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Sterling Scott of GrowLife (OTC:PHOT) recently released an open letter to shareholders encouraging them to vote yes on a proposal that would increase the authorized stock from the current 1 billion shares up to 3 billion (about 10 times the number of shares outstanding as Google). As part of this open letter Mr. Scott also addressed market rumors which included my insinuation made one week ago that GrowLife mirrored the structure of a classic penny stock pump and dump scheme.

The irony of this letter should not be lost on investors. As a response to market criticisms that PHOT is a "pump and dump" scheme, Mr. Scott is asking current shareholders for the authorization to TRIPLE the number of shares outstanding. While he is correct in his assertion that fund raising can be difficult for companies operating in grey areas of the law, the idea that it is in the best interest of shareholders to dilute their shares by a factor of 3 because of this is absurd. For those investors that don't fully understand share dilution, if you triple the number of shares outstanding in a company each existing share becomes worth 1/3 of its current value. So, if your shares are trading at 15 cents, after such a transaction they would then be worth only 5 cents.

Additionally, there is no specific capital financing needs mentioned as the reasoning behind this round of securities issuance. Were it a 10 to 20% dilution shareholders could potentially ignore this oversight, but an unwarranted request to triple shares further confirms my allegations from one week ago.

In doing due diligence I have further questions for GrowLife as to the structure of CANX USA who is supposedly funding GrowLife's GIFT program with a potential $40 million in funding. CANX was incorporated in November of 2013 (per the Nevada Secretary of State website) and lists Randy Breitman as an owner. Mr. Breitman was introduced as joining the management team as Director of Business Development back in July.

Oddly enough, in addition to Mr. Breitman two other owners are listed for CANX, and those are corporations listed as CANX USA I & CANX USA II. Upon further perusal of the Nevada Secretary of State's website, it turns out that these two entities are owned by Anthony Ciabattoni and Linda Fetzer. In my research I have yet to pinpoint who Linda Fetzer is, but Anthony Ciabattoni is on the board of directors of GrowLife. This leaves at least 2 of the 3 owners of CANX as direct representatives of GrowLife. It seems highly unusual for a company that is supposedly providing $40 million in future funding to GrowLife to be owned by GrowLife employees. If employees of the firm have this kind of wealth perhaps they should be looking to arrange corporate funding from them directly instead of through backdoor and surreptitious corporate structures such as CANX who conveniently enough has been issued millions of warrants priced below market price and also a consulting contract of a value that has not yet been disclosed.

Finally, I'd like to address the concerns of Mr. Scott in regards to an orchestrated short sale campaign. The rule of thumb for brokerage firms is to disallow shorting of stocks below $5 in share price due to their volatility. Additionally, for shares to be available to be rehypothecated and loaned out for shorting purposes they must be owned at brokerage firms on margin. Federal Reserve Board regulations prevent over-the-counter bulletin board stocks like GrowLife from being purchased on margin, thus making them ineligible to be legally shorted. So, the ability of me or any other investor to short GrowLife (or any other OTCBB penny stock for that matter) would be difficult if not impossible. That being said, I reiterate my price target of 5 cents on PHOT.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.