Seeking Alpha

Perry Coleman's  Instablog

Perry Coleman
Send Message
Individual Investor with a MBA in Finance from Loyola University Maryland, and a Masters of Science in Computer Information Systems from The University of Phoenix in Arizona. Currently working in the defense industry. SA Required Disclosure: I am long MJNA.PK and write articles on behalf of... More
My company:
MJ Market Watch
My blog:
MJ Market Watch
View Perry Coleman's Instablogs on:
  • Twitter Shows Relationship

    (click to enlarge)

    Disclosure: I am long OTCPK:MJNA.

    Tags: MJNA
    Apr 11 2:37 AM | Link | 5 Comments
  • MJNA & CBIS: International Growth On The Horizon

    Marijuana legalization reform is not only sweeping across the United States, It's also sweeping across the globe. Every day, new legislation is being introduced to either legalize the use of medical marijuana or reduce or eliminate criminal penalties altogether. Many are looking at Medbox (OTCQB:MDBX) as the only real horse in the race to profiting from this expansion, but that proposition could prove foolish for investors. That's because the assumption quickly breaks down when logic is applied and we realize that no one is going to buy a box unless they plan on putting something inside.

    This is where companies like Medical Marijuana, Inc (OTCPK:MJNA) and Cannabis Science, Inc (OTCPK:CBIS) come in. These are the types of companies that will be filling those boxes. They will also be filling pharmacies, dispensaries and providing the needed services and expertise to succeed in the marijuana industry. And they will be doing it around the world.

    These are developmental stage companies that are accelerating their product development efforts to gain first mover advantages as legalization undergoes international expansion. But growth for companies is more difficult to manage than some would think. Experiencing exponential growth sounds like a great problem to have. But companies can grow too fast, and if an entity is not prepared to handle the expansion, problems can manifest levels that are unmanageable.

    Medical Marijuana recently announced its international expansion into Europe, Canada and the Caribbean Island Nations in its latest press release. The press release also mentioned its expansion across the United States, but that's old news for anyone who has been following the stock. Pharmaceutical companies, especially upstarts such as Cannabis Science, can have explosive growth cycles when its drugs reach maturity and FDA acceptance. And with its focus on being "an advocate for patient rights around the world" as stated in their mission statement shown below, that growth could easily expand into international markets.

    Cannabis Science Mission Statement

    "Cannabis Science, Inc. is a patient oriented company dedicated to meeting the needs of the community with products based on cannabinoid science, as well as being an advocate for patient rights throughout the world."

    In fact, international expansion is a natural progression for pharmaceutical companies with successful offerings. But growth does not come without problems. So what are some of the problems that rapid growth could pose? Let's take a look at some of the pitfalls of growing too fast and see how MJNA and CBIS are prepared to deal with these issues.

    Start-Up & Operating Capital

    It costs a lot of money to start a business. Of course that amount is relative to the size of the business that one is trying to start, but let just say that the more you need, the harder it will be able to get. Many companies start with Bridge Loans. Bridge Loans are short term in nature and come with higher interest rates. The name is derived from being able to bridge the gap between a business's start-up costs and securing longer term financing at more favorable rates.

    Businesses that have acceptable risk profiles can then obtain bank loans for operations and expansion. But as many are aware of, banks won t do business with marijuana companies because of federal drug trafficking laws that are focused on money laundering. New legislation has been introduced to reform these regulations but is still under review in the current congressional legislative session.

    This brings us to equity financing. Equity financing is derived from companies selling common or preferred stock. Many are concerned about the share counts of MJNA and CBIS. MJNA reported having 808,238,318 shares outstanding with 363,114,259 in the public float in its December 31, 2013 Annual Information and Disclosure Statement. CBIS shows having 850,000,000 authorized shares with 710,290,573 outstanding. These share counts are large for sure. But without traditional business loans being available, it's understandable that these companies have to use equity financing to fuel product growth and expansion.

    Management & Execution

    Expanding onto the global playing field presents many challenges that businesses with only US exposure don't have. Obviously geographic location presents its own challenges, but the real difficulty comes in understanding the laws and regulations of the countries in which operations take place. And you can be sure that those laws and regulations vary widely from country to country. Management has to be able operate in this environment without bringing undue risk to the organization.

    In the finance world, in summary this is often referred to as "country risk". Country risk can come in the form of political risk, economic risk, import/export risk and exchange rate risk to name a few. Political risk is a major concern for companies in the marijuana business. Many countries have laws and treaties that govern the import and export of marijuana and hemp products. This is area of strength for MJNA as it already has a foothold in many of the countries in which it will be expanding.

    But the real strength for both MJNA and CBIS is the value of its intellectual properties. In my previous articles linked below, I mention how MJNA was using its licensing strategy to reduce risk. As they continue that expansion on the international horizon, those strategies will prove to be very useful in the management of that risk and the generation of revenue. For example, many countries have reciprocity requirements when allowing US firms to do business in their countries. These requirements can mandate that local businesses and labor be used in business ventures. By licensing the capability to produce and distribute products to local manufactures, much of the red tape of dealing with these types of problems can be eliminated.


    One of the largest costs for companies expanding overseas is infrastructure and its associated maintenance costs. This is also an area where the use of intellectual property will prove vital to success. Instead of building out or leasing properties, the use of the licensing strategy, as mentioned above to enable the use of local infrastructure and expertise will provide for speed to market and reduced costs.

    For a pharmaceutical company such as CBIS, using this type of licensing strategy is the norm. Another big challenge for both companies will be navigating the regulatory approval processes of the varying nations. Ideally, MJNA and CBIS would be able to leverage some of the testing done in the US and any FDA approvals that it might achieve. But there will always be additional requirements.

    As I've mentioned in my previous articles, licensing will prove to be a powerful tool for managing risk. More specific information is listed in each article and they are listed and linked below:


    Medical Marijuana's global expansion is already taking place. Cannabis Science still has a ways to go. But what's important to take away is an understanding of how these companies are using their licensing strategy to reduce risk. And for those who are looking for parity, the strategy also provides some balance to the amount of equity used to fuel development and expansion in the US and abroad and the reduction in the need for debt financing.

    Both of these stocks are small caps and carry a higher degree of risk. So understanding how the use of intellectual property can influence portfolio risk will help better decisions to be made when making investing decisions. By using licensing, revenue is generated in the form of royalties and companies can transfer the risk and the costs associated with growth, whether US and abroad, to other parties. This is especially important for expansion overseas because it removes a large degree of specialized expertise needed to operate in the foreign nations.

    Disclosure: I am long OTCPK:MJNA, OTCPK:CBIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: CBIS, MJNA, long-ideas
    Mar 25 9:38 AM | Link | 3 Comments
  • Medical Marijuana, Inc: How Business Shapes The Industry's Growth

    Medical Marijuana, Inc. (OTCPK:MJNA) recently released a press releasetitled Medical Marijuana Inc Reviews State of the Industry and Prospects for Future Growth that outlined the progressive expansion of the various forms of marijuana legalization in the United States. I believe that the overview was a message to shareholders to help simplify this very complex transformation of the industry. The company has recently been the focus on many positive and negative articles that have posted on its Yahoo Finance Page. This is to be expected when a new and significant opportunity unfolds. I have written three of them myself:

    Many investors are trying to absorb all the information and of course, some misinformation. So I wanted to take a broader look at the subject. As many great philosophers have alluded to, if you don't understand the history, you are doomed to repeat it. With that thought in mind, I offer the following:

    Many believe that the recent trend towards decriminalization of marijuana is contrary to what the government knows about the effects of marijuana on society. It's obvious that society is leaning towards medical and recreational use, but is limited in deciding its own fate. The congressional representatives of this nation must act on our behalf. As a society we elect representatives to carry out the actions and initiatives that are thought to be of the most benefit for societies collective good. We elect these officials at the state and the federal levels. Our state representative tend to be more in tune with what's important to their citizens while our federal representatives try to balance reelection by their constituents and the federal policy that affects the nation as a whole.

    Getting elected or reelected to public office costs a lot of money. That money can come from individuals, businesses and special interest groups. Of course businesses can and often do have or support special interest groups. This allows those with biggest purse strings to exert the most influence over the decisions that our elected officials make. Most people know this, but what they may not know is how this has affected the criminalization of marijuana.

    It's common knowledge that it is the Controlled Substances Act [CSA] that criminalizes marijuana. When these types of legislation are put into place, they are not done so at the whim of just a few politicians with agendas. As you would expect, there is a significant amount of due diligence to be done to support decisions such as criminalizing marijuana. In fact, this due diligence was done, and surprisingly, when it didn't recommend criminalization, it was ignored. As investors or potential investors in the marijuana industry, you need to understand that the government knew back in 1970 that criminalizing marijuana was not in the best interest of society. It was really more of a decision based on popular political opinion and support of businesses that supported the current administration.

    The Controlled Substances Act was established as Title II of the Comprehensive Drug Abuse and Control Act of 1970. Part F of that Act created the National Commission on Marijuana and Drug Abuse which was chaired by Raymond P. Shafer. The commission was known as theShafer Commission. While the commission was conducting its review, Roger O. Egeberg who was the Assistant Secretary of Health, recommended that marijuana be placed in Schedule I of the Controlled Substance Act.

    The Shafer Commission was more formally known as Marijuana: A Signal of Misunderstanding. It's an exhaustive report that ultimately recommended the removal of the prohibition of marijuana. The report focused on social discouragement of use such as with alcohol and cigarettes instead of criminalization. The report even suggested that prohibition might be contrary to the Constitution as prohibiting use might not be in line with the "the value of privacy in our constitutional scheme".

    So why isn't everyone freely smoking and/or eating marijuana? Well, because the Nixon administration who had commissioned the report, refused to implement the recommendations. It's well known that President Nixon actually tried to influence Shafer s report by telling him that "You're enough of a pro to know that for you to come out with something that would run counter to what the Congress feels and what the country feels, and what we're planning to do, would make your commission just look bad as hell." Nixon was smart and new that Shafer's report would be political suicide. That was 43 years ago and only now has change started to take hold.

    Change can be slow, but with the right catalyst, it can happen with extraordinary and unexpected speed. This is unique opportunity that investors have before them. It is essentially an uprising of the states to do what their elected officials won't do. U.S. Attorney General Eric Holder recently said that he will release his decision on how to handle the conflict with state laws. His decision will lay the foundation on which the battle for decriminalization will be fought. At worst, he could intensify the conflict between federal and state laws. At best, he could open a door for meaningful dialog to take place that could help unburden law enforcement with outdated mandates on society.

    What investors need to understand is that the criminalization of marijuana is about business, both private and government. It actually has very little to do with society from a moral standpoint. But the business model of criminalization is outdated and has lost relevancy. Let's look at some of the industries both legal and illegal that benefit from the criminalization of marijuana.

    Law Enforcement

    Many law enforcement agencies are allocated budgets based on the crime fighting activities that they must engage in. You can be sure that marijuana is a significant revenue generator for the various agencies. The Drug Enforcement Administration (NYSE:DEA) is no different. When Michele Leonhart who is the top administrator at the DEA was asked while giving testimony to congress if marijuana was as bad a "Crack Cocaine", "Meth Amphetamines" and "Heroin", she refused to give a definitive answer. The testimony can be seen at this YouTube video link. It is a textbook example of how to not answer a question no matter how simply it is phrased.

    Alcohol & Tobacco

    These industries are based on vices and are at risk of users transferring to marijuana products. Companies like MJNA could actually benefit from partnerships with these industries as they have well established marketing and distribution channels. Big tobacco also has the agricultural expertise to grow (no pun intended) the marijuana industry. As a side, current legislation is suggesting that the current federal agency be expanded to include the oversight of marijuana and be renamed the Bureau of Alcohol, Tobacco, Marijuana, Firearms and Explosives.


    The medicinal side of marijuana has a tremendous potential for growth. In my opinion, Cannabis Science, Inc (OTCPK:CBIS) is the leader in this area of marijuana medical research with MJNA a close second. Big pharmaceutical companies have deep pockets and will either aggressively fight competitors or look for acquisition opportunities. Some are suggesting that 2013 is the year "Big Pharma" will make its move.

    Drug Traffickers & Other Organized Crime

    This is the area that I think most people think about the least. These illegal entities stand to lose a tremendous amount of money with the legalization of marijuana. Some suggest that the Drug Cartels could be stopped as they make around 60% of their revenues from sales in the United States alone. But what is important here is to understand that with legalization, law enforcement could allocate resources away from marijuana and focus on drugs that are more detrimental to our society. But many only see enforcing existing marijuana laws as a way to stay in business. As mentioned above, the business model is outdated.

    An investor would be very naive to think that these industries aren't already trying to shape the media and trust in the industry. Mavericks such as MJNA and CBIS are easy targets as their share prices have rapidly expanded and their business transactions are becoming more complex. The complexity of the business transactions is often pushed to current or potential investors as cannon fodder to strategically sway investors. They will say things like "I'm no expert, but this seems awfully suspicious to me". They will then say to you that if you don't believe that it is suspicious then explain it. They can't explain it, but they want you to. Of course there is more risk with small caps than with more established issues. But investing in stocks is a risk reward proposition.

    So, beware of those who ask numerous questions instead of providing you information. The model is more of a manipulation technique than it is a true analysis. And also beware when there are an unusual number of posters and authors taking one side of a position. This can be an example of an organized effort to promote the selling of an investment.

    Medical Marijuana is forecasting revenues of $47M in 2013 and $155M in 2014. That's a whopping 229.7% increase. And with recent sale of the PhytoSHERE assets to CannaVEST (FCLS.OB) for $35M in cash and stock, the company plans to expand its branded product offerings through internal growth and acquisition. As always, make sure you research your investments carefully, and also make sure that the information you get is factual and not innuendo.

    Disclosure: I am long OTCPK:MJNA, OTCPK:CBIS.

    Mar 07 12:33 PM | Link | Comment!
Full index of posts »
Latest Followers

Latest Comments

Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.