Seeking Alpha
Long only, value, growth, research analyst
Profile| Send Message|
( followers)  

Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

On Wednesday, January 22, 2014, Medical Marijuana, Inc. (OTCPK:MJNA) announced preliminary results for the fourth quarter of 2013. In its press release, MJNA declared a gross income (revenue) of $8.07 million, and product sales through its HempMedsPX portfolio company of $1.31 million, which is a $1.06 million increase over the $249 thousand HempMedsPX reported in 3Q/13.

MJNA closed at $0.31 on January 24, 201, up nearly 60% from Tuesday's close. Is this price deserved? An analysis of the numbers would indicate not.

Medical Marijuana, Inc., has stated that it will not take revenue from the sale of products that contain THC until it is federally legal to do so. Therefore, all of HempMedsPX's operating revenue in the fourth quarter were from sales of CBD-only products, with most manufactured by CannaVest, for which HempMedsPX acts as distributor. HempMedsPX also sells products supplied by HempVAP and beginning in 1Q/14, anti-aging products from Cannabis Beauty DEFINED.

While it's good to see the increase in sales of Cannabidiol-only products through HempMedsPX, which can be credited to the efforts of Charles Vest, the VP of Communications for HempMedsPX and his team, it should be noted that the PR makes no mention of profit or loss from operations. MJNA is not required to file its full fiscal year 2013 report until April 1, 2014. Therefore, we must estimate MJNA's profit or loss based only on the top line, historic cost of goods sold and expenses.

Importantly, the vast majority of MJNA's $8.07M of gross income is likely the $6,500,000 that CannaVest (OTCQB:CANV) was required to pay MJNA in the fourth quarter as the final payment of its asset purchase of MJNA's Phytosphere industrial hemp operation. This deal was executed in November, 2012 and announced in early 2013. Most likely, as with past payments, nearly all of this one will be made with shares valued at $6 per share.

Author's Note: I sent an email to MJNA at 2PM Pacific Standard Time on Thursday, January 23, 2014 requesting confirmation that the $6.5M payment from CANV was indeed being counted in the $8.07M total, but as of Midnight on January 24, I have received no response from the company. I believe, however, that this allocation is a reasonable assumption, because MJNA has counted the payments from CannaVest in their gross income number in all of the quarters in which they were due.

Once we remove the effect of the $6.5M payment from CannaVest, which will be recorded as extraordinary income on MJNA's Statement of Income, MJNA's operating revenues were only $1.57 million in 4Q/13. Since $1.31 million of that was contributed by HempMedsPX, the remaining portfolios and products, including Wellness Managed Services, CanChew gum and the Dixie Botanicals Cannabidiol-only [CBD-only] products (licensed by MJNA's Red Dice Holdings portfolio company,) generated slightly less than $270 thousand in revenue in the fourth quarter.

The decline in revenue in these three portfolios, from approximately $360K in 3Q/13 could be due to the fact that in the Q4, HempMedsPX began selling CannaVest's Cibdex line of CBD tinctures, which directly compete against the Dixie Botanicals' CBD Dew Drops.

Gross margins at HempMedsPX and CanChew probably were similar to 3Q/13, at about 50%, but the wild card is Red Dice Holdings. Because of the ongoing litigation between Dixie and MJNA over the funding and operation of RDH, MJNA has not shown accurate numbers for Cost of Goods Sold and expenses, only "informational" numbers (as they describe them on page 10 of the 3Q/13 filing). I estimate gross profits, including RDH, of approximately $792 thousand.

On the expense side of the ledger, HempMedsPX, because of the large number of trade shows and events they're attending, will likely see an increase in travel and marketing expenses, while MJNA's corporate expenses will probably fall a bit, since in Q3 they incurred moving expenses. My estimate for expenses in 4Q/13 is approximately $777K.

Putting it all together, we could see a small quarterly operating profit of less than $20 thousand, but with approximately 947,000,000 Outstanding Shares, that's a 4Q/13 EPS of less than $0.0001, effectively, $0.00.

With small, but growing revenues and a miniscule EPS, why does MJNA have a market capitalization of nearly $300 million?

One reason beyond the obvious two, that, 1) traders are buying MJNA because its name includes the words, medical marijuana, and 2) the sector has a lot of momentum, is that as of the end of December, 2013, MJNA owns approximately 4.66 million restricted common shares of CannaVest (Hemp Deposit and Distribution Corp received 20% of the shares, or 1.17M of the 5.83M total).

With CANV closing on Friday, January 24, 2014 at $85.55/share, MJNA's holdings are worth nearly $400M. The problem is that CANV, which has yet to preannounce, and isn't required to file its 10-K until nearly the end of March, is extremely overvalued.

Since HempMedsPX had actual revenues of $1.31M, the cost of goods supplied by CannaVest was likely only about $900 thousand. Round that to $1M, and add a generous $200K for refined oil sold to third-party manufacturers, and CANV's 4Q/13 revenue comes to an estimated $1.2M. Gross profits should be about $840K. CannaVest's operating expenses and interest, if similar to those of 3Q/13, will most likely equal or exceed that, leaving zero in net profits.

CannaVest has a very small number of shares available for trading, and so we may be seeing a situation similar to what happened with Medbox, Inc. (OTCQB:MDBX) in November, 2012 -- too many excited buyers chasing too few shares, with little thought given to the fundamentals.

A more detailed look at CannaVest's upcoming report and its share structure may be read in my article, Is CannaVest's Sky-High Value Justified?

Here is where we see some sort of weird feedback loop: MJNA reports $8.07 million in "gross income," and mentions HempMedsPX's relationship to CannaVest in the PR. Some readers then think that CannaVest sold much more product than it likely did, which increases the price of CANV shares. That increases the value of MJNA's CannaVest holdings on the balance sheet, providing support to a higher stock price.

Nimble traders may be able to profit in the very short term by trading MJNA, but with (in my opinion) so much of its value apparently tied to an extremely overvalued CannaVest, plus the uncertainty caused by a lawsuit brought by Dixie against MJNA over the creation of Red Dice Holdings, MJNA is a stock to be avoided, especially until it files its complete financial report for 4Q/14.

Source: Medical Marijuana's 4th Quarter Update: Less Than It Appears