After its stock all but tanked in the few days after resuming trading, shares of GrowLife Inc. have recovered some lost ground. But despite management’s resilience and the slight stock recovery, prospects for the company don’t look great. Share price for the Woodland Hills seller of marijuana growing supplies has fallen more than 60 percent since the Securities and Exchange Commission re-opened trading April 25 – two weeks after suspending the stock for what it called “potentially manipulative transactions.” Trading was halted April 10 at 50 cents a share on the OTC Bulletin Board and closed at 19 cents on April 30. GrowLife declined comment, but has been actively attempting to persuade investors that the company isn’t as scuttled as the stock price makes it seem. Last week, the company furthered its attempts to hang onto investors, releasing what it called the first part of its “GrowLife 2.0” business strategy. It said all four independent directors of the company agreed to cancel their 500,000-share stock grants for the first quarter. The company also established an audit committee, compensation committee, nominating committee and a mergers-and-acquisitions committee. “This long-term incentive plan will align board compensation with company performance,” said Chief Executive Sterling Scott in a statement. “It recognizes the importance of strong governance, industry leadership and a long-term view of what’s right for the company and the industry.” And in a letter to shareholders issued the day before trading resumed, Scott assured stockholders that the company would remain in business, in addition to establishing a hotline and email communication system for shareholders. “We believe intensely in a positive future for GrowLife and our industry,” Scott said in the letter. “Extraordinary opportunities do not, however, come without risk.” In the letter Scott told shareholders that the SEC had not requested any documents from the company and that GrowLife was not being investigated, but that the halt “was prompted by concerns that some third-party holder(s) of GrowLife stock may have been planning to engage in some form of manipulative promotional activity.” A spokeswoman with the SEC declined to comment on details regarding any potential investigation into the company, past or ongoing. While the announcement last week gave the stock a 6 cent bump, the investment banking community remains unimpressed. “An audit committee is a great start, but it just may be re-arranging deck chairs on the Titanic,” said Alexander L. Cappello, managing director of Santa Monica boutique investment bank Cappello Global LLC. “But I don’t see investor confidence changing for a while. There are some real dark clouds hanging over this space.” ‘Buyer beware’ A number of recent stock transactions may have alienated investors, including various insider sell-offs, most notably by Scott and his estranged wife. The board also voted to triple the number of authorized shares in February. With the steep stock decline, the company’s wildly inflated market cap came back down to earth at $153 million as of April 30. Prior to the halt, the company had a market cap of more than $404 million – or about 82 times its annual revenue. “This was a stock that was way overpriced and is frankly probably still overpriced,” said Lloyd Greif, chief executive at boutique investment bank Greif & Co. in downtown Los Angeles. “The hype is gone and people are now looking at what’s really there – not much. It’s definitely buyer beware.” The company is not in the strongest financial position, losing more than $20 million last year while being forced to issue stock for several acquisitions, wages and even for rent on its corporate offices. Since shares were halted, at least five law firms have announced class-action lawsuits. Still, GrowLife is a known player in a rapidly rising industry, as marijuana legalization gains momentum on the back of ordinances passed in Colorado and Washington in 2012. IBIS World, a Melbourne, Australia research firm, said marijuana was a $1.7 billion industry last year in the United States and expects the industry to grow at an annual rate of 24 percent over the next few years. But there may be little hope for a quick recovery for the company’s stock as many investors were already concerned about putting money into penny pot stocks before the halt in trading. The SEC has halted trading in five such companies in the last couple months and the Financial Industry Regulatory Authority has warned investors multiple times of “potential for fraud in this arena.” Grief said the fact that trading has resumed is not a clean bill of health for the firm, as the SEC may still investigate the company. “This company is on the brink and there should be red lights on for investors,” he said. “The only people who are going to trade are the ones who want out of their positions. The future is grim.”
