Medical Marijuana Inc.: Whistling Dixie, Blowing Smoke

May 06, 2013 11:40 AM ETMedical Marijuana, Inc. (MJNA)168 Comments
Alan Brochstein, CFA profile picture
Alan Brochstein, CFA

I have been so focused on transparency and accounting issues that I have missed what may be an even bigger part of the story: Medical Marijuana Inc. (OTCPK:MJNA) gets no benefit from sales of Dixie Elixirs and other Dixie products in Colorado. I first learned of this on a message board where "StevenRisk" suggested this idea. Given that this certainly wasn't apparent to me after almost three months of studying various aspects of the company, I went back to the filings and press releases in order to understand the relationship better.

While it seems that management doesn't go out of its way to clarify the issue, it's all there in black and white: MJNA owns the brand only (60% actually) and not the company. This is very important because many investors seem to equate success of Dixie Elixirs with potential success for the stock, mistakenly assuming that sales in Colorado result in a benefit for MJNA. I had struggled to reconcile what is clearly a rapidly growing product with the lack of revenue for MJNA. In the 4th quarter, 96% of sales came from a licensing fee for PhytoSPHERE of $4.5mm, which I have described as questionable and which was confirmed by the company in their 4/30 press release.

MJNA announced a year ago that it had acquired "all intellectual property, research and development, formulas and recipes associated with medical cannabis brand, Dixie Elixirs & Edibles, from Dixie Holdings, LLC." The company formed a holding company known as Red Dice Holdings, which is owned 60% by MJNA and 40% by Dixie. RDH does not own Dixie, which continues to operate as an independent company. Tripp Keber serves as President and CEO of both Dixie Elixirs and Red Dice Holdings. The intent of the deal was to extend the brand to states beyond Colorado. While it has, it has done so in a way that dilutes the value of the brand in my view, as the Dixie brand is based on hemp-based products and not THC.

In the fall, the company launched a non-THC product, Dixie X, which was relaunched in January as Dixie Botanicals. These products consist of hemp oil capsules ($7 per capsule for 60 capsules), hemp oil drops ($160 for 2oz or 500mg cannabidiol) and a hemp oil balm $33 for 1.33 oz). It's no wonder revenue doesn't appear to be material!

More recently, the company announced the launch of Dixie X Synergy, which offers a combination of CBD and THC. As the press release states, the product will launch in Colorado then expand to California, Arizona and Washington "as the company's licensing agreements permit." What I found interesting here is the way MJNA described the product being launched by "its portfolio company, Red Dice Holdings, LLC's brand Dixie Elixirs and Edibles." The "brand" is doing the launch. No, brands don't do launches, companies do launches. Dixie Elixirs is launching it in Colorado and then maybe it will be launched in other places.

In October, Tripp Keber was interviewed on 60 Minutes. The company issues a press release that also pointed to a cover story in Newsweek:

Medical Marijuana, Inc. portfolio company, Red Dice Holdings, is the parent company of the Dixie Elixirs & Edibles brand

The link above was in the company's press release and leads to the Dixie website. It's very easy to see how someone reading the press release might not appreciate that being the parent of the "brand" is not the same as being the parent of Dixie Elixirs. There is no "brand" website, which adds to the confusion. Any outsider who visits that website would have a hard time understanding the true relationship, as it appears that all products (THC and CBD) are offered by this one company.

This confusion was further propagated last month, when the company described its co-sponsoring of Snoop Lion's (formerly Snoop Dog) movie premier. The press release was headlined: "Medical Marijuana Inc.'s Dixie Elixirs Brand to Co-Sponsor Premiere of Snoop Lion Movie "Reincarnated" During 4/20 Week." It went on to describe how the Dixie products are sold in 500+ medical marijuana centers in Colorado.

The company is trying to capitalize on the success of the brand with THC products, but where are the THC sales outside of Colorado? Last June, the company described its plans in a press release:

Within 60 days, Red Dice Holdings will launch on-line sales of the CBD based Dixie X and CanChew products in the US through licensed distribution companies. Selected international distribution will follow later this year. Hemp-based CBD products are legal in the United States and studies have shown them to be effective in treating a variety of medical conditions including pain management, anxiety, nausea and convulsions. The CBD health and wellness industry is estimated to be a $5 billion market.

Within 90 days, Red Dice Holdings will enter into exclusive agreements to license the Dixie Elixirs brand, formulations, proprietary extraction processes, delivery methods, equipment and other intellectual property to carefully selected distribution partners in California, Arizona and Washington D.C. The agreements will include all of the Dixie products including Dixie X and CanChew gum.

Of course, the company has yet to launch CanChew, which they had suggested would be launched in April, though they do have a website that indicates the pricing of $300 for 96 sticks. This gum has CBD and no THC. More concerning, though, is the failure to launch THC products. The company had indicated that it would have agreements in three locations. In this press release, the company suggested that it would be selling Dixie THC products by the end of 2012. In its February guidance press release, the company states that it has established its first licensing relationship for Dixie Elixirs in Arizona. It also takes credit for "increased product distribution in Colorado to over 500 retail locations," though this does nothing for the bottom line for MJNA. This is confirmed in the 4/30 press release, as the company states that it hasn't booked any revenue from THC product sales:

Red Dice Holdings and MJNA does not and has not received any revenue from those operations and does not intend to, until and if marijuana is federally legalized. The company does plan on charging a fee for its use when it is in the best interest of the company via its licensing fee.

It's pretty clear that MJNA is getting minimal revenue from anything related to marijuana. I believe that investors are mistakenly assuming that the company benefits directly from the success at Dixie Elixirs. There may be an indirect benefit or a future benefit, but MJNA shareholders do not share in the profits of that company's sales in Colorado. So far, the brand has been diluted by turning it into a nutraceutical product. The only thing "high" about Dixie Botanicals is the price!

While the company's filings properly describe what it is doing with Red Dice (selling CBD as a nutraceutical), its press releases lead readers to an improper conclusion that ownership of the Dixie brand benefits from success at Dixie Elixirs. The failure to launch any THC products outside of Colorado a year after acquiring the brand is yet another example of how management at MJNA has made promises that it hasn't kept, including the gum launch, getting a better listing, getting the DTC chill removed, getting new management and directors and getting a full audit (they only have audited Q4 2012 financials). For now, investors thinking that they are investing in "medical marijuana" should be aware that they are buying into just nutraceutical hemp.

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

This article was written by

Alan Brochstein, CFA profile picture
Alan Brochstein, CFA, was one of the first investment professionals to focus exclusively on the cannabis industry. He has run 420 Investor, a subscription-based due diligence platform for investors interested in the publicly-traded cannabis stocks, since 2013, and he is also the managing partner of New Cannabis Ventures, a leading provider of relevant financial information in the cannabis industry since 2015. Alan is based in Houston.Before focusing exclusively on the cannabis industry in early 2014, Alan had 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 advisors. In addition to advising several different hedge funds and investment managers, including Friedberg Investment Management, where he participated as a member of its investment management committee, Alan was also a senior analyst for the independent research firm Management CV. In 2008, he began providing a first-of-its-kind subscription-based service for individual investors, Invest By Model, which offered two different portfolios that investors could replicate in their own accounts. Alan also offered The Analytical Trader at Marketfy, where he used fundamental and technical analysis in a disciplined process to offer specific trade ideas geared towards swing traders.

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