Long Only, Deep Value, Special Situations
Contributor Since 2013
Abdalla Al-ayrot is a value investor with a long time horizon. I tend to focus on misunderstood and/or under-followed companies where i believe there are a great amount of value that the market is yet to price in.
This is the second article in my article series on Cannabis Stocks. I intent to dig through all of the listed investment opportunities in the Cannabis industry. If you want to join an investor community focused on cannabis investment opportunities, I recommend joining 420 Investor, as you get quality content at a price every investor can afford.
The company was originally incorporated as X-Change Corporation as a Delaware corporation on February 5, 1969. The company changes its corporate domicile to the State of Nevada on October 4, 2000. The stated purpose with the origination of the company was:
"We were originally organized to seek merger and/or acquisition candidates and engaged in various transactions since our inception."
The company has essential been a public shell, which is a corporation without any operating assets. Public shells are commonly used for two purposes, reverse mergers or pump and dumps.
Reverse mergers are an alternative to an IPO. It's often used by private companies to raise money from the public, without having to comply with the listing requirements of the stock exchanges. It's also often cheaper than a traditional IPO. For details on the reverse merger process and the technical details, Wikipedia has an excellent article explaining that.
A pump and dump is the practice of 'pumping' a stock by often spamming out e-mails recommending buying a stock, with the only intend of making the underlying stock's price rise, so that the promoters can 'dump' their stocks, which often makes the stock price crash.
The company has been with no operating assets since December 31, 2008 according to the company's most recent 10-K filling. The company has since December 31, 2008 established 4 subsidiaries without any operating assets and no economic activity:
The company has furthermore engaged in numerous unsuccessful business endeavors, which is mostly failed to close mergers with private company. For all of the failed to close mergers see the company's most recent filed 10-K.
On December 12, 2012 the company entered into an agreement with publicly traded Cannabis Science (OTCPK:CBIS), in which X-Change Corporation where to:
"the Company [X-Change Corporation] acquired various assets related to the use of cannabis including resale formulas, media, activism and marketing videos and other items and the assumption of Cannabis' position in a Joint Venture Operating Agreement with Columbia Corp. and/or dupetit Natural Products GmbH."
X-Change Corporation paid 5 million shares and the assumption of up to $25,000 in liabilities in exchange for a 90% interest in all products, brands and trademarks dupetit Natural Products GmbH. The day after the deal, December 13, 2012, closed Mr. Robert Krane was appointed CEO of the company. Mr. Kran has a background as a 'registered representative' (read stock broker) for the brokerage & investment-banking firm Stifel Nicolaus & Co, president for a firm named Cannabis Consulting, Inc., which Google doesn't know of and vice president of investor relations Cannabis Science, Inc. So, the new CEO of the company has a lot of experience in the field of selling shares to investors and not so much experience in the field running a business.
At the same date that Mr. Robert Krane was appointed CEO, Mr. Alfredo Dupetit was appointed V.P. of European Operations. He is the owner and operator of Dupetit Natural Products GmbH, which he has been since January 2006.
The company has filed a 10-K following the acquisition, which gives us little insight into the profitability of the company, as it covers under a month of ownership of the company's 90% in the JV. However, the company filed a 10-Q covering the quarter after the acquisition of the 90% interest. The following is the income statement from the 10-Q filling covering Q1 2013:
As the income statement shows, the company received no revenue from the JV in Q1 2013, which makes the $175,000 valuation of a 90% stake seem a little high. On the other hand if the JV has future potential, then the $175,000 might be justified. Given the lack of focus in the JV, which is derived from the very diverse nature of the JVs business the future potential seems questionable.
The following is a screenshot from the JVs website (I have highlighted one of the many typos…):
The website is filled with grammatical errors and typos, which professional companies usually have minimized. The JV is furthermore claiming to be engaged in very wide range of different business areas, but as of the recent 10-Q did not have any revenue.
On November 6, 2013 the X-Change Corporation changed its name to Endocan Corporation (OTC:ENDO) and it ticker changed to the current "ENDO"-ticker. Two weeks after the name-change the company entered into licensing agreement, where it claimed to be licensing Cannabis Science's patent N2010968 entitled: "Composition for the Treatment of Neurobehavioral Disorders". The company the following explanation of what the underlying technology could be used for:
"As previously announced, the subject of the patent is development of cannabinoid-based formulations to treat a variety of widespread neurobehavioral conditions, such as attention deficit hyperactivity disorder (ADHD), anxiety, and sleep disorders. The products that Endocan intends to produce using the patent will target substantial international markets that should prove to help many people in need worldwide. "
It sounds legit and complicated, but one thing that worries me is that according the European Patent Office and United States Patent and Trademark Office, the patent application hasn't been filed. I have searched the European Patent Database by the patent application number that is provided in the press release, which is N2010968, the claimed title of the patent: "Composition for the Treatment of Neurobehavioral Disorders" and by both of the companies corporate names.
I have furthermore contacted the CEO of Endocan Corporation for an explanation but I haven't received an answer from him yet. I will publish an article on Seeking Alpha with his answer if I receive an answer from him.
Valuation and share count
Given the companies estimated zero revenue, no patent and an interest in a JV that has an interest in a website without any revenue (as of the recent 10-Q) the valuation of the company should be close to the market value of a public shell company or the tangible equity of the company, depending on which is highest.
I will start out by examining the balance sheet of the company in order to value the company based on tangible equity. Afterward I will value the company based on the market price of a public shell company.
The following is a screenshot of the company's balance sheet from its most recent 10-Q:
As the balance sheet the company's shareholder's deficit as of March 31, 2013 about $1.5 million with the company's only asset being its cash on hand of $59 (yes, 59 bucks). The equity is literally worthless.
On the other hand, there is a market for public shell companies. MergerNetwork.com is a portal in which one can among other products buy public shell companies, which trade in the price range $15,000-$100,000. An optimistic valuation values the company at the upper band of the range, $100,000.
So, based on the valuation methodologies above implies a fair value of the total equity of the company is in the range $0-$100,000. I will now compare the implied fair value of the equity with the current valuation of the entire equity of the company. The following table calculated the company's diluted shares outstanding:
As the table above shows, the company's diluted shares outstanding is 431,261,179, at Monday's closing price of 0.0719 per share, the market capitalization of the company was USD 31,007,679. What might trick investors when calculating the diluted shares outstanding is the failure to take the Melissa Note conversation price into account. Last time, the Melissa Note converted part of the debenture was in the first quarter of 2013 where the creditor, which is described in the company's most recent 10-Q as "Melissa CR 364 Ltd., a Texas limited partnership (Melissa Ltd.)." converted $50,600 of the debenture into 25.3 million shares corresponding to conversation price of 0.002. I know what you are thinking. The share price was surely much lower back in Q1 2013, as no way the creditor could get such a low conversation price. But, it wasn't. The following chart shows the development in the share price of the company in Q1 2013:
As the chart above shows, the trading price of ENDO was actually higher for most Q1 2013 than what it closed at Monday.
So, how can it be true that the conversion price is so low? It might be to the fact that a former officer and shareholder of Endocan Corporation manage Melissa Ltd, according to Endocan Corporation's most recent 10-Q.
The Recent Uptrend
Endocan Corporation is up by more than 100% year to date, as set forth in the following chart from Yahoo! Finance.
In my search for a reason to behind the significant rise in the stock price, I have come to the following to catalysts being playing the dominant part:
The 'Green Rush' is a term used to describe the significant rise in nearly all stocks engaging in a business that is related to Cannabis year to date.
Stock Promotion: According to stock promotion tracking website stockpromoter.com, the stock of the company has been 'pumped' by several newsletters owned by the 'Financial Public Relations and Event' firm Bird Gang Stocks LLC. The newsletters that have 'pumped' the stock according to stockpromoters.com include:
Endocan Corporation's future business prospects seem non-existent as (1) the patent in the claimed "Broad Licensing Agreement" doesn't exist according to the European Patent Office and the United States Patent and Trademark Office and (2) the interest in the JV seems be of no value.
Investors has traded the shares of the company up, valuing the entire company at $31 million, which is giant premium to the company's implied fair value of $0-$100,000. Based on the implied fair value per share there is a 99.9% downside from here with no upside. The recent up-trend is due to 1) hype about marijuana stocks and 2) stock promotion. Both of those catalysts are not based on the fundamentals of Endocan Corporation. The stock promotion is especially worrying, as the company might be a pump&dump.
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.