Pubdate: Sun, 13 Jul 2014
Source: Seattle Times (WA)
Copyright: 2014 The Seattle Times Company
Contact:  http://seattletimes.nwsource.com/
Details: http://www.mapinc.org/media/409
Author: Rami Grunbaum
Page: D1

POT FIRM ZAPPED BY SEC PLANTS ROOTS HERE

Marijuana is the latest pot of gold at the end of the rainbow for 
pennystock companies.

So many ephemeral public companies are now promoting that dream that 
the Securities and Exchange Commission (SEC) this spring temporarily 
suspended trading in a handful of those stocks, warning about "the 
potential for fraud in microcap companies that claim their operations 
relate to the marijuana industry."

One of the companies thus slapped down, GrowLife, has moved its 
headquarters from Southern California to Seattle. It announced the 
shift in a regulatory filing coinciding with Tuesday's start of 
legalized recreational-pot sales here.

GrowLife's new CEO acknowledges industry hype had driven shares of 
the small company to levels that didn't make sense.

"We had a market capitalization of $600 million on $5 million in 
revenue, so 120 times revenue," says Marco Hegyi. "I think that 
raised concerns by the SEC."

But Hegyi, who joined as president in December and became CEO after 
the SEC crackdown, says in an interview that "the company that we've 
turned in to now is so different than it was six months ago."

One difference: It restated its financials last month, pushing its 
first-quarter loss to an astonishing $71 million on sales of $2.4 
million, thanks in large part to noncash charges reflecting a mass of 
warrants and notes it issued.

Another difference, not yet reported in regulatory filings: Hegyi 
says he cut the company's head count by a third this month, from 46 
to 30, and refocused it on direct sales of equipment and supplies to 
marijuana growers.

A third change, says Hegyi, is that the company now has better 
controls, new board members and a focus on regaining compliance with 
regulatory standards.

The SEC hasn't specified what drew its suspicion at GrowLife (ticker 
symbol PHOT). The boilerplate April 10 announcement of the 10-day 
trading halt cited unspecified questions "about the accuracy and 
adequacy of information in the marketplace and potentially 
manipulative transactions in PHOT's common stock."

Hegyi says its focus is to supply "basic infrastructure and 
consumables" through direct contact between its sales reps and growers.

"We don't grow anything and we don't sell paraphernalia," he says. In 
a telephone interview from Maine, where GrowLife has a retail outlet, 
he said the company will shortly expand its direct sales capability 
"from five to 17 states."

GrowLife began as a shell company that bought some small hydroponics 
retailers and suppliers starting in 2012, giving it locations in 
California, Colorado and the Northeast. Hegyi has closed two of those 
seven locations, and while he insists the others are "very strong," 
he's refocusing the staff's expertise on "reaching out to customers" 
at their grow sites.

He envisions providing "much more of a service relationship" to 
assist growers, not just a retail or e-commerce operation.

"When you start concentrating hundreds of plants in one room and 
you're babying them until they grow, you've got a lot of money riding 
on that," Hegyi says. "We have experts who've been part of the grow 
industry for years."

One licensed marijuana producer-processor who vouches for GrowLife is 
Daniel Curylo, who runs Cascade Crops in Shelton, Mason County.

"I love these guys," says Curlyo, who is growing his first crop under 
a license for 3,000 square feet of marijuana plants but acknowledges 
he's an industry newbie. "My grower is on speed dial with our 
(GrowLife) rep in Boulder," Curlyo said.

"The exceptional thing about GrowLife - and I've literally spent 
hundreds of thousands of dollars with them - is the customer service," he said.

GrowLife's stock can still be considered vastly overpriced, despite 
an 85 percent haircut after the SEC's trading halt drove it from the 
OTC Bulletin Board into what Hegyi terms "the gray market" of even 
less-regulated trading.

Even at 10 cents a share, down from its peak of 78 cents in March, 
GrowLife's more than 800 million shares outstanding mean it is valued 
at $80 million or so. That's rich for a company whose latest 
strategic turn remains to be proved - in a field crowded with 
competition for both investors and actual customers.

Bloomberg News reported last month that in all, about 130 public 
companies, most of them penny stocks, claim to be in the pot 
business. And the SEC warnings haven't cooled all the speculation: 
"On some days, cannabis-related stocks account for 15 percent or more 
of all penny-stock trading," reported Bloomberg.

Hegyi says he knows that GrowLife, its customers and its business 
rivals are under the microscope of both marijuana regulators and 
stock-market overseers.

"There's a lot of scrutiny and that's OK," he says. "That's part of 
what we as an industry have to address."
- ---
MAP posted-by: Jay Bergstrom