GrowLife Inc (PHOT)

[JBinNYC]

My thoughts going into tomorrow & a response to eagleeye14:

I applaud you for spending the time to analyze the actual Joint Venture Agreement between Growlife and CANX. Most shareholders, especially the shorts, wouldn’t bother to finish reading the press release, let alone go lookup the exhibits attached to an 8-K. But this one is a particularly important document and I’m tired of watching you post only the convenient parts that advance your own agenda.

If I could sum up the entire length of your post into one sentence, it would be your claim that “after the hype subsides and value transfer/dilution is complete, Growlife shareholders will be left with a stock worth around $0.03 per share, 92% below the current share price.”

Based on my own due diligence, this is a pretty false argument. It is based on the WRONGFUL assumption that after Friday’s vote is approved, all 3 billion authorized shares will become part of the equation, triggering a massive dilution to $0.03 per share. You sir, deserve a job at Fox News for your fair and impartial reporting of the facts. No spin whatsoever in your argument.

Let’s be clear about something. I’ve been long on PHOT since the days of 0.04 territory and we long-term shareholders need to fully consider what a NO vote on Friday means before discussing a YES vote.

If you pull up the most recent quarterly report from 11/23/2013, there is a Going Concern section that reads as follows:

The Company has experienced recurring operating losses and negative operating cash flows since inception, and has financed its working capital requirements during this period primarily through the recurring issuance of notes payable and advances from a related party…..Successful completion of the Company’s development programs and its transition to attaining profitable operations is dependent upon obtaining additional financing. The Company does not have sufficient resources to fund its operations for the next twelve months. Accordingly, the Company needs to raise additional funds in order to satisfy its future working capital requirements, which it may not achieve on commercially reasonable terms…

This doesn’t mean the company was being poorly run. Growlife is aware that this is a critical time in the marijuana industry and was/continues to make sound acquisitions to lock in revenue and other financial benefits before other players get into the market. I think we all understand that marijuana businesses can’t go down to the local bank and get financing like typical businesses so Growlife was using incoming revenue to make strategic acquisitions and grow its business portfolio. In the short-term, this meant increasing operating expenses to produce and sustain long-term gains. And this continues to be Growlife’s game-plan at the moment.

If we vote NO, we as a company will lose our access to $40M for investing in mergers and acquisitions. We will also lose our existing deals with RNXB and FITX. And we will also have to go back to finding immediate financing to continue operations for the next 12 months. We will essentially undo the deals and hard work management has done over the last 2-3 months and we will leave the market with no guidance until the next quarterly release or annual report. In the interim, the loss of such large sources of future revenue could be enough bad news to pull us well back to the $0.04 territory just by voting NO.

As for a YES vote, I think eagleeye14 has done his best to make sure everyone is aware of the downsides to the Joint Venture Agreement. Management had warned us that any loan secured, “may not be achieve(d) on commercially reasonable terms.” But what we are failing to consider is that the CANX group can, at any time, take their $40M in capital and start up their own ArcView Group-type fund as an alternative to OGI. They don’t necessarily need Growlife, but as investors, they are seeing an opportunity to get in early and be partners with the company instead of competitors.

Eagleeye14 makes reference to multiple ‘Traunchs’ in his post and it is true, assuming a YES vote on Friday, the company will be providing CANX with 140M warrants as part of Traunch I and another 100M warrants as part of Traunch II. But he goes on to state, “When all is said and done, Growlife will have issued CANX 1.23 billion warrants” and proceeds to use the total authorized share count to come up with a deflated $0.03 valuation. This is FALSE. As part of Traunch III, CANX will ONLY receive additional blocks of 10M shares when they are EARNED, meaning a block of warrants is only paid out when $1M in capital or assets is raised or placed in OGI. This prevents the outstanding share count from increasing right away, and as management has promised, dilution will only occur when additional revenue is being brought in.

Additionally, eagleye14 claims that Traunch IV will cause another 790M in warrants to be issued to CANX, and that is how he arrives at his final number of 1.23 billion warrants. While this may/may not end up occurring, he failed to consider that the additional warrants are only issued, “upon OGI deriving $80M in gross revenue …or completing $40M in acquisitions.” This most certainly won’t happen on Monday, so it is wrong for him to already consider those 790M shares as part of some dilution down to $0.03.

Then there is the fact that Traunch IV may not even happen at all! Section 7 contains the agreement term, and, “the Joint Venture shall commence as of the effective date of this Agreement and shall continue for three (3) years from the date of execution.” So if OGI doesn’t achieve its gross revenue or acquisition goals within the three years of the agreement, those warrants may not even be issued.

That said, the intention of this ‘traunch’ is clear by its name, “Phase Four: OGI Control Transfer”. The entire section provides the ability for Growlife to go from 45% owner of OGI to having a 51% controlling interest in the company. And this is the long-term goal for management of Growlife.

For anyone that has watched an episode of Shark Tank, we all know that 1% difference from 50/50 is very powerful and very, very valuable. And after putting up $40M of their own capital and providing a minimum of 36 months of executive consultation experience, the members of CANX are willing to give up control of OGI. But they are only willing to give up control of OGI to Growlife, if and only if, they receive a substantial portion of Growlife back in return.

As a long-term shareholder, it took a few weeks for me to come to terms with that above statement. But my conclusion is that CANX wants to be a true business partner, not just provide a loan, and will be focusing on growing OGI, and ultimately, Growlife.

Something else to consider: If Growlife eventually owns a controlling interest in OGI, and CANX receives a 49% share of the remaining outstanding shares at the time, it would be detrimental to CANX, as such a large shareholder, to quickly exercise those warrants. It would have a lot of skin in the game so it would be in its own best interest to facilitate growth and minimize the dilution as shareholders. And that’s why I voted YES.