Flow (DCF) andby applying the Cohen Price Performance Index approach. The multiple based valuation approach uses the

expected 2016 Price-to-Earnings and Price-to-Capital Employed ratio. We also include the Cohen Price

Performance Index, which is representative of the past coverage performance of all stocks evaluated by us. The

last component in calculating the Cohen Price Target is the value derived using the long-term Cohen

Discounted Cash Flow (DCF) valuation approach.

Based on an average of these methods, GrowLife common stock is valued at $0.22, 456.2% higher than thecurrent stock price of $0.04. We recommend purchase for short term traders and long term risk-averse

investors.

EXECUTIVE SUMMARY


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While still in a very nascent stage of growth, the Marijuana Industry has consolidated after visible companies

unified and organized their business models. The best known industrial hemp and medical marijuana companiesare Hemp, Inc., GrowLife, Inc., Medical Marijuana, Inc. Greengro Technologies. Cannabis Science is a

biotechnology company with an excellent future. The industry is now at the beginning phase of what many

predict will be cohesive growth. However, deeper research into each of these stocks and their complex business

structures gives us a completely different picture. We explain below why GrowLife should be the focus stock in

the Marijuana Industry.

Figure 1: Comparison of Major Public ly Traded Marijuana Stocks

Source: Cohen Research If HEMP includes 2 preference shares, total dilution is 4+ billion shares outstanding

GrowLife, Inc. (OTC QB: PHOT) has a simple and scalable business model. The Companys management team

in our view is better, smarter, more experienced and more capable than its competitors. PHOT is a holding

company with multiple operating businesses that manufacture and supply branded equipment and expendables in

the United States. The Companys products and services are used for urban gardening, inclusive of equipment and

expendables for gardening of medical marijuana. Investors are only beginning to understand the true potential of

the PHOT story. Currently the industry focus had been on Medical Marijuana and HEMP, Inc.

Certain writers on the Seeking Alpha website have questioned MJNA regarding regulatory issues and their

accounting. Some have recommended the immediate sale of MJNA stock. MJNAs issued and outstanding

shares exploded from 250 million shares to roughly 938 million shares. HEMP Inc., run by Bruce Perlowin, the

King of Pot, has over 1.3 billion diluted shares outstanding and large blocks of preferred shares. Should the

Company convert these preference shares, which they will do sooner or later, the total outstanding equity shares

will explode to over 4 billion shares. This huge dilution renders a very low sub penny valuation for HEMP.

Further, in more than four years, Perlowin, past President of MJNA and current CEO of HEMP has produced

Metrics

MedicalMarijuana,Inc.

Hemp,Inc GrowLife,IncTicker MJNA HEMP PHOT

Exchange OTCPink OTCPink OTCQB

SharesO/s(inmillion) 935 1,310 531

Price(in$) 0.16 0.04 0.04

52WeekRange(in$) 0.50 0.02 0.15 0.01 0.12 0.0042

MarketCap(in$million) 145.0 46.5 22.3

Float 43.9% 42.7% 77.3%

2012Revenues(in$million) 5.2 0.0 1.5

3yrRevenues20102012(in $million) 12.8 0.0 2.8

2012FreeCashFlows(in$million) (3.7) (0.8) (1.8)

Priceto

Sales 27.9

5,171.7

15.3

WHY BUY GROWLIFE STOCK?


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virtually no sales in both companies (total sales less than $20,000) nor any positive cash flow for HEMP. The

Company has lost over ($2.5 million) in operating cash over the last 3 years without any significant revenues.

HEMP is currently divesting certain divisions, and acquiring others. Using a Discounted Cash Flow method of

valuing HEMP common stock, requires the assumption of 4 billion shares divided into projected 5 year sales.

This math argues against any price target above a penny. HEMP does not have a track record of making moneyin the hemp industry. Perhaps it will one day.

Should MJNA continue to lose its luster in view of their potential problems, and should HEMP continue its past

history of failed operating results, we believe PHOT will be the logical alternative for investment in this industry.

If PHOT can capture a percentage of interested stock investors in the marijuana industry, liquidity and the share

price of PHOT common stock should improve considerably. PHOT is a real company. Grass Roots Research

issued a Sell recommendation on MJNA at $0.25 cents, due to accounting concerns and potential regulatory

issues. The stock trades today at $0.15 cents. One Seeking Alpha contributor projects the stock will trade around

2 cents. Another contributor has projected it to go to $0.00.

MJNA and HEMPs track record argues against significant participation in an exciting industry. Our 48 pageinformational report on HEMP did not include a valuation of that stock. With 4+ billion shares of stock

outstanding and virtually no revenues since Perlowin has guided HEMP INC, it appears to us that HEMP is not a

viable investment vehicle.

We believe the multi divisional operating models of MJNA and HEMP will not come to long term fruition. We

believe the GrowLife (OTC QB: PHOT) business model is the logical common sense alternative for investment

in the marijuana industry.


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Over the last few years, public opinion towards legalization of Marijuana is rapidly changing. This has

highlighted a number of publicly traded marijuana stocks. Many research reports and articles on various websites

such as Seeking Alpha have been written on marijuana companies, including Medical Marijuana, Inc.

(MJNA.PK), Hemp, Inc. (HEMP.PK), MediSwipe, Inc. (MWIP.OB), Tranzbyte Corp. (ERBB.PK), Growlife Inc.

(PHOT.OB), Medbox, Inc. (MDBX.PK), AVT, Inc. (AVTCE.OB), Terra Tech Corp. (TRTC.OB), Rapid Fire

Marketing, Inc. (RFMK.PK), GW Pharmaceuticals Plc. (GWPRF.PK) and a few other companies. However, we

believe that before analyzing these companies fundamentally or technically, investors should understand the

politics of legalization of marijuana. Legalization of Marijuana and its impact on these relatively early growth

stage companies, in our view, is the most important factor to be considered before making an investment decision.

For many years prior to the last decade, public opinion on legalization of marijuana was quite stable. As a

substance classified as a Schedule I drug, people were against the move to legalize marijuana as they believed that

marijuana would lead to harder drugs. However, over the last decade, public opinion has shifted dramaticallytoward support for the legalization of marijuana. As per a recent survey, sentiment in favor of legalization has

increased by 20 percentage points and showed a narrow national majority in just over a decade.

Figure 2: Past and Present Trends Towards Legalizing Marijuana

Source: Pew Research Center 2010-2013, General Social Survey and Gallup Research

The percentage of Americans who view marijuana use as immoral has fallen from 50% to 32% in just seven

years. This sentiment and support has resulted in ballot initiative victories in Colorado and Washington State in

2012 for legalizing the use of Marijuana for medical and/or recreational use. The exhibit below highlights the

growing support for legalization, especially strong among the young, while the only age group staunchly opposed

consists of those 65 years old and over. However, analysts believe that unless the younger generation substantially

alters its views as it grows older, generational change alone is likely to keep support well above the past low

levels of acceptance.

UNDERSTANDING LEGALIZATION OF MARIJUANA


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Figure 3: Increasing Support for Legalization of Marijuana

Source: Pew Research Center for the People and the Press, March 13-17, 2013

Another notable trend in the favorable consensus towards use of marijuana is that most conservatives who do not

favor legalization and believe marijuana should be illegal nonetheless support states rights to legalize it. They

take a dim view of governments ability to enforce a ban. However, a majority agrees that the road to

rescheduling a Schedule I drug is difficult, complex and likely to take much time as there are a number of

considerations that State and Federal Governments need to take into account prior to deciding on legalization of

marijuana. Much of it depends on Attorney General Eric Holder and his views on legalization of marijuana in the

states of Washington and Colorado. In a recent article, Mr/ Holder has made it clear that he is in no hurry toaddress the issue and hinted that legalization would be very complex matter. Some important factors that investors

should be aware of regarding the legalization process of marijuana are listed below:

Supremacy Clause of the Constitution: Under this clause, the Constitution and federal laws takeprecedence over state laws. This means that the Constitution grants the Congress the power to preempt

any state law which counters federal laws. In this case, the Federal Government has the power to overturn

the recent legalization by states.

Re-classification of the Schedule I Substance: While the Government can reclassify the drug fromSchedule I, it is still very difficult to understand all of the chemical components of marijuana and its

consequences to one's health. High Taxation Impact: On a positive note, marijuana being the largest cash crop in the United Sates, can

earn significant revenues for Federal and State Governments if it is legalized and taxed. Going by

estimates, it is believed that the Marijuana Industry may be a $45 billion annual industry. Further, the

ancillary products and services related to marijuana may also be a very large annual industry. Given this,

legalization and taxation of Marijuana may results in a large pool of tax income.


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Impact of Legalization on Marijuana Companies

These considerations will continue to play a central role in determining the outcome of future legalization politics.

Hence, it becomes critical to understand the impact of legalization and status quo on marijuana prior to investing

in Marijuana stocks. Summarized below are the likely outcomes of the ongoing legalization debate:

Effects of Legalization of Marijuana: If the federal government decides to favor legalization, it wouldopen doors that are currently closed to the Marijuana companies in terms of capitalization, product

assortment/selection, R&D, ability to conduct business freely, and the ability to provide (for reputable

companies) more disclosure and increasing transparency to shareholders with regard to company

operations.

Effects of continuing Marijuana as Schedule I substance: In case the government continues its currentquasi-legal medical status or illegal status, this could leave each of these companies open to the

repossession of all assets, criminal actions and money laundering laws. For these reasons, it would be

difficult for these companies to capitalize via traditional methods. We believe this is why institutional

investors will not be attracted to, or participate in the current trading of these stocks.

Impact of Legalization on Growlife

GrowLife is in an enviable position regarding legalization issues. Should legalization come to fruition, PHOTs

industry leverage is powerful. Its current business model is also buffered from industry uncertainties.

GrowLifes diversified multiple wholly-owned, respected brands provide a strong base for scalable, retail sales

channels to drive revenue and sales of core products and new GrowLife innovations. The Company is currently

not involved, nor does it intend to be involved in the production of marijuana. PHOT intends to be at the forefrontof the product and service segments incidental to the marijuana industry. As advancements are made toward

potential legalization of marijuana, GrowLife expects to be ideally positioned in all U.S. federally legal, profitable

aspects of this industry. We believe that the recent acquisitions and product innovations will enable the Company

to aggregate data and marketing knowledge that will be key to long term success once the industry is legalized.

The Company intends to leverage industry relationships, state-of-the-art innovations, and equity to develop a fully

integrated lifestyle brand targeted at the cannabis and marijuana industry as well as other venues.

The Companys current brands and businesses make it the pure play marijuana industry stock of the future. The

Stealth Grow brand of products is expected to be a leading supplier of automation equipment and hi-powered

LED grow light products for indoor horticulture. Once home cultivation of marijuana is legalized, these products

will be in significant demand. Similarly, Greners.com, the online hydroponics superstore and Phototron, producer

of hydroponic grow containers are perfectly designed to grow marijuana in any environment, in addition to other

fruits, vegetables, flowers and herbs. Further, the Companys website, www.cannabis.org is expected to be

transformed from currently a information portal with massive visitors to a full-fledged e-commerce platform for

everything legal to marijuana. This will be well supported by the Companys strong retail sales channel and

wholesalers network.


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GrowLife, Inc. (OTC QB: PHOT) is a United States based holding company that manufactures and sells high

end, progressive horticulture and lifestyle products throughout the country. With core holdings in innovative

technology-based products and services for the indoor gardening industry and specialty markets, PHOT is a well-

diversified group in the growing Marijuana Industry. The Companys brands include Stealth Grow, a producer of

grow room automation equipment and hi-powered LED grow light products for indoor horticulture

(www.sgsensors.com and www.stealthgrow.com), Greners.com, the online hydroponics superstore

(www.greners.com) and Phototron, producer of hydroponic grow containers, which are designed to grow

vegetables, herbs, flowers and fruits in any environment (www.phototron.com). GrowLife is also the US

distributor for the Urban Cultivator brand the greens machine (www.urbancultivator.net). Through GrowLife

Productions, PHOT targets co-producing and co-sponsoring entertainment, lifestyle, music and film events across

the country. The website, www.cannabis.org, is an information portal for the medical marijuana industry that is in

development by GrowLife with the objective of establishing the premier informational portal for the industry

worldwide. GrowLife is actively engaged in pursuing acquisitions that will allow its GrowLife Hydroponics retail

sales division business to expand regionally in the United States.

GrowLife features a combination of core technologies, retail sales channels and wholesale relationships to build asizable enterprise for shareholders. As the industry advances, GrowLife expects to be at the forefront with a richly

populated customer database, revolutionary products and services, and a vast retail network to satisfy consumer

demand with sound margins. This well diversified portfolio places the Company in an enviable position. In the

event of regulatory change towards marijuana, the strong platform built by the Company will establish itself on

the forefront of an exciting industry.

GrowLifes Business Strategy

Post the attractive investment made by GrowLife in 2012, during the current year the Company is expected to

realize the benefits, synergies and efficiencies from consolidation of its acquired businesses. Management expects

to continue acquisitions in 2013 which are both favorable to shareholders and conducive to long-term growth,while improving and expanding scalable existing operations. Through product integration and retail integration,

PHOT intends to create a scalable supply chain that will accelerate sales of the Companys core brands. Further,

the Company will build a strong platform for new technologies that will be introduced or acquired by GrowLife.

The cornerstone of corporate growth is its ability to aggressively market core products, create new innovations,

and make acquisitions which contribute to revenue and overall corporate growth.

ABOUT THE COMPANY


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Figure 4: PHOTs Business Focus

Source: Cohen Research and Company Presentation

GROWLIFEINNOVATIONS

PRODUCT ORSERVICE

ACQUISITIONS

ONLINE RETAIL

BRICK-AND-MORTAR

HYDRO STORES

WHOLESALE &MASS-MARKET


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Bull Case

Huge Market Opportunity: It is estimated that the market for marijuana in the United States alone is$35-$45 billion. We believe the size of the US medical marijuana market is estimated to be $1.7 billion, a

figure that is likely to increase in the coming years. By 2016, the medical marijuana market could surge to

approximately $8.9 billion.

Note: A Modern Alcohol Prohibition Market. Note that Alcohol is a $188 billion dollar market.Some estimates project that marijuanas total worldwide market size is about $120 billion, or

almost 2/3 the size of the Alcohol market. While we are using in our report $35 - $40 billion, if $120

billion is realistic, the marijuana story is just starting to be understood. The Marijauna industry

might be compared to Prohibition 80 years ago. The stock market is telling us that this may be true

at this time.

Figure 5: Marijuana Market

Source: Industry Report, S&P, CNBC Analysis

Growing User Base: Within the 18 states and Washington D.C. that have legalized the use of MedicalMarijuana, there are as many as 25 million patients eligible to benefit from medical marijuana. The strong

demand for medical marijuana is providing opportunities for business development through several

different facets of the industry, including extensive marijuana cultivation as well as its retail distribution.

Attractive Markets: The emerging industry of medical marijuana is dominant in California andColorado which account for 92% of current market share.

Application to Treat Multiple Ailments: According to research, various extracts from cannabis andhemp have shown to have a positive effect on a wide variety of ailments. These cannabidiol extracts and

compounds represent pharmaceutical opportunities to be captured by Companies engaged in the Medical

Marijuana Industry. As the usage of medical marijuana grows, it represents a huge sales and distribution

opportunity for PHOT, because it is positioned to leverage its excellent wholesale and retail network.

BULL AND BEAR CASE


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Figure 6: Expenditure on treatment of selected diseases

Anti-Aging $50 billion

Arthritis $35 billion

Cancer $75 billion

Chronic Pain Management $22 billionHigh Blood Pressure $25 billion

PTSD $72 billion

Source: US dept. of HHS, CNBC Analysis

Figure 7: Pharmaceutical Acti ons of Cannabis

Support for Medical Marijuana Legalization Gaining Momentum: In a recent Gallup Poll, themajority of respondents under 30 (58%) support Marijuana legalization. However, the support declines

with age. The poll also revealed that 40% of respondents have tried marijuana. Approximately 64% are

expected to support legalization for medical purposes. Large majorities of Americans across all ages,

favor doctors to recommend medical marijuana for treatment.

Multiple Revenue Opportunities: The opportunity to expand into the previously highlighted marketswith a more socially acceptable form of marijuana and related products and services provides multiple


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revenue streams for PHOT. Numerous research studies have borne out the benefits of CBD, but products

have not been available.

Recession Proof Industry: The marijuana industry is a recession resistant industry and has performedwell during the recent and current economic downturn. Nationwide, the industry currently has

approximately 2,500 growing operations and dispensaries.

Bear Case

Unfavorable regulatory environment: The strict and unfavorable regulations in the US for marijuanahave slowed the growth of the medical marijuana industry. Unless the U.S. federal government changes

its regulatory outlook towards the legality of medical marijuana, industry growth could stagnate. Other

issues that the medical marijuana industry faces are the regulatory systems within each state that have

passed medical marijuana legislation. Patients, caregivers and dispensaries must abide by the state rules

and laws, which include separate rules and regulations for each county and city.

Competition with established firms: PHOT may face stiff competition from established firms that havea proven track record, although non-operative in its particular market niche. However, at this current point

the medical marijuana market is fractured, as there are no dominant companies taking firm control of the

industry.

Growth of underground distribution network: Colorado has legalized the possession of marijuana.However it faces the rise of a black market due to supply side issues. It is expected that the demand for

legal marijuana is bound to increase but such a rise leaves an important gap on the supply side. If local

growers are unable to satisfy demand, it will lead to drug runners entering the market. As a legal product

being sold in retail shops, it is likely that price will become a tool to attract business and build market

share. Does the government set prices or increase availability of marijuana? If these issues are solved it islikely to lead to the growth of an underground distribution network fulfilling demand.


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Figure 8: Cohen Growth Driver Analysis Base Case

Source: Cohen Research

The Cohen Growth Drivers Model is an intelligent road map used by many securities analysts to analyze the

forecasted growth of a given Company. PHOT is comprised of a diversified portfolio of high end, progressive

horticulture and lifestyle products encompassing all aspects of the cannabis cultivation process: LED grow

lighting, hydroponics and advanced grow room monitoring systems. The Companys subsidiary lineup appears

impressive. Though this particular market is saturated with other high-tech and well-capitalized rivals, we

estimate that this area of the market will experience tremendous growth in the new states that have brought about

legal reform regarding recreational use of cannabis. Finally, PHOT appears to be gearing up a media productionand distribution business. For the year ended December 31, 2012, the Company reported revenues of $1.45

million when compared to $948,406 in the same period last year. During 2012, the Company witnessed a

significant rise in its gross profit margins from 24% in 2011 to 28%. GrowLife is just beginning to realize the

business synergies and efficiencies from consolidation of the 3 acquisitions made in 2012. The increase in

revenues and gross profit percentage reflects the acquisition of higher margin business lines. Going forward, we

expect the Company to continue acquisitions in 2013 which are both favorable to shareholders and conducive to

Annual

Revenues,

Margins,

Assets,

Turns

allfiguresin$million;unless

otherwisementioned 2012 2013F 2014F 2015F 2016F 2017F 2018F 2019F

NetRevenue 1.5 5.4 10.9 19.0 30.5 45.7 61.7 77.1

OperatingMargin 87.1% 16.9% 0.7% 9.0% 15.0% 19.2% 21.7% 23.1%

NetMargin 150.8% 21.0% 3.7% 5.3% 10.5% 14.2% 14.3% 17.5%

EPSDiluted (0.01) (0.00) (0.00) 0.00 0.01 0.01 0.02 0.03

EBITDA (1.3) (0.8) 0.2 2.1 5.1 9.4 14.2 18.7

FreeCashFlow (1.8) (4.0) (3.9) (0.6) 0.0 1.5 4.1 9.0

CashandEquivalents 0.1 1.0 1.7 0.8 0.5 2.0 6.1 15.0

WorkingCapital (0.2) (0.1) 0.5 0.7 3.1 5.1 7.0 8.8

TotalDebt 1.1 1.1 0.8 0.5 0.3 0.2 0.2 0.2

TotalAssets 1.3 6.3 11.6 14.5 18.3 27.1 38.6 54.7

DSO 3.8 54.8 54.8 54.8 54.8 54.8 54.8 54.8

PercentageChangeinAnnualRevenues,Margins,Assets,Turns

2012 2013F 2014F 2015F 2016F 2017F 2018F 2019F

Revenues NM 275% 100.0% 75.0% 60.0% 50.0% 35.0% 25.0%

OperatingMargin NM 81% 96.1% 1468.8% 67.1% 28.1% 13.3% 6.2%

NetMargin NM 86% 82.3% 243.5% 98.0% 34.7% 1.0% 22.3%

EPSDiluted NM 71% 66.2% 351.1% 216.8% 102.0% 36.3% 52.9%

EBITDA NM 38% 123.7% 1023.6% 142.7% 85.4% 50.8% 31.9%

FreeCashFlow NM 121% 1.3% 84.3% 105.0% 4921.8% 167.3% 118.9%

Cash NM 1097% 71.5% 54.8% 34.9% 296.7% 204.9% 148.0%

WorkingCapital NM 58% 944.1% 28.1% 355.4% 63.2% 36.1% 25.6%

TotalDebt NM 0% 25.0% 33.3% 50.0% 14.3% 14.3% 14.3%

TotalAssets NM 390% 84% 25% 26% 48% 43% 42%

DSO NM 1347% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

COHEN GROWTH DRIVERS AND FINANCIAL FORECASTS


15/55



long-term growth, while improving and expanding existing operations to scale. This will result in continuation of

impressive growth in revenues at higher margins as highlighted in the exhibit above.

We believe our revenue and cost estimates are conservative. In addition to our Base Case forecasts, we have

prepared financial forecasts under two additional scenarios, the optimistic (aggressive top-line growth) and

pessimistic case. The exhibit below shows our revenues and earnings assumptions under all three forecasted

scenarios:

Figure 9: Revenue Forecasts All Scenarios


-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2012 2013 F 2014 F 2015 F 2016 F 2017 F 2018 F

in$

000s

Revenues - All Scenarios

Optimistic Case Base Case Pessimist ic Case


16/55



Figure 10: Earnings Forecasts All Scenarios


(0.02)

(0.01)

(0.01)

-

0.01

0.01

0.02

0.020.03

0.03

2012 2013 F 2014 F 2015 F 2016 F 2017 F 2018 F

in$

Earnings per share - All Scenarios

Optimistic Case Base Case Pessim istic Case


17/55



Figure 11: PHOTs Corporate Structu re1


1 Description of Companys Operating Divisions and Subsidiaries has been sourced from PHOTs and other group companieswebsite and other released information.

G

rowLife,Inc. Brands

StealthGrowLED[hempremoved]SGSensorsPhototron

Channels

Greners.com

UrbanGardenCannabis.org

GrowLifeProductions

COMPANYS BUSINESS DIVISIONS AND SUBSIDIARIES


18/55



Brands

STEALTH GROW LED

Widely considered to be the best LED product on the market, Stealth Grow LED is a leading brand of Hi-Power

LED lights for indoor growing. Stealth Grow LED has a proven sales history over 2 years prior to the GrowLife

acquisition and is distributed by the largest wholesaler in the industry.

The product paves the way for LED lighting to change from an option, to an absolutely superior alternative, invirtually any growing environment. Stealth Grow LED introduced the SG 602, the first quad band LED product

with the intensity to replace energy inefficient 600 watt HPS lamps. It then expanded its line of industry leading

LED products with the SG Veg, an extremely powerful LED light source that outperforms 1000 watt Metal

Halide light sources. Stealth Grow LED further expanded its product offerings with the SG 1250 HO and the

industry leading Nite Light, to allow growers to perform all necessary tasks during the dark cycle without

interfering with plant photoperiods.

Figure 12: Stealth Grow LED Products

Source: Company Website


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SG SENSORS

SG Sensors is an operating division of SGT that markets wireless monitoring and control equipment to operate all

major grow room functions. The revolutionary technology used in SG Sensors and designed by management and

shareholders, allows growers to not only monitor but change conditions in real time. The product line allows 24/7

access to all lighting, irrigation, environmental and security controls through the use of a smart phone, tablet or

CPU with optional cloud based data storage.

Utilizing a combination of proprietary features, and NASA based wireless technology SG Sensors by GrowLife

is poised to become the first and only solution for wireless and remote controls, ensuring both optimum

conditions and yield, with the convenience of smart phone or tablet integration. PHOT expects to launch this

product in 2013, and has announced that a waiting list of customers has already been established that could result

in revenues of $1.0 million in year one.

Figure 13: SG Sensor Products


PHOTOTRON

Phototron is a 25 year old, United States based manufacturer of plant growing systems complete with its own self-

contained attractive cabinet with a full line of accessories including nutrients, media, timers and controls. With

favorable results in many different states on medical and even recreational cannabis initiatives in 2012, the

company believes that the addressable market for its plants growing systems has expanded considerably. New

initiatives will be rolled out throughout 2013, most of which will be direct to consumers, for direct sales of

Phototron units and accessories into the expanding addressable market.


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Figure 14:


Distribution Channels

GRENERS.COM

Greners.Com is a Sonoma County, California based online supplier of a full range of hydroponic equipment for

shipment worldwide. Started as a family business, its core strengths lie in its extensive and continuously updated

product offering, its knowledgeable staff and their commitment to informative product reviews for customers,

next day shipping across the country. Greners joined the GrowLife family of companies in July 2012. With the

added resources of GrowLife, Greners is set to expand its business in 2013 through volume growth in supply of

end user customers, increased commitment to unique opportunities for wholesale distribution and retail sales of

GrowLife company brands.


21/55



GROWLIFE HYDROPONICS

Growlife Hydroponics owns and operates a specialty hydroponics store in Los Angeles doing business as Urban

Garden Supplies. The store strives to provide realistic, hands on product demonstrations of core technology in a

one stop shopping environment with well-informed full service sales and technical staff. The Companys core

brands are first and foremost technology products that flourish where they can be demonstrated.

GROWLIFE PRODUCTIONS

Growlife Productions is a wholly owned business unit dedicated to promotion of GrowLifes core brands through

co-production and co-sponsorship of entertainment, lifestyle, music and film events across the country. GrowLife

Productions aims to foster a growing community around GrowLife brands. Entertainment industry notables Eddie

Bernard, Lucas Hildebrand and Kyle Tracey will direct the day to day activities of GrowLife Productions as the

team partners with events of all sizes, including club and theatre shows, music tours and festivals. The GrowLife

Productions team brings with them considerable experience in producing and promoting edgy, ground-breaking

productions such as the first-ever High Times Medical Cannabis Cup in the United States as well as management

of related VIP events featuring Kid Cudi (Denver, 2011) Lyrics Born, Keith Murray and the Eagles of Death

Metal (San Francisco, 2010). GrowLife Productions has a long roster of notable artist clients that includes

Sublime with Rome, DJ Tiesto, Pepper, Queens of the Stone Age, Iration, The Parlor Mob, Mix Master Mike and

many more. Earlier this year the GrowLife Productions team implemented a multi-level marketing campaign for

the largely successful Grammy nominated Sony Pictures Classics release, Beats, Rhymes & Life: The Travels of

A Tribe Called Quest.


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CANNABIS.ORG

Cannabis.Org is an information portal for the medical marijuana industry that is in development by GrowLife. Its

objective is establishing the premier informational portal for the industry worldwide that, in the event of

regulatory change, can also be a major revenue driver for expansion of GrowLife brands, a platform for

establishing additional partnering and revenue share relationships and direct revenue generation through a myriad

of ad revenue opportunities.


23/55



PHOT has grown organically as well inorganically since its inception. Its recent acquisitions have solidified its

position in the market as an innovator and as a leader. Financial benefits from these acquisitions notwithstanding,

we see the Company benefitting more from understanding and applying the processes and the intellectual

properties of the acquired companies.

Figure 15: Value Proposi tion


GrowLife,

Inc.

High demandfor industrial

hemp andmedical

marijuana Diversifed andScallableBusinessModel

ExcellentRetail SaleChannels;

StrongWholesale

Relationships

Legalizationof Marijuana

likely to resultin HugeDemand

CBD Extractsand

Compounds

ReplacingSmokedCannabis

OtherProgressive

CountriesOpening TheirMarkets

Building AMulti-channel

Brand withEstablishedSales andCustomers

Business notreliant upon

theLegalizationof Marijuana

Strategy toaggressivelymarket coreproducts,create new

innovations,and make

acquisitions

VALUE PROPOSITION


24/55



Industrial hemp2 is a variety of Cannabis sativa and is of the same plant species as marijuana. Although marijuana

is also a variety of cannabis, it is genetically distinct from industrial hemp and is further distinguished by its use

and chemical makeup. Hemp is genetically different. Hemp has long been cultivated for non-drug use in the

production of industrial and other goods. For centuries, industrial hemp (plant species Cannabis sativa) has been a

source of fiber and oilseed used worldwide to produce a variety of industrial and consumer products. Some

estimate that the global market for hemp consists of more than 25,000 products. It can be grown as a fiber, seed,

or other dual-purpose crop.

Comparison of Hemp and Marijuana

There are many different varieties of cannabis plants. Marijuana and hemp come from the same species of plant,

Cannabis sativa, but from different varieties or cultivars. However, hemp is genetically different and is

distinguished by its use and chemical makeup. Hemp, also called industrial hemp, refers to cannabis varieties

that are primarily grown as an agricultural crop (such as seeds and fiber, and byproducts such as oil, seed cake,

hurds) and is characterized by plants that are low in THC (delta-9 tetrahydrocannabinol, marijuanas primary

psychoactive chemical). THC levels for hemp are generally less than 1%. Marijuana refers to the flowering tops

and leaves of psychoactive cannabis varieties, which are grown for their high content of THC. Marijuanas high

THC content is primarily in the flowering tops and to a lesser extent in the leaves. THC levels for marijuana are

much higher than for hemp, and are reported to average about 10%; some sample tests indicate THC levels

reaching 20%-30%, or greater. A level of about 1% THC is considered the threshold for cannabis to have a

psychotropic effect or an intoxicating potential. Current laws regulating hemp cultivation in the European Union

(EU) and Canada use 0.3% THC as the dividing line between industrial and potentially drug-producing cannabis.

Marijuana

When cannabis is grown to produce marijuana, it is cultivated from monoecious fiber varieties that have both

male and female flowers on each plant, but where the female flowers are selected to prevent the return of separate

male and female plants (known as dioecious varieties). The female flowers are short and tightly clustered. In

marijuana cultivation, growers remove all the male plants to prevent pollination and seed set. Some growers will

hand-pollinate a female plant to get seed; this is done in isolation of the rest of the female plants. The

incorporation and stabilization of monoecism in cannabis cultivation requires the skill of a competent plant

breeder, and rarely occurs under non-cultivated conditions.

Marijuana is cultivated to encourage the plant to become bushy with many leaves, with wide branching to

promote flowers and buds. This requires that plants be well-spaced, by as much as about 1-2 plants per squareyard. The flower and leaves are the harvested products.

2 Source: December 18, 2012 Congressional Research Service: Hemp as an Agricultural Commodity by Rene Johnson - Specialist in Agricultural Policy

UNDERSTANDING THE DIFFERENT CANNABIS VARIETIES


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Industrial Hemp

To maximize production of hemp fiber and/or seed, plants are encouraged to grow taller in height. Cultivated

plants become a tall stalky crop that usually reaches between 6 and 15 feet, and generally consist of a single main

stalk with few leaves and branches. Hemp plants grown for fiber or oilseed are planted densely (about 35-50

plants per square foot) to discourage branching and flowering. The period of seeding to harvest ranges from 70 to

140 days, depending on the purpose, cultivar or variety, and climatic conditions. The stalk and seed is the

harvested product. The stalk of the plant provides two types of fibers: the outer portion of the stem contains the

bast fibers, and the interior or core fiber (or hurds).

If marijuana is grown in or around industrial hemp varieties, the hemp would pollinate the female marijuana plant.

Marijuana growers would not want to plant near a hemp field, since this would result in a harvest that is seedy and

lower in THC, and degrade the value of their marijuana crop.

Industrial hemp production statistics for Canada indicate that one acre of hemp yields an average of about 700

pounds of grain, which can be pressed into about 50 gallons of oil and 530 pounds of meal. That same acre will

also produce an average of 5,300 pounds of straw, which can be transformed into about 1,300 pounds of fiber.


26/55



The US medical marijuana market is estimated to reach $8.9 billion in 2016 from $1.7 billion in 2011. See

Change Strategy states that in the US, 24.8 million Americans are medically qualified to use marijuana. There are

only about 2.9% or 730,000 total patients that have currently purchased. Clearly the potential user market is just

beginning. The industry though in nascent state, is increasingly becoming an excellent source of revenue for the

Government and currently represents 3% of the entire revenue earned. In the last 15 years, the medical marijuana

industry experienced legalization in 16 states with the District of Columbia and Colorado reporting significant

growth and development.

Figure 16: Medical Marijuana Industry US


California, which contributes 76% of the national volume, dominates the industry with a market share of $1.3

billion a year. Colorado, which currently exhibits the fastest growth market nationally, accounts for 16% of the

market share with nearly 131,000 registered marijuana patients. Together, these two states make up 92% of the

total US market share.

Figure 17: The US Medical Marijuana Market Share


1.7

2.4

3.3

4.6

6.4

8.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

$10.0

2011 2012 2013 2014 2015 2016

Market Size ($ billion)

California76%

Rest of theUS

24%

INDUSTRY ANALYSIS


27/55



According to the Marijuana Policy Project, a total of 1,029,315 patients hold identification cards in a total of 19

states and the District of Columbia with mandatory registration. The numbers for patients with no registration or

voluntary users in California and Washington have been estimated. While there is the possibility that not all

registered people have valid medical use for marijuana, it is also possible that not all medical marijuana users

have been registered. The large numbers of medical marijuana users is an indication of the possible growth in themedical marijuana market. The figures for medical marijuana users in 19 states when extrapolated to 50 states

yields a number of 24,210,698 users.

Figure 18: Statewise medical marijuana patient f igures

Source: Industry Report, S&P, CNBC Analysis and Cohen Research

Notes to the above exhibit:

1. California has voluntary registration (as opposed to mandatory registration in all other legal medicalmarijuana states besides Washington). The Marijuana Policy Project estimated the number of California

patients based on Oregons patients per capita.

2. Connecticuts medical marijuana registration program started on Oct. 1, 2012. Therefore, the is no dataavailable at this time.

StateMedicalmarijuana

patients Statepopulation#ofpatientsper1,000

stateresidents1.Alaska 1,246 722,718 1.72

2.Arizona 33,601 6,482,505 5.18

3.California 553,684 37,691,912 14.69

4.Colorado 107,666 5,116,796 21.04

5.Connecticut

N/A

3,580,709

N/A

6.DC N/A 617,996 N/A

7.Delaware 21 907,135 N/A

8.Hawaii 11,695 1,374,810 8.51

9.Maine 16,444 1,328,188 12.38

10.Massachusetts N/A 6,587,536 N/A

11.Michigan 122,349 9,876,187 12.39

12.Montana 8,717 998,199 8.73

13.Nevada 3,558 2,723,322 1.31

14.NewJersey 239 8,821,155 0.03

15.NewMexico 8,188 2,082,224 3.93

16.Oregon 56,939 3,871,859 14.71

17.RhodeIsland 4,466 1,051,302 4.25

18.Vermont 559 626,431 0.89

19.Washington 99,943 6,830,038 14.63

Total: 10,29,315 Average: 7.78UnitedStates 24,210,698 311,591,917 7.77


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3. DCs medical marijuana law took effect on July 27, 2010, but, as of Dec. 28, 2012, its registrationprogram does not yet exist.

4. Maine did not have a registration program until Dec. 31, 2010, when it began requiring patient ID cards.As of Jan. 4, 2011, no statistics are available for the number of registered patients. The Marijuana Policy

Project estimated the number of Maine patients based on Michigans patients per capita.5. Massachusetts medical marijuana program goes into effect on Jan. 1, 2013. Patient data is not yetavailable.

6. Washington does not have a registration program. The Marijuana Policy Project estimated the number ofWashington patients based on Oregons patients per capita.

7. Two states (NJ, DE) have registration programs that took effect in late 2012 which is partially why thenumber of registered patients in those states is comparatively low. Since these national projections are

based on the average of the 16 states with active registration programs, these two states lower the average

and thus lower the overall projection of medical marijuana patients

8. If the average number of medical marijuana patients per 1,000 residents in states with legal medicalmarijuana is extrapolated to all 50 states (population 311,591,917 as of 2011, according to the US Census

Bureau), then the total number of medical marijuana users as of Dec. 28, 2012 would theoretically be2,421,069 [7.77/1,000 x 311,591,917 = 2,421,069].

9. State population numbers are estimates from the US Census Bureaus 2011 data. Patient numbers werelast updated in December 2012

Currently, eighteen states and the District of Columbia are active markets for medical marijuana. Arizona,

Michigan and Washington are expected to grow significantly as the industry matures during the next few years.

Figure 19: Status of l egalization of marijuana in the US

Source: 2011 Marijuana Market Report by See Change Strategy


29/55



Figure 20: States legalizing possession of Marijuana

Source: http://medicalmarijuana.procon.org/view.resource.php?resourceID=000881

Notes:a. Residency Requirement 16 of the 18 states require proof of residency to be considered a qualifying

patient for medical marijuana use. Only Oregon has announced that it will accept out-of-state applications. It

is unknown if Delaware will accept applications from non-state residents once the program is established.

b. Home Cultivation Karen OKeefe, JD, Director of State Policies for Marijuana Policy Project (MPP), toldProCon.org in a Nov. 7, 2012 email that Some or all patients and/or their caregivers can cultivate in 14 of

the 18 states. Home cultivation is not allowed in Connecticut, Delaware, New Jersey, or the District of

Columbia and a special license is required in New Mexico. In Arizona, patients can only cultivate if theylived 25 miles or more from a dispensary when they applied for their card. In Massachusetts, patients can

only cultivate until the department issues regulations unless they get a hardship waiver.

c. Patient Registration Karen OKeefe stated the following in a Nov. 7, 2012 email to ProCon.org:Affirmative defences, which protect from conviction but not arrest, are or may be available in several states

even if the patient doesnt have an ID card: Rhode Island, Michigan, Colorado, Nevada, Oregon, and, in

some circumstances, Delaware. Hawaii also has a separate choice of evils defence. Patient ID cards are

State Year Passed How Passed (Yes Vote) Fee Possession Limit

Accepts other states'

registry ID cards?

1. Alaska 1998 Ballot Measure 8 (58%) $25/$20

1 oz. usable; 6 plants (3

mature, 3 immature) unknown

2. Arizona 2010 Proposition 203 (50.13%) $150/$75 2.5 oz. usable; 0-12 plants Yes

3. California 1996 Proposition 215 (56%) $66/$338 oz. usable; 6 mature or12 immature plants No

4. Colorado 2000

Ballot Amendment 20

(54%) $35


mature, 3 immature) No

5. Connecticut 2012

House Bill 5389 (96-51

House, 21-13 Senate) *

One-month supply (exact

amount to be determined) No

6. DC 2010

Amendment Act B18-622

(13-0 vote) **

2 oz. dried; limits on other

forms to be determined unknown

7. Delaware 2011

Senate Bill 17 (27-14

House, 17-4 Senate) $125 6 oz. usable Yes

8. Hawaii 2000


House; 13-12 Senate) $25



9. Maine 1999 Ballot Question 2 (61%) No fee 2.5 oz. usable; 6 plants Yes

10. Massachusetts 2012 Ballot Question 3 (63%) TBD7

Sixty day supply for

personal medical use unknown

11. Michigan 2008 Proposal 1 (63%) $100/$25 2.5 oz. usable; 12 plants Yes

12. Montana 2004 Initiative 148 (62%) $25/$10

1 oz. usable; 4 plants

(mature); 12 seedlings No

13. Nevada 2000 Ballot Question 9 (65%) $200 +fees



14. New Jersey 2010


House; 25-13 Senate) $200/$20 2 oz. usable No

15. New Mexico 2007


House; 32-3 Senate)



16. Oregon 1998 Ballot Measure 67 (55%) $200/$1008



17. Rhode Island 2006


House; 33-1 Senate) $75/$10 2.5 oz. usable; 12 plants Yes

18. Vermont 2004

Senate Bill 76 (22-7) HB

645 (82-59) $50



19. Washington 1998 Initiative 692 (59%) *** 24 oz. usable; 15 plants No


30/55



voluntary in Maine and California, but in California they offer the strongest legal protection. In Delaware,

the defence is only available between when a patient submits a valid application and receives their ID card.

The states with no protection unless youre registered are: Alaska (except for that even non-medical use isprotected in ones home due to the state constitutional right to privacy), Arizona, Connecticut, Montana,

Vermont, New Mexico, and New Jersey. Washington, D.C. also requires registration.

d. Maryland Maryland passed two laws that, although favourable to medical marijuana, do not legalize itsuse. Senate Bill 502, the Darrell Putman Bill (Resolution #0756-2003) was approved in the state senate by

a vote of 29-17, signed into law by Gov. Robert L. Ehrlich, Jr. On May 22, 2003, and took effect on Oct. 1,

2003. The law allows defendants being prosecuted for the use or possession of marijuana to introduce

evidence of medical necessity and physician approval, to be considered by the court as a mitigating factor. If

the court finds that the case involves medical necessity, the maximum penalty is a fine not exceeding $100.

The law does not protect users of medical marijuana from arrest nor does it establish a registry program.

e. On May 10, 2011, Maryland Governor Martin OMalley signedSB 308, into law. SB 308 removed criminalpenalties for medical marijuana patients who meet the specified conditions, but patients are still subject toarrest. The bill provides an affirmative defense for defendants who have been diagnosed with a debilitating

medical condition that is severe and resistant to conventional medicine. The affirmative defense does not

apply to defendants who used medical marijuana in public or who were in possession of more than one ounce

of marijuana. The bill also created a Work Group to develop a model program to facilitate patient access to

marijuana for medical purposes.

f. Several states with legal medical marijuana have received letters from their respective United StatesAttorneys offices explaining that marijuana is a Schedule I substance and that the federal government

considers growing, distribution, or possession of marijuana to be a federal crime regardless of the state laws.

These letters have caused some states to delay or alter implementation of their medical marijuana programs.

Figure 21: States with Pending l egislation fo r legalizing Medical Marijuana

Source: Internet and Cohen Research

Illinois Mississippi

Massachusetts Oklahoma

New Hampshire West Virginia

New York Kansas

Ohio Indiana

Pennsylvania Idaho

Alabama MissouriWisconsin Maryland

Iowa

States With Pending Legislation For Legalizing

Medical Marijuana


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As per industry data, the observations for medical marijuana users include:-

73% of patients are male. Use is heaviest in the 25-44 year age group. Leading indications:

o 51% use marijuana as a substitute for prescription medication for significant health cost savingso 82.6% for paino 70.7% to improve sleepo 55% for relaxationo 41% for muscle spasmso 41% for headacheso 38% for anxietyo 28% for nausea

In order to understand the attractiveness of a new market and its opportunities, it is necessary to understand thecurrent and future size of the market as well as the growth rate of the industry. Since this is a new market industry

sources have used three methods to arrive at a figure that will do justice to the potential of the marijuana industry

as a whole. The following is cited from an article titled: How Big Is The Marijuana Market?, published on

www.cnbc.com on April 20, 2010.

Demand Based Method:

The Demand Based method of estimating the total market size is based on how much volume, how many people

consume and at what price. There is no single price or volume that gives us an accurate idea of the total market

size. The National Survey on Drug Use and Health states that around 10 percent of the population over the age of

12 years has used marijuana in the past year while 6 percent of the population has used it in any particular month.15 percent of these monthly users use marijuana on a daily basis. A typical marijuana cigarette contains between

0.5-1.0 grams of the drug and its price for a gram varies from $5 - $20 depending on the origin and the potency of

the drug.

Based on these figures, we have estimated the demand based market figures to be $10-$40 billion. However the

number of users might be underreported since they are collected by the government. Another problem is that the

frequency of use and the price of the drug can vary too. A sensitivity analysis to these figures estimates that these

numbers can go as high as $100 billion.

Supply Based Method:

The other method is to infer the total market size from the supply of marijuana in the market. This is done by

calculating what percentage do seizures by the US Drug Enforcement Administration and US Customs and

Border Protection constitute of the total and then extrapolating the figure to get an overall estimate figure.

While consumption figures have remained steady, supply levels, eradications of plants and seizures have

continued to grow. Figures from the DEAs National Drug Intelligence Center show a 120 percent increase in


32/55



eradications in 2007 compared to 2004. 1.5 million pounds of marijuana was seized in 2008, around 149 percent

increase from 2005. A 2006 study Marijuana Production in the United States estimates the total supply of

marijuana to be around 22 million pounds in weight. Canada and Mexico harvested another 50 percent of that

figure.

The average yields for an outdoor plant is around 24 oz. and around 1.5 oz. for an indoor plant. Using the same

price ranges and consumption rates as calculated for demand, the market value of the marijuana market jumps up

to $120 billion. These figures might be inflated because the weight of the plant, entire plants along with roots as

well as the need of the government to show its effectiveness in fighting the war on drugs.

Comparison Method:

The final method of ascertaining the marijuana market is by comparing it with other vices that are legal and

comparable. A comparison with the tobacco and alcohol industries should give a range to the market size that

marijuana can grow to. About 52 percent of Americans above the age of 12 years have consumed an alcoholic

beverage; 28% of Americans use tobacco in any given month. The use of tobacco by the American population hasfallen from 30% in any given month but the use of marijuana has remained constant for the past 10 years and

shows only a one percent variation over the last two decades. Similarly alcohol consumption has remained steady

around 51%.

The November 2009 Standard & Poors industry report states that alcohol and tobacco together generated $263

billion in 2008 of which alcohol industry had a share of $188 billion and tobacco industry contributed $75 billion.

The beer industry contributed $99 billion, the spirits industry contributed $61 billion and wine industry

contributed $27 billion to the alcohol industry figures. Cigarettes contributed $71 billion in sales to the tobacco

industry.

The H&HS data suggests that there are nearly 5 smokers to 1 marijuana user. For the marijuana market to be asbig as tobacco, marijuana users would need to spend an average of $35 - $40 per day. Such figures suggest that

the marijuana market would be smaller than the tobacco market since a typical smoker spends $7 - $8 a pack a

day.

Taking all three methodologies into consideration, we believe the marijuana market will be between $35 - $45

billion. If an investor believes that marijuana prices are higher and the actual consumption is higher then the

market size will be larger. On the other hand, if an investor believes that consumption is unlikely to expand

further and prices after legalization will be lower then the market size will be smaller than our estimated figure.

While the Food and Drug Administration (FDA) currently denotes hemp based cannabinoids to be food based

and legal without a medical marijuana license, it is the past 10 months that have shown definite improvement inthe legalization, decriminalisation and implementation of marijuana laws in the US. The recent Gallup polls have

given the verdict that approximately 50% of Americans want marijuana to be legalized for the purpose of

recreation up from 12% in 1969 whereas a majority of 74% want marijuana to be legalized for medicinal

purposes. Not only has the medicinal marijuana movement gained momentum but the support for industrial hemp

is also finding takers in the US. The support for legalization of marijuana is based on the two factors of medicinal

relief and the possible millions of dollars that states could earn as taxation revenues.


33/55



The conservative state of Texas has already proposed a bill short of legalization. The bill states that a person

arrested for marijuana can provide evidence that he has been given instructions for marijuana use from a doctor.

The bill also provides protection to doctors who have recommended marijuana use.

A bill in Hawaii makes the possession of an ounce of marijuana legal for people who are 21 and over. It also

allows people to grow a yet unspecified amount of marijuana in a secure place. These benefits come with a system

of tax and regulated legal marijuana commerce.

Medicinal uses of marijuana has gained wider acceptance in the US but the vote for recreational uses of marijuana

is still lacking confidence. We believe that regardless of the manner of use, the support for marijuana will

continuing growing and the investment in this industry will increase. The slow growth is a result of investment in

a product that is largely illegal but slowly moving to a legal status.

Comparing the marijuana industry that could grow to $35-$45 billion to the tobacco and alcohol industry that

pays 40%-50% in taxes (sales and excise), it can be expected that the government is looking at $16-$20 billion in

taxes. With the burgeoning debt problem that the government faces, it is clear that the government wants to tap

into a tax base that will provide consistent as well as large tax revenues. The playing field is developing into onethat has positive outcomes for all the parties concerned including investors.


34/55



The Hemp and Cannabis industry is in its nascent stage. However, this industry has a worldwide market without a

definite leader. Its growth is becoming more popular worldwide. There are hundreds of businesses and many

more potential opportunities that this industry provides. Bloomberg Business estimates that the entirety of the

marijuana industry (legal and illegal), on a worldwide basis, exceeds $110 billion. Some of the companies

operating in the United States are:

Figure 22: Overview of Publicl y Traded Marijuana Stocks

TranzbyteCorporation

OTCBB:ERBBPrice:$0.0043

Tranzbyte Corporation (www.tranzbyte.com) is adriving force behind Altitude Organic Corporation. Thecompany expects to continue its plan to acquire, hold, orspin out successful divisions in what has been described

in previous news releases as "dividend farming,"Companies that qualify and decide to become public ontheir own will agree to carve out shares for Tranzbyteand their ERBB shareholders.

ConvertedOrganics,Inc.OTCBB:COIN

Price:$0.0022

Converted Organics Inc.'s mission is to promote, developand operate profitable innovative clean technologiesthat contribute to the improvement of environment byuse of sustainable business practices and the judicioususe of natural resources.

GreengroTechnologies

OTCBB:GRNHPrice:$0.04

Greengro Technologies is a world class provider of ecofriendly green technologies with specific domainexpertise in indoor and outdoor agricultural sciencesystems serving both the consumer and commercialfarming markets. Its customers include restaurants,community gardens, small and large scale commercialclients.

COMPETITION


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GWPharmaceuticals

PLC.OTCBB:GWPRF

Price:$0.77

Operating under license from the UK Home Office, theCompany researches and develops cannabinoidpharmaceutical products for patients who suffer from arange of serious ailments, in particular multiple

sclerosis and cancer pain. GW has assembled a large inhouse scientific team with expertise in cannabinoidscience as well as experience in the development ofboth plantbased prescription pharmaceutical productsand medicines containing controlled substances.

HealthSciencesGroup,Inc.

OTCBB:HESGPrice:$0.0001

Health Sciences Group, Inc. is an investment technologyportfolio company that acquires nascent healthsciences technology and related innovations, inventionsand IP assets to enhance their growth anddevelopment. The company builds revenues and assetvalue through a model of continuous growth, incomefrom or sale of its portfolio holdings, and technologylicensing or distribution agreements.

FusionPharm,Inc.OTCBB:FSPMPrice:$0.21

FusionPharm, Inc. was organized to capitalize onopportunities present in the rapidly growing the $26billion organic food and specialty herb market.FusionPharm's primary focus is the development anddeployment of the patent pending PharmPodsadvanced hydroponic cultivation systems.

Hemp,Inc.OTCBB:HEMP

Price:$0.03

HEMP,Inc.focusesonthevastmarketcreatedbythequicklyemerging,andgrowing,multibilliondollarindustrialhempindustry.Hemp,Inc.isnotinvolvedinthecultivationormarketingofmedicalmarijuana.Thecompanyisbuildinginfrastructurewiththepotentialtogainsubstantialmarketsharebeforeandafterindustrialhempprohibitionends.


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Medbox,Inc.

OTCBB:MDBX

Price:$27.75

Medbox is a leader in the development, sales andservice of automated, biometrically controlleddispensing and storage systems for medicine and

merchandise. Medbox has offices throughout theworld, including New York, Arizona, Connecticut,Massachusetts, Tokyo, London and Toronto, and hastheir corporate headquarters in Los Angeles.

MedicalMarijuana,Inc.

OTCBB:MJNAPrice:$0.15

Medical Marijuana, Inc.'s mission is to be the premiercannabis and hemp industry innovators, leveragingour team of professionals to source, evaluate andpurchase valueadded companies and products, whileallowing them to keep their integrity andentrepreneurial spirit. MJNA strives to create

awareness within the industry, developenvironmentally friendly, economically sustainablebusinesses, while increasing shareholder value.Medical Marijuana Inc. does not grow, sell ordistribute any substances that violate United StatesLaw or the controlled substance act.

MediSwipe,Inc.

OTCBB:MWIPPrice:$0.04

MediSwipe Inc. provides innovative patient solutionsfor electronically processed transactions within themedical marijuana and healthcare industries.MediSwipe provides terminalbased service packages

and integrated Web Portal addons for physicians,clinics, hospitals and medical dispensaries thatinclude: digital patient records, Electronic Referrals,Credit/Debit Card merchant services, CheckGuarantee and Accounts Receivable Financing.


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THE COHEN PRICE TARGETTM- $0.22

The Cohen Price TargetTM is a dynamic and logical valuation approach that combines market-based approaches

and intrinsic value methodologies. Capital raising and cash are the life blood of any micro-cap/small cap

Company. Hence, the Cohen Price TargetTM includes four components, 25% equal weighted that together reflect

and are based on the Companys ability to raise capital for growth. The four components used in our price index

are: Price-to-Earnings ratio (P/E), Cohen Price-to-Capital Employed ratio (P/CE) (Both Market based valuation

approaches), Cohen Discounted Cash Flow (DCF) method (Theoretically an Intrinsic Value based approach) and

Cohen Price Performance Index.

Note: Our above price targets are based on the financial forecast and intrinsic value of the stock. In case of a

possible acquisition of PHOTs assets by a larger industry player, we believe investors can expect a large

premium. In the case of an exit from either of its investments at attractive valuation, shareholder value would

increase.

Our formula for The Cohen Price TargetTM is shown below.

Figure 23: The Cohen Price TargetTM

Formula


PricetoEarnings(P/E) in$

EarningsPerShare2016Forecasts 0.01IndustryAverageFutureP/ERatio 41.35DiscountFactor 0.72PricebasedonP/ERatio 0.21

PricetoCapitalEmployed(P/CE) in$

CapitalEmployed 0.07IndustryAverageP/CERatio 6.19DiscountFactor 0.72PricebasedonP/CERatio 0.32

CohenDiscountedCashFlowModel in$

CohenDCFValue BaseCase 0.29

CohenPerformanceIndex in$

CohenPricePerformanceIndexValue 82.5%CurrentStockPrice 0.04PricebasedonCohenPerformanceIndex 0.07

CohenPriceIndexTarget 0.22

CurrentPrice 0.04Upside/(Downside)Potential 456.2%

VALUATION


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Figure 24: Cohen Discounted Cash FlowTM


4.0% 5.0% 6.0% 7.0% 8.0%

OptimisticCase 0.31 0.37 0.47 0.62 0.94

BaseCase 0.19 0.23 0.29 0.39 0.60

PessimisticCase 0.08 0.10 0.13 0.18 0.28

0.10

0.20

0.30

0.40

0.50

0.60

0.700.80

0.90

1.00

inUS$

RangeofLongTerm Growth Rates

RangeofTargetPricevs.LongTermGrowthRates

12.0% 11.0% 10.0% 9.0% 8.0%

OptimisticCase 0.28 0.35 0.47 0.66 1.04

BaseCase 0.17 0.22 0.29 0.41 0.66

PessimisticCase 0.07 0.10 0.13 0.19 0.31

0.20

0.40

0.60

0.80

1.00

1.20

inUS$

RangeofCostofCapital

RangeTargetPricevs.CostofEquity


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GrowLife, Inc., is an exciting Company comprised of a diversified portfolio of products, services, technology and

businesses focused on the marijuana industry. GrowLife companies manufacture and supply branded equipmentand expendables that promote and enhance the characteristics of quality and quantity of indoor and outdoor urban

gardening. GrowLife is in a unique position to leverage industry relationships, state-of-the-art innovations, and

equity to develop a fully integrated lifestyle brand through acquisitions and internal growth entirely dedicated to

the cannabis and marijuana industry.

With many states rapidly adopting laws for medical access, and the potential message within President Barack

Obamas announcement regarding the Federal Governments priorities - it would appear that the industry has

progressed to a point of acceleration. A nascent national medical marijuana industry, fueled by legalization in 18

states plus the District of Columbia, is in the midst of unprecedented development and growth. Unlike other

industries, the marijuana industry does not face the problem of whether the consumer will accept the product.

Demand is very strong. It faces issues regarding the regulation and legalization of the use of marijuana. Simplyput, there is no inherent risk in acceptance and consumption of the product. The wholesale legalization of

marijuana, whereby the cultivation, sale and distribution is regulated similarly to alcohol or tobacco, is highly

enticing and necessary for cash-strapped municipalities and state governments.

We believe the Companys fully integrated business model that features a combination of core technologies, retail

sales channels, and wholesale relationships provides a perfect platform to be at the forefront of the nascent but

growing industry. Further, the strong and experienced management team, financial capabilities, robust projected

revenue streams and growth potential in its marketplace makes the stock a valuable investment proposition.

GrowLife, Inc. provides an exciting potential short term trade and long term investment opportunity for long term

risk-averse investors.

RS/Grass Roots Distribution Research and Distribution, Inc.

CONCLUSION


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The PHOT team is an impressive mix of highly skilled professionals and industry veterans in their respected

fields. This team has several years of professional working experience with industry and world authorities on

marijuana and cannabis, evaluate, acquire and develop value added companies and products. By leveraging itsmanagements experience and exciting business model, PHOT is able to provide an unparalleled platform of

businesses that are unique among industry competitors. We have spoken with other management teams in the

industry. PHOTs management professionals are more highly qualified than those we have interviewed.

Executive Management Team

Sterling Scott, CEO & Chairman

Sterling Scott has served as the Chairman and CEO of GrowLife Inc. since April of 2012. As a former Federal regulatory attorney he brings a refreshing level of credibility to a fragmented

industry with exponential growth potential.

Scott brings nearly 30 years of experience in managing businesses and practicing business law toGrowLife.

BA in Social Sciences from Shimer College and a JD from DePaul University. Previously an associate and partner with acclaimed Jenner & Block in Washington D.C., as well as

becoming a member of the Senior Management Team for Technical Management Services Company(TAMSCO).

He has a successful M&A track record, having assisted with transactions as high as $100 million.

Kyle Tracey, Interim President

Strategically appointed as interim President of GrowLife, Inc. for his industry credentials, work ethic, andcapacity to innovate, market, and sell hydroponic equipment. Mr.. Tracey has been serving the company

as President of GrowLife Productions, Inc.

Kyle Tracey delivers the imperative contacts and respect to achieve market penetration for GrowLifebrands and sales channels (brick-and-mortar stores or online properties).

BA in Business Management from the Uni

Documents

Grassroots Reseach - GrowLIfe, Inc Report