GrowOp: The Hydroponic IPO For Medical Marijuana

Medical marijuana is easily one of the most controversial businesses in America today.  It is also one super-fast growth industry.  24/7 Wall St. is always on the lookout for issues where Wall Street meets Main Street, and if this does not fit that bill then nothing else does.  If you heard that a technology player in the field of medical marijuana was about to have an Initial Public Offering you might not believe it.  Well, it is.  A California company called GrowOp Technology Ltd. plans to have an IPO later this year.  We just interviewed GrowOp’s CEO and found out more about the company.

Derek Peterson,  GrowOp’s founding-CEO and a director, was an investment banker at Wachovia and Morgan Stanley.  Clearly, he is not blowing smoke. GrowOp is based in Oakland, Calif. and is the technology behind hydroponic growing systems and it has retail branded franchises in the works.

Legal medical marijuana sales are astronomical.  Even the smaller dispensaries often have annual sales of $4 million to $5 million, according to Peterson .  The larger well-run dispensaries have annual revenues of $10 million or even more.  California has more than 500 hydroponic retailers, and GrowOp estimates that they generate more than $250 million in annual sales.  On a nationwide basis this is a billion dollar business and has seen growth rates of roughly 40% in the last several years.

GrowOp manufactures and sells indoor hydroponic and agricultural equipment.  The company also created and distributes the portable hydroponic cultivation units called the BIG BUD and the little BUD.  Cities and states are licensing large-scale cultivation facilities to legal growers now in states which have approved medical marijuana.  Peterson noted, “Our goal is to become the Apple of hydroponic technology, and we feel by developing and offering innovative designs, clean packaging, and competitive prices the market share is there for our taking.”

The company began selling the growing equipment and systems last May and 2010 sales were roughly $800,000 in equipment distribution outside of franchise sales. So far, sales in January were close to $275,000 and the company’s target for equipment sales is about $4 million to $5 million in 2011 and $10 million to $15 million for 2012.

Generally speaking, a retail franchise fee will run about $25,000 and the franchisee will pay a 5% royalty fee on sales back to GrowOp.  It also offers larger territory franchises that depend upon each local market.  Michigan, California and Colorado are practically sold out and the total franchises sold so far would cover 70 to 75 stores around the country.

Peterson indicated that the company has close to 40 private shareholders who have invested nearly $1 million in aggregate and those holders currently own about 22% of the company with options to boost their stake up to 30%.  GrowOp is also looking at a mini-max financing round of financing before the IPO, and Peterson said the company is “in the ninth inning of the IPO process after its audit is completed.”

It opened a 15,000 square foot flagship retail store called weGrow  with partner Dhar Mann near the Oakland Airport.  We wanted to get a bit more clarity on the separation of the two entities.  Peterson noted, “GrowOp is the distribution company and is the foundation or bottom of the vertical, while weGrow is strictly retail and we will be supplying product as a separate entity with an entirely corporate structure.  The franchise will not roll-up into the public offering our benefit is building our own outlet for product sales while at the same time selling to the existing base of brick and mortar as well as online retailers.”

Peterson further noted that the company has signed a contract to be the sole supplier to a couple of online retailers as well and, which should generate close to a million dollars a year in sales.

In a last statement, Peterson added:  “Medical Cannabis, like any commodity, has multiple uses.  Almost any product you see today, will have a multitude of peripheral opportunities around it; food products, clothing, retail, merchant services, transportation etc. And cannabis is no different the market opportunities are endless.”

As you can imagine, it is very likely that GrowOp and any company in the business around medical marijuana will not come without controversy.  Can you imagine the “threats and risks” section contained in its S-1 filing?  Taxation, regulation, political change, tampering, sabotage, crime, society-shifts, and religion are some  of the risks to the business.  If everything pans out as Derek Peterson and his business partners expect, GrowOp may become “GrowthOp” for investors.

There is a term for entrepreneurs in the businesses around legalized marijuana or medical marijuana… Hempreneurs.   Green Generates Green.

Jon C. Ogg