The Long View
A GrowLife Directional Update
As a management consultant for many years I look at a business’s market factors, customer needs, business operations, and future trends to determine where to place the bets. Always keeping in mind that there will be bends and turns, some up, some down. If the company is on the right course, then it gets closer to its destination. We are getting closer.
I am working on a Ask Me Anything (AMA) posting to address many shareholder questions. Please send your questions to email@example.com. Also, thoroughly read sec.gov filings for PHOT information.
The hydroponics supply industry is expected to experience significant growth as indoor cultivation and State legalization of cannabis increases. Quantitative data can be found from many good sources such as ArcView, Viridian Capital and New Frontier, which reflect consistent growth. Also, at the end of 2014, Forbes and Investing.com conveyed and MainStreet.com stated: “The amount of pot purchased annually by Americans is an estimated $50 billion, but only $2 to $2.5 billion of it is purchased legally, according to a Wall Street report.”
Qualitatively, our customers continue to address serious and difficult challenges from banking to IRS policies; Less so from DEA and State regulatory agencies. Even employees of cultivators and dispensaries face difficulties with their personal banking. Every cultivator that I have met is staffed with compliant, hard working people. These businesses are provided little write-offs and support from the IRS, which create further taxation and lower returns to their investors, creating even more pressure.
Why does this matter?
Since it matters to our customers, it matters to us. GrowLife works to support the needs of its customers by providing what they need, when they need it, and at the price that is needed. If we do not, our competitors will. The developing legal cannabis economy is far more fragile than many news stories depict.
Given that over 90% of cannabis sales occur outside of legal channels, we, as a nation and industry, must find ways to support the development and stabilization of the legal industry, which over half the country has approved. The alternative is that the demand will continue to be satisfied without the Federal and State government support.
The industry’s discussion then turns to Federal support by removing cannabis from Schedule I, which did not happen last week and personally, I do not see it happening in the near future. As an industry, we must play the cards that we are dealt at the State level and support legal compliance.
Many States will hold elections to legalize recreational and medicinal approval. Recreational candidate States include Arizona, Arkansas, California, Florida, Maine, Massachusetts, Montana, Nevada and North Dakota. Much is at stake: California’s annual State tax revenue estimates are $1 billion.
Why is the Go Green Hydro acquisition and getting back into California important to GrowLife? A retail presence in strategic markets is necessary since e-commerce alone today is not enough. In California, every adult will be able to grow up to six plants for personal use. Thus, the need for GrowLife Cube.
I have gleaned from reading several interpretations that the DEA declined removing cannabis from Schedule I because it is not ready to give blanket approve to the plant or acknowledge that it has medical benefits. However, the DEA has encouraged more research and less State interference. Broadening cannabis research beyond the National Institute on Drug Abuse is perhaps an even more important step in the right direction.
Across the US thousands of businesses are legally growing indoor crops, some fruits and vegetables, but far more cannabis. Because of the significant growth expected in hydroponics supply, it has become a highly competitive, cash intensive and customer centric industry. GrowLife is prepared to address these competitive requirements.
First, the opportunity to sell both infrastructure equipment and recurring supplies to the indoor cultivators is constantly increasing as demand for indoor food production is adopted and legal cannabis cultivation is approved across the second half of the United States. Therefore, GrowLife must address competition on all sides: Regional retail stores; inventory laden superstores, such as Home Depot; online e-commerce; and, distributors and manufacturers that are selling directly to large customers.
To best capitalize on the industry’s growth, GrowLife will continue with its multi-faceted distribution strategy, which serves customers in a comprehensive manner: Direct sales to large commercial customers, retail in some markets for local convenience, and e-commerce via GrowLifeEco.com to fulfill orders across the nation from customers of all sizes. GrowLife will provide products through all three distribution channels because a single channel compromises the customer’s need and would restrict GrowLife’s market reach.
Perhaps some day Home Depot will deliver Botanicare to Green Man, but we do not believe it will happen anytime soon. On the other hand, GrowLife does today.
Second, serving the increasing number of cultivators has become cash intensive in our business because of larger inventory levels at retail, extensive e-commerce online marketing, and supporting payment terms to large accounts. GrowLife owned a superstore in Massachusetts and learned early on that extensive inventory is not enough. Retail success is about having the right products on hand, knowledgable talent, advisory services and superior turn-over ratios.
Next time you are in Home Depot, find their Black Magic display and ask a rep about the trade-offs between Botanicare and Advanced Nutrients or a 600 vs. 1000 Watt DE light. As for coverage, a typical hydroponics store will carry about 1,000 different indoor growing products, in GrowLifeEco.com we offer over 12,000 products. Go Green Hydro is more than a store to GrowLife, it is an entry point to a strategic market that can compliment GrowLife’s e-commerce and direct sales channels.
Third, our customers come in at different stages from caregiver cultivators to 80,000 square foot commercial operations. We reach as many as possible with e-commerce where we do not have stores or a direct sales presence. Greners.com, our former e-commerce system, used a 2011-styled website to take orders, charged a great deal for shipping, and was painful to use on a mobile device. We could not justify investing in re-engineering a five year old technology. Instead we worked for the last six months with one of our shareholders, who reached out to me and offered to have his team help us build GrowLifeEco.com, our new e-commerce site. It is a great site with competitive pricing, free shipping and optimized for mobile devices. Our next step is to put web marketing in place to increase awareness, traffic and conversions.
Finally, we recognized the demand from small, aspiring cultivators across the country seeking to learn and use a complete turn-key solution for equipment and supplies. Some may be first-time growers, others are looking for a way to develop commercial skills. To address this demand, we packaged GrowLife Cube, a multi-tier annual subscription service, for cultivators to get hands-on experience about indoor growing and produce pounds of crops. Many still buy the components separately and we work to develop online cultivation tools to move them from using rows of gro/dan to a perpetual grow operation. This program is also expected to flourish with greater marketing awareness that cultivates customers, produces higher gross margins and establishes a recurring revenue stream.
Operations & Equity
Since getting off the Grays on February 18, 2016 we have had six active market makers trading our stock. To be specific, PHOT has traded over 3/4 of a billion shares (762,601,219) as of last Friday. So, let’s discuss what has been holding GrowLife back.
Grow and go private, or pull back and stay public?
For 22 months GrowLife had a dry spell on the Grays and was funded with debt and limited gross margin dollars. The debt is now due and being paid with shares rather than unavailable profit dollars. The alternative was to shut the company down.
Until recently GrowLife has not had access to adequate capital to be competitive with our distribution channels. Faced with limited funds GrowLife was forced to choose between investing in marketing and expansion, or pull back revenue and stay public. The Company decided to focus on PHOT’s public trading requirements, spending its funds primarily on filings, auditors, taxes, finance and legal, then modestly on sales.
Likewise, limited supplier terms and lower purchasing volume have challenged the Company’s ability to meet the price and terms needed to grow with larger cultivation operators. I see PHOT’s 17,000 shareholder base and daily trading volume strategic to our long term success. The public liquidity power that PHOT uniquely has provides GrowLife with the ability of engaging, acquiring and expanding with more manufacturers in the future as its valuation strengthens. As the share price increases, the delution decreases and buying power increases. We are, therefore, all motivated to increase the Company’s price per share.
While we financed the time needed to allow PHOT to recover its public trading status on OTCBB and get off the Gray Market, it was at the cost of revenue growth and debt. TCA Global Fund came in last year when the Company needed financial support with high-risk cash-debt loans. Then earlier this year Old Main Capital was brought in to help with the default forbearance from TCA and start retiring GrowLife’s debt. Now, Chicago Venture Partners has joined in to help GrowLife expand our business with additional debt exchange, convertible funding and the pending S-1 Registration funding. The result is debt retirement and expansion capital, but with some dilution. All this has been fully disclosed for some time at sec.gov. It is important that shareholders thoroughly read PHOT filings.
How debt management may work? [Example and not guidance]
For example, retiring $3 million in debt on a $15 million company valuation creates just under a 17% dilution ($3/$18), a $1.00 share price may go to $0.83. However, most financial advisors will explain that such dilution disclosed in financial statements is normally reflected in the current price.
Another example is increasing the company valuation through acquisitions with debt. For example, a $3 million business, acquired at 1x sales, may increase the valuation in our industry at a 10x multiple, or by $30 million. The resulting combined value is $45 million (3x share price) with combined debt of $6 million for a 12% dilution of ($6/51), a $1.00 goes to about $2.50.
We have two years of competitive momentum to make up. Some question the Company’s ability to recover. While I cannot give you guarantees, I remain confident in our ability to rebuild shareholder value. My confidence is based on our understanding and relationship with our customers, competitors, suppliers and market conditions, which are complex. One of our large customers lost a crop valued at over a million dollars when an unauthorized pesticide used generations ago was found in a parts-per-billion test. They came to us for help and we provided it.
This nascent industry is about relationships where challenges abound and character matters. Throughout every challenge GrowLife’s management has made the best business decision it could. For the most part, our customers, shareholders and suppliers stand by GrowLife because of the trust we have built; they want us to win.
When I look at the future, I see cultivation communities remaining fragmented for many years, even after cannabis is removed from Schedule I. The nature of cultivators is to promote their unique recipes/formulas that vary by region. National brands may attempt to unify the market but will number in the hundreds because there is so much at stake and many celebrities will have their own brand. Charolette’s Web may be the exception in the medicinal side because it has developed trust and is not simply a licensed name.
The demand for varying supplies will continue and innovation will accelerate indoor cultivation and reduce wasted resources. For example, LED lighting will augment high pressure sodium lamps to induce protective and nutrient effects that currently require chemicals. Crop monitor on your mobile device is also there as will be plant genetics. However, with a controlled growing environment the opportunities are only limited by our imagination.
New technology will enable entrepreneurs to locally deliver safe indoor crops at prices competitive to outdoor and without the waste or health risk. Systems such as MIT’s OpenAG enable environments from different geographies and times to localize remote crops. Indoor and outdoor food growing champions such as Caleb Harper, Nick Saul and Ron Finley will inspire more people to shape our local and global communities with programs that feed the hungry with dignity. Personally, I expect GrowLife to be a leader in supplying these communities and, with GrowLife Cube, and its derivatives, image it helping thousand of new cultivators to become successful urban farmers.
GrowLife, Inc., press releases and other public statements contain forward-looking statements that are made pursuant to the safe harbor provisions of the Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. By their nature, forward-looking statements and forecasts involve risks and uncertainties related to events dependent on circumstances that will occur in the near future. These statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from results expressed or implied by forward-looking statements. These risks and uncertainties include, but are not limited to, our ability to obtain rights to distribute and market our products, product availability, demand and market competition, and access to capital markets. For a more complete discussion of the risks to which our is business is subject please see our filings with the SEC. You should independently investigate and fully understand all risks before making any investment decisions in us.