First Impressions of GrowLife’s (PHOT) 2013 Annual Report
Apologies if too long, and not cited with specific pages, but this is my breakdown of the 10k after reading it and just making notes. Overall…I like the revenue growth, and think 2014 will be great. I am underwhelmed with the GIFT revenues reported for LEAF.
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Highlights:
•Quarter over quarter growth
•Year over year growth of 235%
•Future projections for 2014 are of critical importance, as revenue potential in a post-legalization climate offers immense potential (2014 will have full year of CO, partial WA state legalization, and more states implementing medical marijuana at or before November elections).
Foundation – 2013 revenues comprised of brick and mortar stores (7 stores in California – Los Angeles (Southern) and Santa Rosa (Northern); Colorado – Edwards (Vail Valley) and Boulder; Massachusetts – Peabody (North Shore); New Hampshire – Plaistow; and Maine – Portland) (Bolded = legal MJ environment) and 3 websites (58Hydro.com, Greners.com, Phototron.com)
Revenue is up Quarter over Quarter
2013 –
Quarter #1: $91,809
Quarter #2: $208,446
Quarter #3: $475,870
Quarter #4: $674,620
2014 –
Quarter #1: $760,709
Quarter #2: $872,557
Quarter #3: $1,313,339
Quarter #4: $1,912,311
Also, see page 18. Gross profit for 2013 is reported as 853k, up from 2012 gross profit of 411k in 2012. (Net loss overall, as described below… but gross profit nevertheless for the second straight year. The % did decline, and competition is cited as the reason)
Revenue is up year over year
2011 - $948,406
2012 - $1,450,745
2013 – $4,858,976
Revenue up 235% year to year shows great growth in an emerging sector. This is a positive.
LOSS and other debt issues in the report
Net Loss shows a $19.2mil increase year over year, and this is huge. A silver lining is that it appears the majority of losses are non-cash as the company is issuing stock options as payment. So, it’s not equipment/business model and the number may be misleading. They were general/administrative. (As seen below)
It certainly provides ammo for any looking to attack this report and/or company.
The PR states: "Moreover, the Company's financial results also include substantial non-cash, one time charges related to warrants that were issued by the company in 2013 and expensed by the company in accordance with GAAP requirements. The reported net loss of the Company for 2013, on a non-GAAP basis, exclusive of non-cash one-time charges, was $2,038,907."
Sterling Scott, CEO, addressed this issue in the PR today, stating “With the exception of one-time, non-cash charges in 2013, the important metrics of the Company are sound and improving.”
Not counting the stock related expense, GrowLife’s operating loss in 2013 was $1,327,380. This total is up $299,369 from 2012. A positive here, IMO, is that share based compensation declined $131,932.
Impairment of Goodwill and Intangible assets, loss of $279,515
This is unexpected compensation and changes in the legal climate affecting assets value.
It is significantly down from $634,128 in 2012. A positive.
Change in Fair Value of Derivative, loss of $3,598,455 in Q4
Each financial instrument is evaluated and initially recorded at its fair value; this is re-valued at each reporting date. Here, there was a BIG change in value. See Note 21 on page 57-61. GrowLife had a change in value of its financial instruments (notes) of -$3,701,078, offset by $42,269 in rent from the Boulder store. This is an aggregate total of several notes to various holders.
This shouldn’t be taken lightly, but shouldn’t be overly worrisome, either. The company issued notes to several holders to grow the business. The expression ‘it takes money to make money’ applies. Each note adds up, though, and must be offset by increased revenue and company growth. They obviously feel confident in their ability to generate enough short term revenue to expire the notes and/or exercise them. Acquisitions, debt… will it pay off?
Dilution a minimum
Company issued 262,595,733 shares for notes (see above ‘derivative liability’). GrowLife also issued 36,981,862 shares for cash at .035 per, for a total of $1,294,365.
We really only need to focus on the 36M shares sold for cash, as the other shares are for convertible notes and used to grow the company.
Takeaway: Taking 2013 Q4 revenue as a base, the $1.9M projects to $7.6M over a full year. With legalization upon us in Colorado as of Jan 1, the Portland store operating in a legal MJ environment as well, and overall business booming across the sector this year it is not unreasonable to see $10M revenue or more in this segment of GrowLife’s business in 2014. I have talked to employees at several GrowLife stores, who have informed me that inventory is moving very rapidly over the last few months, further confirming a potential spike in 2014. I encourage any investors to make similar phone calls!
Future growth… an estimation of the GIFT program
Background: The JV with CANX detailed in the Nov. 30 PR created the entity Organic Growth International (OGI). PHOT owns 45% of OGI, a percentage rising to 51% at the conclusion of the JV. Revenues detailed below are accretive to PHOT at that %.
GIFT to CMMS (LEAF Aspen)
1. “Per the terms of the G.I.F.T. agreement, the Company has agreed to finance $280,000 of equipment, to be purchased from the Company, over a term of 5.5 years (66 months), with monthly payments in the amount of $6,878 beginning in month seven and ending in month sixty-six.”
60 months of payments, $6878 per month = $412,680. Profit of $132,680 to OGI, giving PHOT $59,706 profit from their 45% cut.
I’m underwhelmed. This is just under $12,000 per year in profit on $37,141.20 in annual revenue.
Perhaps volume would remedy the meager bottom line. OGI has been given up to $40M to utilize for GIFT, and this was only $280k, or 0.7%.
If PHOT can string together enough GIFTs, accretion of this revenue may prove productive.
Sterling Scott, CEO, intimates on MoneyTV there are currently 10-20 potential GIFT customers currently under consideration.
The projections here are estimations with a huge assumption, because mot all GIFTs are created equal. Each potential grow operation will be of different size. For the sake of discussion and operation, we can use the LEAF deal and extrapolate.
$12,000 per year in profit on $37,141.20 in annual revenue from LEAF, times 10, equates to $120,000 profit from the equipment on just over $371k in revenue.
Still not loving the numbers.
Mitigating this is the fact that PHOT will sell all nutrients, bulbs, and supplies to each GIFT under an exclusive equipment provision. This revenue and profit cannot be ignored. Information on this revenue total would be welcome from management.
Takeaway: This is the big move GrowLife made in the sector, asking shareholders to approve an increase in Authorized Shares and trust the company to use these shares combined with the Joint Venture money received from CANX to grow the company revenue and footprint. Early revenue and profit projections don’t move the needle as anticipated, IMO.
Other factors
Lawsuit with RXNB – This looms large with closing rescheduled to take place Friday. RXNB wants the shares NOW. GrowLife doesn’t think they have shown them the books to there satisfaction. This is a huge issue looming for Friday, IMO. See page 15 for details.
Reading the board, much has been made about insider stock compensation, as the slew of Form 5’s were filed Friday. On the top of page 17 this is summarized. During 2013, 44,150,110 shares valued at $1,428,636 as wages. Non issue JMO. Actually, a plus as it incentivized performance in the company growth.
The chart on page 83 lists each member’s compensation. By way of example, Sterling made $615,933 in cash and stock.
Expectations
Quarter 3 earnings saw an immediate drop post-earnings, much related to CEO Sterling’s comments intimating better revenue numbers. Not the case this quarter.
After the drop, the PPS took an immediate turn in PPS 3 days later, as GrowLife released news of the CANX JV (announcing the GIFT) immediately following the Q3 earnings release, moving the PPS from $.07 and reaching $.17 within a very short time. If earnings are again met with disappointment, don’t rule out the possibility of more GIFT news immediately. It happened before, just 4 months ago.
Brick and mortar stores and websites, potentially $10M in 2014 ( see above).
GIFT needs to be implemented in volume to be revenue accretive to the point it makes the company very profitable, as hoped.
I don’t make PPS predictions. Especially in the OTC. I will say that there’s good and bad here. That being said, I’m holding my position and watching closely. If there is a dip, even a severe one, I expect it to be recovered within the month of April. On the other hand, revenue is up, debt is understandable when growing this business at the rate they are growing it. Damned if you report, because people will poke holes. If you believe in the business model, and I do, then it’s a hold.
Overall I give the 10k a C+/B-. I’m underwhelmed by GIFT details and don’t like the derivative debt they are banking on paying off. I also don’t like the recurring losses of $24,400,704 and stockholder deficit of $5,843,964. As stated, I do understand that the money has to be spent to grow and make the money GrowLife projects to make in 2014 and beyond. These details underscore for me how ‘all in’ this company went to capitalize in this industry immediately.
Sorry so long, I like to be thorough. This is a first read… surely a deeper understanding awaits over the next few days.
TM
