Matthew Finston's  Instablog

Matthew Finston
Send Message
I approach investing as a social theorist and a cultural historian. As a result, I am a contrarian. Studying the history of financialization, I have to agree with value investors like Seth Klarman, George Soros, and John Quiggin that markets are ultimately inefficient. However, I am not an... More
  • Marijuana Stocks: What Exactly Are You Buying? 5 comments
    Feb 18, 2014 9:00 AM | about stocks: CBIS

    There has been a lot of talk lately about whether analysts are "bearish" or "bullish" on this industry. I think these views are cop-outs. It is more complicated than that.

    To start, there is money being made and to be made. The questions you should ask is how much and when? An estimated $1.34 billion was made in marijuana sales in 2013 and some have projected that number to nearly double in 2014. So money is being made. But can you make some too?

    But SEC rules forbid public companies from dealing in federally illicit commodities. So when you are investing in pot stocks, you are not touching that green. Furthermore, from an equity standpoint, 2 billion is considered small-cap. Considering that the term 'small-cap' is designated for individual companies and not an entire industry, we are more likely looking at nano-cap companies. But current valuations of pot stocks are individually moving into small-cap zones without ever posting a profit.

    For eager investors hoping to cash in on this burgeoning industry, pot stocks have become an enticing way to get in on the ground floor. The idea being that Cannabis Science Inc, (OTCPK:CBIS), Medical Marijuana Inc, (OTCPK:MJNA), or even Growlife Inc, (OTC:PHOT), might be that opportunity. And for many it has. Money made.

    But an essential question that has not been asked is why did these companies go public so early in the game? The obvious answer is that they needed cash. But before just giving anyone your hard earned cash, you should investigate why they need it; whether they will use it effectively and efficiently; and finally, whether they will be able to give a sufficient enough return to justify your injection of capital.

    A lot of these companies have been publicly traded for a while now. CBIS has been incorporated since 1998. Researching CBIS' historical profitability and management of capital can give you an idea whether you should trust them with your cash.

    CBIS is one of my favorite pot stocks because it epitomizes the fundamental flaws in this industry. Before discussing valuations, business model, and speculative growth, have you checked it's SEC disclosures? CEO and President Robert Melamede, the eponymous medical marijuana guru, has been disposing his stake in CBIS on a daily basis since January 2, 2014. Although insider trading is not the only criteria investors should look at, it does give potential investors an idea how management evaluates the future of the company.

    As of March 31, 2013, Dr. Melamede owned 50340333 shares of out of its 684,390,573 shares of common stock (currently there are 761,323,906 shares outstanding). In the last month and a half Dr. Melamede has disposed of 5 million of his 50 million shares, roughly 10% of his stake. For a company that has yet produce a sellable product, it seems quite suspicions that Dr. Melamede should be dumping this early. Who knows, those shares could be worth 10x that amount once they finally have synthesized there cannibanoid-based formula (CBDs) for treating cancer, ADHD, and HIV. Seriously. If CBIS has in fact discovered a way to synthesize CBD to cure cancer, then this company has yet to see its true value.

    So why is Dr. Melamede selling? Because you are buying. Maybe Dr. Melamede's wallet is a bit light and needs the extra cash. But remember, that is your cash, your investment dollars. And finding the cure for cancer is expensive. CBIS has already racked up 90 million in debt. Yet its current market cap is 140 million. That amount is not based on earnings, not based on equity, and not based on tangible assets. Those are investment dollars that have been poured in since Colorado legalized marijuana.

    A look at CBIS historical disclosures give us an insight as to what your investment dollars have bought you.

    In 2000, CBIS went public as National Healthcare Technology Inc. Dr. Melamede was not part of the roster at this point. The company had a total of $18,334 in assets and somehow already managed to rack up 1.2 million in debt. Of course publicly traded pharmaceutical companies tend to hold a significant larger amount of debt than other companies. That is due to the high costs of development.

    In their 10-SQB disclosure, the company explains that they decided to go public so as to fund their Phase III trial of their intravenous drug Magkelate. However, without enough cash and their developer supposedly dying, the company lost its patent and became inert for several years.

    For the next few years, the company decides to leave the healthcare industry and try its hand at "manufacturing and distributing decorative stone veneers and finishes." Any sudden change in business direction should give investors caution. But the company does not go into massive debt at this point. This remains the case through September 2005 when National Healthcare Technology's accumulated deficit still amounted to only 700k. But in 2006, the company began acquiring massive amount of debt. Why?

    In 2006, National Healthcare Technology decided to make another direction shift. Now, National Healthcare Technology is in the oil and gas business. They acquire an initial 11 million debt to fund this new direction. By June 2006, this number spikes to 26 million, 15 million of which are for "professional fees." These fees are for a Ross-Lyndon James, the then acting President, Director and CEO, as well as Brian Harcourt, which from their disclosure appears to be Mr. James' lackey.

    Skipping the part where the company changes its name to Gulf Shore Inc, we come now to 2009 when National Healthcare Technology makes another shift in business model: Cannabis Science. As of April 6, 2009, the company decides that it is going back to the healthcare business with a going concern of cannabis pharmaceutics.

    Even though the company changed its name, it still has retained its accumulated deficits amounting to $52 million without having made a return on their investment. This deficit has not gotten any lower. CBIS' most recent quarterly reports show that this figure has grown to 90 million. In addition, CBIS has disclosed they also have nearly a 3 million stockholder deficit.

    Now, consider again why Dr. Melamede is selling. And according to its latest filing, CBIS needs more cash if they are too sustain business operations.

    If CBIS fails to produce its CBD-based drug like Maklegate, it will just change its business model to whatever the next big trend is. Yes this company needs cash. It needs cash to fatten the wallets of the company's management who have failed to provide their investors will a solid return.

    CBIS is just one of the many pot stocks trading now with unrealistic valuations. Behind every Pot Stock ticker there is a story of a company that has changed business directions and has failed to use capital effectively. True, certain companies trading now may be the future of this industry. But as of now, the money is in the idea not the business.

    If you owned pot stocks prior to January 1st, you most likely have doubled or even tripled your position. That is great! But how long will the hype last? How long until investors look behind the glossy websites and the slick pitches and see that the game is rigged against the investor.

    For those investors now trying to get in now after eyeballing 300%-3500% spikes in the last month, who do you think will buy your investment? And now that you own stake in CBIS, RFMK, or ENDO what exactly do you own? Do you really know?

    Money is being made. It is being made on the idea of pot stocks becoming main stream investment opportunities. However, little analysis is being done on how legalization will actually affect the future value of a marijuana as a commodity. Sure, as an illicit drug, or even as a deregulated drug, an ounce can still go for $600. But the price for this commodity will surely go down as it becomes easier to grow and sell.

    You probably think I'm bear. I'm not. I think money can still be made as long as you understand how the game is being played. In fact, a lot of money will be made as this continues to be a volatile industry. What these past two months show us is that investors like the idea of investing in pot. And sometimes that is all it takes for you to make money. And if you understand that what you are buying isn't a share in the next market revolution but a fleeting idea, you can play this industry to your advantage.

    First: news is key. Doesn't matter if it is positive, negative, or neutral, much of what drives these stock prices up is that they are being recognized as a pot stock. The smart marijuana investors understand that no company has sufficiently demonstrated a long play. They are betting that they can make a quick return on their investment by investing in a pot-stock first.

    Which brings me to my second point: watch out for companies that change their "going concern" to marijuana. Remember you are not actually buying a piece of the company's equity or future earnings but the idea.

    Finally: don't hold on forever. Look at how other investors are valuating the marijuana industry. You can always buy back in if you want but you will never get back those quick gains.

    Now, does this sound like solid investing ideas? Of course not. But this is how it is being played. The volatility and the market caps tell the story. The people investing in this industry are not billionaire hedge-fund managers who can single-handedly control the price of a security. They are intrepid investors like you willing to stake a few thousands they have saved up in hopes of doubling or tripling their money quick. And if you want to make money, you have to play this industry as well. Otherwise, you might be the last one holding shares in a company with zero assets and a debt of 90 million.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: CBIS
Back To Matthew Finston's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (3)
Track new comments
  • Asplinator1
    , contributor
    Comments (47) | Send Message
     
    nice
    19 Feb 2014, 06:46 AM Reply Like
  • fascettofe
    , contributor
    Comments (7) | Send Message
     
    Great article uncovering several truths about this sector and directly or indirectly, about different player's business models!!

     

    I particularly like $FITX, in spite of its controversial CEO and his ways of promoting the stock. They are building the largest growing facility in Canada and probably in the world. Once they get approval from Health Canada (a big upcoming milestone for the company) and after April 1st, when Canada will change the rules of engagement in the MMJ sector allowing "super growers/producers" to distribute directly to patients, $FITX will be on its way to making millions in the short term and billions in the longer term. Although they will face competition and most likely will not be able to sell the 1.3 million annual pounds in the internal market, their application to HC (import/export) will allow them to clear that figure fairly easily, as already about 29 countries accept MMJ as a legal narcotic treatment. Forecasts put MMJ at about $7-$9 per ounce in Canada once it is deregulated. If they clear the first batch by the end of the year or Q1 2015 at those local and international prices, you will have the first company in this space breaking the billion dollar mark [in sales]!! Also, they plan on being VERY profitable working at 80-87% Gross Margin levels. Bottom line is still unknown but presumably will be very high as well. By the way, $PHOT has agreed to finance their facility construction on a $12M loan. In return, they are entitled to 25% (only $25M) of $FITX revenues once they past the $100M mark in sales, among other royalties and fees. So $PHOT will also benefit from $FITX success and will see a huge capital inflow coming again strictly from the MMJ industry.
    19 Feb 2014, 01:18 PM Reply Like
  • Matthew Finston
    , contributor
    Comments (969) | Send Message
     
    Author’s reply » The key issue for the Canadian marijuana market is who has a mmpr license. Without it, doesn't matter how big their facility is. There are certain security clearance requirements that must be met to receive the license. Here is the website listing the eligible mmpr licensed producers http://bit.ly/1mulwux. One to look out for is tweed. They plan on going public relatively soon. http://bit.ly/1muluCM. They will be listed on Canada's TSX venture exchange. This is different from Canada's tsx senior exchange. TSX-V is like the Canadian OTC-BB or NASDAQ small cap. My concern is that as more companies acquire mmpr licenses, what will happen to those companies who have only "applied" like $fitx? That could lead a lot of investors who are looking for the short term gains to jump ship.
    19 Feb 2014, 06:22 PM Reply Like
  • rongillis
    , contributor
    Comments (17) | Send Message
     
    If you are to read into the financials of current Canadian and US marijuana "players" coupled with MMPR projections, they are fairy tales, a lot like these basic holding companies owed and / or operated by the same people...such as MJNA's accounting of their sale to CAANvest (revenue??????) and the number of shares these guys paid and more often authorized by only them, to their personal benefit....or predictions of producing / selling 1.3MM lbs ...as if they'll ever produce and sell that amount...also the only permit CEN has received (ready to build) is a boilerplate form letter over 350 other applicants received. Also, his claims of having such positive relationships, 45 min calls etc....but not just with a representative of HC, but the woman in charge.....im both a Canadian and one of hundreds of applicants for a license. What we've been told by the REP at HC we are dealing with, is we stand a better chance than most applicants because of a couple reasons....

     

    First, our business plan has been completed whereas most haven't submitted theirs as they don't want to put the "time" into it and not necessarily important at the moment...they have a plan, but it's not truly plans, rather hopes and dreams....

     

    (most still can't even produce a true plan or long term strategy, it's about pumping these....$0 valued stocks in my mind.....worthless..., and they prey on the regular person by quoting industry deports on current and future market possibilities which they say to the public that they know know they'll make money because it's such a gold rush.....and look at what were saying as a means to justify vs true actions and valid approval of an MMPR license.....)

     

    Second, our plan is to be able to scale and quickly if the market requires it. We're seeking financing in part for the proposed operation build out and necessary working capital to be used to fund operations, just around $ 1.5MM . But, well be selling day 1 because of the import policy....

     

    Third, a lot of these shell companies heaving publicity about their "ready to build" letter, they've broken ground (if in fact they were at the final stage, they'd be building as the final HC assessment/visit can only be done on a completed building .....)..there are others, but HCS reps point was they want level headed, professionals that are long term not just for a pump n dump....so if CEN is as sure as they maintain and truly only require the security HC approval....they would be building in preparation, and based on sales / profit forecasts, as fast as possible....instead, in reality they aren't dumb, they're not shelling out the funds to build because they aren't near to the final stage ...n he's still maintains that line in investment conferences...

     

    Fourth, our revenue projections are realistic. Forecasting y1 top line revenue $ 3MM, running at 50- 60% capacity of the original building. Unless the growth exceeds the even huge number of 64%, dictating a hyper growth strategy, that too is considered, allowing us to be prepared for whatever situation happens.

     

    I could go on, but since I believe the examples I was given by my rep at HC, no bps, unrealistic revenue $100 million one guy, another said he wants to be at the $5 billion dollar Mark by y3).....instead of starting small and learn efficiently to handle growth better etc etc ...with the exception of a.few larger co's....most OTC stocks here and the US are outright fraudulent.....please, read notes to FS's to see all these interested co's that buy and sell using an ever increasing stock pool......

     

    This is a huge market, do not for a minute believe I'm s.nay sayer.....quite the opposite really, I think it's going to be gangbusters....but, what I do think and for thr most part, a lot of "paper cos" that pay more $ 1.5MM+ for investor relations, even though revenue is a.6th of that...237k....so companies like ours will be the ones to survive, because we are "real" companies" producing tangible products, long term vision and goals, for shareholder enrichment, but not $100 million in revenue by y3, and the market is real and also will eventually be Billions ....but the real play is with real companies, not frauds, dubious companies and characters, creating webs of financial transactions between themselves.....ungh, I have to so much more... however other duties call!!!!
    9 Apr 2014, 12:31 AM Reply Like
  • Matthew Finston
    , contributor
    Comments (969) | Send Message
     
    Author’s reply » sir/madam, I think you may have the wrong article. canada is not mentioned once here. except in the comments.
    9 Apr 2014, 12:46 AM Reply Like
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


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.