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 (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:
- Article 1 Jan 31, 2013 - Medical Marijuana, Inc: The Secret to Legally Tapping Into The Market For THC
- Article 2 Feb 13, 2013 - Marijuana Legalization - Here and Now
- Article 3 Feb 26, 2013 - Medical Marijuana, Inc. Uses Licensing Strategy to Expand Operations for PhytoSPHERE Systems, LLC
- Article 4 Feb 11, 2013 - Medical Marijuana, Inc.: Strategic Preparation for Expansion And Growth
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.