PHOT : GrowLife Stock Analysis and Research Report

2017-11-25 - by Asif

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GrowLife, Inc. is incorporated under the laws of the State of Delaware and is headquartered in Kirkland, Washington. GrowLife was founded in 2012 with the Closing of the Agreement and Plan of Merger with SGT Merger Corporation.

The company's goal of becoming the nation’s largest cultivation facility service provider for the production of organics, herbs and greens and plant-based medicines continues to guide its decisions. The company's mission is to measure its success by its customer’s success; serving cultivators of all sizes as a reliable business partner and its shareholders with value and trust. Through knowledgeable representatives and its e-commerce website, GrowLife provides essential and hard-to-find goods including growing media, industry-leading hydroponics equipment, organic plant nutrients, and thousands more products to specialty grow operations across the United States and Canada.

The company primarily sell through its wholly owned subsidiary, GrowLife Hydroponics, Inc. GrowLife companies distribute and sell over 15,000 products through its e-commerce distribution channel, GrowLifeEco.com, and through its licensed retail storefronts. GrowLife and its business units are organized and directed to operate strictly in accordance with all applicable state and federal laws.

GrowLife is focusing on customer success. In that regard, the company believe that the indoor cultivation industry will continue to experience significant growth and, as a result, serving this industry has become highly competitive, cash intensive and customer centric. However, GrowLife has plans to address these challenges.

First, the opportunity to sell both infrastructure equipment and recurring supplies to the indoor cultivation industry is constantly increasing as demand for indoor cultivation grows across the United States and Canada. GrowLife believes the demand will continue to grow and more states and municipalities enact laws and regulations allowing for greater indoor cultivation activities. GrowLife continues with its multi-faceted distribution strategy, which the company believe serves customers in the following manner: Direct sales to large commercial customers through GrowLife Hydroponics, retail licensing through licensed partners for local convenience, and e-commerce via GrowLifeEco.com to fulfill orders across the nation from customers of all sizes.

Second, selling with multiple channels readily available products is foundational to GrowLife, however differentiation comes from products that are uniquely available from GrowLife and benefiting its customers. The company recently formed GrowLife Innovations, Inc. which is where the company housed its recently acquired building material assets. FreeFit® is a patented product line of eco-friendly and easy to install vinyl floor tiles with patterns and prints that can provide passive benefits to its customers. GrowLife is currently testing custom configurations with cultivators to quantify its economic value to customers. Building materials is a starting point for GrowLife Innovations. Other products and services are being developed and tested with plans to bring them to market over the next few months.

Third, GrowLife’s customers come in different stages from caregiver cultivators to 80,000+ square foot commercial operations. Along with its business-to-business (B2B) focus GrowLife has been expanding to the business-to-consumer (B2C) by offering the GrowLife Cube subscription products. The company recognize demand is increasing from small, aspiring cultivation consumers across the country seeking to learn and use a complete indoor growing solution. To address this demand, the company packaged GrowLife Cube, an entry-level offering for consumers to get hands-on experience with indoor growing. Although many still buy the components separately, GrowLife is working on developing videos and supplier tools to attract them to this one-stop shop program. Many states are giving individuals the legal freedom to cultivate crops in their own home and GrowLife Cube gives them the necessary tools.

GrowLife started the expansion of sales and store personnel and marketing efforts with continued funding from Chicago Venture Partners, L.P. Chicago Venture is supportive in the expansion of the sales and marketing teams in a growing market. GrowLife is growing in several markets including California and Canada. GrowLife received funding on an as-needed basis for such costs. As the personnel were hired late in the December 2016 quarter, the impact started in the March 2017 quarter.

GrowLife also considered the lack of capital access since 2014 and the new funding vehicles with Chicago Venture Partners, L.P. Operations were significantly impacted during 2014- 2016 as a result of the lack of access to capital. GrowLife did not have cash to ship orders. With the addition of GrowLife’s new partners, GrowLife has access to capital and are growing its sales again.

Resumed Trading of its Common Stock

On October 17, 2017, the company were informed by Alpine Securities Corporation (“Alpine”) that Alpine has demonstrated compliance with the Financial Industry Regulatory Authority (“FINRA”) Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of 1934. As a result, Alpine may initiate an unpriced quotation for the Company’s common stock. The company expect to file an amended application with the OTC Markets to list the Company’s common stock on the OTCQB once the minimum share price of $0.01 per share is achieved. The company currently trade on the OTC Pink Sheet market.

Market Size and Growth

While there is a great deal of purchasing of indoor cultivation equipment for non-Cannabis cultivation, many of its investors have a high-interest in the direction of the Cannabis industry as it may directly affect GrowLife’s growth. Therefore, the following market information is provided.

Twenty-nine states and the District of Columbia currently have laws broadly legalizing marijuana in some form.

Seven states and the District of Columbia have adopted the most expansive laws legalizing marijuana for recreational use. Most recently, California, Massachusetts, Maine and Nevada all passed measures in November legalizing recreational marijuana. California’s Prop. 64 measure allows adults 21 and older to possess up to one ounce of marijuana and grow up to six plants in their homes. Other tax and licensing provisions of the law will not take effect until January 2018.

Several legislatures in states recently passing legalization measures are debating regulatory proposals around the use and sale of marijuana. Massachusetts lawmakers were weighing bills earlier this year that would lower the amount residents can legally possess and place restrictions on retail stores.

A number of states have also decriminalized the possession of small amounts of marijuana. Some medical marijuana laws are broader than others, with types of medical conditions that allow for treatment varying from state to state. Several states (not shown on the map below) have passed narrow laws allowing residents to possess cannabis only if they suffer from certain rare medical illnesses.

The company's map shows current state laws and recently-approved ballot measures legalizing marijuana for medical or recreational purposes. Final rules for recently-passed medical marijuana laws are pending in Arkansas, Florida and North Dakota.

Information is current as of October 2017.

Source: www.governing.com/gov-data/state-marijuana-laws-map-medical-recreational.html

GrowLife serves a new, yet sophisticated community of commercial and urban cultivators growing specialty crops including organics, greens and plant-based medicines. Unlike the traditional agricultural industry, these cultivators use innovative indoor growing techniques to produce specialty crops in highly controlled environments. This enables them to produce crops at higher yields without having to compromise quality - regardless of the season or weather and drought conditions.

Indoor growing is commonly used for plant-based medicines because they often require high-degree of regulation and controls including government compliance, security, and crop consistency. This makes indoor growing a preferred method. Cultivators of plant-based medicines often make a significant investment to design and build-out their facilities. They look to work with companies such as GrowLife who understand their specific needs, and can help mitigate risks that could jeopardize their crops.

Indoor growing techniques, however, are not limited to plant-based medicines. Vertical farms producing organic fruits and vegetables are beginning to emerge in the market due to a rising shortage of farmland, and environmental vulnerabilities including drought, other severe weather conditions and insect pests. Indoor growing technology and techniques enable cultivators to grow crops all-year-round in urban areas, and take up less ground while minimizing environmental risks. However, indoor growing techniques typically require a more significant upfront investment to design and build-out these facilities, than traditional farmlands. If new innovations lower the costs for indoor growing, and the costs to operate traditional farmlands continue to rise, then indoor growing techniques may be a compelling alternative for the broader agricultural industry.

StateYear Passed How Passed
1.Alaska1998 Ballot Measure 8 (58%)
1 oz usable; 6 plants (3 mature, 3 immature)
2.Arizona2010 Proposition 203 (50.13%)
2.5 oz usable; 12 plants
3.Arkansas2016 Ballot Measure Issue 6 (53.2%)
3 oz usable per 14-day period
4.California1996 Proposition 215 (56%)
8 oz usable; 6 mature or 12 immature plants
5.Colorado2000 Ballot Amendment 20 (54%)
2 oz usable; 6 plants (3 mature, 3 immature)
6.Connecticut2012 House Bill 5389 (96-51 H, 21-13 S)
2.5 oz usable
7.Delaware2011 Senate Bill 17 (27-14 H, 17-4 S)
6 oz usable
8.Florida2016 Ballot Amendment 2 (71.3%)
Amount to be determined
9.Hawaii2000 Senate Bill 862 (32-18 H; 13-12 S)
4 oz usable; 7 plants
10.Illinois2013 House Bill 1 (61-57 H; 35-21 S)
2.5 ounces of usable cannabis during a period of 14 days
11.Maine1999 Ballot Question 2 (61%)
2.5 oz usable; 6 plants
12.Maryland2014 House Bill 881 (125-11 H; 44-2 S)
30-day supply, amount to be determined
13.Massachusetts2012 Ballot Question 3 (63%)
60-day supply for personal medical use (10 oz)
14.Michigan2008 Proposal 1 (63%)
2.5 oz usable; 12 plants
15.Minnesota2014 Senate Bill 2470 (46-16 S; 89-40 H)
30-day supply of non-smokable marijuana
16.Montana2004 Initiative 148 (62%)
1 oz usable; 4 plants (mature); 12 seedlings
17.Nevada2000 Ballot Question 9 (65%)
2.5 oz usable; 12 plants
18.New Hampshire2013 House Bill 573 (284-66 H; 18-6 S)
Two ounces of usable cannabis during a 10-day period
19.New Jersey2010 Senate Bill 119 (48-14 H; 25-13 S)
2 oz usable
20.New Mexico2007 Senate Bill 523 (36-31 H; 32-3 S)
6 oz usable; 16 plants (4 mature, 12 immature)
21.New York2014 Assembly Bill 6357 (117-13 A; 49-10 S)
30-day supply non-smokable marijuana
22.North Dakota2016 Ballot Measure 5 (63.7%)
3 oz per 14-day period
23.Ohio2016 House Bill 523 (71-26 H; 18-15 S)
Maximum of a 90-day supply, amount to be determined
24.Oregon1998 Ballot Measure 67 (55%)
24 oz usable; 24 plants (6 mature, 18 immature)
25.Pennsylvania2016 Senate Bill 3 (149-46 H; 42-7 S)
30-day supply
26.Rhode Island2006 Senate Bill 0710 (52-10 H; 33-1 S)
2.5 oz usable; 12 plants
27.Vermont2004 Senate Bill 76 (22-7) HB 645 (82-59)
2 oz usable; 9 plants (2 mature, 7 immature)
28.Washington1998 Initiative 692 (59%)
8 oz usable; 6 plants
29.Washington, DC2010 Amendment Act B18-622 (13-0 vote)
2 oz dried

Source: Marijuana State Laws – Summary Chart from ProCon.org

Strategy

The company's long-term strategy revolves around three key premises: First, the indoor growing market for fruits, vegetables and medical plants is here to stay. The company see an opportunity for it to double for several years, especially after last year’s election raising the number of states that support Cannabis; Second, GrowLife will continue to establish itself as a national brand to provide the much-needed advisory services and sell lighting, nutrients, mediums and other equipment, supplies and services to cultivators across the country; And third, the demand for more healthy, safer and economical ways to run indoor growing operations will dramatically increase and require innovative products to intelligently drive down costs without compromising quality. These are critical premises for the Company’s growth.

The company's growth plan consists of adding more knowledgeable, talented and committed people, creating greater access to equipment and supplies, and offering more and better choices. The company must sequence its steps in a timely and deliberate manner. The company attract and retain such talent by offering healthcare benefits along with a pay-for-performance compensation model that appeals to high performers.

The company's base business provides GrowLife with a solid high-growth foundation, especially as the company 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. GrowLife is shifting its retail store business from a fixed to variable cost structure, which allows it to apply its 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 seek to set up new GrowLife-licensed hydroponic stores. GrowLife is pleased with the initial response and lessons learned from the License Program, which have helped refine its offerings, customer engagement and operating process.

The other two channels for its base business, Online e-commerce and Direct Sales, continue to be refined as the company apply more talent to them. The company plan to serve the base business with these channels by helping those price-sensitive customers drive down their equipment and supply costs. While this puts great price pressure on its manufacturers, the company closely watch metrics move to the 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 increased by 20%.

In addition, its expansion business efforts are equally capable of revenue growth. However, expansion investments come with great risk not too different than building a start-up. The company's expansion efforts are intended to be game-changers.

The Cannabis industry itself is a game-changer. Many people are discovering great benefits with the plant that are far beyond its commercial growth. Even with all the government challenges the company believe that both business and consumer will persevere because the demand and benefit of the plant are genuine based on scientific research conducted throughout the world. Consistent safety measures and standards are on their way. Therefore, the company see the greatest opportunities and challenges to be in helping to address the mainstream acceptance and management of the plant…the game-changers.

GrowLife will therefore be pursuing such game-changers 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 cloud-based tools for the government to extensively coordinate its policies with the industry in a safe and responsible manner. The company expect to see some of these expansion game-changers come to market in 2017 such as the recent asset acquisition of building materials. The caveat is that there are many moving parts and these game-changers may or may not come to pass.

GrowLife’s greatest growth may come from a business that is not a significant contributor today. The company see key areas that may be game-changers for it in 2017: Mergers & Acquisitions and Partnerships (MAP); Consumer with GrowLife Cube; and plant-related services. Each of these areas will require it to add the right people at the right time. Many talented individuals are ready to join GrowLife.

MAP in its base business with Retail Licensing Program has quickly taught it to invest in new procedures and people. Growth from M&A is the most obvious expansion move. Over the last year, the company explored a half-a-dozen acquisition opportunities. However, the company found that they were all over-priced. Even after factoring in the possible valuation lift to the PHOT share price, the risk/reward did not make sense.

The most visible example was Go Green Hydroponics, where the company had entered into a non-binding letter of intent last year. In February 2017, the company 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. The company will therefore not be pursuing this acquisition since its retail strategy has shifted to the GrowLife Retail Licensing Program.

Another area GrowLife is continuing to develop is demand from new consumers entering the industry, where they seek to learn how to build indoor operations. GrowLife has tested GrowLife Cube, an entry-level growing package that provides the basic set-up for an indoor farming operation. GrowLife provides all the necessary growing equipment and supplies. GrowLife has determined that there are many consumers without growing experience, knowledge and local access to hydroponic equipment and supplies. Therefore, GrowLife is tuning GrowLife Cube to more effectively reach and satisfy these new consumers.

Finally, in January the company spent time at the Seed to Sale Show in Denver to explore the plant and seed business. The company's conclusion is that it is an attractive business that needs to be further explored but in an indirect manner. GrowLife is not ready to directly touch the plant due to Federal interstate laws. GrowLife is instead considering how to legally support it through state based-partners.

The company 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. The company continue to assemble the best team in the industry to create a great opportunity. The company's investors and shareholders have shown strong loyalty and support even through difficult times.

Overall, GrowLife is in a stronger position than it has been for some time. With continued work and support, GrowLife is encouraged with the prospect of bringing growth back to the company and increase shareholder value.

Key Market Priorities

The company's goal of becoming the nation’s largest cultivation facility service provider for the production of organics, herbs and greens and plant-based medicines requires GrowLife to (i) expand its nationwide, multi-channel sales network presence, (ii) offer the best terms for the full range of build-out equipment and consumable supplies, and (iii) deliver superior, innovative products.

First, the company provide distribution through retail, e-commerce and direct sales to have national coverage and serve cultivators of all sizes. Each channel offers varying pricing for differing benefits. Retail sells at list price by offering inventory convenience, e-commerce provides lower prices without requiring local inventory, and direct sales delivers the best bid price for high-volume purchasers. Additional points of service may be added through existing distribution locations and services. This may be done in several manners and programs that may incorporate cultivator-centric locations with other retailer store owners.

Second, the company serve the needs of all size cultivators and each one’s unique formulation, or ‘recipe’. The company provide thousands of varieties of supplies from dozens of vendors and distributors. More importantly is its experience of knowing which products to recommend under each customer’s circumstance.

And third, its experience with hundreds of customers allows it to determine specific product needs and sources to test new designs. Lights, pesticides, nutrients, building materials and growing systems are some examples of products that GrowLife can provide. Popular name branded products are seeking to be part of the GrowLife company in many forms. In exchange, the company can market their products in a unique manner over generic products.

The company's company can expand with these strategies until it serves more indoor cultivators throughout the country. Once a customer is engaged, the company can gradually expand their purchasing market share by providing greater economic benefit to the customers who buy more products from GrowLife than from other suppliers.

Employees

As of September 30, 2017, the company had one full-time employee and one consultant at its Seattle, Washington office. Marco Hegyi, its Chief Executive Officer, is based in Kirkland, Washington. Mark E. Scott, its CFO, is based primarily in Seattle, Washington. In addition, GrowLife has approximately 8 full and part time employees located throughout the United States and Canada who operate its businesses. None of its employees is subject to a collective bargaining agreement or represented by a trade or labor union. The company believe that GrowLife has a good relationship with its employees.

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