As the sports world prepares for the NCAA Men's Basketball Championship, commonly referred to as 'March Madness,' the penny stock world has of late been rocked by 'Reefer Madness.' Marijuana stocks have taken the OTC limelight recently, and the mainstream has picked up on this trend, as shown by constant news reports and articles on the nascent marijuana business. One of the biggest stories of 2014 will indisputably be the marijuana business, as Colorado raked in revenues of $3.5 mm in the month of January alone. Certainly, Washington is licking its chops, as it prepares to go fully recreational this spring.
One current example of the marijuana buzz is the recent organizing of an NCAA-style 'Stock Mania' challenge by CNNMoney, where fans may select the companies in a head-to-head manner, choosing the company they would prefer to invest in. CNN picked the 32 contenders for this contest based on the most popular tickers searched by CNNMoney readers. Apple, playing the role of 'Goliath,' crushed David, GrowLife, Inc. (OTCPK:PHOT), by a tally of 76% - 24%, but that's not the point. The mere fact that a marijuana company has made a list of the most popular searches on CNN Money points to the awareness, interest, and potential of the company, and truly, the entire marijuana sector. GrowLife, among its peers, has gained substantial traction.
So, who is GrowLife? Why has it become so popular? Should investors buy in?
GrowLife, trading under the ticker symbol PHOT, is a hydroponics company who owns and operates seven brick and mortar stores, online websites, and is emerging as a supplier of equipment for consumers and fellow marijuana companies across the country.
2013's bottom line is of lesser importance in a 'future-based' market
GrowLife's revenues for 2013 are promising, and have increased quarter over quarter, with Q3 revenue of $1.31M starkly rising from the $480K from the same period in 2013. However, when the 2013 annual numbers are released at the end of this month GrowLife will almost certainly still be in the red, and likely fall just below their annual projections of $5.4m. Nevertheless, it is clear that the marijuana industry in just getting started, with only 20 states allowing medical marijuana and 2 states currently allowing recreational use, and of those two, only Colorado is currently operational.
Despite the expectant losses, investors may be wise not to turn a blind eye to companies which have not yet shown a profit, but have entered into a new and emerging landscape. Here we can look no further than the social media sector, where stocks such as Twitter (NYSE:TWTR) have shown increasing Q3 revenues but posted net losses. On November 6, Twitter reported that losses had tripled to $64.6 million in Q3. And yet, the release of the IPO for Twitter the very next day was priced at $45 a share, and the stock soared over $70, less than six weeks later. To further underscore this, in the three-month period ending 12/31/13, Twitter reported a staggering $511 million loss, yet the stock still trades in the range of $50. The reasons are simple; investors are not looking at 2013, but at the 'buzz' around the company and the future expectations of revenue growth. If you think that this sounds like the marijuana sector, you might be right.
In what might be the first inning of the first game of a long series, I do not think it is very useful or instructive to focus on the revenue and profit figures from previous years. Here, the market needs to be 'forward thinking'. As we watch what many pundits tout as the 'next big industry,' akin to the ending of alcohol prohibition, investors looking to enter the marijuana sector are well advised to look at factors such as management, business models, and future income potential. After reviewing these aspects, I believe GrowLife is the top marijuana company in the sector.
Trustworthy management and transparency
The marijuana sector, without naming names, has attracted businessmen of all ilk. It is certain that some of these companies are purely 'pump and dump' marijuana stocks that have rode the trend to rise from sub penny to a Rocky Mountain High of $.30 to $.40 overnight with no financials or legitimate business model. GrowLife is not one of these companies, and has constructed a diverse and experienced team to implement a forward-thinking business model.
CEO Sterling Scott has over 30 years of experience in a combination of managing small to medium sized businesses and in practicing business law. Mr. Scott was an associate and partner with Jenner & Block in Washington D.C. and concentrated on federal regulatory issues affecting businesses and related litigation.
President Marco Hegyi (who replaced current VAPE CEO Kyle Tracey) has an extensive background which includes significant terms of management service as Senior Director of Global Product Management at Yahoo! and prior to Yahoo!, led Microsoft's Partner Program management for Microsoft Windows, Office and server beta releases.
Executive Vice President Robert Hunt is an active attorney in Colorado who has more than five years of experience in the gardening industry specializing in organic and hydroponic growing methods as the majority owner and Chief Executive Officer of both Rocky Mountain Hydroponics, LLC ("RMH") in Colorado and Evergreen Garden Centers, LLC ("EGC") in Massachusetts, New Hampshire and Maine. Attorney Hunt also advises and guides advise and guide medical marijuana dispensaries through the rapidly changing legal landscape.
Does this sound like a 'fly by night' organization, here to pump and peddle a non-existent product, only to cash out and leave shareholders holding the bag? Not in my opinion. Officers of this pedigree are nearly impossible to match in the marijuana or any other emerging sector.
Management has also committed to transparency, fully complying with SEC reporting even though they trade on the OTC's middle tier, or OTCQB, and are not held to any minimum financial standards. Nevertheless, every company event, quarterly revenue report, and acquisition has been filed with the SEC within the required time. This not only sets the stage for an expected future uplisting but gives the company credibility and investors confidence.
Business model and Future Earnings - Equipment sales, the GIFT program, and intellectual property
Recently, CEO Scott was interviewed on MoneyTV with Donald Baillargeon exposing his business plan. Succinctly, Scott stated the plan in very simple terms; GrowLife is many pieces in place as possible.
GrowLife currently operates 7 brick and mortar stores, as well as 3 websites which engage in equipment sales. The projected revenue for 2013 was $6.4M. While GrowLife appears to be on pace to fall short, it does not appear that it will by very much based on Q3 numbers. More importantly, many of these stores, such as the newest in Santa Rosa, were not opened until the end of Q3 of 2013. Combined with the huge rise in marijuana based sales, especially after the first of the year, and employees of the stores state they gave never been busier. Revenue for the brick and mortar stores and online may alone may be able to exceed $10M in 2014. Added to this projection is the recent announcement to co-brand existing LED Stealth Grow technology with FusionPharm (OTC:FSPM), a leader in 'pod-based' growing technology. The future looks very bright, indeed.
The GrowLife Infrastructure Funding and Technology (GIFT) program
In November, GrowLife entered into an agreement with a group of private investors, CANX, to create the GrowLife Infrastructure Funding and Technology (GIFT) program. The joint venture between CANX and GrowLife created OGI, the company which will be funding all GIFT transactions. GrowLife owns 45% of OGI, a number which will increase to 51% at the completion of the JV. The GIFT program is designed lock in very best customers (businesses legally growing marijuana) and establish a long term (3-5 year) relationship with them. GrowLife, after vetting and screening the company, will offer to build out an entire grow operation with the top of the line equipment they have been selling for over 25 years, and fund the grow operation from day 1. Land leases done in conjunction with Real Estate Investment Trusts (REIT's) to acquire land, the GIFT program will allow businesses to enter the booming and lucrative marijuana company immediately and repay the GIFT over a period of years. This not only generates goodwill in the industry and name recognition, but will more importantly for investors also be revenue accretive
Currently GrowLife has inked two GIFT deals, one with CEN Biotech to build the largest and most advanced cannabis production facility in the world in Lakeshore, Ontario, Canada, and one with Colorado dispensary LEAF Aspen. This number will be multiplied imminently. In the above referenced interview, Scott went on to say that GrowLife currently has 10-20 GIFT customers under consideration, with each transaction generating between $500K - $5M to GrowLife, with the smaller value GIFTs being slated for three year payback plans and the larger designed to be spread over 5 years.
Long term customers paying back millions of dollars' worth of equipment over a period of years is an investor's dream. The amount of revenue will be able to be calculated with exactitude, the 'break even' point of the loan can be easily calculated, and each will generate between roughly $166K ($500K over three years) to $1M a year, a number made larger by each customer needing to continually buy nutrients and bulbs under an exclusive equipment provisions written into the GIFT transaction. Moreover, GrowLife never itself crosses the 'green line' and only enters into agreements where the growers are legally licensed to grow marijuana. This makes it repeatable as each state passes recreational or medical marijuana laws. Each state must grow their own product, as marijuana is currently a Schedule 1 controlled substance. How will these companies ramp up operations to be ready for the long lines the first day marijuana goes on sale? Surely, some will receive a GIFT from GrowLife. Long term, revenues could be staggering.
Moreover, the GIFT transaction with CEN Bio gives GrowLife a 25% cut of all revenue in the largest and most advanced cannabis production facility on the world, preferred distribution, names GrowLife as the exclusive equipment provider, grants them a seat on the board of directors, and provides for a $45M bonus once 1 million pounds of marijuana have been grown. On their end, GrowLife will equip the facility and deliver approximately 250 million shares. Dilution can be healthy, and this is a prime example of how GrowLife intends to, and has used, their authorized shares.
One of the undervalued pieces of the marijuana industry may be the medical patents, as after all, marijuana is a medicine in 20 states. OGI will acquire a 40% ownership in RXNB, an emerging pharmaceutical company with a portfolio evaluation of $110M and existing annual gross revenue of $27M. RXNB possesses proprietary, cutting-edge systems in the field of agriculture, applicable to medical marijuana. RXNB technologies include a number of patents and technology, promising to accelerate plant growth, allow perpetual grow cycles of about 35 days and protect plants from adulterants, which will yield greater harvests. Revenue accretive and a technology asset GrowLife may license in time.
GrowLife also recently completed a Medicus research study. CEO Scott has stated that the data therein is tantamount to a geologist's assay, providing GrowLife a guide to the lowest risk and highest probability of success in market segments for therapeutic applications, allowing the company to review the worldwide state of the science and plan targets for future operational expansion.
Lastly, GrowLife has also been working on a kiosk point of sale system. Strict federal compliance for all marijuana sales will be in place if and when a state goes into the legal or medical distribution of marijuana. Software is to be installed on a dedicated kiosk in dispensaries providing a point of sale for dispensary customers, but also a cash and credit reporting system assuring tax and regulatory compliance for operators. Under the 'GrowLife Financial' heading, this branch of the business is yet another way for GrowLife to remain in the forefront of this booming industry.
A contrarians POV
GrowLife is not yet profitable, one of the GIFT deals is contingent on CEN Bio to obtain their Canadian license to grow, and there is uncertainty in the unclear stance of the Federal Government towards marijuana. Also, investors are asked to trust GrowLife to use their shares wisely and not dilute. Currently, GrowLife has approximately 750M outstanding shares, this will rise to approximately 1.25M after the completion of the first GIFT with CEN Bio and the RXNB transaction. This indicates they will have approximately 1.75 outstanding shares in their pocket. How they use them will ultimately decide the true value of this company. So far, shares have been used to acquire assets and increase revenue. Much like a credit card, it's good to have it if you need it, and when GrowLife buys they build the business. If this continues the 'contrarian' view falls apart.
There is always a risk when investing, especially in penny stocks, and especially in an emerging sector where few clear leaders have yet emerged. However, the risk here is mitigated by the outstanding leadership, transparency, and business model. Marijuana is not going away. This business will grow like a weed, and GrowLife is well positioned to be a household name in the industry. What they do in the next several months will go a long way towards any future PPS predictions, but as CEO Sterling Scott has said, there is room in the market for one of the 'good' marijuana companies to reach a $1B market cap and uplift to a major exchange in the next 2-3 years. I'm betting on GrowLife being that company, and as an investment in the future, the company currently appears to be extremely undervalued at a market cap of around $500M.
Disclosure: I am long PHOT. 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.