The Marijuana Sector appears to be on the verge of having a breakout year. Three of my picks are established players in this space while the fourth has an indirect tie. Although the sector has a lot of wanna be's and its share of scams, some companies are destined to survive and prosper with this new industry. I won't pretend to be familiar with every candidate, after all, there are more than 200 of them now. However, I've studied these particular companies extensively for the past year or longer and feel confident that they're on track to give long term investors significant gains in 2017. I expect all of them will be trading higher by the end of the year and expect to provide more detailed analysis of each one in the coming months.
InMed Pharmaceuticals (OTCQX:IMLFF)
InMed is the sleeper in this bunch. This is a Canadian biotech company that's been flying under the radar for much of its existence. They've assembled a distinguished team of scientists and pharmaceutical executives with impressive credentials in this industry. For example, their Chief Medical Officer, Dr. Ado Muhammed, was formerly Associate Medical Director at GW Pharmaceuticals (NASDAQ:GWPH). He appears to be the only former senior GW executive to be working for another public company. Their CEO, Eric Adams, has over 25 years' experience in company and capital formation, global market development, mergers & acquisitions, licensing and corporate governance including stints with Abbott Laboratories and as CEO of enGene, Inc. Their Chief Scientific Officer, Dr Sazzan Hossein, was Group Leader and Senior Scientist at Biotechnology Research Institute of National Research Council Canada, the Government of Canada's prime biotechnology research organization. The rest of their management has equally distinguished resumes. My point is that these are not beginners looking for a quick buck on the latest medical fad.
InMed currently has two drugs in development with several more in the pipeline that were uncovered using their proprietary Bioinformatic software program that matches data on existing drugs and their effects with data on 80 to 100 different cannabinoids and their effects on the body's naturally occurring cannabinoid receptors. From their website...
Bioinformatics: Proprietary Drug / Disease Targeting Tool
InMed's discovery platform is a "network based platform" for identification on novel plant based therapies using: (NYSE:I) comprehensive algorithms to integrate data from numerous bioinformatics databases, (ii) a database on the structure of currently approved pharmaceutical products, and (NASDAQ:III) an extensive database on over 200,000 phytochemicals, including phytocannabinoids.
Until recently, marijuana research has focused primarily on THC and CBD which constitute 80% of the therapeutic compounds available in the cannabis plant. However, cannabis contains another 80 to 100 drugs that appear to have some medical value. InMed's software allows it to match the clinical effects of these cannabinoids with the effects of various existing drugs to identify the most promising avenues for further research. This gives them a significant competitive advantage in time and cost of discovering new and novel treatments.
Their first drug candidate, INM750, is targeted at Epidermolysis Bullosa (EB), a rare horrible genetic disease with no known treatment or cure that prevents the upper layer of ones skin from attaching to the body. The result is extremely fragile skin that can blister or shed with the slightest touch or trauma. Even if you never expect to make money on this pick, after seeing the suffering that kids with this disease, so called butterfly kids, go through, one should give kudos and support to this company for attempting to find a treatment and cure. If all goes as planned, clinical trials will begin early in 2018. While there are only approximately 25,000 EB patients in the US, the global market for an effective treatment is estimated at $1 billion.
Their second drug candidate, INM085, is targeted at Glaucoma with a patented new nanoparticle delivery system using a once per day eye-drop that they believe both relieves pressure in the eye and provides neuroprotection for the retina. There are 2.7 million glaucoma patients in the US alone with a worldwide market estimated at $5.6 billion.
In addition to their Bioiniformatics software and drug pipeline, InMed has developed and patented a biosynthetic process using genetically modified bacteria to manufacture naturally occurring cannabinoids. With 80 to 100 identified cannabinoids, many occurring in small percentages in the plant, it can become extremely prohibitive for pharmaceutical companies to harvest them from plant cultivation. This new patented Biosynthesis process allows them to produce these cannabinoids in commercially viable and pharmaceutically pure quantities and will be extremely interesting to any drug company developing cannabinoid therapies. InMed is poised to reap some significant revenues from commercializing this technique.
While I would recommend InMed as a long term investment, I do not expect a quick reward. Clinical trials are at least a year away and we can expect some dilution as InMed raises money for it's operating budget. It just announced a private, non-brokered placement of 5.5 million shares at $.18/share for $1 million in cash. So far the dilution has been manageable, however, the company has gone through long periods with little news which has caused the pps to drift. This should change as they complete in-vitro tests, publish more research and we get closer to trials. Since the company is not yet producing any revenue it would be impossible to make a pps prediction. With luck we'll see a gradual growth in the pps through the next six months with more acceleration toward the end of the year. In the meantime, I advise interested investors to take advantage of dips in the price to load up for next year. On the bright side, this could be the most lucrative of my picks since, if it follows the path of GW Pharma, in a few years we could be looking at a pps in dollars rather than pennies (see Identifying The Next GW Pharma Which Went From $8.50 to $132 In A Few Years). InMed CEO, Eric Adams is certainly a believer as he is targeting an uplist to NASDAQ within two years.
mCig, Inc. (OTCPK:MCIG)
I've written extensively about this company on several occasions and expect to provide more detailed analysis in the coming months. My earlier analysis proved to be premature. The revenue from their construction division, which was formed to build facilities for commercial MJ cultivation, was stymied by the inability of their commercial prospects to obtain the necessary funding for their projects. Product revenues from their CBD oils also suffered as merchant banks were either unwilling to risk doing business with companies in this sector or charged exorbitant fees with high bad debt reserve requirements. Their profit margin plunged to 11% as competition became more fierce. The business plan was completely revamped twice in an effort to boost product sales until construction revenue could kick in.
The pps sank below $.05 in July 2015 and didn't recover until last October after Paul Rosenberg, their CEO, announced that he was retiring 50 million of his personal shares and returning them to the treasury. This step effectively offset all of the company's dilution since its inception. It was also revealed that construction had commenced and would accelerate in the next several quarters as they announced a new $3.5 million contract to build a greenhouse facility called Solaris. In the aftermath of these announcements, the pps shot from under $.03/share to over $.20.
They currently have roughly $13 million in signed contracts over the next three years with roughly $7 million in construction and another $3 million in VitaCig and VitaCBD products, for a total of $10 million scheduled to be booked within the next 12 months. mCig products now have signed minimum order quantity multimillion dollar contracts with several overseas partners that should give them a revenue flow of at least $2.4 million/year in product sales for the next three years. They've finally found a workaround for the merchant bank issues and their profit margin on product sales has improved to roughly 20% of internet sales and 28% of wholesale, mostly overseas, revenue. Combined with initial revenues from construction, it was enough to enable mCig to claim a net profit for 2FQ17 (ending October 31, 2016) with all three of their revenue segments, construction, internet sales, and wholesale now in the green.
Several new executives were brought into management in the past year. Their new CFO, Mike Hawkins, has been largely responsible for categorizing their revenues into more manageable and logical segments and emphasizing greater financial discipline with a focus on profitability for each segment.
Mike's efforts were complemented with two recent mCig acquisitions. The purchase of CHO (Cherry Hemp Oil) brings a bulk CBD/hemp oil manufacturer, along with an experienced sector CEO, J.J. Southard, into the mCig fold. Southard cut his teeth in the industry in 2008 with his first medical marijuana dispensary in Colorado. He will now manage mCig's CBD Division as it's Executive Director. In addition to it's own branded products, mCig will now be white labeling bulk CBD for other brands both here and abroad.
mCig's second acquisition, Grow Contractors Group, brought in their CEO, Robert Kressa III and an established network of engineers, contractors and master growers that's been servicing the MJ sector since 2008. While their in house general contractor, Ron Sassano will continue to handle the nuts and bolts of hands on construction, Kressa will now be in charge of the business end as CEO of their new Grow Contractors subsidiary which replaces Scalable Solutions as mCig's contracting arm. In addition to construction, mCig will now be able to contract for ongoing consulting, staffing and operations management services at the facilities they build. These facilities are already planning additional construction phases with the recent expansion of the recreational market into Nevada, California and several other states.
As icing on the cake, mCig recently obtained an exclusive agreement from Sangreen Green Houses, one of the premier greenhouse manufacturers in the world to market this Chinese product in the US. According to their recent PR...
Greenhouse technology is one of the most "in demand" portions of the sector as they relate to the cannabis and urban farming industries due to their low cost structure and operations. Currently, Cultivators are forced to use high priced greenhouse manufactures, where companies are paying a premium based off of name recognition from firms utilizing the same hot dipped galvanized steel from China or aluminum structures. Rather than pay the premium on a US name mark up, Scalable Solutions & Sangreen will circumvent the middleman while creating the highest quality, lower cost greenhouse that cultivators desire.
As an indication of the significance of this partnership, mCig is about to release a "Build Your Own Greenhouse" application on its website to handle the large volume of bid requests.
In the meantime, mCig is pushing ahead with their plan to produce a plant filled marijuana cigarette they've branded as Rollies. Efforts to release the product last June were aborted when the rolling machine they ordered proved incapable of handling the load. They went back to the drawing board and designed a new machine which is currently being tested. Assuming the tests are successful, they will be releasing Rollies sometime this year, probably beginning in the Nevada market. With recreational now legal, many Las Vegas tourists will likely be looking for a relatively inexpensive way to get a buzz while visiting the casinos without a huge investment in plant and smoking equipment. mCig also plans to white label the rolling services to other brands and dispensaries around the US.
Revenue will not be the only growth avenue for mCig next year. As many of you recall, mCig spun off it's VitaCig vitamin vaporizer brand into separate company called VitaCig, Inc. in late November of 2014. At the time, they payed a 1 for 1 share dividend to MCIG shareholders. After struggling through a series of part time CEO's and lackluster sales, Paul Rosenberg, mCig's CEO, decided to add a CBD product line while he searched for a buyer who could devote more time and resources to building the company.
Last July, Paul was successful in finding a buyer in a company called LX Retail Group. In a somewhat complex deal, mCig purchased back the complete VitaCig product line, including almost $4 million in Minimum Order Quantity (MOQ) VitaCig contracts over 3 years, from the VitaCig Corporation. In exchange, the company gave up 172,500,000 of its ownership shares in the company and cancelled $92,276 in loans in return for a convertible note for $95,000 of the loan balance. The VitaCig shell corporation then purchased Malecon Pharmacy, a company 100% owned by LX Retail in a reverse acquisition for roughly 575 million VitaCig shares. The end result was that LX retail group now owns controlling interest in Vitacig, Inc. which has since been renamed Omni Health (OTCPK:OMHE), with mCig retaining another 9% or roughly 75 million shares. On the flip side, mCig again owns the complete VitaCig product line and all associated revenues.
Now that mCig's ownership share of the company has fallen below 20%, it can use the equity method of accounting and claim the market value of it's investment as an asset. Previously it could only claim 47% of Vitacig, Inc earnings, which until recently were minimal. Since the transaction went through, this asset has appreciated by almost $1.5 million and could increase tenfold or more once Omni reveals its business plan and financials (see my next pick). I estimate that each $.05 increase in OMHE's pps adds roughly $.011/share in book value to mCig. In the meantime, mCig shareholders who received the VitaCig share dividend and held, now have a viable company with very bright prospects and a 40+ year track record.
Since reacquiring the VitaCig product line, mCig has expanded its distribution channel to new countries in the EU, Canada and Japan and is currently negotiating new deals in South America, The Philippines and South Africa. It's distribution channel now extends to 30 countries.
Building on this global reach, its recent profitability and lack of debt, its Omni assets and its growing share price, mCig is setting its sights on acquiring other synergistic MJ companies. It's looking for companies, with experienced management and revenues, that it can incubate and perhaps eventually spin off while retaining some ownership. Consolidation in the MJ space is inevitable and mCig is now well positioned to take advantage of that trend.
Considering it's recent run and based on the present value of its signed contracts, I consider mCig to be rationally priced at roughly $.24/share. We may see some near term consolidation at this point. Over the coming year, however, I can see considerable growth. I think we're at the high end of what I would consider a rational pps based on their signed contracts, although it is still undervalued in relation to its peers. The market is now focused on what stocks promise the most growth in 2017. In that regard, mcig is in very good shape.
- They've reported that they have so many greenhouse bids that they've decided to create a build-your-own greenhouse web design page. They can undercut the price of any of their competitors thanks to their partnership with Sangreen.
- Their VitaCig products have worldwide distribution in over 30 countries with new countries to be added this year.
- VitaCBD is selling well and their CBD oils will be white labeled in bulk to other companies
- Rollies should be released this year along with rolling services.
- They've announced that they're negotiating to acquire a Nevada MME production and/or cultivation license.
- They plan to acquire and incubate other MJ companies as the sector consolidates, with the intent to eventually spin them off like their OMHE investment.
It's very likely we'll hear news (and contracts) on one or more of these areas before the end of the month.
Omni Health, Inc.
As mentioned above, Omni Health was a private company named Malecon Pharmacy that LX Retail Group decided to take public by purchasing the empty shell of VitaCig, Inc. (formerly VTCQ) in a reverse acquisition. At this time, this is the company's only link to the MJ sector. I doubt we will see any further involvement with this industry in the near future as it would endanger their ability to conduct banking transactions.
Because it's been a private company, little is known at this time about its business and financing. However, what has been revealed so far is very intriguing and is likely to result in huge profits for early investors. The company started as an independent pharmacy located in Hialeah, Fl over 40 years ago. It appears that the original founders sold the company in 2007, most likely to LX Retail Group. On June 22, 2016, the company was sold to Vitacig, Inc. in a reverse acquisition which resulted in LX Retail acquiring majority ownership with a minority 9% retained by mCig, Inc. Since then, the company has been virtually silent about itself as it worked to complete an audit of it's financials. This silence is understandable when one considers that auditors have to go through 40+ years of private financial records. Even if an audit was performed in 2007 when the company was purchased by LX Retail, auditors may question some of those figures. Indications are that the audit is either complete or in it's final stages and there's an expectation we might finally see the results by the end of this month.
What is known is that the pharmacy operation was generating $1 to $2.5 million in revenue in 2007. However, it's unlikely that LX Retail would take the company public on the basis of a single brick and mortar pharmacy's revenues. Since the purchase, LX has added an online specialty pharmacy business which is one of the suppliers for the Health Mart national chain of independent pharmacies.
Specialty pharmaceuticals are high priced drugs, costing a minimum of $500/month per prescription or more that are targeted at rare or chronic conditions such as cancer, rheumatoid arthritis or multiple sclerosis and that may also require special handling or follow-up care. Specialty Pharmacies are often contracted with nursing homes, long term care facilities, hospitals and insurance carriers to supply patient medications. In the case of Malecon/Omni, they offer automated prescription filling with pre-packaged pill packs customized to the needs of the individual patient with date and time that the medication(s) in each pack should be taken.
For patients on long-term treatment plans we expertly pack their medications in MaleconPack™ . Each personalized compartment of MaleconPack™ contains all the pills the patient needs and is clearly labeled with the precise time to take them. We also offer free verified automatic refills of medications: your medicines arrive several days before your supply is gone and free verified renewal: we will call your physician for renewals when refills are used up. All of the above will insure that you are taking your medications on time, as scheduled and for the entire duration of the prescription, thus improving your therapeutic outcome.
On November 21, in announcing its name change to Omni Health, their CEO, Mike Hawkins, revealed...
The Company projects to have a net income of $1.6M in its first quarter (May 1 - July 31, 2016) which consists of operational income and the income derived from discontinued operations, as it shifts its model into the pharmaceutical industry.
In addition to being CFO of mCig, Mike Hawkins was interim CEO of Vitacig, Inc when it was acquired. He's continued in that role to assist Omni as it goes public and installs new management. So far, this has been the only official communication from Omni. However, we've also seen a few tantalizing tidbits from mCig as well.
On October 24, well before the Omni announcement, Paul Rosenberg stated...
Omni Health, Inc. -- While not recorded on the financial statements of MCIG, the Company maintains approximately a 9% interest in the company. Omni Health is the manufacturer and distributor of anti-aging creams and operates a Pharmacy operation in the Miami, Florida area.
Omni Health is conservatively projecting $6M in revenue with an 8% net profit margin for FY 2017. Omni will be more active independently promoting their company as soon as the symbol change is approved, any day now. Realizing value for our shareholders is a must and we have great plans for our position in Omni for our shareholders.
At this point, I have not been able to track down any information on the anti aging creams, or how much revenue or profit that part of the business represents. However, the $6 million in revenue seems to conflict with the $1.6 million net income and 8% profit margin. Even if one factors in the lost profit from VitaCig discontinued operations, it would only contribute a small fraction of the $1.6 million in net income. An 8% profit margin with $1.6 million in earnings should put their revenue at roughly $20,000,000/quarter or $80,000,000/year.
So what do we know?
1.) Fact - Omni has reported that Their Net Income (earnings) for 1FQ2017 was $1.6 million
2.) Fact - Their current shares outstanding is 1,130,651,683 as of November 7.
3.) Fact - That makes their Earnings per Share $.00566/share if projected over 4 quarters.
4.) Fact - That makes Omni's current Price Earnings (NYSE:PE) ratio (at a pps of $.025/share) 4.42
5.) Fact - Average PE ratios for companies in the Healthcare and Drug sectors range from 32.11 to 66.58
6.) Fact - If Omni's PE were to conform to the sector averages, it's pps would be $.18 to $.38/share
7.) Fact - mCig reported that Omni's profit margin was 8%. That translates to $20 million in revenue for 1FQ17 or $80 million over 4 quarters.
Even at a very conservative PE ratio of 10x, this stock would be trading at $.0566/share. It closed last Friday at $.025.
So we're left with several questions.
Was the $1.6 million in net income for 1FQ17 an anomaly or is it representative of what we can expect each quarter?
What should we make of Paul Rosenberg's projection of $6 million in annual revenue for 2017 with an 8% profit margin? Was he being conservative, acting on dated information or has LX Retail added an additional business unit to the company or done an acquisition?
How much of this company's profits are driven by the specialty pharmacy business and how much is being contributed by anti-aging creams?
What are Omni's plans for growth and expansion? Why did they decide to go public now?
Once Omni draws back the curtain and answers these questions I expect we'll see a very profitable pop in its share price.
Player's Network (OTCQB:PNTV)
My last pick, Player's Network, along with Omni, completes what I view as mCig's current ecosystem. I started following PNTV almost a year ago when mCig first announced that it had signed a contract to build them a large scale 26,000 sq ft cultivation and production facility in Las Vegas called Green Leaf Farms. At the time I considered them too loaded with toxic debt to be considered for a serious investment. By last summer, I had changed that opinion as I marveled at how Mark Bradley, their CEO had maneuvered himself into a reasonably strong financial position.
Through July 28 of last year the company was able to reduce it's convertible debt to a very manageable $198,144. Then on August 15 the company signed a $2.5 million convertible funding agreement with RxMM Health Ltd. The agreement appears to be more of a partnership and investment on the part of RxMM. For one thing, after doing it's due diligence, RxMM felt the company was worth a $2.5 million investment. As payment for the loan, RxMM will be entitled to 20% of PNTV's revenues from it's MJ related activities, which will be applied against the loan principle. PNTV will also provide marketing services, including advertising on its Weed TV platform for up to 10 dispensaries...
a.The Company will utilize its available resources to provide marketing services to RxMM that may include up to 10 Dispensaries, Cultivation, Products and Technology for a period of 3 years from the closing of this Definitive Agreement at a cost based on the pass through of actual cost to PNTV.
b.This includes setting up digital channels for the RxMM's various holdings on the WeedTV.com platform, with all professional services rendered as a pass through at their actual cost. These services include, but are not limited; to production, marketing and distribution services of content as outlined in the LOI at a 50% discount.
In addition, PNTV agrees to participate in other projects with RxMM...
8.Potential Joint Ventures. The Parties agree to enter into a joint venture or other commercially structured arrangements with the intention to acquire or apply for medical marijuana dispensary licenses and operate such businesses subject to mutually agreed terms and conditions. It has been agreed that the branding of the dispensary businesses will be under RxMM's lifestyle retail formula and national brand. Such joint ventures may include third parties but will be approached in goodwill and fair dealings manner for the betterment of the Company's shareholders.
Before the RxMM loan had fully funded, PNTV signed a second agreement with SK L-43, LLC for another unsecured $3,925,000 in additional financing to be advanced in tranches through May 1, 2017 at 5% interest. SK L43 is also entitled to be issued warrants for up to 178,214,286 shares at 125% of the average purchase price of the shares for the 90 day period preceding each advance. The first tranche of financing for $925,000 would have been issued through December 15. The first round of additional warrants (roughly 92 million shares) were issued at prices ranging from $.03 to $.06/share. The shares don't vest until four months after issuance and expire after two years. PNTV's share price closed at $.0169 last Friday. Consequently, SK-L43 needs to see a price appreciation of 80% to 360% for its warrants to be in the green.
The two deals, totalling $7.6 million, are structured to provide seed funding for Green Leaf Farms, which is scheduled to start production in January. mCig is currently designing another phase of Green Leaf construction targeted for summer. With recreational marijuana about to become legal in Nevada, PNTV will be well positioned to take advantage as tourist flock to Las Vegas.
Initially incorporated in the 1990's, the company started out as a media company providing the type of gaming programming one sees in Vegas when turning on their hotel room TV. They currently have three channel offerings, Vegas On Demand TV, Real Vegas TV and Weed TV.
Their Weed TV channel is well suited to attracting Nevada tourists to local dispensaries that carry Green Leaf Farms and it's client's products. Current plans call for expanding their media offerings by offering customized channels for content from various companies.
In January 2014, the company filed a lawsuit against Comcast for reneging on an agreement to broadcast their content. That suit is currently still pending but potentially could add millions to PNTV's book value if the ruling is in their favor.
Also in 2014, the company was granted two Nevada Medical Marijuana Establishment (MME) licenses for cultivation and production and is in line to receive additional dispensary licenses in the near future. It is one of only two fully reporting publicly traded companies to have been granted Nevada MME licenses. According to their web page...
Green Leaf expects to generate a profit of approx. $2.8 Million - $3.2 Million dollars in the first fiscal year of operation. The second year could generate over $15 Million in revenues based on the current MME market without consideration of Nevada legislature approving recreational use. Las Vegas is the largest tourist and entertainment destination in the world with 40 million visitors each year. In the event Nevada legislature allows for recreational use, Green Leaf feels the revenues could outperform all current recreational states combined.
Based on their projected income and relative to its peers, I believe this stock is seriously undervalued. With production at Green Leaf expected to start in January, we should see some initial revenue when Green Leaf publishes their 1Q17 financials sometime before mid-May. Their first full quarter revenue should be in their second quarter which we won't see published until August. I expect that the company's share price will see it's next level after they report that their facility has been inspected and deemed ready for production sometime this month. If production and expansion proceeds as planned and they appear on target for $2.8 million in profit in the first year, at a conservative PE of 10x they would be trading at a minimum over $.05/share. That would be roughly a 300% gain over the current price. Given the hype surrounding marijuana stocks this year I expect the market will give them a much higher premium.
All four of these picks have seen tremendous price appreciation over the past six months. They've all had a multi year track record of operation with reasonably good fundamentals. I consider all of them to be currently still undervalued in relation to their peers and plan to follow up with more detailed analysis in the coming year. I expect anyone investing at current prices will realize significant profits throughout 2017. On the cautionary side, these are all penny stocks and, as such, can be more easily subject to price manipulation. Never invest more than you can afford to loose. With changes at the federal level, there is some uncertainty about the future of the MJ sector, however, assuming no changes in the regulatory framework, I view the marijuana sector as somewhat recession proof. Indeed, if things go south in Washington, we may all be reaching for something to numb our minds.
Good luck to all of us in 2017!
Disclosure: I am/we are long IMLFF, MCIG, OMHE, PNTV, GWPH.
Additional disclosure: I have never been compensated by any of the companies appearing in this article. The opinions expressed are entirely my own.