Why Medical Marijuana Won't Profit From Colorado Legalization

| About: Medical Marijuana, (MJNA)

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With the recreational sale and use of marijuana now being legal in the State of Colorado, "green rush" stocks are being snapped up by eager investors. Unfortunately, investing only on the basis of a name can result in a bad investment.

Medical Marijuana, Inc. (OTCPK:MJNA) is one such company, because while it includes the word "marijuana" in its name, it has stated many times that it will not take revenue from the sale of products containing THC or marijuana until federal law is changed. Therefore, any investor buying MJNA because recreational marijuana is now legal in the State of Colorado should understand that the company will not profit in the short term from marijuana legality. It is also possible that MJNA won't ever see marijuana-based profits with its current corporate structure.

In April 2012, MJNA and Dixie Elixirs formed a limited liability company, Red Dice Holdings (RDH), with MJNA owning a 60% share of the new company and Dixie owning the remaining 40%. More about the formation of Red Dice Holdings may be found in Alan Brochstein's article from May 6, 2013, "Medical Marijuana, Inc.: Whistling Dixie, Blowing Smoke." Subsequently, Dixie Elixirs created a new brand, Dixie Botanicals, which would manufacture and sell federally legal products containing only Cannabidiol (CBD) extracted from industrial hemp grown outside the United States. Meanwhile, the Dixie Elixirs brand would sell products that contained THC and marijuana.

On April 30, 2013, MJNA issued a Shareholder Letter and Corporate Update, which included the following section:


We have been asked by shareholders if MJNA is involved any marijuana or THC product sales and manufacturing. The company does own through its 60% ownership in Red Dice Holdings, LLC the formulations, brand names and intellectual property of over 70 products containing THC or marijuana from the Dixie brand purchase. However the company does not operate, distribute or sale [sic] those products, but has agreed to its use by a state licensed manufacture within Colorado and is in the process of expanding in several other states. Red Dice Holdings and MJNA does not and has not received any revenue from those operations and does not intend to, until and if marijuana is federally legalized. The company does plan on charging a fee for its use when it is in the best interest of the company via its licensing fee. So that it is clear, MJNA does not grow, sell or distribute marijuana under any circumstances as defined by the USCSA. Red Dice Holdings does sell hemp based products through Dixie Botanicals where these products are legalized and controlled. (emphasis added)

In other words, MJNA was telling shareholders that RDH, though it has licensed the Dixie Elixirs formulations and brands to Dixie Elixirs, will not take revenue from Dixie Elixirs for the sale of the resulting products until federal legalization. Red Dice will, however, accept revenue from Dixie Botanicals' federally legal CBD-only products, because those products are made with Cannabidiol extracted from legally grown industrial hemp.

Subsequent to that Corporate Update, MJNA has added a disclaimer to its press releases stating that it, or its subsidiaries, "…do not sell or distribute any products that are in violation of the United States Controlled Substances Act (US.CSA)." It also includes a similar statement on its website. As of today, the Federal government is essentially taking a "stand back and watch" approach to the State of Colorado's legalization of recreational marijuana as it evaluates how the state manages the new laws, but electing not to enforce federal law in one state is not federal legalization. Therefore, unless management chooses to ignore federal law and change the stated policy, MJNA will not recognize income or profits from the sale of Dixie Elixirs' products in Colorado.

What if Marijuana Eventually Becomes Federally Legal?

It is possible that MJNA will never be able to earn revenue from the sale of Dixie Elixirs' products, even if federal legalization is eventually achieved because the Dixie/MJNA relationship may have been dissolved long before then. On July 18, 2013, Dixie Holdings, LLC filed a Breach of Contract lawsuit with the Superior Court for the State of California for the County of San Diego, alleging that when Red Dice Holdings was formed, MJNA never made the required payment of twenty four million shares of stock into an escrow account for the benefit of RDH.

The case (37-2013-00058302) has now moved to the arbitration phase, and one possible outcome is the dissolution of RDH, which could result in MJNA losing the Dixie licenses and formulations as Dixie and MJNA go their separate ways. More about this lawsuit, which MJNA did not disclose in its Q3 2013 quarterly report, may be found in Brochstein's article from Dec. 10, 2013, "Did Dixie Narc On Medical Marijuana, Inc. To The SEC?"

In conclusion, if an investor is looking for a company that can profit from the sale of products containing Cannabidiol, then further due diligence on MJNA might be warranted. If, however, one is looking invest in a stock that could quickly profit from the sale of products containing THC and/or marijuana, for now MJNA isn't one of those stocks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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