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Alan Brochstein, CFA has worked in the securities industry since 1986, primarily with the responsibility for managing investments in institutional environments until he founded AB Analytical Services in 2007 in order to provide independent research and consulting to registered investment... More
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  • Medical Marijuana Inc.: Big Day Passes With More Questions Than Answers 9 comments
    May 16, 2013 6:49 AM | about stocks: MJNA

    NOTE: This was my article I pulled before publication because the company did issue its filing at a few minutes before midnight PST. Some of my concerns about the company's true financial condition look justified, and I will address the filing (which was not complete - the footnotes stopped suddenly on note 4) shortly.

    Medical Marijuana, Inc. (OTCPK:MJNA) last addressed the public on April 30th, when it shared a press release intended to address the falling share price and to outline the future direction of the company. Chairman and COO Michelle Sides promised "we will let our actions, products and revenue speak for themselves". Two weeks later, the company appears to have stumbled badly on a very important issue, its Q1 earnings release and filing, and may also have delayed its launch of CanChew Gum.

    Delayed Financial Filings

    In the press release, the company clearly stated:

    1ST QUARTER FINANCIAL FILINGS ON OR BEFORE MAY 15, 2013:

    The auditor is performing the final verifications of the 1st Quarter filing and will have it posted shortly thereafter.

    As of midnight (EST), there was no sign of a press release or a filing on the OTCMarkets website. CannaVEST (OTCQB:CANV) filed an NT 10-Q on the 15th indicating that it would be delayed in filing its 10-Q until the 20th due to a change in auditor that it had announced the previous day. The delay is unfortunate for shareholders of MJNA, as it will be important to evaluate how CANV accounts for its transaction related to PhytoSPHERE. As a reminder, I have addressed my concerns overaggressive revenue recognition from this deal, which the company confirmed in its 4/30 press release. In its 10-K, CANV indicated through mid-April, it had sold only $1.275mm of CBD oil:

    To date, our operations have consisted of selling $1,275,000 of raw Cannabidoil product to third parties, such raw product obtained by us through inventory acquired from PhytoSPHERE Systems, LLC and contracts with various suppliers in Europe.

    This is important because through Q1, MJNA will have recognized $10.5mm in revenues from the transaction ($4.5mm received in January and as of 12/31 and $6mm received in April and as of 3/30). Of course, this is all stock. This is extremely aggressive accounting where the revenue recognition is way ahead of the end-market consumption of the product.

    Potential CanChew Gum Delay

    It's not clear what has transpired with CanChew Gum, a product that has been delayed for quite some time. CanChew Gum is an innovative patented over-the-counter gum that delivers 10mg of CBD per stick. MJNA owns 50% of the company, CanChew BioTechnologies, that developed the gum. In a press release last July, the company suggested that the OTC gum would launch "on or around October 1st". The initial plan was to offer it on the internet but also in Colorado, California, Arizona and Washington DC "by Q4 2012". On October 2nd, the company issued a press release describing a "market trial" beginning November 15th, with a launch of the product now projected for "early 2013".

    The April 30th press release shared the following update:

    The Company has successfully launched of the CanChew Gum website (canchewgum.com) and is taking sales and product requests. We experienced a delay in the launch of the products due to last minute changes and approvals that we required from attorneys involved to ensure that all marketing and packaging was done correctly and in compliance with the appropriate regulatory bodies.

    At that time, the website was operational and the company was promising shipments by 5/15. As of 5/14, the verbiage changed:

    All Product is currently OUT OF STOCK , new stock is expected shortly and all orders are expected to ship within 24 hours after product arrival.

    While it's possible that the company had gum and sold out and now is out of stock again (I called to inquire but could not reach anyone at the company), it's just as likely that they haven't shipped yet. Hopefully the delayed press release detailing Q1 results (which were pre-announced in early April) will address this issue.

    A Thaw in the Chill

    On 5/14, the company apparently received some good news, as traders were reporting that the DTC Chill had been lifted at TD Ameritrade. The company had indicated in the press release that it had filed the necessary papers with DTC. The SEC describes a DTC Chill:

    Occasionally a problem may arise with a company or its securities on deposit at DTC. In some of those cases DTC may impose a "chill" or a "freeze" on all the company's securities. A "chill" is a restriction placed by DTC on one or more of DTC's services, such as limiting a DTC participant's ability to make a deposit or withdrawal of the security at DTC. A chill may remain imposed on a security for just a few days or for an extended period of time depending upon the reasons for the chill and whether the issuer or transfer agent corrects the problem.

    The net effect has been a restriction on buying the stock at some brokerages. It's not clear what the reason for the Chill has been. The SEC cites one typical cause as an issue with the transfer agent not being in compliance with DTC rules, but these are usually resolved quickly. The SEC gives some other potential causes, including violation of state of federal laws by some or all of an issuer's securities or questions about a security being freely transferable. In any event, after a long delay, the Chill appears to be behind MJNA, which is positive.

    It's unfortunate that MJNA management appears to have missed its own deadline that it shared two weeks ago for reporting its Q1 results, as the company is trying to restore credibility. Given its goal to uplist to OTCQX, it is important too that the stock, which closed at .19 but has traded over the last few weeks between .12 and .23, remain above .10 (on a closing basis), or it could delay potential uplisting. The first hurdle is to complete two years of audits (the company audited Q4 of 2012). The stock must close above .10 for 90 consecutive days prior to applying for the uplisting according to OTC.

    It's very clear to me that investors are looking for a way to take advantage of the trends towards marijuana legalization. I profiled several companies that could potentially benefit a few months ago. While the prices have fallen substantially since then, the fiduciary concerns are too substantial with most of these companies. MJNA is one of the two or three best possible choices, but, until management delivers on its promises and becomes more transparent, I think the stock is quite risky. The current market cap is approximately $160mm (based on a presumed 850mm shares approximately, which is up from 808mm at year-end). This is an expensive proposition in my view for a CBD oil company with a call option on THC, but, if management delivers on its "potential" of $155mm in sales and $95mm in operating income in 2014 that it shared in February, then the price will prove to be a real bargain.

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

    Stocks: MJNA
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Comments (9)
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  • So on Yahoo it seems they came out at 9am eastern. Are there any time zones where it was still 5/15 at that point? haha
    16 May 2013, 09:41 AM Reply Like
  • Author’s reply » I went to bed too early! They filed on OTC at 2:50 EST. That is before midnight in CA, where they are based. I think that they may have been trying to prevent me from writing an article (lol)...
    16 May 2013, 09:46 AM Reply Like
  • I saw on a message board that they posted at midnight last time around - My guess was 2:55 Eastern, so I missed by 5 minutes.

     

    However, I don't think I saw anything on Yahoo when I got up briefly at 5:30 Eastern - now it shows up as 9am - but having trouble accessing it.
    16 May 2013, 09:52 AM Reply Like
  • Author’s reply » The press release says very little. You need to go to the filing (which is incomplete - they omitted several notes): http://bit.ly/17zljh7

     

    Failed to reiterate guidance and snuck in an internal review that can't be pretty.
    16 May 2013, 09:56 AM Reply Like
  • Trying to load the filing - 10 minutes and 2 browsers later, it's 45% complete. Must be a lot of people trying to get it.
    16 May 2013, 09:58 AM Reply Like
  • Author’s reply » And THAT is the bull story as well as an explanation of why the stock is where it is...
    16 May 2013, 09:59 AM Reply Like
  • Also, it appears the report is completely slanted. Apparently they don't know how to use computers or scanners as well.
    16 May 2013, 10:14 AM Reply Like
  • Or directly convert a Word file to PDF.

     

    Hint: In Word 2007, check the "Save As ... " options.
    16 May 2013, 01:11 PM Reply Like
  • Hey Alan, I was still up when the released. It's quite a lengthy read and I was bummed when the notes stopped in the middle of #4.

     

    They have a lot of developmental stuff going but I will say there was a lot less "fluff" in this report and it seemed pretty honest to me. They definitely spin everything as positive but I would expect that from any company.

     

    It's either a day trade or a long term play, of course everything is I guess?
    16 May 2013, 01:36 PM Reply Like
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