2017 GrowLife Roadmap
Navigating through Opportunities
Let’s cut to the chase:“How hard can it be to grow a company in one of the fastest growing industries?” A resonating question I hear repeatedly. The answer is that short-term spikes are relatively easy but to build lasting long-term growth demands more work and thought than most people like to talk about. I will share my point of view on an answer and how GrowLife intends to go big. The plan to grow PHOT revolves around our 2017 Roadmap plan from concepts that were explored in 2016. Feel free to post your comments and give me feedback. All I ask is that you make them constructive.
Over the last year I challenged our team to push on two business fronts: Recover our Base business and define and pursue some game-changing Expansion opportunities. Some people may ask why not focus on just one front? You could argue if pushing on one is better than many fronts. Some say “put more wood behind one arrow” but I happen to believe that the opportunities before us are significant and will not be as readily available in the future as they are today. Loosely translated: The cost of buying market share today is less expensive than next year due to increasing competition. I also believe that GrowLife is capable of building more than one business at a time with Mergers, Acquisitions and Partnering, and recruiting solid available talent. Finally, I believe our shareholders deserve to have us make several bets and not play it safe. Therefore, we are pursuing parallel bets because we have no time to waste.
Back to the question of how difficult is it to grow a Cannabis-related company. There are many types of Cannabis-based businesses, but for this discussion let’s put the industry companies into two groups: Those that touch and those that don’t touch the plant, Touch and Non-touch companies. Touch are cultivators, dispensaries, packaging, edible/medicinal product makers, delivery and distributors. Non-touch are marketing, underlying information systems, cash transportation, packaging, equipment/supply manufacturers and product suppliers such as GrowLife. Let’s next state the obvious; Performance of Non-touch companies are dependent on Touch companies. This is an important point because the symbiotic dependency means everything and relies on the market price of the plant.
The three key business factors of all companies are revenue, gross profit margins and growth rate. The influencing factors for Touch are driven by price per gram or pound set by market demand. These then directly affect the revenue and margin for the Touch companies. Growth for Non-touch companies are also dependent on the margins from the Touch companies, which means that if margins are tight for Touch companies then the growth rate slows down for the Non-touch companies.
So why does this matter if the industry is growing at say 100%? Shouldn’t the leading companies grow at about the same rate? The number of entering competitors creates saturation and lower prices result in lower margins. Couple these lower margins with lower unit forecasts and it’s a race to the bottom. This means that everyone needs to get their operating costs down just to break even. And, if the plant price greatly drops below a company’s business plan due to saturation, investment capital becomes more expensive and hard to get.
Let’s throw out the MBA chatter and simplify with real numbers. If a company’s business plan is based on the plant selling for $1,500-$2,000 per pound where it affords margins and growth to their investors…everyone is happy. However, when the price goes below $1,000 and even reaches $750, all connected companies suffer except those that have great competitive differentiators, such as brand reputation, patents and innovations that decrease operating costs. Last year the market hit $750, even for high-quality strains. It was a blood bath that not many people want to talk about.
Some Cannabis marketing companies grew by keeping their cost of operations and service low and increasing revenue generation resulting in high margins and topline growth. Those companies did well because industry spending shifted from production to sale of product. A few other companies did well because they were able to consolidate market share from competitors. But for the most part, the industry growth in 2016 hurt more than helped most companies. Thus 2017 for Touch companies, such as cultivators, is about driving down their cost of operations, or cost per gram, as low as possible by scaling up operations and streamlining production costs.
So the answer is that not many companies are making money these days, regardless of the industry growth. But, what is happening is that we are all positioning ourselves to make money as the market grows over the next two years. This begs the follow up question: How is GrowLife preparing for profitable growth? We are growing Base and Expansion businesses through the underlying foundations: People, capital and a differentiating strategy.
Ask me why I am still here and I will point you to these three reason. Last week GrowLife announced the addition of two board members: Ms. Katherine McLain, corporate counsel for Stripe and the return to the Board of Mr. Mark Scott, GrowLife CFO. Also, Mr. Darren Erasmus, a well-respected cultivation industry leader from House & Garden Nutrients, joined as our National Sales Manager. Last month we announced that Chicago Venture Partners, our lead investor, not only helped consolidate our debt but will continue to stand by us as we seek to expand the Company. Lastly, we are solidifying our differentiating strategy by innovating and partnering with strong and well-financed groups of investors.
Our Base business is defined as providing equipment and supplies for indoor cultivation and will continue to build on three distribution channels: Online e-commerce, Direct Sales and Retail stores. We remain confident that demand for hydroponic gardening and farming will continue to increase as Cannabis legalization permeates the US and the rest of world. Therefore, we will continue to invest in the growth of our Base business.
However, we will not be tied to strategies that worked five years ago but instead leverage GrowLife’s assets to their fullest extent. Although I have a personal passion for the increasing demand for healthy and locally grown indoor food crops that will require products sold by GrowLife, we will concentrate on serving the more specialized Cannabis industry. We will apply our competitive advantage in Cannabis and help licensed cultivators expand and refine their operations.
This Base business provides GrowLife with a secure and high-growth foundation, especially as we see interest increase for the GrowLife Retail License Program that was announced at the end of 2016. This License Program creates financial and operating efficiencies for GrowLife. We are shifting our retail store growth from a fixed to variable cost structure, which allows us to apply our indoor cultivation competency to other retail partners, and reach more cultivators in markets across the US faster. The License Program offerings range from a Store-within-the-store, such as the one in place in Philadelphia at Fairmount Hardware, an Ace Hardware franchisee, located at 2011 Fairmount Ave, Philadelphia, PA, to partnering with retail investors who set up new GrowLife-licensed hydroponic stores. We are pleased with the initial response and lessons learned over the last eight weeks from the License Program, which have helped refine our offerings, customer engagement and operating process.
The other two channels for our Base business, Online e-commerce and Direct Sales, continue to be refined as we invest in them with talent. We plan to serve the Base with these channels by helping those price-sensitive customers drive down their equipment and supply costs. While this puts great pressure on our manufacturers, we closely watch metrics move to lowest cost per gram. One of the largest cultivators recently shifted their lights from a popular 1,000W to 315W where the electricity savings alone drove down their production cost by 35% and production inceased by 20%. We explored acquiring the 315W manufacturer but were unable to agree on a price that made sense.
Our Expansion bets are equally exciting and capable of great revenue growth. However, Expansion bets come with great risk not too different than building a start-up. Our Expansion bets are intended to be game-changers.
I personally see the Cannabis industry as a game-changer and not just another business or drug. Many people are discovering great benefits with the plant that are far beyond its commercial growth. Even with all the government challenges I am confident that both business and consumer will persevere. Not because of opportunistic suits like myself but because the demand and benefit of the plant are genuine. Consistent safety measures and standards are definitely on their way. But splintering the States with varying policies and pitting them against the Federal government continues to contradict the social need. Therefore, I see the greatest opportunities and challenges are in solving these problems…the game-changers.
GrowLife will therefore be pursuing such game-changers in its Roadmap to help propel the industry forward on several fronts. Acquisitions may range from innovations that significantly drive down the operating costs for commercial cultivators to the desperately needed software-as-a-service tools for the government to extensively coordinate its policies with the industry in a safe and responsible manner. If we perform as I expect us to, we will see some of these Expansion game-changers come to market in 2017. The caveat is that there are many moving parts and all this may or may not come to pass, but it will not be for a lack of talent or effort.
GrowLife’s greatest growth may come from a business that is not a significant contributor today. We see three key areas that may be game-changers for us in 2017: Mergers & Acquisitions and Partnerships (MAP), Consumer with Cube subscription services, and Plants & Seeds. Each of these areas will require us to add the right people at the right time. Many talented individuals ready to join GrowLife are in the pipeline.
MAP in our Base business with Retail Licensing Program has quickly taught us to stretch beyond our comfort zone and invest in new procedures and people. Growth from M&A is the most obvious expansion move. Over the last year I took point on M&A and closely looked at over a half-a-dozen acquisition opportunities. My conclusion was that they were all over-priced. Even after factoring in valuation lift to PHOT, the risk/reward did not make sense.
The most public example was Go Green Hydroponics, where we had entered into a non-binding letter of intent last year. We recently announced in an SEC 8-K/A filing that the non-binding letter of intent had expired and GrowLife does not expect to close the acquisition of Go Green Hydroponics. We will therefore not be pursuing this acquisition since our retail strategy has shifted to the GrowLife Retail Licensing Program.
Some other M&A candidates offered unique and innovative cultivation technologies designed to drive down operating costs for cultivators of any size. Although we have the financing partners ready to provide the necessary capital, we did not see the revenue and margin growth to justify entering into M&A debt. Still, there are a couple of deals that we are currently exploring.
Another area we are continuing to develop is demand from new consumers entering the industry, where they seek to learn how to build indoor operations. We have tested GrowLife Cube, a turnkey subscription service that provides the basic set-up for an indoor farming operation. GrowLife provides all the necessary growing equipment and supplies on a monthly subscription basis. We estimate that there are millions of consumers without growing experience, knowledge and local access to hydroponic equipment and supplies. Therefore, we are tuning GrowLife Cube to more effectively reach these budding consumers to help them be successful. We remain confident that this subscription business is the right way to go.
Finally, last month I spent a few days at the Seed to Sale Show in Denver to explore the plant and seed business. My conclusion is that it is an attractive business that needs to be explored but in an indirect manner. GrowLife is not ready to directly touch the plant. We are exploring how to engage it through partners as we do not wish to compete with our customers.
Why make such bets?
We see the indoor cultivation industry as growing faster than other industries due to increasing demand for and legalization of non-toxic pain relief medicines. For years GrowLife has built its brand through experience with leading commercial cultivators. We continue to assemble the best team in the industry to create limitless potential. Our investors and shareholders have shown strong loyalty and support even through difficult times. And, the GrowLife and PHOT brands have maintained an envied publicly-traded base of 17,000 shareholders with an average trading volume of about 25 million shares every day to provide liquidity.
The board of directors and management team have solid experience in their own right. Their diversity and blended value brings collaboration and insight to help us take decisive action. Every day I learn something from them and they challenge me to bring my A game. But frankly, that’s not enough if we are going to capitalize on a once-in-a-lifetime market opportunity. At GrowLife we work in two world: The here and now, and the upcoming.
We choose to work towards the highest standards and make the necessary tactical and strategic moves. We realize that we are in a zero-sum game and our growth must be earned every day. Call it Red Ocean or Blue Ocean, our customers have a great deal at stake and having their trust means everything to us. Therefore, we cannot stand still by selling the same old products. We must expect to take risks or die.
Overall, GrowLife is in a stronger position than it has been for some time. With continued work and support, we expect to bring growth back to the company and increase shareholder value. In 2017 I hope to talk with more shareholders to better understand their perspectives and thoughts on GrowLife. Hopefully we can hold some form of shareholder meeting, but only if we can do so cost-effectively. If not, I will continue to connect through Twitter or let people know when I will be at a trade show or store opening.
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