Growlife (PHOT) resumes trading, but new allegations slam share price

It was one of the high flying stocks in the burgeoning US medical marijuana space, with a billion dollar market cap, an almost consistently upward stock chart, and blue skies ahead.

Growlife (OTT:PHOT, Stock Forum) was a weedco darling in mid-March.. before ‘the incident’.

That incident was a wobble in share price followed by a trade halt as the SEC announced its "concerns regarding the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in Growlife's common stock."

Partners abandoned the company. Orders were cancelled. And the litigators began to flood Growlife’s news stream with class action lawsuit filings and investigations.

The blowback didn’t just hurt Growlife, it took a lot of market cap off the entire sector as rumors of further trade halts at other companies began to spread.

It wouldn’t be unreasonable to suggest the first bursting of the medical marijuana bubble came as a result of the Growlife trade halt.

Yet, today the stock resumed trading, with the company claiming not only was it not being investigated by the SEC, but regulators had no interest in asking questions of management.

In a statement, Growlife said, “The SEC has informed GrowLife through counsel that it is not the subject of an informal or formal investigation. The SEC has not requested any documents from the company or its Board. Nor have they issued GrowLife any subpoenas or broad requests for information.

It appears, from counsel's discussions with the SEC's staff, that the SEC suspension was prompted by concerns that some 3rd party holder(s) of GrowLife stock may have been planning to engage in some form of manipulative promotional activity. GrowLife does not have any more specific information regarding this matter.”

A strict reading of the earlier SEC statement doesn’t put doubt to this claim. While the market, the media – even the company itself - read the SEC’s words as indicating the company was the subject of the investigation, which properly led investors to ask questions about the firm and the sector, a third party issue is much less ominous.

This is very good news for Growlife, and for the larger sector. Regardless, investors wanted no part of the controversy, dumping the stock today and slashing 58% of value off the company. It now trades at $0.21, a 72% discount to its 52-week high of $0.77.

Growlife says it has expanded its customer support team to answer questions, and has sharpened its focus on ‘higher levels of oversight’.

So is Growlife undervalued and oversold? Sadly, it would appear not.

A Seeking Alpha contributor has pointed out in a report today, “On March 31, 2014, in conjunction with the release of its 2013 10-k filing, directors (Tony Ciabatonni, Eric Shevin, Alan Hammer and Jeff Giarraputo) were paid two million shares at a price of $0.02 per share which constitutes a ~97% discount to the then trading price (of $0.58). How was a valuation that is over 90% below trading value established? How can the company continue to grant shares to insiders at the same price for over a year with material changes in the market and trading value of the underlying equity?”

The author continues, “How appropriate is it that the CEO (Sterling Scott) and CFO (John Genesi, who was only appointed mid-year in July 2013) were paid compensation of $1.1 million when the company only had $4.9 million of sales? This implies that two members of the company were compensated ~24% of total revenue alone.”

It may well be that the SEC has no interest in looking into Growlife going forward, but on the basis of these revelations, it should indeed be looking deeper.

Growlife may rise in value over the coming trading days, b0ut to figure the company is out of the woods would be optimistic.