Monday, March 11, 2013 1:32:40 AM
>>> Pipe Dreams: Can These Marijuana Stocks Make You Rich?
Mar 6 2013
by: Panoplos
http://seekingalpha.com/article/1250571-pipe-dreams-can-these-marijuana-stocks-make-you-rich?source=yahoo
3D printing systems? Online casinos? Wearable tech? Investors and non-investors alike are without a doubt fumbling over themselves, eager for a glimpse of what next revolution may take the world by storm.
3D Printing (or Additive Manufacturing)--though the concept has been around since the late '70s--has of late come of age as a technology and is expected to turn the current manufacturing paradigm on its head. 3D printing is estimated by Forbes to become a $3.1 billion dollar worldwide industry by 2016. It is no wonder early participants like 3D Systems Corporation (DDD) were selected by the investment gurus early on to skyrocket in value. Indeed, the company has more than doubled since its IPO in mid-2011.
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Online gambling, according to The New York times, already generates $32 billion in annual revenues overseas and, with the advent of mobile betting platforms, has the potential to reach $100 billion worldwide by 2017. Early entrants such as Boss Media and Playtika were quickly swooped up by the big boys (Lottomatica Group, SpA (LTTOY.PK) and Ceasers Entertainment (CZR), respectively), bringing to the founders and their investors immense wealth; and things are just getting rolling!
Spectators were blown away when Google (GOOG) unveiled "How It Feels through [Google] Glass" to the world through a YouTube promotional video that achieved 14 million views in less than a week. According to an ABI research report, "wearable computing devices, like Apple's iWatch, will exceed 485 million annual shipments by 2018." It is no secret that devices like Google Glass and the predicted Apple (AAPL) iWatch stand to revolutionize the way we live and interact with each other and our environment, bringing huge profits to the companies that manage to capture these markets early.
So, what do these have to do with Marijuana?
In my previous article, Weeding Through The Growth: An In-Depth Analysis of Marijuana Stocks, I provided an outline of the Marijuana industry and initiated coverage of the most publicized of the publicly traded cannabis-related stocks. Of course, this article is but one of hundreds, and the pace of PR newswires, the nearly daily onslaught of breaking stories covering yet another state deliberating new legalization measures, and the mounting pressure in Washington to reconsider cannabis's current legal status all serve as an ever stronger indicator of an oncoming tsunami, one that will doubtlessly carry with it disruption and opportunity analogous in economic terms with the three industry-generating breakthroughs listed above.
In fact, The Economist recently published an article that highlights one Silicon Valley VC who values the cannabis market at $50 billion, and CNBC published a headline that conservatively figured the market was worth between $35 and $45 billion in 2010, long before the elections that made marijuana legal for recreational use in two states. However, reiterating the message of my previous article, the numbers are tricky due to lack of transparency in the industry and tend to focus only on cannabis in flower form, itself.
In referencing the above, I hope the parallel drawn will serve to hit home the sheer scale and potential of this industry for those who are not as familiar with the marijuana subculture. For those in the know, it goes without saying.
Recognizing this enormous scale, the reality is many early investors are approaching the cannabis industry with starry eyes, hoping against hope that this just might be the proverbial pot of gold at the end of their hazy rainbow, and that the little leprechaun of green would ne'er lead them astray. Other, more pessimistic types fear these folks are simply seeing the world through rainbow tinted glasses, staring down the barrel of their pipe to a life gone up in smoke. Only time will tell if riches are to be had by investing in the early marijuana market participants, or even if the current motley crew of frontrunner companies represent more than pipe dreams.
With this as the backdrop, in this article I will expand the previous analysis to cover two of the other smaller or less-publicized of the group. Namely:
(click to enlarge)
Please note that I originally intended to cover two additional participants in Terra Tech Corp. (TRTC.OB) and GW Pharmaceuticals Plc. (GWPRF.PK), but due to time constraints and in light of recent activity and further availability of information since initiating coverage of the sector, I decided it would be better to instead use the time to revisit a couple of the companies discussed in the first article of this series. To all those that were hoping to see analyses of these two entries, please accept my sincerest apologies and rest assured I will follow up with expanded coverage within the next couple weeks.
Now, without further interruptions, let's get started.
Medical Marijuana, Inc. (MJNA.PK)
Right on the heels of the Michael Llamas scandal instigated by the infamous Infitialis article, a hot debate has formed around MJNA's recently announced divestiture of its PhytoSPHERE holdings to CannaVEST in the form of an asset sell-off. The company has not made any official public statements regarding the deal beyond a reiteration of what is found in its recent Annual Report and press release. This has left investors and analysts perplexed and hopeful more information will be forthcoming.
To fill the gap left by the company, voices in the community have been raised both in defence of the deal structure, claiming it an ingenious move on MJNA's part that enables them to distance themselves from the legal barbs of cultivating marijuana and hemp until legislation change is achieved, and in questioning the legitimacy and efficacy of the deal to ultimately increase shareholder value.
Those who are cautious about the transaction, myself included, believe MJNA owes its investors a more thorough explanation and would do well to address the more invective criticisms of the deal. For instance,
How was the appraisal value of $39.5 million for Foreclosure Solutions, Inc. (FCLS.OB) determined? On Nov. 16, 6,979,900 shares of FCLS (representing 99.7% of the company) were purchased by an acquiring group for $375,000 total.
In a typical share-based acquisition scenario, the acquiring party issues X number of shares to the target company's shareholders in proportion to the then-current market value of those shares. Keep in mind FCLS traded with literally next to nil turnover at a share price under $2 just weeks before FCLS's 8-K filing, and an even lower PPS not too long before that. The sudden jump in value to $5 was obviously achieved by colluding on the open market to set the share price of the shell company at the desired target.
Moreover, there is something very atypical about this reverse merger: in a standard reverse takeover, the proprietor of the merged entity retains full ownership of the resultant company, especially if the parent organization is public. This is to insure owners of the parent company--public investors in the case of MJNA--retain the full value of their investment. However, in the case of the CannaVEST deal, MJNA and its investors are not guaranteed ownership. (More on this to come.)
No mention was made as to how MJNA reached a valuation of $35 million for the PhytoSPHERE assets. According to the Q4 report, the Cannabidiol "inventory" alone was appraised at this value. The Annual Report repaints the picture entirely, however, by divulging the complete emptying of PhytoSPHERE into CannaVEST in return for an initial installment of 900K shares (or 11.4%) of the company and a promissory note for the remaining balance. Why was the "audited" financial report in conflict with the truth about the deal?
Additionally, the Q3 report establishes that PhytoSPHERE contributed $1 million in revenues for the quarter on G&A expenses of a mere $356K specific to the subsidiary. Rough estimates would give PhytoSPHERE a net profit margin of ~60-70%. Absurdities aside, if we were to take the $15 million purchase price for the 460 kg of CBD oil that MJNA is expected to pay CannaVEST over the year, this would mean PhytoSPHERE was capable of turning $10 million in profits from the production of the oil.
The quandary for shareholders is that they are getting a total of $35 million for a portfolio company that is apparently capable of generating at least $10 million in annual profits with significant assets, IP and a demonstrated potential for growth that would make many companies envious.
Recall, CannaVEST has the option to pay the remaining balance in cash, which would result in only minority ownership for MJNA, leaving shareholders in the lurch. This, of course, is predicated on the assumption MJNA will not liquidate its small stake; however, it is easily deduced from the fact the company is declaring these shares as "cash flows" that this is exactly what it intends to do. Which brings us to our next question:
What if PhytoSPHERE is not worth $35 million? The assumptions outlined above for determining intrinsic value of the subsidiary are admittedly fanciful. Without the MJNA repurchase program, FCLS may be worth far less than anticipated. My guess is MJNA is banking on the fact that investors are pushing marijuana stock prices so high, it will have no trouble dumping its holdings on the market to hit its "cash flow" projections.
However, if this plan backfires and the market refuses to pile in, MJNA could be on the hook for misleading investors as to its business outlook for the year.
Moreover, according to one securities law firm, Hamilton & Associates, this practice could result in a DTC chill (sound familiar?) and global lock on the shares, which would make it "impossible for [MJNA] to establish liquidity in its securities."
Be this as it may, MJNA investors are faced with a glaring issue in the company having sold off shareholder assets--paid for by market capitalization--to a company it then intends to float under a new ticker on the open market. If the investors push the new company's market cap. above $39.5 million, holders of MJNA shares will have been robbed of significant potential value. This begs the question:
Why is MJNA disposing of its golden goose (PhytoSPHERE) at a discount, only to buy the golden eggs (CBD oil) back later at inflated prices?
According to those lauding the move, the transaction was undertaken in order to shield MJNA from potential legal action by the Feds. The argument goes that since no board members are shared across the companies, MJNA is not legally bound to CannaVEST, so it is now no longer exposed to the risk of federal prosecution. However, one has to question this line of reasoning when in fact a major shareholder of MJNA in Michael Mona, Jr. is the company's sole member on the Board of Directors. A rose by any other name...
Of course, there are still strong aspects of the company's portfolio that make it very attractive. For instance, the Annual Shareholders Report highlighted the fact that all of its subsidiaries are experiencing healthy growth and will contribute to stronger revenues for the current year. The company's unaudited financials showed a net income of around $7 million on revenues of $12.38 million, clocking its net profit margin for the year of 2012 at 57% with an EPS of 0.8 cents. MJNA shares are currently trading around 0.30 a share, so the TTM P/E registers at 34.11. For a company experiencing such explosive growth, this ratio indicates the market is not willing to pay for the risks.
This is why it is so critical that MJNA come forward to address the concerns raised by the Infitialis article and those listed above.
As an official response has not been forthcoming, and with these issues still hanging overhead, my sentiment regarding the company remains negative due only to the large uncertainty factor involved. However, if MJNA management reaches out with a voice of reason that leaves no doubt regarding the relationship with Michael Llamas and gives answers as to its intentions and the propriety of the CannaVEST transaction, I would most likely turn bullish towards the stock and recommend buying at an appropriate entry point--fully comprehending, of course, the systemic risks involved.
MediSwipe, Inc. (MWIP.OB)
Since initiating coverage of MediSwipe, significantly more information--mainly through press releases--has come to my attention about the company that I believe sheds better light on its operations and business model.
As mentioned in my last article, the company's website leaves much to be desired and has unfortunately proven a misleading indicator as to its level of business activity. MediSwipe appears to rely solely on press releases for dissemination of information pertaining to current operations of the company; a practice that, given the lack of updated financials, undoubtedly raises a few eyebrows.
Over the past couple of months, particularly, MediSwipe has released a flurry of craftily worded PR announcements that many an unsuspecting reader may construe to mean huge improvements in cash flows. The headlines are particularly tricky. For instance,
On January 11, the company announced "$500,000 for Month of December in Elective Medical Procedure Consumer-Related Financing."
On February 21, MediSwipe released another very similarly worded announcement that headlined "Revenues on Over $1,000,000 for Months of January and February in Elective Medical Procedure Consumer-Related Financings."
The issue here is rather obvious: MediSwipe is declaring revenues through these rather sensational pieces without giving any clear indications as to what the revenues actually were. Readers who managed to interpret these headlines correctly are left scratching their heads.
So, what exactly does a personal loan broker make? If mortgage brokerages are any indicator, and taking into consideration a) the higher risk demographic they are pursuing and b) the assumption that, unlike a mortgage, no real collateral is available to the financing terms, we shouldn't expect MWIP's take-away to exceed 0.5% of loan values.
OK, this just sounds too low, right? I mean, the company is emphasizing the millions in financing deals for a reason, so--for argument's sake--let's assume its commission rate is even as high as 5%. In this scenario, MediSwipe is generating $25,000 a month on the top line from a business that hasn't managed to grow over the stated period. Nothing to call home about, for sure, but certainly better than what we witnessed in Q3.
Perhaps we are being too cynical. The twin announcements do go on to explain that MediSwipe considers itself positioned to become "the 'LendingTree' for the elective surgery industry," and that the company's banking and financing network enables it to approve virtually anyone for financing applicable to a number of elective procedures with "an 80% approval rate or better from [sic] more traditional lending sources." The release also notes MediSwipe currently has 3,000 doctors throughout the country participating in the program.
This is great news and all, but I would like to know what this has to do with secure merchant transaction and patient identification systems--you know, the stated core competencies of the company. It may be the case the company is hoping to up-sell its other solutions, or perhaps it is simply in need of cash and is going after some low-hanging fruit. Whichever it turns out, there is no obvious moat here for MediSwipe, so I am inclined to evaluate this aspect of the business with far more skepticism than its core operations.
With that out of the way, let's turn our attention to the next bit of news more germane to the MediSwipe story of more interest to us.
On Feb. 5, the company announced "new orders of 5,000 plus digital patient cards for Michigan medical dispensaries in conjunction with (3) MediPayment Kiosks." Now this is more like it.
The importance of MediSwipe's role in this particular segment is understood better when we take into consideration two key factors.
First, on Feb. 19, Michigan introduced proposed legislation in the form of House Bill 4271 that outlines new requirements for the state's medical marijuana program. The bill suggests "a secure patient identification system" that apparently falls right in line with the HIPAA compliant solutions MediSwipe has exclusive distribution rights to. If MediSwipe positions itself correctly, it stands to benefit greatly from the new legislation in that it will be the only solution tailored to the dispensary market that meets the strict patient identification and data security requirements of the bill.
Second, Michigan's bill is said to embody conventions other state governmental bodies may take into serious consideration when codifying their own new medical marijuana laws. Given the nature of the industry and its history of operating in the shadows, governments will demand high levels of visibility into all aspects of product distribution. Cloud-based patient identity systems like those offered by MediSwipe could help streamline medical marijuana dispensary compliance and lower the barrier of entry for those looking to set up shop.
It does appear that MediSwipe is very active and has started to gain some traction in the MMJ market, but for the time being I reiterate my negative sentiment on the company for the following reasons:
Owners are disposing of shares. Recent filings have revealed that in the past two months alone, 2 million shares were issued to Venture Equity LLC, who immediately sold 400K, and the CEO parted with 2,575,000 shares at the height of the market price for the stock. This is abnormal behavior for a startup of this size and typically points to deficiencies in cash flow. This may also prove the driving factor behind the company's frequent and overzealous IR releases.
The stark reality remains that cannabis dispensary credit and debit transactions are impossible at present, which has proven a poison pill to a core component of the MWIP business model. Until this is settled, the company will continue to scramble for other sources of operating cash.
It may be that things improve with their exposure to the HIPAA compliant patient identification market, however, so I will keep a watchful eye on their progress here.
Without access to MediSwipe's Q4 results, it is impossible to determine fair value for the company. Even with the latest drop, MWIP's market cap. sits at $32 million--a significantly high number for black box financials.
Now for our expanded coverage of the industry.
Tranzbyte Corporation (ERBB.PK)
According to Tranzbyte's corporate profile, the company "attracts established and early growth businesses seeking to take advantage of resources not generally available to private companies through the public capital markets." The concept behind its business is to acquire these entities with the purpose of transforming them into "fully-reporting, publicly-traded, bulletin board companies," in a sense acting as an OTC reverse merger mill--only, it doesn't appear it has actually done this beyond its own company.
Business Analysis
Though not mentioned on the site, Tranzbyte evidently started out 10 years ago as a developer of audio and video disc digital-enhancement technologies. Something extremely important to note here is that Tranzbyte declares the IP associated with these outdated technologies on the balance sheet valued at a post-amortization $500K, or more than half of total "assets." (More on this later.)
What follows is a breakdown of the subsidiaries and business ventures listed in the company's most recent filings.
Altitude Organic Medicine
In February of 2011, the company acquired Altitude Organic Licensing Corporation and its subsidiaries (namely Altitude Organic Medicine) for $80,000. Altitude Organic Medicine is a medical marijuana dispensary "franchise" founded out of Denver, CO in 2009, and though the Tranzbyte website states "the company has operated in California, Colorado, and Arizona," it apparently has only one location in Denver.
Proxima RF Technologies
In addition to the Altitude Organic holdings, in January of last year, Tranzbyte acquired a company by the name of Proxima RF Technology Corp. for 6,500,000 Preferred Series C shares of the company at a par value of $1 per share, which the company has agreed to "use [their] best efforts to repurchase and retire ... during 2012," however no shares have been retired to date.
Proxima RF Technologies specializes in the development of RFID readers and reader modules for 13.56 MHz passive and RFID enabled sensor tags. These technologies have a wide range of applications, with the more relevant being inventory tracking systems. It is not clear if Proxima RF has engineered the core silicon in its readers, or if it is simply creating modules with OTS RFID components, such as those from Sony Corporation (SNE).
The company's December 2012 Quarterly Information and Disclosure Statement discloses that Proxima RF products "are currently being tested and deployed in several national grocery retail stores and restaurants, as well as state utility commissions," and goes on to explain the subsidiary is "engaged with a Value Added Reseller in providing RFID reader, sensor tags and data loggers to the United States Army Blood Services Program in a demonstration project." The disclosure also states that the company is holding "promising early discussion[s] with Panasonic regarding use of ProximaRF's mobile data logging solutions in its medical supply division."
More related to our industry of interest, the company mentions ongoing developing of what it terms "The Integrity Tag," an RFID-based tracking system for cannabis inventory that will give law enforcement better visibility into the distribution of the regulated substance; promising, given the measures states may take to monitor cannabis distribution, as outlined in the MWIP section above.
Interestingly enough, I am very familiar with RFID technologies and the market in general and can share with authority that the space is crowded, to say the least. With nothing particularly unique on offer, it is not easy to conclude to what degree the subsidiary represents long-term value for ERBB shareholders. It should be noted, however, that product development of this nature is both time and cash intensive.
In fact, it appears the subsidiary is facing operating cash deficiencies. Per the disclosure statement, "The company is seeking additional resources to finance the delivery of existing contracts, to continue new product design and development activities such as work on The Integrity Tag, and to focus on aggressive marketing and sales activities." This should be interpreted as a forewarning of further dilution.
Hurricane MRI
Tranzbyte has (recently?) obtained the rights to market Cirrus Open MRI medical imaging devices throughout North and South America for Hurricane Enterprises Ltd., a company that possesses exclusive world-wide distribution rights for the MRI devices. It is not clear why the company has engaged in this industry, and it remains to be seen how it intends to fund the sales organization to realize any benefits therefrom.
Reselling MRI technology is a capital intensive business that requires a highly qualified and well connected sales force. The company currently has no cash on the books, so retaining key personnel is going to be nigh on impossible. This makes it difficult to believe Tranzbyte will be capable of generating significant shareholder value from these efforts.
Panpacific International
Lastly, Tranzbyte entered into a joint venture production agreement in May of 2010 with a company by the name of Panpacific Business Limited, whereby it was to receive "50% of the profits in three scheduled concerts with internationally known artists to be performed in Hong Kong, and other agreed-upon joint enterprises, for 60 million restricted common shares valued at $2,400,000." The narrative found in Tranzbyte's annual report explaining this joint venture weaves through a complex set of transactions related to the deal that results in the company owning only 5% of a jointly formed entity on a cost basis of $480,000 (this is an important number, so keep it in mind).
I couldn't be bothered to untangle the mess to determine how much actual value was created for the company out of this deal, so I will leave it up to the reader if you are so inclined. I do suspect, however, due to the very convoluted manner in which the deal was presented without any concrete revenue numbers, it lost money on the investment. Anyway, with no cash flows from the JV mentioned in the financial report, it has at least proven immaterial to the company's current profitability.
On the whole, the company appears all over the chart, and one would be hard-pressed to come away with the impression that it has a business model that is built to last. I also feel its lack of success speaks for itself.
Financial Analysis
Out of all the businesses so far covered, I have to share that Tranzbyte gets the trophy for keeping an insolvent company trading on the open market.
The company has reported zero, yes zero, revenue for the last six months and only $21,023 for the six months prior. Losses for the same period tallied in at $378K.
Frankly speaking, Tranzbyte is blatantly ripping shareholders and investors off. The company has a long laundry list of debentures and stock issues that anyone with a right mind would know to steer clear of. As of its recent filing, the company holds liabilities in excess of $3.5 million and claims to have assets of $1 million; however, the stated assets are non-existent. The IP mentioned above is worthless, and it continues to account for the $480K from the Panpacific deal on the balance sheet; good luck laying claim to that in court.
Recommended Investment Strategy (Avoid; Strong Sell)
ERBB is a ticking time-bomb with an insanely high market cap. of $15 million. Unless circumstances drastically change, I fear anyone currently holding this company's shares will more than likely lose their entire investment. It is truly a miracle that OTC Markets Group has allowed this insolvent company to continue stealing money from the public.
(I really hate having to report things of this nature, but the truth is there for everyone to see. I just wonder why nobody has bothered to pay attention.)
Rapid Fire Marketing, Inc. (RFMK.PK)
Rapid Fire Marketing, Inc. is a holding company engaged in the development, marketing and distribution of portable vaporizers of smaller, discrete form-factors for "smokeless" consumption of tobacco, cannabis and other herb-derived oils. At the core of the holding company, RFMK develops the Vapor Inhaler, which is the base technology used in its subsidiaries' products, like the CANNAcig and Cumulus vaporizers.
For those who are not familiar with the concept, vaporization is the process of inducing a phase transition of a substance (i.e., from liquid to gas) through evaporation, sublimation or boiling. In the context of cannabis, vaporizers utilize conduction or convection to achieve evaporation of the active compounds (THC, CBD, etc.) in the cannabis plant material, releasing them for smokeless inhalation.
Vaporization is a great alternative to the traditional means of consuming marijuana; it is both more efficient at extracting the active compounds from buds or infused oils and healthier for users, as the method avoids most of the toxic or even carcinogenic byproducts of plant matter combustion during smoking. Early iterations of vaporizer products were bulky, required access to an electrical outlet and tended to run hotter as a result of the vaporization methods used.
With the advent of more compact and efficient battery technologies and sophisticated vaporization techniques, vaporizer manufacturers have been able to create pen-sized units that vaporize cannibinoid-infused oils (concentrates) or waxes, allowing for more discrete usage of the product. This is possible because the units also do not release any of the odors or second-hand smoke associated with traditional consumption methods.[1]
Interestingly, in addition to the core vaporizer business, RFMK, through its fully-owned subsidiary Medical Cannabis Management (MCM), is putting resources towards developing a media and public relations engine focused on heightening general awareness of the entrepreneurial spirit behind cannabis companies. It seems to be at a very early stage, but, the company has managed to sign on the flamboyant and outspoken marijuana activist Cheryl Shuman as its general spokesperson and has given her oversight of MCM development. It will be very interesting to see where this goes.
Business Analysis
At the present time, RFMK relies on a 3rd party outsource firm by the name of HexCorp, Inc. for the development and manufacturing of Vapor Inhaler based products. On August 28, 2012 it announced a non-compete with HexCorp, insuring protection of the technologies proprietary to RFMK and staving off the threat of any potential knock-off products entering the market. However, it is not readily apparent whether or not the technology behind Vapor Inhaler is included in what is defined proprietary, and to date no known patents have been filed or are owned by the company.
With this being said, there is some debate as to what exactly the Vapor Inhaler is and if it really delivers on the company's promises. Some argue that RMFK, like many companies with similar products, has simply repurposed the common 510 model e-cig for use with THC concentrates, and that such repurposing without truly redesigning the heating element and chamber for such use negatively impacts product lifespan and user experience. Others have given rather positive reviews, rebutting naysayers claims with detailed accounts of confirmative personal experiences with the devices.
Perhaps lackluster uptake of the device is why the CEO, Tom Allinder, indicated in the company's most recent press release that due to "huge" market demand for dry herb (as opposed to concentrates) vaporization products, in lieu of its next shipment of Cumulus and CANNAcig vapor inhalers from HexCorp, RFMK is in the process of readying a next generation product that will address the niche. It was also mentioned in the release that the new unit (yet to be named) "will be made from scratch which [RFMK] will file a patent for." This marks a new phase for the company, where it will embark on a journey to create its own line of products, possibly securing a better competitive position in the market.
It should be noted here that the market is saturated with many competing devices. Vaporization technologies can literally be traced back to ancient history, so gaining an edge on competitors would require quite a bit of ingenuity. At this point, it may be too early in the race to tell if RFMK have the winning horse. With that said, we can look to another factor that will most likely serve as an appropriate indicator as to the popularity of RFMK's products: revenue. Let's have a peek inside the books.
Financial Analysis
The most recent (unaudited) Quarterly Report for Rapid Fire Marketing, Inc. was filed for Q3 on Nov. 7th. The company managed turnover of $25K on a cost basis of $14K, giving it a gross margin of 44%. RFMK managed to burn (or um...vaporize) $170K in the same period, reducing cash on hand to $24K, and this after significant increases to paid-in capital. Net losses for the past three quarters have amounted to $431K, and the company lists total assets at $324K against current liabilities of zero.
The company, like most of the others in the group, has relied heavily on share issues for operating capital. In the nine months leading up to the filing, the company issued no less than 439 million shares (almost doubling total outstanding) of common stock and 8 million of Series A preferreds.
In June of last year, the CEO provided an update to shareholders regarding the company's sudden plunge in share price, wherein he explained RFMK's need to replenish working capital for the purpose of getting it to "fully reporting status." At that time, it was shared the process would take 3~6 months and that the company was undergoing an audit for the filing in order to gain access to "better funding." In fact, it was announced on September 25 that the company managed to secure $2.2 million from Ironridge Consumer Co. for an undisclosed percentage. It is believed this cash injection should give the company much needed tailwinds to carry it into the next phase of its growth.
On February 28, the company released another update in which the CEO informed investors the 10-K would be further delayed due to the need to recenter the audited financials around the two-year period of 2011 and 2012. This was due to the fact that "2010 was too much of a challenge to complete due to changes in previous management." However, the CEO reassured investors the process would be completed "within 60 days."
Recommended Investment Strategy (Watch : Hold)
Even though competition in the market is strong, done properly, RFMK could possibly brand itself as the go-to source for high-end, quality vaporizers. In that vein, and going on the company's rapid fire press releases, it does seem to be garnering some traction of late for its products, having announced various distribution contracts and increased orders.
Additionally, with the help of its spokesperson, Cheryl Shuman, the company has managed significant press coverage, and having a segment with Tomy Chong puffing away at its CANNAcig is definitely cause for confidence the brand will get stronger recognition amongst the diehard cannabis crowd.
However, it is just not possible at this time to determine fair value without updated financials or any verifiable indication of top-line growth. Having said this, one important difference between this company and most others in the sector is it has a relatively small market cap at $3 million. With the backing of venture capital--though this does mean dilution to a currently unknown degree-- if the company were to evidence any amount of solid income growth over the next few quarters, the upside potential of this stock could be significant.
Conclusion
We are without a doubt in the midst of a socioeconomic revolution of epic proportions, and it is no secret those looking to jump in early face significant risks of loss due to immaturity of the participating companies, general lack of transparency and, once legalized at the federal level, the possible threat of well-moneyed corporations swooping in to steal what little slice of pie these smaller players currently enjoy.
This being said, I truly believe that many a millionaire will be minted from the group of individuals who approach the sector with a proper level of sagacity and unwavering patience.
Until next time, happy Seeking Alpha!
Article Notes:
For those interested in reading more about the process and benefits, check out this overview provided by HIGH TIMES.
Additional disclosure: I trade in and out of these stocks on any given day. I am not committed to any position with either a long or short sentiment.
<<<
Mar 6 2013
by: Panoplos
http://seekingalpha.com/article/1250571-pipe-dreams-can-these-marijuana-stocks-make-you-rich?source=yahoo
3D printing systems? Online casinos? Wearable tech? Investors and non-investors alike are without a doubt fumbling over themselves, eager for a glimpse of what next revolution may take the world by storm.
3D Printing (or Additive Manufacturing)--though the concept has been around since the late '70s--has of late come of age as a technology and is expected to turn the current manufacturing paradigm on its head. 3D printing is estimated by Forbes to become a $3.1 billion dollar worldwide industry by 2016. It is no wonder early participants like 3D Systems Corporation (DDD) were selected by the investment gurus early on to skyrocket in value. Indeed, the company has more than doubled since its IPO in mid-2011.
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Online gambling, according to The New York times, already generates $32 billion in annual revenues overseas and, with the advent of mobile betting platforms, has the potential to reach $100 billion worldwide by 2017. Early entrants such as Boss Media and Playtika were quickly swooped up by the big boys (Lottomatica Group, SpA (LTTOY.PK) and Ceasers Entertainment (CZR), respectively), bringing to the founders and their investors immense wealth; and things are just getting rolling!
Spectators were blown away when Google (GOOG) unveiled "How It Feels through [Google] Glass" to the world through a YouTube promotional video that achieved 14 million views in less than a week. According to an ABI research report, "wearable computing devices, like Apple's iWatch, will exceed 485 million annual shipments by 2018." It is no secret that devices like Google Glass and the predicted Apple (AAPL) iWatch stand to revolutionize the way we live and interact with each other and our environment, bringing huge profits to the companies that manage to capture these markets early.
So, what do these have to do with Marijuana?
In my previous article, Weeding Through The Growth: An In-Depth Analysis of Marijuana Stocks, I provided an outline of the Marijuana industry and initiated coverage of the most publicized of the publicly traded cannabis-related stocks. Of course, this article is but one of hundreds, and the pace of PR newswires, the nearly daily onslaught of breaking stories covering yet another state deliberating new legalization measures, and the mounting pressure in Washington to reconsider cannabis's current legal status all serve as an ever stronger indicator of an oncoming tsunami, one that will doubtlessly carry with it disruption and opportunity analogous in economic terms with the three industry-generating breakthroughs listed above.
In fact, The Economist recently published an article that highlights one Silicon Valley VC who values the cannabis market at $50 billion, and CNBC published a headline that conservatively figured the market was worth between $35 and $45 billion in 2010, long before the elections that made marijuana legal for recreational use in two states. However, reiterating the message of my previous article, the numbers are tricky due to lack of transparency in the industry and tend to focus only on cannabis in flower form, itself.
In referencing the above, I hope the parallel drawn will serve to hit home the sheer scale and potential of this industry for those who are not as familiar with the marijuana subculture. For those in the know, it goes without saying.
Recognizing this enormous scale, the reality is many early investors are approaching the cannabis industry with starry eyes, hoping against hope that this just might be the proverbial pot of gold at the end of their hazy rainbow, and that the little leprechaun of green would ne'er lead them astray. Other, more pessimistic types fear these folks are simply seeing the world through rainbow tinted glasses, staring down the barrel of their pipe to a life gone up in smoke. Only time will tell if riches are to be had by investing in the early marijuana market participants, or even if the current motley crew of frontrunner companies represent more than pipe dreams.
With this as the backdrop, in this article I will expand the previous analysis to cover two of the other smaller or less-publicized of the group. Namely:
(click to enlarge)
Please note that I originally intended to cover two additional participants in Terra Tech Corp. (TRTC.OB) and GW Pharmaceuticals Plc. (GWPRF.PK), but due to time constraints and in light of recent activity and further availability of information since initiating coverage of the sector, I decided it would be better to instead use the time to revisit a couple of the companies discussed in the first article of this series. To all those that were hoping to see analyses of these two entries, please accept my sincerest apologies and rest assured I will follow up with expanded coverage within the next couple weeks.
Now, without further interruptions, let's get started.
Medical Marijuana, Inc. (MJNA.PK)
Right on the heels of the Michael Llamas scandal instigated by the infamous Infitialis article, a hot debate has formed around MJNA's recently announced divestiture of its PhytoSPHERE holdings to CannaVEST in the form of an asset sell-off. The company has not made any official public statements regarding the deal beyond a reiteration of what is found in its recent Annual Report and press release. This has left investors and analysts perplexed and hopeful more information will be forthcoming.
To fill the gap left by the company, voices in the community have been raised both in defence of the deal structure, claiming it an ingenious move on MJNA's part that enables them to distance themselves from the legal barbs of cultivating marijuana and hemp until legislation change is achieved, and in questioning the legitimacy and efficacy of the deal to ultimately increase shareholder value.
Those who are cautious about the transaction, myself included, believe MJNA owes its investors a more thorough explanation and would do well to address the more invective criticisms of the deal. For instance,
How was the appraisal value of $39.5 million for Foreclosure Solutions, Inc. (FCLS.OB) determined? On Nov. 16, 6,979,900 shares of FCLS (representing 99.7% of the company) were purchased by an acquiring group for $375,000 total.
In a typical share-based acquisition scenario, the acquiring party issues X number of shares to the target company's shareholders in proportion to the then-current market value of those shares. Keep in mind FCLS traded with literally next to nil turnover at a share price under $2 just weeks before FCLS's 8-K filing, and an even lower PPS not too long before that. The sudden jump in value to $5 was obviously achieved by colluding on the open market to set the share price of the shell company at the desired target.
Moreover, there is something very atypical about this reverse merger: in a standard reverse takeover, the proprietor of the merged entity retains full ownership of the resultant company, especially if the parent organization is public. This is to insure owners of the parent company--public investors in the case of MJNA--retain the full value of their investment. However, in the case of the CannaVEST deal, MJNA and its investors are not guaranteed ownership. (More on this to come.)
No mention was made as to how MJNA reached a valuation of $35 million for the PhytoSPHERE assets. According to the Q4 report, the Cannabidiol "inventory" alone was appraised at this value. The Annual Report repaints the picture entirely, however, by divulging the complete emptying of PhytoSPHERE into CannaVEST in return for an initial installment of 900K shares (or 11.4%) of the company and a promissory note for the remaining balance. Why was the "audited" financial report in conflict with the truth about the deal?
Additionally, the Q3 report establishes that PhytoSPHERE contributed $1 million in revenues for the quarter on G&A expenses of a mere $356K specific to the subsidiary. Rough estimates would give PhytoSPHERE a net profit margin of ~60-70%. Absurdities aside, if we were to take the $15 million purchase price for the 460 kg of CBD oil that MJNA is expected to pay CannaVEST over the year, this would mean PhytoSPHERE was capable of turning $10 million in profits from the production of the oil.
The quandary for shareholders is that they are getting a total of $35 million for a portfolio company that is apparently capable of generating at least $10 million in annual profits with significant assets, IP and a demonstrated potential for growth that would make many companies envious.
Recall, CannaVEST has the option to pay the remaining balance in cash, which would result in only minority ownership for MJNA, leaving shareholders in the lurch. This, of course, is predicated on the assumption MJNA will not liquidate its small stake; however, it is easily deduced from the fact the company is declaring these shares as "cash flows" that this is exactly what it intends to do. Which brings us to our next question:
What if PhytoSPHERE is not worth $35 million? The assumptions outlined above for determining intrinsic value of the subsidiary are admittedly fanciful. Without the MJNA repurchase program, FCLS may be worth far less than anticipated. My guess is MJNA is banking on the fact that investors are pushing marijuana stock prices so high, it will have no trouble dumping its holdings on the market to hit its "cash flow" projections.
However, if this plan backfires and the market refuses to pile in, MJNA could be on the hook for misleading investors as to its business outlook for the year.
Moreover, according to one securities law firm, Hamilton & Associates, this practice could result in a DTC chill (sound familiar?) and global lock on the shares, which would make it "impossible for [MJNA] to establish liquidity in its securities."
Be this as it may, MJNA investors are faced with a glaring issue in the company having sold off shareholder assets--paid for by market capitalization--to a company it then intends to float under a new ticker on the open market. If the investors push the new company's market cap. above $39.5 million, holders of MJNA shares will have been robbed of significant potential value. This begs the question:
Why is MJNA disposing of its golden goose (PhytoSPHERE) at a discount, only to buy the golden eggs (CBD oil) back later at inflated prices?
According to those lauding the move, the transaction was undertaken in order to shield MJNA from potential legal action by the Feds. The argument goes that since no board members are shared across the companies, MJNA is not legally bound to CannaVEST, so it is now no longer exposed to the risk of federal prosecution. However, one has to question this line of reasoning when in fact a major shareholder of MJNA in Michael Mona, Jr. is the company's sole member on the Board of Directors. A rose by any other name...
Of course, there are still strong aspects of the company's portfolio that make it very attractive. For instance, the Annual Shareholders Report highlighted the fact that all of its subsidiaries are experiencing healthy growth and will contribute to stronger revenues for the current year. The company's unaudited financials showed a net income of around $7 million on revenues of $12.38 million, clocking its net profit margin for the year of 2012 at 57% with an EPS of 0.8 cents. MJNA shares are currently trading around 0.30 a share, so the TTM P/E registers at 34.11. For a company experiencing such explosive growth, this ratio indicates the market is not willing to pay for the risks.
This is why it is so critical that MJNA come forward to address the concerns raised by the Infitialis article and those listed above.
As an official response has not been forthcoming, and with these issues still hanging overhead, my sentiment regarding the company remains negative due only to the large uncertainty factor involved. However, if MJNA management reaches out with a voice of reason that leaves no doubt regarding the relationship with Michael Llamas and gives answers as to its intentions and the propriety of the CannaVEST transaction, I would most likely turn bullish towards the stock and recommend buying at an appropriate entry point--fully comprehending, of course, the systemic risks involved.
MediSwipe, Inc. (MWIP.OB)
Since initiating coverage of MediSwipe, significantly more information--mainly through press releases--has come to my attention about the company that I believe sheds better light on its operations and business model.
As mentioned in my last article, the company's website leaves much to be desired and has unfortunately proven a misleading indicator as to its level of business activity. MediSwipe appears to rely solely on press releases for dissemination of information pertaining to current operations of the company; a practice that, given the lack of updated financials, undoubtedly raises a few eyebrows.
Over the past couple of months, particularly, MediSwipe has released a flurry of craftily worded PR announcements that many an unsuspecting reader may construe to mean huge improvements in cash flows. The headlines are particularly tricky. For instance,
On January 11, the company announced "$500,000 for Month of December in Elective Medical Procedure Consumer-Related Financing."
On February 21, MediSwipe released another very similarly worded announcement that headlined "Revenues on Over $1,000,000 for Months of January and February in Elective Medical Procedure Consumer-Related Financings."
The issue here is rather obvious: MediSwipe is declaring revenues through these rather sensational pieces without giving any clear indications as to what the revenues actually were. Readers who managed to interpret these headlines correctly are left scratching their heads.
So, what exactly does a personal loan broker make? If mortgage brokerages are any indicator, and taking into consideration a) the higher risk demographic they are pursuing and b) the assumption that, unlike a mortgage, no real collateral is available to the financing terms, we shouldn't expect MWIP's take-away to exceed 0.5% of loan values.
OK, this just sounds too low, right? I mean, the company is emphasizing the millions in financing deals for a reason, so--for argument's sake--let's assume its commission rate is even as high as 5%. In this scenario, MediSwipe is generating $25,000 a month on the top line from a business that hasn't managed to grow over the stated period. Nothing to call home about, for sure, but certainly better than what we witnessed in Q3.
Perhaps we are being too cynical. The twin announcements do go on to explain that MediSwipe considers itself positioned to become "the 'LendingTree' for the elective surgery industry," and that the company's banking and financing network enables it to approve virtually anyone for financing applicable to a number of elective procedures with "an 80% approval rate or better from [sic] more traditional lending sources." The release also notes MediSwipe currently has 3,000 doctors throughout the country participating in the program.
This is great news and all, but I would like to know what this has to do with secure merchant transaction and patient identification systems--you know, the stated core competencies of the company. It may be the case the company is hoping to up-sell its other solutions, or perhaps it is simply in need of cash and is going after some low-hanging fruit. Whichever it turns out, there is no obvious moat here for MediSwipe, so I am inclined to evaluate this aspect of the business with far more skepticism than its core operations.
With that out of the way, let's turn our attention to the next bit of news more germane to the MediSwipe story of more interest to us.
On Feb. 5, the company announced "new orders of 5,000 plus digital patient cards for Michigan medical dispensaries in conjunction with (3) MediPayment Kiosks." Now this is more like it.
The importance of MediSwipe's role in this particular segment is understood better when we take into consideration two key factors.
First, on Feb. 19, Michigan introduced proposed legislation in the form of House Bill 4271 that outlines new requirements for the state's medical marijuana program. The bill suggests "a secure patient identification system" that apparently falls right in line with the HIPAA compliant solutions MediSwipe has exclusive distribution rights to. If MediSwipe positions itself correctly, it stands to benefit greatly from the new legislation in that it will be the only solution tailored to the dispensary market that meets the strict patient identification and data security requirements of the bill.
Second, Michigan's bill is said to embody conventions other state governmental bodies may take into serious consideration when codifying their own new medical marijuana laws. Given the nature of the industry and its history of operating in the shadows, governments will demand high levels of visibility into all aspects of product distribution. Cloud-based patient identity systems like those offered by MediSwipe could help streamline medical marijuana dispensary compliance and lower the barrier of entry for those looking to set up shop.
It does appear that MediSwipe is very active and has started to gain some traction in the MMJ market, but for the time being I reiterate my negative sentiment on the company for the following reasons:
Owners are disposing of shares. Recent filings have revealed that in the past two months alone, 2 million shares were issued to Venture Equity LLC, who immediately sold 400K, and the CEO parted with 2,575,000 shares at the height of the market price for the stock. This is abnormal behavior for a startup of this size and typically points to deficiencies in cash flow. This may also prove the driving factor behind the company's frequent and overzealous IR releases.
The stark reality remains that cannabis dispensary credit and debit transactions are impossible at present, which has proven a poison pill to a core component of the MWIP business model. Until this is settled, the company will continue to scramble for other sources of operating cash.
It may be that things improve with their exposure to the HIPAA compliant patient identification market, however, so I will keep a watchful eye on their progress here.
Without access to MediSwipe's Q4 results, it is impossible to determine fair value for the company. Even with the latest drop, MWIP's market cap. sits at $32 million--a significantly high number for black box financials.
Now for our expanded coverage of the industry.
Tranzbyte Corporation (ERBB.PK)
According to Tranzbyte's corporate profile, the company "attracts established and early growth businesses seeking to take advantage of resources not generally available to private companies through the public capital markets." The concept behind its business is to acquire these entities with the purpose of transforming them into "fully-reporting, publicly-traded, bulletin board companies," in a sense acting as an OTC reverse merger mill--only, it doesn't appear it has actually done this beyond its own company.
Business Analysis
Though not mentioned on the site, Tranzbyte evidently started out 10 years ago as a developer of audio and video disc digital-enhancement technologies. Something extremely important to note here is that Tranzbyte declares the IP associated with these outdated technologies on the balance sheet valued at a post-amortization $500K, or more than half of total "assets." (More on this later.)
What follows is a breakdown of the subsidiaries and business ventures listed in the company's most recent filings.
Altitude Organic Medicine
In February of 2011, the company acquired Altitude Organic Licensing Corporation and its subsidiaries (namely Altitude Organic Medicine) for $80,000. Altitude Organic Medicine is a medical marijuana dispensary "franchise" founded out of Denver, CO in 2009, and though the Tranzbyte website states "the company has operated in California, Colorado, and Arizona," it apparently has only one location in Denver.
Proxima RF Technologies
In addition to the Altitude Organic holdings, in January of last year, Tranzbyte acquired a company by the name of Proxima RF Technology Corp. for 6,500,000 Preferred Series C shares of the company at a par value of $1 per share, which the company has agreed to "use [their] best efforts to repurchase and retire ... during 2012," however no shares have been retired to date.
Proxima RF Technologies specializes in the development of RFID readers and reader modules for 13.56 MHz passive and RFID enabled sensor tags. These technologies have a wide range of applications, with the more relevant being inventory tracking systems. It is not clear if Proxima RF has engineered the core silicon in its readers, or if it is simply creating modules with OTS RFID components, such as those from Sony Corporation (SNE).
The company's December 2012 Quarterly Information and Disclosure Statement discloses that Proxima RF products "are currently being tested and deployed in several national grocery retail stores and restaurants, as well as state utility commissions," and goes on to explain the subsidiary is "engaged with a Value Added Reseller in providing RFID reader, sensor tags and data loggers to the United States Army Blood Services Program in a demonstration project." The disclosure also states that the company is holding "promising early discussion[s] with Panasonic regarding use of ProximaRF's mobile data logging solutions in its medical supply division."
More related to our industry of interest, the company mentions ongoing developing of what it terms "The Integrity Tag," an RFID-based tracking system for cannabis inventory that will give law enforcement better visibility into the distribution of the regulated substance; promising, given the measures states may take to monitor cannabis distribution, as outlined in the MWIP section above.
Interestingly enough, I am very familiar with RFID technologies and the market in general and can share with authority that the space is crowded, to say the least. With nothing particularly unique on offer, it is not easy to conclude to what degree the subsidiary represents long-term value for ERBB shareholders. It should be noted, however, that product development of this nature is both time and cash intensive.
In fact, it appears the subsidiary is facing operating cash deficiencies. Per the disclosure statement, "The company is seeking additional resources to finance the delivery of existing contracts, to continue new product design and development activities such as work on The Integrity Tag, and to focus on aggressive marketing and sales activities." This should be interpreted as a forewarning of further dilution.
Hurricane MRI
Tranzbyte has (recently?) obtained the rights to market Cirrus Open MRI medical imaging devices throughout North and South America for Hurricane Enterprises Ltd., a company that possesses exclusive world-wide distribution rights for the MRI devices. It is not clear why the company has engaged in this industry, and it remains to be seen how it intends to fund the sales organization to realize any benefits therefrom.
Reselling MRI technology is a capital intensive business that requires a highly qualified and well connected sales force. The company currently has no cash on the books, so retaining key personnel is going to be nigh on impossible. This makes it difficult to believe Tranzbyte will be capable of generating significant shareholder value from these efforts.
Panpacific International
Lastly, Tranzbyte entered into a joint venture production agreement in May of 2010 with a company by the name of Panpacific Business Limited, whereby it was to receive "50% of the profits in three scheduled concerts with internationally known artists to be performed in Hong Kong, and other agreed-upon joint enterprises, for 60 million restricted common shares valued at $2,400,000." The narrative found in Tranzbyte's annual report explaining this joint venture weaves through a complex set of transactions related to the deal that results in the company owning only 5% of a jointly formed entity on a cost basis of $480,000 (this is an important number, so keep it in mind).
I couldn't be bothered to untangle the mess to determine how much actual value was created for the company out of this deal, so I will leave it up to the reader if you are so inclined. I do suspect, however, due to the very convoluted manner in which the deal was presented without any concrete revenue numbers, it lost money on the investment. Anyway, with no cash flows from the JV mentioned in the financial report, it has at least proven immaterial to the company's current profitability.
On the whole, the company appears all over the chart, and one would be hard-pressed to come away with the impression that it has a business model that is built to last. I also feel its lack of success speaks for itself.
Financial Analysis
Out of all the businesses so far covered, I have to share that Tranzbyte gets the trophy for keeping an insolvent company trading on the open market.
The company has reported zero, yes zero, revenue for the last six months and only $21,023 for the six months prior. Losses for the same period tallied in at $378K.
Frankly speaking, Tranzbyte is blatantly ripping shareholders and investors off. The company has a long laundry list of debentures and stock issues that anyone with a right mind would know to steer clear of. As of its recent filing, the company holds liabilities in excess of $3.5 million and claims to have assets of $1 million; however, the stated assets are non-existent. The IP mentioned above is worthless, and it continues to account for the $480K from the Panpacific deal on the balance sheet; good luck laying claim to that in court.
Recommended Investment Strategy (Avoid; Strong Sell)
ERBB is a ticking time-bomb with an insanely high market cap. of $15 million. Unless circumstances drastically change, I fear anyone currently holding this company's shares will more than likely lose their entire investment. It is truly a miracle that OTC Markets Group has allowed this insolvent company to continue stealing money from the public.
(I really hate having to report things of this nature, but the truth is there for everyone to see. I just wonder why nobody has bothered to pay attention.)
Rapid Fire Marketing, Inc. (RFMK.PK)
Rapid Fire Marketing, Inc. is a holding company engaged in the development, marketing and distribution of portable vaporizers of smaller, discrete form-factors for "smokeless" consumption of tobacco, cannabis and other herb-derived oils. At the core of the holding company, RFMK develops the Vapor Inhaler, which is the base technology used in its subsidiaries' products, like the CANNAcig and Cumulus vaporizers.
For those who are not familiar with the concept, vaporization is the process of inducing a phase transition of a substance (i.e., from liquid to gas) through evaporation, sublimation or boiling. In the context of cannabis, vaporizers utilize conduction or convection to achieve evaporation of the active compounds (THC, CBD, etc.) in the cannabis plant material, releasing them for smokeless inhalation.
Vaporization is a great alternative to the traditional means of consuming marijuana; it is both more efficient at extracting the active compounds from buds or infused oils and healthier for users, as the method avoids most of the toxic or even carcinogenic byproducts of plant matter combustion during smoking. Early iterations of vaporizer products were bulky, required access to an electrical outlet and tended to run hotter as a result of the vaporization methods used.
With the advent of more compact and efficient battery technologies and sophisticated vaporization techniques, vaporizer manufacturers have been able to create pen-sized units that vaporize cannibinoid-infused oils (concentrates) or waxes, allowing for more discrete usage of the product. This is possible because the units also do not release any of the odors or second-hand smoke associated with traditional consumption methods.[1]
Interestingly, in addition to the core vaporizer business, RFMK, through its fully-owned subsidiary Medical Cannabis Management (MCM), is putting resources towards developing a media and public relations engine focused on heightening general awareness of the entrepreneurial spirit behind cannabis companies. It seems to be at a very early stage, but, the company has managed to sign on the flamboyant and outspoken marijuana activist Cheryl Shuman as its general spokesperson and has given her oversight of MCM development. It will be very interesting to see where this goes.
Business Analysis
At the present time, RFMK relies on a 3rd party outsource firm by the name of HexCorp, Inc. for the development and manufacturing of Vapor Inhaler based products. On August 28, 2012 it announced a non-compete with HexCorp, insuring protection of the technologies proprietary to RFMK and staving off the threat of any potential knock-off products entering the market. However, it is not readily apparent whether or not the technology behind Vapor Inhaler is included in what is defined proprietary, and to date no known patents have been filed or are owned by the company.
With this being said, there is some debate as to what exactly the Vapor Inhaler is and if it really delivers on the company's promises. Some argue that RMFK, like many companies with similar products, has simply repurposed the common 510 model e-cig for use with THC concentrates, and that such repurposing without truly redesigning the heating element and chamber for such use negatively impacts product lifespan and user experience. Others have given rather positive reviews, rebutting naysayers claims with detailed accounts of confirmative personal experiences with the devices.
Perhaps lackluster uptake of the device is why the CEO, Tom Allinder, indicated in the company's most recent press release that due to "huge" market demand for dry herb (as opposed to concentrates) vaporization products, in lieu of its next shipment of Cumulus and CANNAcig vapor inhalers from HexCorp, RFMK is in the process of readying a next generation product that will address the niche. It was also mentioned in the release that the new unit (yet to be named) "will be made from scratch which [RFMK] will file a patent for." This marks a new phase for the company, where it will embark on a journey to create its own line of products, possibly securing a better competitive position in the market.
It should be noted here that the market is saturated with many competing devices. Vaporization technologies can literally be traced back to ancient history, so gaining an edge on competitors would require quite a bit of ingenuity. At this point, it may be too early in the race to tell if RFMK have the winning horse. With that said, we can look to another factor that will most likely serve as an appropriate indicator as to the popularity of RFMK's products: revenue. Let's have a peek inside the books.
Financial Analysis
The most recent (unaudited) Quarterly Report for Rapid Fire Marketing, Inc. was filed for Q3 on Nov. 7th. The company managed turnover of $25K on a cost basis of $14K, giving it a gross margin of 44%. RFMK managed to burn (or um...vaporize) $170K in the same period, reducing cash on hand to $24K, and this after significant increases to paid-in capital. Net losses for the past three quarters have amounted to $431K, and the company lists total assets at $324K against current liabilities of zero.
The company, like most of the others in the group, has relied heavily on share issues for operating capital. In the nine months leading up to the filing, the company issued no less than 439 million shares (almost doubling total outstanding) of common stock and 8 million of Series A preferreds.
In June of last year, the CEO provided an update to shareholders regarding the company's sudden plunge in share price, wherein he explained RFMK's need to replenish working capital for the purpose of getting it to "fully reporting status." At that time, it was shared the process would take 3~6 months and that the company was undergoing an audit for the filing in order to gain access to "better funding." In fact, it was announced on September 25 that the company managed to secure $2.2 million from Ironridge Consumer Co. for an undisclosed percentage. It is believed this cash injection should give the company much needed tailwinds to carry it into the next phase of its growth.
On February 28, the company released another update in which the CEO informed investors the 10-K would be further delayed due to the need to recenter the audited financials around the two-year period of 2011 and 2012. This was due to the fact that "2010 was too much of a challenge to complete due to changes in previous management." However, the CEO reassured investors the process would be completed "within 60 days."
Recommended Investment Strategy (Watch : Hold)
Even though competition in the market is strong, done properly, RFMK could possibly brand itself as the go-to source for high-end, quality vaporizers. In that vein, and going on the company's rapid fire press releases, it does seem to be garnering some traction of late for its products, having announced various distribution contracts and increased orders.
Additionally, with the help of its spokesperson, Cheryl Shuman, the company has managed significant press coverage, and having a segment with Tomy Chong puffing away at its CANNAcig is definitely cause for confidence the brand will get stronger recognition amongst the diehard cannabis crowd.
However, it is just not possible at this time to determine fair value without updated financials or any verifiable indication of top-line growth. Having said this, one important difference between this company and most others in the sector is it has a relatively small market cap at $3 million. With the backing of venture capital--though this does mean dilution to a currently unknown degree-- if the company were to evidence any amount of solid income growth over the next few quarters, the upside potential of this stock could be significant.
Conclusion
We are without a doubt in the midst of a socioeconomic revolution of epic proportions, and it is no secret those looking to jump in early face significant risks of loss due to immaturity of the participating companies, general lack of transparency and, once legalized at the federal level, the possible threat of well-moneyed corporations swooping in to steal what little slice of pie these smaller players currently enjoy.
This being said, I truly believe that many a millionaire will be minted from the group of individuals who approach the sector with a proper level of sagacity and unwavering patience.
Until next time, happy Seeking Alpha!
Article Notes:
For those interested in reading more about the process and benefits, check out this overview provided by HIGH TIMES.
Additional disclosure: I trade in and out of these stocks on any given day. I am not committed to any position with either a long or short sentiment.
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