Growlife, Inc. is a long way from its heyday as a bellwether pot stock and is still facing an uphill struggle amid the company's misrepresentations and mounting debt
May 11, 2016: One of the hottest issues during the marijuana stock craze of 2013 - 2014 was Growlife, Inc. (PHOT), a stock de rigueur partly because of the ongoing pot frenzy and partly because of a stream of promotional newsletters issued by the usual suspects.
A little history
PHOT has always fancied itself as "a nationally recognized cultivation brand, providing world-class hydroponic equipment, lighting, nutrients, media, and other grow supplies to licensed commercial and urban operations". We're not sure how a nationally recognized brand generates only $3.5 million in net revenue and what's worse, this is a 59% decrease in net revenues year over year, but it is not a point worth belaboring. We will agree that PHOT appears to be a real operation as opposed to most of the penny stock issuers who run a sham business. But so what?
On April 10, 2014, the SEC, working with FINRA, suspended trading in PHOT for "questions about the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in PHOT’s common stock." The stock, consistently an active trader on the OTC with millions of shares exchanged each day, had closed at about 50 cents the day before, giving the company a market cap of about $400 million. With only $2.6 million reported in tangible assets at the time and quarterly operational losses at $37.8 million on net revenues of $2.4 million, the regulators had a legitimate concern.
The trading suspension brought cries of over reaching by the SEC as bag holders faced the evaporation of tens if not hundreds of millions of dollars. PHOT issued a press release expressing their own wonder at the suspension. In another press release issued four days later, the company continued to claim ignorance as to the reasons behind the suspension and admitted to some insider selling, but attempted to assure shareholders that it was all done properly and according to guidelines. Perhaps so, but it does more than raise an eyebrow that GrowLife CEO Sterling Scott’s wife sold more than 5.7 million GrowLife shares at 50 cents/share on April 9, one day before the suspension. Class action litigation against PHOT was announced by several law firms.
Once the trading suspension was lifted, PHOT was relegated to the Grey Market and market makers were unable to post bids or asks. This is the case with all stocks that are suspended by the SEC. When trading resumed on April 25th, the stock opened at 15 cents, a 70% discount from the previous close. Volume was brisk as panicked sellers were grateful for those that were looking to cover short positions and those that thought they were buying shares at a bargain price. Heavy volume continued through the summer, buoyed by optimistic press releases from the company. Still, those who understood what it means to be on the lowly Grey Market stayed away and their prudence was rewarded. By the end of the year shares of PHOT were trading at 2 cents.
Then on August 5, 2014, the SEC and FBI concurrently announced charges brought against a series of stock promoters, claiming that they purchased cheap shares of stocks including marijuana related issuers PHOT and Hemp, Inc. (HEMP) and ran their share price up through a series of wash trades. They later laundered their proceeds from the sales of these stocks by purchasing gold and silver bars.
While neither PHOT nor its only officer was implicated in the charges, we will note that PHOT did participate in stock promotion activities, most notably Scott Sterling's then frequent appearance on the despicable online program MoneyTV, a conduit for promoting many a pump and dump scheme. Its host, Donald Baillargeon, is never shy to blame so-called bashers and shorters for the demise of an obvious scheme. And it certainly is convenient that the Scotts were able to profit so handsomely from the promotion.
On May 7, 2015, the settlement of the class action lawsuit brought by shareholders against PHOT was announced. The settlement amounts, $700,000 in cash and $2,000,000 in newly issued PHOT stock were paltry compared to the losses incurred, especially considering that the law firm received 25% of the proceeds.
It's back! Or is it?
On February 18, 2016, PHOT announced that it had resumed quotation on the OTCBB (Bulletin Board), "after receiving clearance from the Financial Industry Regulatory Authority (“FINRA”) on its Form 15c2-11". The company reiterated that statement in another press release on February 24 and gleefully trumpeted the renewed interest in its stock.
Investors' new-found taste for PHOT stock was predicated on false statements by the company. While the company had been approved to be quoted through the OTC Link system, the stock itself was classified as a pink sheet not a Bulletin Board issue and was not yet quoted on the Bulletin Board platform because, in fact, it did not have approval under Rule 15c-211. This was well illustrated on February 25, 2016 FINRA's Daily List which classifies PHOT as being unable to be quoted on the OTCBB for this very reason.
Another indication that the company was making a false statement is in its reference to its (the company's) Form 15c-211. A Form 211 is filed by the sponsoring market maker, not by the company itself. In fact, FINRA will not communicate with the company regarding this form at all. It is the market maker who receives word of an approved Form 211 and it seems unlikely that the market maker would have provided PHOT with false information. Until the Form 211 is approved by FINRA, a market maker cannot participate in the trading of the stock under Rule 15c-211, and the stock should continue trading on the Grey Market. Mysteriously, these stocks do occasionally under the restriction of unsolicited quotes only, as in the case of PHOT. Nonetheless, market makers are not permitted to participate in the trading process.
|PHOT's Quotation Status as of May 11, 2016|
Without an approved Form 211, enabling a market maker to direct trading in the stock, PHOT's status is really not any different than that of being on the Grey Market. Certainly, the trader is exposed to the same perils as those of trading on the Greys.
So was PHOT lying in its February 18 and 24 press releases or was it just a misunderstanding? We'd almost be prepared to believe that the company misconstrued the circumstances and simply misstated the facts if it had corrected these statements at some point down the road. Certainly, the Officers and Directors of a public company, entrusted with the public's money, couldn't be in the dark for so long. In fact, the company has since doubled down on this statement by reiterating it in its May 5, 2016 press release:
The 15c2-11 approval in mid-February has given GrowLife the ability to negotiate more flexible financing terms for expansion, working capital and efficiently reduce its debt, thus improving the Company’s financial position and opportunity to grow once again,” stated Marco Hegyi, GrowLife President and CEO.The "approved 15c-211" presented no such ability because there is no approved Form 211! This press release is in fact, misleading, and the company's persistence in pressing this fallacy could cause it to find itself in hot water with the SEC once again, perhaps bringing yet another suspension.
On May 10, 2016, PHOT filed a Form S-1 for the purposes of offering an undetermined number of newly issued shares to be sold into the market.
The confusion regarding the Form 211 continues on this filing.
On February 18, 2016, our common stock resumed unsolicited quotation on the OTC Bulletin Board after receiving clearance from the Financial Industry Regulatory Authority (“FINRA”) on our Form 15c2-11. We are currently taking the appropriate steps to uplist to the OTCQB Exchange and resume priced quotations with market makers as soon as it is able.This statement is self contradicting. It once again reiterates the nonexistent clearance from FINRA on their Form 15c-211 and yet makes note that PHOT will attempt to uplist to the OTCQB "Exchange"--OTCQB is an OTCmarkets market tier, not an exchange--and yet recognizes that market makers are not currently able to quote the stock. This now makes us wonder if the company is simply lying or is represented by an idiot for a lawyer. Either scenario or a combination of both is plausible.
The shares to be registered under the S-1 were issued in order to satisfy PHOT's massive debt. This is just the beginning. The company owes a lot of money and undoubtedly will issue a lot more stock, i.e. billions of shares, to satisfy that debt. It has collateralized all of its assets to one note and voting control is surrendered to those who will receive additional shares on their defaulted notes. From the S-1:
Several of the Company’s convertible promissory notes remain outstanding beyond their respective maturity dates. This may trigger an event of default under the respective agreements. The Company is working with these noteholders to convert their notes into common stock and intends to resolve these outstanding issues as soon as practicable. Any default could have a significant adverse effect on our cash flows and should we be unsuccessful in negotiating an extension or other modification, we may have to restructure our operations, divest all or a portion of its business, or file for bankruptcy.According to the S-1, the company had $2 million in outstanding convertible debt on December 31, 2015. That number is much larger when considering accrued interest and any additional debt taken on. The admitted defaults will certainly create a conversion scenario much more favorable to the lenders. In fact, we anticipate that the company is working so diligently to reinstate itself on the OTCQB not because it is a viable business--past performance strongly suggests that it is not: As of December 31, 2015, our accumulated deficit was $116,715,648--but possibly because the corporate officers could be on the hook with personal guarantees. At any rate, billions of new shares will be created to satisfy the debt, certainly leading to the dumping of these shares and likely with the assistance of the same old email promotions. Myopic investors who will fondly recall the heyday of PHOT, will be seduced into throwing good money after bad, overlooking the fact that the share price will continue to be decimated as the dumping proceeds. Then to put the cherry on the sundae, the stock will certainly be reverse split once these debt satisfying shares have been divested. The process of share issuance, divestiture and rollback may even have to be repeated, depending on the ability of the company to fully satisfy its obligations under the resultant market capitalization.
Even the most optimistic result of the end game, a future where PHOT is a viable and profitable company, does not present a scenario where an investment in the company right now, or even over the next year or two, could be anything but flushing money down the drain. The company must prove itself able to survive the debt amid deflating revenues and a degrading share price before any accumulation of shares could be considered wise.