10 More Overvalued Shorts

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Includes: CBCA, CVSI, HPIL, LATX, NGBL, POETF, RMISF, SQCC, SRNA, TXMD, UBIQ, UTMR
by: Edward Schneider, CFA

Summary

Each stock has a market cap of $0.2B to $1.0B.

No real revenues, bleeding cash, and dysfunctional businesses.

Fundamentally they should go to zero.

Due to the wide readership of last week's article 5 New Extremely Overvalued Shorts, enclosed are 10 more overvalued shorts. In response to comments about the low liquidity in the five shorts mentioned last week, several of the following shorts have higher trading volume.

I also received some skepticism on the performance of this shorting strategy as well as interest on how to implement such a strategy. The Quan Technology Fund has been shorting these speculative overvalued stocks since late 2009, and has made money every year despite a strong bull market during that period. For more details on the results as well as implementation of such a strategy, please refer to the February article -- Shorting Overvalued OTCBB Stocks - Results And Advice.

Nine of the ten following short candidates are newcomers to my Seeking Alpha short articles, have market values of $0.2B to $1.0B, generate zero or nominal revenues, lose money, and have dysfunctional business models. Fundamentally, they should go to zero.

Name

Ticker

Price

Daily Trad. Vol.

Ent Val

Revs

EV/Revs

Net Loss

TherapeuticsMD

TXMD

$6.25

$13.0M

$938M

$11.7M

80x

-$36.1M

Asia Travel

ATSR

$3.47

$10k

$619M

$0.5M

1163x

-$507k

Ubiquity

OTCQB:UBIQ

$5.70

$34k

$569M

$0.4M

1278x

-$56.2M

HPIL Holding

OTCPK:HPIL

$9.20

$30k

$523M

$30k

17445x

-$929k

Medbox

MDBX

$10.13

$492k

$303M

$3.3M

92x

-$2.7M

Latitude 360

OTCPK:LATX

$1.90

$20k

$279M

$1.5M

185x

-$2.4M

RM2 Intl.

RM2.L/OTC:RMISF

$1.21

$312k

$276M

$0.1M

2655x

-$77.3M

Ultimate Rack

OTC:UTMR

$1.38

$57k

$214M

$0

1000x*

-$15k

Poet Tech.

PTK.V/OTCQX:POETF

$1.30

$1.7M

$200M

$0

1000x*

-$9.1M

Surna

OTCQB:SRNA

$1.70

$26k

$171M

$0.3M

492x

-$2.2M

*Companies without revenues, have a default EV/Revs of 1000x

TherapeuticsMD is a Boca Raton, FL-based company trying to transition from a vitamin and nutritional supplement distributor to a women's wellness company with a pharmaceutical pipeline focusing on menopause therapies. I wrote about TXMD in the past - see Star Scientific And TherapeuticsMD: 2 Overvalued Pseudo-Pharmaceuticals, and subsequently covered it last year after the company's substantial equity financing at $1.70 per share. Given a bloated market cap three times higher than where we shorted it in the past, without a corresponding improvement in fundamentals, the Quan Technology Fund re-initiated the short position earlier this year.

Management's plans to build out a nationwide distribution network and fill that network with proprietary drugs that address women's health, including hormone replacement therapy (HRT) products for menopause. Over the last 18 months, the company has progressed in some aspects to achieve that goal. TXMD shares now trade on the NYSE instead of the OTCBB. The company raised funds of $200M in the past 18 months (including a $64M secondary offering for insiders to sell their stock at $7.10 per share) with the help of some higher tier investment banks that now cover TXMD. The company is aggressively pursuing clinical trials for HMT drugs for menopause, including the promising vaginal and vulvar atrophy niche, led by ex-Pfizer (NYSE:PFE) employee Sebastian Mirkin. The company has filed for 47 patents versus only a few patents two years ago, and recently had some patents issued including a method patent.

But if you remove all the noise, promotional news releases/conference calls, and sell-side research, the company has delivered limited tangible progress compared to when we covered our short in early 2013. In 2012, management claimed to be in Phase III trials with FDA approval of these HRT products as early as 2013 and as late as 2015. Today, with $137M in additional primary capital later and A LOT more to come, we are still preparing for Phase III trials including a suspension of one trial by the FDA. IF and when the FDA approves these controversial HRT drugs, TXMD will need to overcome 1) existing drugs that are serving its targeted menopause markets, 2) upcoming low-dosage HRT menopause drugs that are ahead of TXMD in clinical trials, and 3) generic drugs for menopause hormonal therapy that may take away the market opportunity before TXMD's drugs are approved.

Revenues consist of low-value distribution of pre-natal vitamins and other nutraceuticals. To generate the $12M of the last twelve months' sales, TXMD had to expend $20M in SG&A expense alone. Meanwhile, R&D expenses jumped 39% sequentially to an annual run-rate of $33M in Q2 2014, and should accelerate further in the coming quarters as Phase III trials begin in earnest. TXMD's net loss rose for the fourth consecutive quarter to -$11M (-$44M annualized) in Q2. TXMD's prolific cash needs are an investment banker's dream with hundreds of millions of dollars in capital offerings generating highly lucrative fees, subsidized by investors who buy the biased sell-side research that these conflicted investment banks produce.

But for argument's sake, let's believe sell-side analysts' estimates. They project low sales and heavy losses through 2016. Consensus 2017 revenues bounce to $96M and a breakeven GAAP bottom line, with revenues moving up to $237M in 2018 with $80M in net profit. These rosy long-term forecasts are the basis for aggressive price targets. There are two key elements missing in sell-side investment price targets: 1) they do not account for the large share dilution that will be needed for the company to achieve breakeven in 2017 (increasing the share count from 155M today to 165M in 2017 is not credible), and more importantly, 2) they do not account for the low probability of this optimistic scenario actually occurring (and discounting cash flows and/or claiming these aggressive numbers are a base case do not cut it).

The banker that led one of its recent financing rounds has a $10 price target using a 165M share count in 2017. Move that share count up to a more realistic 205M, and the price target goes to $8. Secondly, let's generously assign a 25% probability that this very optimistic scenario comes to fruition, a 25% scenario where the company muddles along at half the value, and 50% probability that TXMD follows its current path and dilutes itself into oblivion and/or goes bankrupt. The price target then falls to $3.

Frankly, I would not pay anything close to $3 for TXMD. The company burned through tons of investor dollars in recent years with little to show for it. Why should this trend suddenly change?

If you look at the CEO, the Board of Directors, and their related band of insiders, you would have trouble justifying any value at all. Massive insider selling of super-cheap shares is only the tip of the iceberg. Please refer to my above article as well as this article for more details.

Asia Travel is a Hong Kong-based travel agency with very little business. The company also operates a small, three-star Hong Kong hotel. The company was formerly known as Realgold International, Inc., and changed its name to Asia Travel Corporation in June 2013.

Asia Travel is a virtual company with only two employees, generating only $0.5M in revenues over the twelve months ended June 2014, and losing -$0.5M over that period. Even worse, the company has $2M in high-interest bearing net debt that it cannot afford to pay off.

A recent 10-Q filing reveals:

On July 22, 2013 the Company entered into a Regulation S Stock Purchase Agreement ("Agreement") with a group of 34 non-US individual purchasers ("Purchasers"). Under the Agreement, the Company will issue a total of 125,788,400 shares of common stock to Purchasers for a total price of $628,943 ($0.005 per share). The issuance of the 125,788,400 shares is pursuant to the exemption provided by Regulation S. None of the Purchasers is a US person and the transactions underlying the Agreement are carried out outside US. Accordingly, July 29,2013, 125,788,400 shares of common stock have been issued.

In other words, 71% of ATSR's stock is held by Chinese/foreign investors at a price of $0.005 per share. In comparison, the current price is $3.50, equating to an enterprise value of $619M. If you add it all together, ATSR is a screaming short that has no value whatsoever.

Ubiquity has a graphical user interface (GUI) and navigation tool to manage consumers' online content called Sprocket (speaking of Sprockets - consumers have downloaded this Sprocket video more than Ubiquity's GUI). The company also claims to have a web services platform called WEAV. Ubiquity has a chic web site that promotes its services using all the right buzzwords. The site even claims to have 17 reputable clients.

The disparity is these so-called clients barely generate any revenues. Sales for the twelve months ended June 2014 were only $0.2M (excluding related-party Q1 2014 sales of $250k). Q2 2014 revenues were just $14k, down both sequentially and versus year ago figures. Below the top line, it's a bloodbath. For the twelve months ended June 2014, EBITDA was -$54M and net loss was -$56M. The main culprit was a very generous $42M stock-based compensation package expensed in Q4 2013.

Name & Title

2013 Cash Comp.

2013 Stock Comp.

2013 Total Comp.

Chris Carmichael, CEO

$0.842M

$3.744M

$4.586M

Connie Jordan, Exec. Sr. VP

$0.251M

$1.656M

$1.907M

NB: Mr. Carmichael & Ms. Jordan had similar compensation levels in 2012

Also, according to the latest 10Q:

The Company paid or accrued bonuses related to equity raises of $284,370 and $179,026 to two officers during the six months ended June 30, 2014 and 2013, respectively. These officers receive percentages of 5% and 1.5% for all monies obtained through capital raises.

Thus, not only are executives taking salaries and stock options way beyond the company's means, but some executives are double-dipping by earning commissions on capital raises. To be fair, Mr. Carmichael's family is also extending credit to the company. But on balance, these questionable corporate practices raise a red flag for investors.

A combination of stock-based compensation/acquisitions, stock-for-services, and capital raises led the share count to skyrocket to 100M currently versus 15M one year ago. Issuing shares like candy to directors, employees, service providers, and others is a recipe for disaster.

It's surprising that UBIQ shares can maintain an enterprise value of $569M given such massive dilution with nominal/declining revenues and huge losses. The free float is 68%, although average daily trading volumes is a less-than-robust $34k. The stock did not budge after a recent news release of an LOI with Hong Kong-based American Tec claiming an expected $150M in revenues IF an agreement is reached. Maybe it prevented the stock from tanking further. In any case, the LOI is very suspect. American Tec is a China-based "board stuffer" (i.e. assembles circuit boards). American Tec is one subsidiary of North Asia Strategic Holding (OTC:NSTFF) (8080.HK). The parent company's revenues are only $110M. So, how can this one subsidiary generate revenues of $150M in the twelve months subsequent to a signed agreement?

I do not think that Ubiquity is completely worthless. This recent LOI could potentially lead to some sales. The patent portfolio may have some value, although the bulk of the company's 18 issued patents are not directly related to its current business. Some patent applications relating to Sprocket and WEAV have been submitted, but none have been granted. The company provides a gross patent value of $7.8M (before amortization) as of June 2014. Ignoring the negative book value and projected losses, and just taking this $7.8M gross amount plus the very slim chance that this recent LOI provides enough cash flow down the road to cut down Ubiquity's high cash burn, divided by 100M shares, optimistically values UBIQ at $0.25 to $0.50 per share. This is a far cry from today's price of $5.70. More realistically, Ubiquity can be viewed as a Series A investment that, after cutting away all the fat, VCs would probably give a $10M pre-money valuation ($0.10 per share), if they were brave enough.

HPIL Holding is an investment holding company with nominal capital and no operations with a market value of $523M! HPIL has been floundering around since 2004 in various failed businesses, with the current management team of two people taking over in 2009. The latest business transition came in 2012, leading to a new name of HPIL Holding and a business plan to invest in six sectors: healthcare, energy, food, real estate, communications, and art & culture. From its home-base in Saginaw, MI, HPIL has formed cooperative agreements with other investment groups in northern Italy in some of these sectors. So far, these agreements have yielded very little activity. HPIL has also taken a 32% interest in a small real estate management firm. HPIL's only other investments that I can decipher from its web site are Italy-based IFLOR (massage device) and possibly India-based Trueskill Energen (installer of solar panels, wind turbines, etc.). None of these appear to be earth-shattering investments.

But HPIL's scattered strategy or questionable investments are the least of the company's problems. These investments were too small to have any impact, and were carried at just $0.2M on the books as of June 2014. Moreover, HPIL has no capital to invest in future investments. Cash was only $0.4M as of June 2014, covering the company's internal burn rate for the next few quarters.

Even worse, conflicts of interest abound. The two employees/managers of HPIL, Louis Bertoli and Nitin Amersey, have the following related party transactions per the latest 10Q:

The Company's wholly owned subsidiary HPIL HEALTHCARE Inc. uses the service of MB Ingenia SRL ("MB Ingenia") for the production of the "Massage Vibrator for the Relief of Aches and Pain". HPIL HEALTHCARE Inc. made property and equipment purchases from MB Ingenia totaling $24,193 for the six months ended June 30, 2014 and $91,137 for the six months ended June 30, 2013. Mr. Bertoli was the President and CEO of MB Ingenia until November 28, 2013, at which time Mr. Bertoli's brother became President and CEO of MB Ingenia. Mr. Bertoli also serves as an executive officer and director of our Company.

The Company had advances receivable from MB Ingenia of $241,746 as of June 30, 2014 for the production of the IFLOR units. These advances are non-interest bearing. The Company also had advances receivable from HREM as of June 30, 2014 totaling $100,000. These advances are non-interest bearing and due on demand.

The Company uses MB Ingenia for various corporate business services, including technical support and engineering services related to the IFLOR Device and use of office space by Mr. Bertoli. For the six months ended June 30, 2014 and 2013, the Company incurred expenses of $24,910 and $24,548, respectively, in relation to these services.

On July 20, 2009, the Company entered into a two-year consulting agreement with Amersey Investments LLC ("Amersey"), a company controlled by a director and the CFO of the Company, Mr. Nitin Amersey. Amersey will continue to provide office space, office identity and assist the Company with corporate, financial, administrative and management records. For the six months ended June 30, 2014 and 2013, the Company incurred expenses of $30,000 and $33,020, respectively, in relation to these services.

The Company uses Bay City Transfer Agency & Registrar Inc. ("BCTAR") to do its stock transfers. Mr. Amersey is listed with the Securities and Exchange Commission as a control person of BCTAR. For the six months ended June 30, 2014 and 2013, the Company incurred expenses of $3,147 and $1,525, respectively, in relation to these services.

The Company uses the services of Freeland Venture Resources LLC, for Edgar filings. Mr. Amersey is a control person in Freeland Venture Resources LLC. For the six months ended June 30, 2014 and 2013 the Company incurred expenses of $7,610 and $3,640, respectively, in relation to these services.

The Company uses the services of Cheerful Services International Inc. ("Cheerful") for corporate press releases. Cheerful is owned by Mr. Amersey's children. For the six months ended June 30, 2014 and 2013, the Company incurred expenses of $3,730 and $5,160, respectively, in relation to these services.

Moreover, Mr. Bertoli was also able to obtain beneficial ownership of 50M shares, equating to an 88% stake in HPIL, at a bargain-basement price in a transaction that started in 2012 and was revised in April 2013. Mr. Bertoli's UK-company exchanged the patent and know-how of the IFLOR massage device for 50M shares at a value of $12.5M. First of all, the IFLOR business has not produced any value thus far, and is unlikely to produce anything close to $12.5M in value in the future. Secondly, the effective non-cash transaction price of $0.25 per HPIL share was way below the quoted market price of $5.45 at the time of the final transaction (or below the $10 quote at the time the transaction was initiated in 2012). In fact, HPIL raised capital from investors in February 2013 at $5.10 per share, two months before Mr. Bertoli's barter exchange was finalized at $0.25 per share. In short, HPIL has some corporate governance issues.

In June 2014, HPIL issued $350k of preferred stock to a new investor, pushing back the claims of common shareholders who purchase/own HPIL quoted stock. As the company was running out of cash at that time, management was not in a strong bargaining position.

Fundamentally, HPIL is worthless. It is just a tool for Mr. Bertoli to TRY to manage his investments; often at the expense of minority shareholders. The main reason for HPIL's bloated $523M valuation is that Mr. Bertoli controls 93.6% of the stock. The float is only 6.4%. I chose to short HPIL anyway because, in my experience, stocks like these with ridiculously high valuations eventually implode. There is buy-in risk, but in that case, you just have to jump right back-in and short it again.

Medbox makes marijuana dispensing systems, and is based in Los Angeles, CA. Although off from their highs from earlier this year, marijuana stocks like Medbox, Surna, CannaVest (CANV), and Crown Baus Capital (CBCAE) still retain bubble market valuations in the $100M to $1.3B range. These stocks are all full of news releases with much ado about nothing. For example, Medbox's latest vaporware releases were Medbox, Inc. Announces the Launch of its New Investor Relations Website and Affinor Growers Adds Former MedBox CEO as Consultant.

Using these news releases as fodder, promoters then try to persuade retail investors to buy these stocks at bubble valuations, while insiders sell their virtually free shares. In fact, in each of the last few days, four Medbox insiders, including the founder/largest shareholder, have been selling shares.

The latest Medbox pitch is the medical marijuana market is $1.5B and growing. Medbox is now expanding its business model from pot dispensary systems into medicinal hemp-oil concentrates, medicinal cannabinoids, land acquisition and leasing to dispensaries and retail stores, banking services, armored transport, etc. In this manner, Medbox can obtain a larger share of the market. Upcoming state regulations will be stringent. This will knock-out mom-and-pop pot growers and dispensers, allowing larger professional groups like Medbox to take a larger share of the market.

Let's get a dose of reality. The medical marijuana market may or may not be $1.5B and growing, but Medbox is shrinking from little to nothing. Q2 2014 revenues of $168k were down 89% y-o-y and 50% sequentially. In fact, none of the hyped OTCBB pot stocks (including the above-mentioned MDBX, SRNA, CANV, CBCAE) had any revenues to speak of, and combined would be less than 1% of the claimed $1.5B market. The point is 0% of $100M, $1.5B or $10B is zero. These virtual companies have dysfunctional businesses with barely any employees. They are going nowhere. None of them were even marijuana companies a few years ago. They just jumped on the marijuana legalization hype train.

Speaking of dysfunctional, Medbox achieved the rare feat of COGS actually exceeding revenues:

Medbox Financials

2014 Q2

2014 Q1

2014 1H

Net Revenues

$168k

$332k

$499k

COGS

($549k)

($892k)

($1,440k)

SG&A

($1,070k)

($705k)

($1,775k)

Operating Loss

($1,518k)

($1,273k)

($2,791k)

With only seven employees, little capital, and management having to spend all their time fund raising to survive, there is little chance that Medbox's endeavors into land acquisition and leasing, armored transport, etc. will work out, especially with no relevant experience in those areas. In the meantime, Medbox's biometric dispensing systems sales are disappearing. Cash should run out by the end of September, unless management raises more money. But somehow, Medbox still maintains a $303M market valuation.

In my experience, sky-high borrow rates often precede a stock crash. Medbox stock lenders demanding borrow rates of over 100% must be nervous for a reason. It is not surprising that insiders have been selling.

Latitude 360 manages three restaurant/entertainment facilities in Jacksonville, Pittsburgh and Indianapolis, and plans to open a fourth outlet in October in Albany, NY. Latitude 360 went public on the OTCBB in June 2014 through a reverse takeover of Kingdom Konkrete. The company continues to operate Kingdom Konkrete's Go and Carry concrete business, which accounts for 4% of revenues and operates at a loss. Latitude 360 is a fairly new entity, having opened its first facility in Jacksonville in 2011.

Latitude 360 is a struggling, debt-laden, miniscule company that should not be public, and certainly should not have an enterprise value of $279M. For the month of June 2014 (the first month of reported operations), the company had a loss of -$2.4M ($28.6M annualized). The company carries $41.4M in debt and capitalized leases, with only $117k in cash. The related interest expense was $682k ($8.2M annualized) just in the month of June. Adding to the company's liability woes are four outstanding litigation proceedings seeking aggregate damages in excess of $3M.

The inexperienced investor may be impressed by June net sales of $1.4M ($17M annualized). However, this is a nominal amount in the retail sector; and translates to heavy losses for these large 50k square-footage stores with high staffing needs. Frankly, management better quickly raise prices substantially, and pray that traffic doesn't fall off, to avoid bankruptcy. The only other way to stave-off bankruptcy would be an enormous equity raise. But the price discount required to entice investors to fork over the tens of millions of dollars needed to save this business would by HIGHLY dilutive to current investors.

A reported 7.7% increase in same-store sales for the months of July-August (versus year-ago figures) is unlikely to make a dent in reducing operating losses. In fact, the company's plight may have worsened, as the non-standard news release did not provide current monthly or year-ago figures (as the increase could be off of a lower year-ago base).

If any of my readers live near Pittsburgh, Indianapolis or Jacksonville, you may consider visiting Latitude 360 for an entertaining evening, it may not be around for long.

RM2 International is a UK-listed start-up manufacturing composite-based shipping pallets. The company claims to have a lighter, more durable pallet than polymer or wood pallets. The company generated only $0.1M in revenues over the last reported twelve months ended December 2013, while incurring a horrific net loss of -$77M over that period. Moreover, the company will have to expend substantial capital to manufacture these pallets.

RM2's key assets consisted of a September 2013 $3M acquisition of a logistics tracking company plus a plant in Ottawa valued at $14M to make these composite pallets. In Q4 2013, RM2 was recapitalized including insiders issuing themselves 46M in virtually-free $0.01 shares. In January 2014, management and Cenkos Securities used financial alchemy to turn this modest asset into a high-flying £137M ($223M) AIM IPO valued at £283M ($460M) at that time. RM2 shares are currently trading at £0.745 ($1.21) per share, below the £0.88 ($1.43) IPO price.

Since the IPO, no updates have been published except for 2013 financials released in June 2014. I adjusted the enterprise value of $418M as of December 2013 (which included $29M of net debt) to $276M to adjust for IPO cash proceeds and an estimated 1H 2014 operating cash burn of $80M. The estimated 1H cash burn includes management's stated plans for expanding manufacturing capacity, operating expenses, and a one-time $40M liability payment.

Until recently, much of the management team was ex-investment bankers with no relevant industry experience. It was this management group that likely used their industry network to pull-off the large IPO. The company recently went on a hiring spree to assemble a team with relevant industry experience, although the CEO remains an ex-investment banker. Judging from the lack of news this year, the new management team is still settling in.

RM2 does not list any patents in its literature and filings. A patent search on RM2 International and Plastics Research Corporation (a defaulting manufacturing entity that RM2 took over) came up empty. The pultrusion process that RM2 uses to make these composite pallets has been around for a long time (see this pultrusion machine patent issued in 1972 which has a schematic diagram quite similar to the one in RM2's IPO prospectus). Thus, even if RM2 has some initial success in renting composite pallets, the pallet market behemoth - Brambles (OTCPK:BMBLY), along with Peco, iGPS, and other peers can duplicate the process, thereby nipping RM2 in the bud.

Moreover, this is a mature business that carries average market valuations. Brambles trades at an EV/Revenues ratio of just under 3x. At that multiple, RM2 would need revenues of $100M to justify its current valuation, as opposed to the $0.1M in revenues currently on the books. Given the mature, slow-growing industry and no sustainable competitive advantage to obtain market share, it is unlikely that revenues will ever reach close to $100M.

Basically, there is little tangible evidence to justify RM2's grandiose valuation - no real revenues have been reported, massive losses, no proprietary technology, mature industry, etc. Catalysts for RM2 stock to implode could be 1) release of 1H 2014 results, 2) insider lock-up expiration in January 2015, among other events. Sooner or later, gravity will bring these shares down to earth.

Ultimate Rack is transitioning its business model from bike racks to online vacation packages. In the spring of 2014, the two majority owners of Ultimate Rack sold their 77.5% stake to Robert Oblon of Plano, TX-based Travopoly Travel for $300k or $0.0025 per share, valuing the company at $387k. Incredibly, Ultimate Rack's value exploded 552x to $214M in only a few months with neither reported changes in the company's non-existent finances nor substantive news releases. In addition, Travopoly charges Ultimate Rack an undisclosed consulting fee for its services. Travopoly is now looking to use Ultimate Rack's public market access (i.e. share dilution) to finance acquisitions of small brick-and-mortar travel agencies.

Ultimate Rack has not reported results since the three months ended April 2014. The company did not yet file its 10Q for the quarter ended July 2014, and is delinquent with the SEC.

The grossly overvalued Ultimate Rack has no revenues, a loss of $15k, no employees to be found (just one consultant), and appears to be in a one-sided relationship with its majority owner. This is the ultimate short!

POET Technologies is performing optoelectronic research at a lab at the University of Connecticut (UConn). POET has a long and complex history for such a small research lab. Under the name of OPEL Technologies, the Toronto-based company originally developed solar trackers (a device that orients the solar panel position to optimize energy collection). Subsequently, OPEL acquired Shelton, CT-based ODIS Inc., a developer of gallium arsenide optoelectronic integrated circuits (GaAs OEICs) that attempt to integrate optical components onto high-speed GaAs-based transistors (consisting of a GaAS substrate with layers of indium gallium arsenide). In 2012, management downsized by closing the solar tracking business, and focused on the GaAs OEIC opportunity. At that time, the company was renamed POET Technologies to reflect the planar optoelectronic technology (i.e. POET) process used to make the GaAs OEICs.

The largest tech companies in the world ranging from Intel to JDS Uniphase in the day have been spending billions of dollars on integrated optoelectronics for years. From a small lab in Connecticut, it is hard to believe that Professor Geoff Taylor now has the industrial-grade solution that everyone will use in place of silicon. Planar lightwave circuits on GaAs, and other III-V materials have been around for decades. I am skeptical of the competitiveness of POET's technology, as are the optoelectronic experts that I conferred with.

But let's give POET the benefit of the doubt, and assume its technology has commercial potential. First of all, this technology is still in the lab today, and is not yet stable or reproducible. POET will require five years and $100M-$200M in capital to produce this commercial-quality OEIC. Partly recognizing this dilemma, management changed their strategy again earlier this year from a chip manufacturing model to a sub-licensing model.

The rub is that the potential commercial value decreases dramatically if POET does not have a full-fledged industrial product in the marketplace. Prototypes do not cut it. Management can earn some licensing revenue based on the patents that it exclusively licenses from UConn. But much of the negotiating leverage and enforceability disappears, as potential clients would have to undertake the production and market risk.

So in this unlikely rosy scenario, we are left with a limited licensing revenue stream. Management optimistically estimates that elusive revenues are two years away in the sub-licensing business model. It should take longer, but again, let's give management the benefit of the doubt. In the meantime, paying Synopsys (NASDAQ:SNPS), foundries, mask sets for different spins, etc. to have a credible prototype still costs $10M to $20M. By the way, this will require new skill sets and employees (i.e. more costs and execution risk) to manage this process. The current five lab researchers at UConn will not suffice.

Let's assume the improbable that in two years POET's planar technology works and is refined enough to license to third parties. POET will have to expend a minimum $15M ($10M above in capex plus $5M in opex with cost-cutting) over the next two years to obtain annual revenues that may reach a few million dollars from a combination of BAE or another military customer and possibly small upfront license fee from a few semiconductor companies. Well, we should shut the company down (again). But instead, let's take another leap of faith and assume that even though no major semiconductor firm signs up or pays royalties initially, a small start-up agrees to pay royalties to POET on units sold, and eventually succeeds. In that extreme scenario, the revenue stream may break into the tens of millions of dollars in say Year 6, and can lead to more royalties (depending on exclusivity) in ensuing years until the patents expire. Only at that point in time would POET become profitable and generate a positive NPV. This analysis leads to the conclusion that POET has a slim chance of generating value for shareholders as a going concern.

The more that I look at POET, the more doubts I have. The marketing spin on its news releases is appalling. For example, a recent news release took the negative of paying Synopsys a lot of money in the hope of achieving a chip design, and spun it as a positive joint collaboration. Whether it's with Synopsys or a foundry, POET is quickly spending the $5M in equity raised earlier in 2014 on third-party service providers without any certainty of success (and unless POET hires qualified people to manage this Synopsys process, it will be money down the drain).

Another red flag is that POET is an OTCBB and Canadian Venture exchange quoted public company, when it should be solely government or university funded (not even venture funded) at such an early stage. The fact that management has produced zero revenues for the last four years, and lost money every year since inception, despite management's promises to the contrary is not very comforting. The company had negative EBITDA of -$4M to -$9M in each of the last four years with very few feet in the lab. Where is all the money going? Why should the future be any different?

Needless to say, POET is not worth $200M. It is hard for me to see much value at all.

Surna is another pot stock similar to Medbox. Based in Boulder, CO, Surna claims to make hydro (water-chilled) marijuana-growing equipment. Surna appears to spend more time writing its many news releases than selling hydro equipment. Management produced its first revenues in Q2 2014 amounting to $0.3M. Unfortunately, they had to expend a quarterly operating loss of -$0.3 and a net loss of -$2.4M to generate those sales.

Surna became viewed as a pot stock only in March 2014 through a reverse takeover, after closing down its previous dormant Asian media and gaming business earlier in the year. SRNA managed to catch the end of the marijuana stock bubble on its first day of trading as a pot stock on March 31, 2014, closing at an all-time high of $7.85. On that very same day, Surna's three listed officers and two related-insiders, issued themselves 10.3M shares of stock at a price of $0.25 per share. While the stock currently trades at $1.70, at least insiders are still in the money.

Surna's outspoken CEO, Tom Bollich - a Zynga (NASDAQ:ZNGA) founder, speaks in broad strokes of the booming marijuana industry, and Surna's future role as a marijuana technology leader in agriculture and support services. But looking at Hydro Innovations current products, it is hard to see any leading-edge equipment, and with only $347k in Q2 sales, the market seems to concur.

Surna will need more money to better adapt its water-chilling technology to marijuana growers and/or to make future acquisitions. Unfortunately, Surna had net cash of only $99k at the end of June 2014, and will need to raise more capital just to survive, forget about expanding.

Despite the stock's decline from the March peak, SRNA still sports a bloated enterprise value of $170M. While that may be lower than Medbox's $303M EV, it really does not matter that much. They are both worthless, and sooner or later both will be trading for a few cents per share.

Disclosure: The author is short TXMD, ATSR, UBIQ, MDBX, LATX, UTMR, POETF, SRNA, CBCAE, CANV. Also short RM2.L.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.