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June 12, 2017

Summary of Our Research Findings

  • This report offers an analysis of Grow Condos, Inc.
  • Based on the extreme excitment among investors in the fast growing sector and the opportunity in front of Grow Condos, we beleive these shares can easily surpass $1.50 over the coming months.
  • Grow Condos leases and sells indoor grow facilities to cannabis growers. Besides this, the company also outfit these growers along with supplying them with a unique advisory and consulting services.
  • GRWC sales are being driven by burgeoning legal cannabis market.
  • The US legal cannabis market stood at ~$7 billion in 2016 and is expected to grow at a CAGR of ~25% till 2020 to reach ~$22 billion. The market is expanding as more states ease marijuana laws.
  • We believe the greatest and the most profitable opportunities will be in the ancillary services such as real estate, education and advisory. GRWC is perfectly positioned to take advantage of these trends.
  • With the launch of ‘Smoke on the Water’ brand, the company has entered a very lucrative and niche RV and campground market. The market is highly fragmented and presents significant roll-up acquisition opportunities.
  • The 37-unit condo style upcoming warehouse facility at Eugene could potentially bring in more than $5.5 million in revenues.
  • The Company’s business model is highly scalable and we believe has the potential for building a national footprint.
  • We see GRWC as an ancillary play on the multi-billion-dollar legal cannabis market with strong pipeline of new project launches and an experienced management team.

Grow Condos Inc. (OTCQB: GRWC)

Introduction

GRWC leases and sells condo style indoor grow spaces to cannabis growers. GRWC also provides consulting and advisory services to cannabis growers. Grow Condos is focused on a ‘pick-and-shovel’ approach to participating in the exploding marijuana industry.

The Company was originally incorporated in 1999 and started real estate and support services for cannabis industry in June 2014. The shares trade on the OTC Ventures Market, often called the OTCQB, under the symbol GRWC. Grow Condos is fully reporting with the U.S. Securities & Exchange Commission, is up-to-date in its filing requirements, and undergoes full yearly audits by a certified auditing firm.

Grow Condos primarily generates revenues from three facets 1) Real estate, 2) Education and advisory services and 3) Ancillary services. Through real estate division, GRWC offers purchase or lease of uniquely designed condo units (~1500-2500 sq. ft.) to cannabis growers. GRWC currently has one operating property in Eagle Point, Oregon (10 units) and is in the process of building another in Eugene, Oregon (~37 units).

In addition, GRWC is also entering the recreational marijuana sector with the launch of its new subsidiary, Smoke on the Water. It plans to build marijuana friendly RV (Recreational Vehicle) parks and campgrounds for tourists/campers. While the traditional condo style grow facilities continue to remain attractive, we believe the RV and campground market offers tremendous opportunity and could be a game-changer. The RV industry is highly fragmented and is perfectly ripe for ‘roll-up’ acquisition strategy.  We believe that as more number of states ease marijuana laws, there is a tremendous opportunity for a brand of recreational lodges and RV parks such as ‘Smoke On the Water’.

GRWC is targeting the cannabis market which is highly regulated, but is now experiencing explosive growth amid ease of restrictions. The market is expected to grow at a CAGR of ~25% till 2020. With more states in the US likely to legalize marijuana, the ‘green-rush’ is showing no signs of slowing down. If legalized federally, the market could grow to $37 billion in five years and to $50 billion in ten years. We believe the greatest and the most profitable opportunities will be in the ancillary services such as real estate, education and advisory. GRWC is perfectly positioned to take advantage of these trends. The company’s business model is highly scalable and it is planning to expand beyond Oregon into Colorado, Washington, Nevada and California. According to statistics, 1 in 5 people or ~20% of the US population reside in a legal marijuana state, highlighting market potential for the building of a national footprint.

We believe the launch of Eugene project and entry in the RV and campground market will provide a fillip to revenue and earnings. The marijuana industry is primed to benefit with the states increasingly accepting marijuana and many industry experts believing that that federal legalization will follow as well.

The Legal Marijuana Market – $50 billion potential opportunity

GRWC is targeting a niche end market which is highly regulated, but is now experiencing explosive growth amid ease of restrictions. The legalization of medical and adult use of cannabis is the key driving force behind the increasing attractiveness of the industry. According to research reports, the North American legal cannabis market stood at ~$7 billion in 2016. The market is expected to reach ~$22 billion by 2020, representing a CAGR of 25%. According to New Frontier Data, the legal cannabis market will create more than a quarter of a million jobs by 2020, more than those created by manufacturing, utilities or even government jobs. These projections are based on the states that have already passed such legal initiatives and does not include additional states that could come on board by 2020. More than 1.2 million people already use medical marijuana for a wide variety of medical problems, from cancer to epilepsy to depression.

Eight states in the US have legalized the use of recreational marijuana (cannabis), while 29 states allow marijuana to be used for medicinal purpose. These numbers are expected to rise towards 40 states by 2020 as pending legislation in a number of states is expected to be put into practice in the next several years.

Exhibits One – States where Marijuana is Legalized

 

Exhibits Two – Legal Marijuana Market

Source: New Frontier Analysis

However, marijuana is still not legal at the federal level. Recently, new Senate legislation have passed shielding medical marijuana patients, from federal prosecution in states that have legalized marijuana for medical purposes. Other pending legislation is calling to reclassify marijuana from a Schedule I drug, which has no medical benefit and includes recreational drugs (like LSD and heroin), to a Schedule III drug, which has an accepted medical use.

Although, number of bills are being introduced to dilute the interference of federal laws at the state level, there is no certainty that it will materialize. Though industry experts believe that with the states increasingly accepting marijuana; that federal legalization is not a question of if but rather when. If legalized federally, the market could grow to $37 billion in five years and to $50 billion in ten years.

Warehousing market upbeat on rising Marijuana cultivation

The legalization of marijuana has propelled the demand for warehouses to be used as grow facilities. Marijuana growers have consumed large warehouse spaces over the past few years especially in states with no restrictions on pot consumption. According to CBRE research, marijuana grows occupied 4.2 million square feet of industrial space in Denver at the end of 2016, up 14% since 2015. Similarly, California has seen huge rush for grow facilities as it prepares to issue permits for large-scale medical marijuana cultivation next year. Even in Eugene, Oregon where GRWC is building a new warehousing grow facility, the market remains tight.

With growing demand and added baggage of marijuana business, landlords and property owners are able to charge a premium from new tenants looking for spaces. The rates could be as high as two to three times the prevailing market rate. The scenario augurs well for players such as GRWC.

Eugene – a new 37-unit condo grow facility

The company is planning to build a growing and processing facility in Eugene. The five-building marijuana complex will have 50,000 square feet of potential growing space divided into 37 units (‘pot condos’) of 1500 sq. ft. each, which will be sold or leased. The industrial spaces will be sold at $150,000 to $175,000 each. The condos will be shells with hook-ups for plumbing and electrical systems. The entire design with electric systems, water and drains will have to be done by the growers. The units will feature 22-foot ceilings so owners or tenants can add a mezzanine, increasing growing space to 3,000 square feet, from 1,500 square feet. The Eugene site will have extra security as well, such as cameras and a six-foot chain link fence with screening around the buildings.

CEO, Wayne Zallen, stated that the company will prefer outright sale of the condos than leasing them. Post sale, GRWC can offer its consulting services such as help with design and build-outs. The company can even run a grow operation for the new owner. GRWC estimates that the total cost (including buying price) of making a condo unit operational as a grow facility could be as high as ~$400,000. This presents significant revenue generation opportunity for GRWC in the consulting and ancillary area.

In our view, the condo grow operation style can easily be duplicated and expanded to other states. Grow Condos is looking to expand operations Colorado, Washington, California and Nevada as well as other states and locations as more states adopt and expand cannabis laws. Management believes there is a tremendous opportunity to build out a national footprint across the USA for this formula as more and more states make marijuana legal.

Exhibit Three – A Quick View of the Company’s Indoor Grow Facility

Source: Company Data

RV and Campground Market – A Huge Opportunity

The company plans to build out a RV campground/resort brand named “Smoke on the Water” providing a turn-key solution for the campground owner/operator. Grow Condos will participate in a revenue share and or royalty/rental basis while maintaining the ownership of the real estate thus taking advantage of any land appreciation.

Recently, GRWC closed acquisition of Lake Selmac Resort, a 5-acre property and plans to transform it to the weed-friendly campground under its ‘Smoke on the Water’ brand. The campground sits beside a lake in the heart of Oregon’s cannabis cultivation region.

The facility currently offers fishing, swimming, boating, RV parking, and tent or cabin camping, and Grow Condos plan to add marijuana to the mix. The campground can accommodate RVs, tents and also have cabins for rent. The company is also planning to open a pot dispensary on the property as well.

As per the Company, plans currently underway at the Lake Selma Resort include the development of a territorial conversion to the Native American theme, enhanced with TeePee style accommodations, Yoga and other spiritually enhancing activities throughout the day, and astrology and celestial centered nightly events. Other exclusive features include ‘Theater Night on the Water’, an event by which visitors will be able to experience movie viewing on a floating screen while enjoying a peaceful night on the lake.

Oregon’s relaxed marijuana laws have opened up a lucrative niche opportunity at private facilities like Lake Selmac Resort which offer tourists to enjoy nature and outdoor activities along with pot consumption. We note that it is not yet permissible to recreationally smoke in National and State Parks and as such private properties offering recreational marijuana activities are bound to attract more visitors.

If successful, the company hopes to expand their business model to campgrounds in other states that have legalized marijuana.

Exhibit Four – Smoke on the Water

Source: Company Data

The RV industry continues to enjoy strong growth with RV ownership reaching record levels. More than nine million US households now own an RV, the highest level ever recorded (a 16% increase since 2001 and a 64% gain since 1980). Manufacturers expect to ship 470,000 RVs in 2017, up ~9% from last year’s 430,691, which was also a record. According to PKF Consulting, RV travel is 23%-59% less expensive than other types of vacations, for a family of four that owns an RV.

Exhibit Five – RV vacation cheaper vs. other types

Source: Recreation Vehicle Industry Association

 

The RV and campground industry is highly fragmented and in our view presents M&A opportunities for brands such as ‘Smoke on the Water’ to expand. Currently, the industry is entirely dominated by a ‘Mom and Pop’ type business with no tangible exit strategy. CEEO, Wayne Zallen, noted that these establishments are available at reasonable valuations of 4x-7x EBITDA. These can then be converted into culturally themed cannabis friendly parks.

We believe Smoke on Water is a great way to capitalize on the country’s growing level of recreational marijuana acceptance. A recent survey by The Denver Post in Colorado, showed marijuana laws influencing vacation decision of potential summertime visitors almost 49% of the time. Of the total 49%, ~22% of survey respondents said the easy access to drug was ‘extremely influential’ in their decision to visit Colorado. In addition, 20% said it was ‘very much influential’ and ~7% said it was ‘somewhat influential’.

Revenue Drivers and Financials

The company has filed its report for quarter ending March 31, 2017 on May 27, 2017.   The revenues stood at $26,801 for the quarter ended March 31, 2017 compared to $29,084 for the same period in the previous quarter. The revenue was primarily generated from monthly rental income from tenants.

The operating income stood at $17,607 driven by derivatives income of $295,482 compared to a loss in the previous year. However, there is a significant increase in G&A, Sales and Marketing and professional fees expenses compared to the same period in the previous year.

Operating cash flow for the March 2017 quarter was negative $622,280, but with proceeds from the notes payable and some additional financing activity, the cash balance at the end of the March increased by approximately $10,000.   The company has also purchased plant and properties worth $283,100 including the acquisition of Lake Selmac Resorts. The company has also repaid a part of its mortgaged loan and other borrowings of approximately $45,000 to strengthen its balance sheet.

We see strong sales growth possibilities for the Company, once Eugene project is launched and the RV park commences operations. The Eugene project comprises 37 condo units and each unit could fetch ~$150,000 to $175,000 in sale according to the Company. This translates to a revenue potential of ~$5.5 – $6.5 million, excluding any consulting and advisory fee which might be additionally generated as growers require such services for setting up the growing facility.

The Company has made intentions of establishing national footprint as more states make marijuana legal. GRWC has plans to expand beyond Oregon into Colorado, Washington, Nevada and California. Management has indicated that RV and campground market offers huge opportunity and is currently largely untapped. GRWC plans to engage in ‘roll-up’ acquisitions to tap into the highly fragmented RV market and expects the first ‘Smoke on the Water’ resort at Lake Selmac to add significantly to revenues this year.

 Corporate Capitalization

Based on the most recently filed corporate quarterly report, which occurred on May 27, 2017, as of the quarter ending March 31, 2017, there were approximately 30.5 million shares outstanding, yielding a total market capitalization of approximately $21.1 million.

The Company currently has only one operational project and as such revenues are negligible at $85,968 for the nine months ended March 31, 2017. The balance sheet shows assets of $2.5 million and approximately $3.0 million of total liabilities, majority of which comprises mortgage loan, convertible loan and derivative liability. As of the end of March 2017 quarter, cash on hand stood at $79,042.

This is sufficient to sustain the day to day operations of the Company for approximately 60 days.  It is not likely that operating revenues will increase in the near future to a sufficient extent to cover the operating expenses of the Company.  Therefore, it will be necessary to obtain additional capital from the sale of equity or debt securities to continue operations beyond 60 days.

In our view, GRWC will need working capital financing to launch its new projects. While we have no first-hand knowledge of the events, we would not be surprised to see a significant amount of financing move into this company over the short-term.

Risks

Risk – Competition – As we point out above, there are significant opportunities in the marijuana market. However, this means there is also a lot of competition chasing this opportunity. To the Company’s advantage it is one of the early movers in the industry with already running project and proven execution skills. Going forward, management’s ability to execute and launch new projects will be a key factor in determining company’s success.

Risk – Future Financing – Management of GRWC has been able to successfully raise capital to finance corporate operations so far.   As of March 31, 2017, GRWC had just 60 days of cash remaining. We believe it is likely the Company will need to raise additional funds to drive the revenue plan. It is unclear how much financing management will be able to attract.

Risk – State Regulation – Continued development of the lease or lease purchase business depends on the continued legislative authorization of marijuana at the state level. Any number of factors could slow or halt the progress.

Marijuana remains Illegal under Federal Law – Although GRWC does not sell marijuana or has any operations that directly work with the marijuana plant, the company may be deemed to assist in facilitating the selling or distribution of marijuana in violation of the federal Controlled Substance Act. Marijuana remains illegal under federal law. It is a Schedule-I controlled substance. Even in those jurisdictions in which the use of medical and recreational marijuana has been legalized at the state level, its prescription and sale is a violation of federal law. A change in federal attitude towards enforcement could cripple the industry.

Risk – Dilution – In order to fund and launch projects, we believe it is likely that GRWC will need to raise additional capital. These capital raises and conversions of debt to equity are likely to result in common share dilution.

Limited Operational History and Operates in New Industry – GRWC has a limited operating history and may not succeed. The company is subject to all risks inherent in a developing of any business enterprise. The likelihood of its continued success will considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in the competitive and regulatory environment in which it operates. As a new industry, there are not established entities whose business model GRWC can follow or build on the success of. Similarly, there is limited information about comparable companies available for potential investors to review in making a decision about whether to invest in the Company.

Management Team

Wayne Zallen, CEO and Director

Wayne Zallen is the Chief Executive Officer and Director of Grow Condos Inc. Mr. Zallen began Grow Condos in October 2013 when he bought an unfinished, industrial warehouse from a local bank and subsequently developed it into a safe haven for medical marijuana growers. Mr. Zallen has since developed an innovative lease-option model that benefits both the grower and the investor. In April 2009, Mr. Zallen gained deep industry experience by developing an aeroponic growing method that produces superior quality medical marijuana in a minimal amount of time.

From 2006 till present, Mr. Zallen is the President of Sigclo Enterprises, LLC. Prior to that Mr. Zallen specialized in buying, building and assisting startup companies in achieving their untapped potential. To date these businesses, continue to operate profitably.

From 1986 to 2000, Mr. Zallen was involved in the financial servicing industry, owning one of the first Allstate’s insurance franchises and achieving a top 1% national ranking. Later he went on to establish a San Francisco Bay Area regional office of American National Financial, Inc., where he hired, trained, and developed sales agents to originate over $8 million per month in wholesale and retail loans across Northern California.

Mr. Zallen has also been a Business Manager & Account Executive for John Rhein Advertising and was responsible for business management, budgeting, media evaluation, and procurement at John Rhein Advertising where he developed exclusive advertising campaigns which went on to be syndicated nationwide.

In 1977 Mr. Zallen obtained an Industrial Design Bachelor of Science degree from The Ohio State University.

Charles B. Mathews, Corporate Chief Financial Officer

Mr. Mathews is the Corporate Chief Financial Officer of Grow Condos, Inc. Mr. Mathews brings over 30 years of executive financial management experience with both public and private companies. He has operated as a successful proprietor, Charles B. Mathews, CPA, an accounting and business consulting firm in Phoenix, AZ since 2000. Having set his sights on serving the cannabis sector, he has been gaining invaluable insight into the industry. He has served as Chief Financial Officer for mCig, Inc. (OTCQB: MCIG) and Vitacig, Inc. in addition to his tenure as Executive Vice President and Chief Financial Officer of Quepasa Corporation (NYSE: QPSA), a publicly traded leading Hispanic internet portal.

Mr. Mathews, a Certified Public Accountant, earned his B.A. in Business Administration from Alaska Pacific University and an M.B.A. from Arizona State University.

Joann Z Cleckner, Secretary

Mrs. Cleckner is the secretary of Grow Condos Inc. She has been the owner of Joann Z Cleckner, CPA, an accounting firm specializing in small business consulting, tax planning, tax preparation as well as providing bookkeeping services to small business clients.  In addition to her accounting practice, from 2011 through 2012, Mrs. Cleckner was an intern with the Sonoma County District Attorney, providing legal research in criminal matters, writing briefs and making court appearances.

Mrs. Cleckner previously worked in the Tax Department of Bank of America and when the division she worked was sold to General Electric, she became a Divisional Controller for GE.

After earning a BA in Comprehensive Social Studies at The Ohio State University, Mrs. Cleckner went on to earn an MA in Public administration with an emphasis in Personnel and Labor Relations as well as a JD, Cum Laude. She is interested in alternate dispute resolution and has an Oregon Mediation Certification.

Carl S. Sanko, Director

Mr. Sanko is a Certified Professional Accountant (CPA) and has provided tax, accounting, and consulting services to clients for the past five years, including working as a contract CFO, Secretary, and Director of Kush (a private Nevada corporation) for the past year and a half.

Mr. Sanko is also a licensed real estate broker, owning an independent real estate corporation.

David M. Tobias, Director

Mr. Tobias brings nearly 30 years of Executive Management experience in the Cannabis industry and is a respected industry leader.

He is currently President & Secretary of Wild Earth Naturals, Inc. He also sits on the Board of Directors of Rocky Mountain Ayre, Inc. and Cannabis Sativa, Inc. Mr. Tobias was previously a Director & Vice President of Medical Marijuana, Inc. and President of Hemp, Inc.

 

 

 

Disclosures

We do not own these shares and have no plans to acquire, purchase, sell, trade or transfer these shares in any manner.

We have no association with anyone, or any group, with any plan to acquire, purchase, sell, trade or transfer these shares.

Any opinions we may offer about the Company are solely our own, and are made in reliance upon our rights under the First Amendment to the U.S. Constitution, and are provided solely for the general opinionated discussion of our readers. Our opinions should not be considered to be complete, precise, accurate, or current investment advice. Such information and the opinions expressed are subject to change without notice. Separate from the factual content of our articles about the Company, we may from time to time include our own opinions about the Company, its business, markets and opportunities.

The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. We did not make an independent investigation or inquiry as to the accuracy of any information published by the Company, or other firms. The author relied solely upon information published by the Company through its filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Statements herein may contain forward-looking statements and are subject to significant risks and uncertainties affecting results.

This report or article is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed. This publication does not take into account the investment objectives, financial situation, or particular needs of any particular person. This publication does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. We are not registered as a securities broker-dealer or an investment adviser with FINRA, the U.S. Securities and Exchange Commission or with any state securities regulatory authority.

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Information, opinions, or recommendations contained in this report are submitted solely for informational purposes. The information used in statements of fact made has been obtained from sources considered reliable, but we neither guarantee nor represent their completeness or accuracy. Such information and the opinions expressed are subject to change without notice. This research report is not intended as an offering or a solicitation of any offer to buy or sell the securities mentioned or discussed. The firm, its principles, or the assigned analyst may or may not own or trade shares, options, or warrants of this covered Company. We have received compensation of $2,000 to cover out distribution and production of this report. If additional compensation is received, future version of the report will be updated to reflect this compensation.   Globe Small Cap Research, has not in the past received compensation for the production of previous reports. The party responsible for the production of this report owns no common stock and/or warrants in the subject Company, in any way, shape, or form. The views expressed in this research Company report accurately reflect the analyst’s personal views about any or all of the subject securities or issuers referred to in this Company report, and no part of the analyst’s or the firm’s compensation was, or will be directly or indirectly related to the specific recommendation or views expressed in this report. Opinions expressed herein reflect the opinion of Globe Small Cap Research and are subject to change without notice. We claim no responsibility to update the information contained in this report. Investors should consider the suitability of any particular investment based on their ability to accept certain levels of risk, and should not rely solely on this report for information pertaining to the Company covered. We can be contacted at info@globalmallcaps.com.

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