Growlife CEO Marco Hegyi on marijuana stocks and why you should grow cannabis vertically
Before the recent uptick, the marijuana stock market ran quite cold over the first half of 2018, the result of a mixed bag of circumstance. Investors blamed everything from a market correction to US Attorney General Jeff Sessions’ rescinding of the Cole Memo to the summer doldrums on the sector’s downturn, with most experts hopelessly agreeing on all of the above, plus more. The “green rush” was more a metaphor for investor’s complexions than it was a reference to the size of their portfolios.
“Most of these young cannabis-related stocks are small, and they’re hard to trade in because they don’t have the liquidity,” Marco Hegyi, CEO and President of Growlife Inc. (OTCMKTS:PHOT) told PotNetwork in early August. “They don’t have the volume or the base of shareholders. So you’re lucky to see them if they have, maybe, a couple thousand shareholders or if they trade a few thousand shares.”
Hegyi presented his thoughts on the marijuana stock market at the World Medical Cannabis Conference & Expo, recently held in Pittsburgh, with a presentation entitled “Investing in Publicly Traded Cannabis Companies.” A 30-year veteran of the software industry drafted into cannabis; this now marks the second sector he’s helped build from the ground up.
“Growlife has this unique advantage,” Hegyi continued. “When I was talking to the investors a couple months ago, they were upset. Oh, you have 3 billion shares, what are you going to do, and all that.” Though the company had a rocky start to the year, share prices have increased exponentially over the past 12 months.
He then revealed Growlife’s advantage in the market. “But we have 100,000 shareholders. Their jaws dropped. We trade about 20 million shares a day. Investors can get into [Growlife], ride it out, hopefully, they stay long but if they want to get out, they have an exit path. There’s not this lockup where, if you go into a small company that has limited trading, it takes a while to get out —and sometimes you can’t get out —it’s very difficult, and it’s mostly controlled by a handful of high-percentage owners.”
In the new era of legal cannabis where institutional investors dominate the headlines, Growlife remains competitive because of the value they offer to everyone. “This company is controlled by its shareholders,” said Hegyi.
“This is a traditional commodity business.”
Growlife is a picks and shovels play born out of the necessity of the cannabis industry. An ancillary company that doesn’t touch the plant, they offer all of the necessary supplies and equipment for growers, about 15,000 in total according to Hegyi. They sell their products online, through retail stores, and through a direct sales force both in the US and now in Canada.
Approached by the company nearly five years ago, Growlife pegged Hegyi to boost acquisitions and integrate them. By the numbers, their most recent financials tell a very convincing story of his tenure. In Q2 2018 the company saw a 131.7 percent increase in revenue over the same quarter the previous year; for the six-month period ending June 30, they experienced revenue growth over 90 percent year-over-year, with a gross profit increase of 71 percent.
The reason behind their success, according to Hegyi, is continuity of team. “Our management has been around roughly five years on average,” he said. “We’ve learned from things in the past.”
Besides what Hegyi considers to be a phenomenal team, along with stellar marketing, Growlife’s success lies in proprietary-branded products with high margins. In other words, the fundamentals.
“This is a traditional commodity business,” Hegyi told PotNetwork, breaking down some of the mystique of the cannabis industry that plagues so many other companies. “We acquired, for example, FreeFit, which is a flooring company. The margins are phenomenal. They’re roughly about 40 percent; 50 percent. In the commodity business, when you sell hydroponic equipment, you’re lucky to make maybe 15 percent.”
According to Hegyi, Growlife is tripling their margins with FreeFit. By his numbers, about 20 percent of their revenue last quarter came just from that. And then their e-commerce business grew by over 300 percent [to which he credits Lauren Schmitt, Vice President of E-Commerce and Consumer Division]. Canada, in his words, is starting to click.
“I’d say we’re at the beginning of high margins, high growth for the company,” said Hegyi.
“And every penny counts.”
What excites Marco Hegyi these days, however, isn’t marijuana stocks or talk of margins, it’s Growlife’s new Vertical Grow System. Test results for the new system show it may create a 76 percent per-plant kilowatt reduction —numbers that have generated a lot of buzz. Though the term is tossed around casually these days, for growers out West falling victim to price drops, the Growlife Vertical System could indeed be a game-changer.
According to Hegyi, when exploring ways to bring down costs, Growlife realized that equipment and supplies only accounted for around 20 percent of total operations for their customers. The real trifecta they hit upon, the one that could save their customers money, was electricity, infrastructure, and labor.
The problem, according to Hegyi, was to keep down costs without risking quality and causing massive layoffs.
“What we ended up doing is, we went vertical,” Hegyi said, describing the new system. “Instead of five to 15 plants, you can do 70 plants in the same eight-by-eight square foot space because now you’re doing it vertically.”
He continued: “We started building our own lights. We just cleared the deck and said, ‘Okay, let’s do this in an eight-by-eight-by-eight cubic room, so we don’t waste any of the air, any of the power, just keep the cooling down without wasting a lot of electricity for air conditioning, humidity and all of these things.’ It turns out that, even though we were just doing simple eight-by-eight, that’s what the customers were excited about. They said, ‘Oh, this is so modular.’ We’re containing the risk so that, instead of doing one big room, if you have a failure in a crop you don’t have to wipe out the whole crop, you’re not talking about wiping out 500 plants, you can deal with 70 plants and use, what is that, genetic drift management.”
Growlife hopes to help growers save money, and bring the cost per gram of production down to about 35 to 50 cents per gram, a huge saving over the current $1.50 to $2.00 per gram they’re now paying. According to Hegyi, it means all the difference in the world to these growers.
“When it was wholesale, 10 bucks, who cared whether it costs $2 or $3, but now it sells for $2 to $3 wholesale, and every penny counts,” he said.
“It’s better to just focus in on solid fundamentals.”
Things weren’t always so bright for Growlife, however, and to his credit, Marco Hegyi doesn’t shy away from the past. When discussing the recent volatility deflating marijuana stocks on both sides of the North American border, he recalled the trials his company experienced nearly half-a-decade ago. Part lesson, part ghost, it reminds Hegyi to keep Growlife on solid footing.
In 2014 the company, in his words, had a trailing 12 revenue around $4.5 million with a market cap over $500 million. Growlife was at 120 times their revenue. “We had no business in that neighborhood. Our share price went from 8 cents to 78 cents in about four months.”
The SEC “clamped” down, putting a 10-day halt on trading; a death-knell for most companies. It took Growlife 22 months to come back. Today, Hegyi focuses on the fundamentals.
“How do you justify your value,” asked Hegyi, rhetorically. “Do you have the revenues behind you? Some of these [cannabis] companies have very small revenues, and their multiples are so high. Now, you may think some of these investors know what’s going on, so people piggy-back on that. But that’s dangerous because if you’re in a stock and a stock climbs, most of the time you want to get out to make your gain and the people who get in suffer from the deflation.”
It’s solid advice in an age of billion-dollar companies that haven’t sold a bud. The cannabis stock market, like the industry itself, is fraught with assumptions —expectations of millions to be had even as states like California continue to struggle to compete with a revitalized black market.
“Canada is hyper-inflated, and we’re going to see something happen,” said Hegyi. “I mean, some of those companies have $5, $6, $7 billion market caps and their revenues are not that high.”
“It’s better to just focus in on solid fundamentals. We do it through acquisition,” he continued.
“This is a way to help our customers.”
As an outsider now on the inside of one of the fastest-growing industries of the new century, Marco Hegyi has a unique perspective on cannabis. He sees the cannabis industry as more than one business. To him, it’s a formation of about 100 or more different businesses, including transportation, finance, software, and more.
Broken down further, businesses mean jobs, and jobs mean people. “To treat people like they’re criminals who are actually trying to make a living and playing by the law and the rules, I think, is a shame,” Hegyi told PotNetwork.
That concern for people infects everything that he does in this industry. Putting aside his responsibility as a CEO and to his shareholders, Hegyi broke down Growlife’s new Vertical Grow System as something that can, sincerely, help the people.
“This is a way to help our customers — and these customers are really compliant growers, and so they’re really solid citizens,” said Hegyi. “I can’t stress that enough because I get so much noise about how these guys are just stoners, and they’re really lazy, and they don’t really comply. It’s just the opposite.”
He continued: “These people take money from friends and family, they follow every word of the law when it comes to how to run an operation and they’re just, to me, they’re rock stars. And all of a sudden, with the pricing going down, they’re being forced to either go out of business or consider alternatives. And we don’t talk about the alternatives, but there are alternatives to selling through the legal channels.”
“To see these tremendous people being treated, just, so improperly —I hope that a national federal champion does come out, and can help support [cannabis] and eventually make it legal nationwide,” added Hegyi.