Pubdate: Thu, 10 Mar 2011
Source: San Francisco Chronicle (CA)
Copyright: 2011 Hearst Communications Inc.
Contact: http://www.sfgate.com/chronicle/submissions/#1
Website: http://www.sfgate.com/chronicle/
Details: http://www.mapinc.org/media/388
Author: Ryan Flinn, Bloomberg News
Bookmark: http://www.mapinc.org/find?115 (Cannabis - California)

POT-GROWING SUPPLIERS PLANNING IPOS

In an industrial section of Oakland, former Morgan Stanley investment 
banker Derek Peterson hops into a trailer being outfitted with shower 
drains, lights and humidifiers, all used for growing marijuana.

"This is one we're finishing up, what we call our bloom room," he 
said. Peterson, 36, sells the trailers for $30,000 to $80,000 as 
"plug-and-play" facilities for cultivating pot. Customers don't need 
to worry about buying hydroponic equipment or even staying on-site - 
lighting, temperature, nutrients, water and humidity can be operated 
remotely via an iPhone app.

The legalization of medical marijuana - permitted in at least 15 
states - has kicked off a booming economy in ancillary goods. 
Startups such as Peterson's Grow-Op Technology Ltd. and General 
Cannabis Inc. compare the phenomenon to the California Gold Rush, 
when the people making the real money were the ones selling pickaxes 
and shovels. Both companies are planning initial public offerings, 
part of an effort to remove the stigma from what's seen as a 
multibillion-dollar industry.

"We're better off by being in the public arena and showing a face of 
professionalism," said Jim Pakulis, chief executive officer of 
General Cannabis, who says medical marijuana could be a $60 billion 
industry nationwide. "The market will just continue to expand."

Growing marijuana violates federal law, and recreational use of the 
drug remains illegal at the state level. That puts related businesses 
at risk of getting shut down by law enforcement. By focusing on 
equipment, services and technology, Pakulis and Peterson aim to 
sidestep the legal pitfalls of the trade while reaping the benefits 
of its expansion.

Dispensary map

General Cannabis operates several businesses, including WeedMaps.com, 
which directs users to more than 800 pot dispensaries nationally; a 
company that handles administrative tasks for more than a dozen 
medical marijuana clinics in California; and a payment-processing 
service for dispensaries.

"We are a technology company with an affinity toward medicinal 
cannabis," Pakulis said in an interview.

General Cannabis, in Costa Mesa (Orange County), plans to raise $10.5 
million in an IPO, according to documents filed with the Securities 
and Exchange Commission on March 1. The company posted net income of 
$1.2 million in 2010 on revenue of $7.7 million.

Pakulis, 47, has been involved with managing and consulting startups 
in various industries for more than 15 years. The company also 
brought on a former Silicon Valley Bank executive in January to lead 
its strategic efforts.

Word of mouth

GrowOp's Peterson spent almost a decade managing investment 
portfolios before starting his current company. After stints at 
Wachovia and Morgan Stanley, where he managed a $100 million fund, he 
went out on his own, taking some clients with him. In addition to 
GrowOp, he oversees a $48 million portfolio with a partner.

GrowOp sold its first trailer in May, and by the end of the year 
posted $800,000 in revenue, Peterson said. It made $250,000 more in 
January alone, he said.

The business has mainly grown through word of mouth. Peterson is 
producing a catalog, which he expects will generate 90 percent of 
sales. It will offer hundreds of products for cultivating pot - 
everything from light bulbs and nutrients to something called 
"hydroponic grow medium."

Soil of your dreams

"It's pillow stuffing," Peterson said, as he digs his hand through a 
box of chunky blocks of white foam material. "But apparently plants 
grow phenomenal in it."

Peterson wants to undercut distributors of these products to the 
retail hydroponic shops, where growers buy materials for cultivating 
plants. Distributors typically mark up their goods 100 percent, he said.

"We can operate a thriving business and do so with 60 to 70 percent 
margins," Peterson said.

His goal is sales of $2.5 million this year, then $5 million to $8 
million next year. While GrowOp hasn't filed paperwork to go public - 
and its revenue is smaller than General Cannabis' - it plans to have 
an IPO this year. GrowOp is in the audit stage of its offering plan 
and working with Network 1 Financial Securities Inc., Peterson said.

Peterson always wanted to take a company public, though he never 
found the right specialty. That changed when he learned how much 
medical marijuana growers were making, he said.

"The few dispensaries in my neighborhood - I started talking to them 
and found out they were doing $10 million to $14 million in business 
a year," Peterson said. "I just started to see the economics."

Medical uses

Marijuana, produced from the cannabis plant, can be smoked or 
ingested. Advocates of medical use say marijuana can ease cancer 
patients' nausea from chemotherapy, help treat glaucoma, stimulate 
AIDS patients' appetites and ease pain for multiple sclerosis sufferers.

While law enforcement has taken a hands-off approach to General 
Cannabis and Grow-Op, the federal marijuana ban could mean the 
companies are aiding and abetting a crime.

"Under United States federal law, the possession, use, cultivation 
and transfer of cannabis is illegal," General Cannabis said in the 
"risk factors" portion of its filing. "We provide services to 
customers that are engaged in those businesses. As a result, law 
enforcement authorities may seek to bring an action or actions against us."

California initiative

California voters approved a ballot initiative in 1996 permitting 
people with a doctor's recommendation to possess the drug, though 
they rejected a proposition last year that would have legalized it 
for recreational purposes. Other states have followed California's 
lead with medical-pot laws.

Not everyone thinks the industry is primed for growth. Dale 
Gieringer, who runs the California office for the National 
Organization for the Reform of Marijuana Laws, said the value of 
medical pot has started to fall as more growers add supply to the 
market and reduce prices.

"There's a glut on the market, a general retrenchment, and it's not 
clear to me how much the market can expand unless laws change," Gieringer said.

In the past few years, prices have dropped by half to $1,800 a pound 
for marijuana grown outdoors, he said. Pot grown indoors fetches a 
higher price - $3,000 a pound - though it's seeing a decrease as 
well, Gieringer said.

Peterson says customers are interested in his trailers and products 
for various reasons. One buyer in Colorado uses his to grow mushrooms 
for culinary use. Another wanted to get into the business because 
making a profit in his other profession as a porn-film director was 
getting difficult.

"They see the green rush - and like the Gold Rush back in the day - 
are getting picks and shovels," Peterson said.
- ---
MAP posted-by: Jay Bergstrom