A Look Inside the S-1s of Upcoming Public Offerings

public offering

There are many early-stage companies with an eye on cannabis that are entering the publicly-traded space these days. We wanted to give you a brief overview of some of the companies that are likely to offer public securities for the first time in 2015.

Before and after presenting these companies (and the others we will be highlighting next month) it is imperative to note that these are or will be OTC-listed securities. They are generally going to be companies with little to no revenues that are operating in highly competitive, cost-intensive and regulated industries. They are going to be more illiquid than your average NYSE or NASDAQ stock, and they won’t be held to the same reporting standards as companies that trade on the largest exchanges.

Two companies focused on the horticulture industry have filed S-1 registration statements with the SEC and had them approved, which is a prerequisite to any national listing. S-1 statements are a treasure trove of good information for investors, as they are required to contain a detailed outline of the business, revenue strategy, competition, risks, and the specifics of potential share offerings themselves. As new material information for investors comes about over time, the S-1 should be amended by the company prior to the initial public offering of securities.

 

Indoor Harvest: Agricultural Play with Cannabis Potential

Indoor Harvest has created quite a fair amount of buzz in the industry with its approach to vertical farming solutions and innovation. The company is planning a public offering of up to 2.46 million shares, out of a total of 8.5 million outstanding shares.

Indoor Harvest is a development-stage company engaged in the business of designing, developing, and marketing of commercial-grade aeroponic fixtures and vertical farming. Aeroponic growing in its essence is the cultivation of plants without a growing medium (as in soil, or water in the case of hydroponics). The company is taking a modular approach to its design technology, as it seeks to offer customized solutions that can adapt and fit within different indoor environments. The company’s products are designed for leafy greens, fruiting plants and herbs.

Indoor Harvest looks to have a big addressable market in the United States, in which food production is often hampered by geographic/climate limitations, energy efficiency, and space concerns. In the S-1, Indoor Harvest targeted three distinct markets as sales prospects going forward: horticulture enthusiasts, commercial growers and horticulture researchers. The S-1 also states that Indoor Harvest has not yet decided whether to market products specifically to the cannabis grow industry.

Sales have not yet begun, but the company thinks it has the supply chain essentials in place to meet future demand. And while there are currently no issued patents to Indoor Harvest, it does have an application in to the USPTO for a patent on “modular aeroponic systems and related methods.” The planned proceeds of $1.2 million from the public offering would go toward funding ongoing operating expenses related to research and development, fabrication facilities setup and the construction of an indoor demonstration farm within its existing operating facility.

 

Cabinet Grow

The Irvine, California, based Cabinet Grow operates in a similar vein to Indoor Harvest, but Cabinet Grow is focused more on the home grower as opposed to more commercial solutions. Cabinet grow currently sells three different size models for indoor horticulturists, offering both soil-based and hydroponic grow environments.

The smallest model is the MediCab Micro, a hydroponic grow cabinet. This is followed by the hydroponic Yielder Max, while the largest size model, the Earth Cab Pro, is an organic soil growing environment. All of the products are designed to be self-contained cabinets, and all of the models come with LED and standard CFL/HID lighting options.

Cabinet Grow is set to offer up to 5 million shares to the public, with planned proceeds of $2 million. These proceeds will be used for inventory build, sales and marketing increases, and general working capital.

 

Risk Factors

To a greater extent than Indoor Harvest, Cabinet Grow’s products are pretty squarely focused on cannabis growing—its end markets will not involve the same general farming benefits as Indoor Harvest. While that doesn’t make Cabinet Grow’s total addressable market any less attractive, it does up the risk profile slightly. Per the S-1,

“should it be determined … that our products or equipment are deemed to fall under the definition of drug paraphernalia because our products are primarily intended or designed for use in manufacturing or producing cannabis we could be found to be in violation of federal drug paraphernalia laws.”

But the company also adds that, “We have no direct or indirect design features in our equipment specifically or primarily of the cultivation of medical cannabis. Although it is possible that medical cannabis may be grown in our hydroponic and soil based equipment, we make no inquiry of our customers as to their intended agricultural use of or products.”

This tacit implication shouldn’t be any problem for the company as a true risk factor, but it is worth noting. Also worth noting is that Cabinet Grow is already generating some solid revenues. After recording over $530,000 in sales during 2013, Cabinet Grow has booked just over $447,000 in the nine-month period ending September 30, 2014.

Cost management is definitely an issue to watch, as the company had recorded over a $1.2 million net loss over the same nine-month period. But this is not at all out of the ordinary for such an early stage company; in fact, the company seems to have garnered some powerful thumbs up from publications like High Times, which has recognized the company twice via its STASH awards.

 

Parting Thoughts

Both of these companies are addressing very large end markets, especially if you put them in the broader class of agricultural technology. But we feel compelled to leave you with a parting disclosure that these are both early-stage companies, and as such involve a high degree of risk, including the risk of complete loss of investment capital.

 

*Author holds no shares of any companies mentioned in this, or any of his articles. All opinions stated here are for informational purposes only. Investors should do their own due diligence before investing in any industry, especially in high-risk areas like cannabis.

Ryan has spent nearly 20 years analyzing financial markets and investment opportunities for institutional and high-net worth investors. He specializes in determining the size and scope of new markets, changing industry trends and the market potential of new companies, products and services. Ryan has also published hundreds of articles on investment topics, market commentary and macroeconomic analysis.

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