'Marijuana Madness' Awards Medical Marijuana, Inc. A Ridiculous Market Cap

About: Medical Marijuana, Inc. (MJNA)
by: Rolling O Research

At Wednesday’s close of $0.22995, Medical Marijuana, Inc.’s market cap is $677.6M.

Medical Marijuana, Inc. isn't a marijuana company.

Medical Marijuana, Inc.'s revenue in the first half of 2016 was only $3.3M, down 43.8% from 1H/15.

According to CV Sciences, Inc's recent 10-Q filing, MJNA is in default on a $2 Million Promissory Note.

Medical Marijuana, Inc. (OTCPK:MJNA) closed today (Nov 2, 2016) at $0.22995, a rise of 376% since the stock closed at $0.063 on Oct 14, 2016. With nearly 2.95 Billion shares outstanding, it now has a market capitalization of $667.8 Million, which based on MJNA's fundamentals and short-term prospects, is several times too high, bordering on the ridiculous.

MJNA's sharp rise in the stock price over the past few weeks is likely due to anticipation of the upcoming recreational marijuana votes in California, Arizona, Maine, Massachusetts, and Nevada, but assuming all of these initiatives pass into law, the company will see little benefit when they go into effect. This is because MJNA is primarily a company that sells products based on CBD (Cannabidiol) extracted from industrial hemp stalks and seeds, and has stated that until marijuana is federally legal, it will not sell products that include THC (Tetrahydrocannabinol,) and still states on its website that it doesn't sell products that violate the U.S. Controlled Substances Act.

Author's note: A few months after I wrote that article about MJNA and Colorado, the company issued a press release announcing that MJNA and Dixie Brands had settled their differences and gone their separate ways.

Even the passage of medical marijuana laws in North Dakota, Montana, Arkansas and Florida could be a negative for MJNA, because since the company specializes in CBD extracted from the stalks and seeds of industrial hemp, it's entirely possible that it could lose market share to competitors that extract it from the buds of high-CBD strains of marijuana such as Charlotte's Web (since reclassified as medical hemp).

Medical Marijuana's financials are due in mid-November, but as of the end of 2Q/16, they certainly were not the kind of numbers that would warrant a nearly $700M market cap. For the first six months of 2016, MJNA reported total revenue of $3.26M, which was down 42.6% from the $5.8M reported in 1H/15. The Net Operating Loss in the first half of 2016 was approximately $1.5M, and due to various one-time charges and write downs, the 1H/16 net loss was about $15M.

Over the past year, MJNA has issued many press releases about CBD acceptance in Mexico and Brazil, but it has yet to show any revenue from these ventures. Perhaps we will see something in the third quarter report, but so far, MJNA has showed no evidence that HempMeds Brazil is worth the $140M that's shown as an asset on the balance sheet.

In the past week, the company has also issued a couple of press releases about one of its portfolio companies, Axim Biotechnologies, Inc. (OTCQB:AXIM). One release spoke of Axim securing private funding to "… continue its pharmaceutical clinical trials program in cannabinoil research and development for multiple indications", while the second told of Wageningen University in the Netherlands beginning pharmacokinetic/pharmacodynamics (PK/PD) studies to determine the amount of CBD in the blood after chewing Axim's CanChew Plus CBD gum for thirty minutes. The eventual goal appears to be a treatment for irritable bowel syndrome. The odd thing here is that Axim is a fully-reporting, SEC registered stock, and while non-registered MJNA owns nearly 15M shares of AXIM, it would seem that these announcements should be coming from Axim itself in the form of 8-K filings that, in the case of the first PR, would describe the nature of the private funding, e.g., straight loan, restricted shares, convertible debt, etc.

As it is, since closing on Oct 25, 2016 at $0.42, AXIM has risen 1042%, closing today at $4.80 (with a $225M market cap,) despite the fact that in the first half of 2016, Axim lost $2M on revenues of $25 Thousand. On paper, MJNA's stake in Axim is now worth approximately $71M, but this is a ridiculous valuation story for another day.

Even with Axim's $71M on the balance sheet, MJNA would be hard pressed to justify a $0.23 stock price based on Book Value per share (Yahoo shows $0.07,) but MJNA appears to have a history of establishing large valuations for new operations in the first year, then writing them down in subsequent years.

Throughout 2015, MJNA valued the Kannaway multi-level-marketing asset at $100M on the balance sheet, but when Medical Marijuana filed its 2015 Annual Report, it was revealed that Kannaway only generated $2.6M revenue in 2015, with approximately 70% of that coming in the first half of 2015. In that same report, MJNA wrote down the Kannaway value to $26.5M. Since Kannaway's sales in the first half of 2016 totaled approximately $670K, I expect that we'll see another write-down at the end of 2016.

Since paying $9.25M in 4Q/15 for the 93.4% of HempMeds Brazil it didn't already own, MJNA has valued that asset at $140M. As I mentioned earlier, there is no revenue yet being shown from HempMeds Brazil, so what justifies that value? Will it also be written down when MJNA files its report for 2016?

There is one final issue that was mentioned in CV Sciences, Inc.'s (OTCQB:CVSI) 3Q/16 10-Q that was filed on Nov 1, 2016. I'll quote directly from Page 14 of the filing:

In August 2015, we entered into an agreement to sell MJNA our products and received from MJNA a promissory note in the principal amount of $2,002,910 ("MJNA Promissory Note") that was to be paid in 12 equal installments beginning on November 3, 2015 in exchange for the product shipped to MJNA. The MJNA Promissory Note is secured by 2,000,000 shares of the Company's common stock held in escrow. MJNA has failed to make any payments on the MJNA Promissory Note and is in default. The MJNA Promissory Note is likely not collectible, and the probable form of collection is for the Company to foreclose on the 2,000,000 shares of Company common stock. At September 30, 2016 and December 31, 2015, the fair value of the collateral was determined to be $480,000 equal to the $0.24 per share closing price of the Company's common stock as of December 31, 2015, multiplied by the 2,000,000 shares of Company common stock.

What's going on at MJNA that has prevented it from meeting the terms of the August 2015 agreement?

Based strictly on fundamentals shown in the 2Q/16 filing, in early October, MJNA was overvalued at $0.06. At $0.23, it's clearly in the ridiculous overvaluation zone. We are in a period of "Marijuana Madness", however, so it could go higher into the election. Longs should consider taking some profits, because just as with the early 2013 and 2014 "Green Rush" spikes in MJNA's stock price, the gains could go away as quickly as they came.

Disclosure: I/we 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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.