GrowLife’s Acquisition Strategy Leads to Spike in Revenues, But Wider Net Loss, in Q1

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GrowLife Inc., a publicly traded company that provides cultivation equipment and related technology to the medical marijuana industry, reported a sevenfold increase in revenues during the first quarter but also sunk deeper into the red mainly due to noncash charges.

Revenues soared to $760,709 during the first three months of the year vs. $91,809 in the same period of 2012, fueled by several acquisitions, according to financial documents filed this week.

But expenses outpaced the revenue gains, leading to a $1.18 million net loss compared with a deficit of $121,686 in the first quarter of 2012. The company said much of the loss (around $865,000) is attributed to noncash charges tied to convertible debt and the retiring of debt – which doesn’t impact the company’s cash position.

Still, even excluding those charges the company would have reported a loss of roughly $300,000 – more than triple its deficit a year earlier.

Additionally, the 2013 first-quarter results include the recent acquisitions of several companies, but the comparative 2012 results do not. On a pro-forma basis – which gives another layer of insight by factoring in the financial data of the acquired companies for the first quarter of 2012 to make a better apples-to-apples comparison – revenue declined 43%. On that basis, the net loss a year earlier for the combined companies was $541,043.

Despite these issues, GrowLife Chief Executive Officer Sterling Scott said the company is pleased with its overall financial performance in the first quarter but expects to make more significant gains going forward.

“We are a deeply ambitious company,” Scott said. “We would’ve liked to see higher revenues. But we’re building a lean, mean machine, and unfortunately it does take time to put all those pieces together effectively. As is the case with most medical marijuana stocks, ours is a future-looking story.”

Scott added that it’s not surprising for early-stage firms to show large noncash charges, though he said the company will attempt to lower and even eliminate them altogether down the road.

GrowLife managed to keep some of its expenses in check, with costs of goods sold and general and administrative expenses rising at a much slower pace than revenue. The Woodland Hills, Calif.-based company also increased its cash balance to $246,640 at the end of the first quarter compared with $6,251 a year earlier. According to its financial documents, GrowLife has issued roughly 300 million new shares over the past year.

The company’s core business revolves around selling hydroponics equipment both online and directly to customers through retail stores, with an emphasis on the medical marijuana industry. Its clients base includes state-licensed dispensaries that grow cannabis, stand-alone MMJ cultivation operations, home growers, caregivers “and everyone in between,” Scott said.

The company is pursuing growth in part through an aggressive acquisitions strategy as it looks to consolidate the hydroponics/cultivation equipment side of the industry and benefit from the efficiencies that can be realized in doing so. Last fall, GrowLife (formerly called Phototron Holdings) completed the acquisitions of the online hydroponics site as well as a retail cultivation store called Urban Garden. In the current quarter, it expects to complete the acquisition of three additional companies: Rocky Mountain Hydroponics, Evergreen Garden Center and – which generated a combined $4 million in revenue last year.

GrowLife intends to capitalize on some of its recent acquisitions by bolstering its business – particularly in retail storefront sales – in the Northeast, which has become a hotbed of MMJ activity. The company plans to spend $300,000 to $500,000 to build its operations in that part of country over the next 12 months, Scott said.

“We want to be a confident, serious medical marijuana company, and that’s reflective of the investments we’re making in every area of our business,” Scott said. “Our strategy is to continue to grow through acquisitions and through organic development, and we are investing heavily in our company and all the operating divisions of our company.”

Scott said GrowLife is exploring a number of different options to finance its investments, including some that would provide funding over a longer period of time.

GrowLife stock is currently trading at about 5 cents a share, up from 4 cents before the company announced its financial results but down from a recent high of 11 cents in February and flat compared to the beginning of the year.