Medical Marijuana Inc (MJNA)

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Seeing Through the Smoke
Once again, I have been deleted from SA. I posted this instablog last night. It was published. But has now been removed? Sketchy stuff. That website is a JOKE! Threatened by my blogs

Seeing Through The Some
The past few months have been a most interesting time for the expanding quasi-legal marijuana and hemp markets. Several publicly traded stocks like MJNA, MDBX and NTRR have seen explosive growth over the past 6 months and the result has been a barrage of press, message board activity and public interest. In an effort to put some perspective on the recent hype, I'd like to offer some insight as a seasoned financial market participant with almost 2 decades of experience in the cannabis industry.

Personal Disclosure

First let me get the personal disclosures out of the way in order to clarify my experience. I have been a market participant, professionally and personally for over 15 years. Without getting into too much detail, I have worked at Merrill Lynch in NY and have been involved with proprietary trading firms in Los Angeles, aka dark pools, as well as personally trading and investing for over 10 years. Currently, I am not professionally involved in finance, as I found managing other people's money to be unfulfilling. Ironically, my current work in the film/TV business has me managing budgets and OPM, albeit in a more creative fashion and I am still well compensated for the work.

In addition to the financial background, I have extensive experience with cannabis from cultivation to distribution to consumption. Again, without specific details, I have been around cannabis for more than half my life and I have been a medical user since 2003 when California passed legislation allowing cannabis to be sold at complaint retail locations. My reasons for using cannabis vary, but by no means do I fit into the typical "Jeff Spicoli" type "stoner". I am in excellent physical condition. I work 12 to 24 hours per day on a regular basis. I rarely drink alcohol. Aside from the occasional instance, I rarely use other recreational drugs but I never use anti-depressants or other legal medication except for maybe antibiotics.

For the last bit of personal disclosure, I have long positions in MJNA, ERBB, CBIS and SKTO. While my displacement is long, I understand the tenuous nature of these equities and would only recommend buying them with discretionary funds. The cannabis market and the companies involved are in their infancy, therefore making investing extremely risky. The opportunity to make a lot of money is equal to the potential to lose it all, so please invest only what you can stand to lose.

Now that that is out of the way, hopefully you have stuck around to read the cannabis market analysis.

Historical Background of Hemp and Cannabis

Every single major culture across the world, past and present, has used cannabis and hemp. The earliest appearance of cannabis is from ancient Chinese texts from over 4000 years ago. Since then Greeks, Romans, Mongolians, Persians, European and American cultures have documented use of cannabis for medicinal, spiritual, and social purposes. Also, many of these cultures used hemp for textiles, building material and food. The first use of hemp can be documented as far back as 10,000 years ago. Contrary to popular myth, the US Constitution was not drafted on hemp paper but the first US flag certainly was made from hemp, as were the Union soldier's uniforms during the Civil War. In fact, George Washington enacted legislation requiring Americans to grow hemp and Virginia actually threatened imprisonment for failure to grow hemp. Schoolbooks were even made of hemp prior to 1880. According to a 1938 issue of Popular Mechanics, hemp was a "billion dollar crop". See the following links to better understand historical uses of cannabis and hemp referenced above:

http://www.hort.purdue.edu/newcrop/ncnu02/v5-284.html

http://www.psychologytoday.com/blog/the-teenage-mind/201105/history-cannabis-in-ancient-china

http://en.wikipedia.org/wiki/Cannabis_(drug)

http://www.lewrockwell.com/spl2/reason-hemp-is-illegal.html

Unfortunately, the past decade has been particularly cruel to cannabis and hemp, especially in the United States. Starting at the turn of the 19th century, wealthy private interests and public legislative bodies in the US embarked on several decades' worth of disinformation and lies in a successful effort to prohibit cannabis and hemp. Perhaps the most well know opponent of marijuana was William Randolph Hearst whose overwhelming influences via his interests in media lead to shaping the negative social opinions. Hearst was instrumental in outlawing cannabis by using racism and ignorance. In a more sinister capitalist maneuver, in order to protect business interests, Hearst is alleged to have lobbied heavily for the outlaw of hemp. Read more about Hearst and other prohibitionists devious ways of creating negative public perception regarding hemp and marijuana.

http://marijuanacannabis.wordpress.com/2008/12/10/quotes-from-the-people-that-made-marijuana-illegal/

Current Status of Hemp and Cannabis in the United States

By now, most people are aware of the extent of marijuana and hemp prohibition in the USA. Currently, federal law prohibits cultivation, distribution and use of cannabis and also outlaws the production of hemp by way of the Marijuana Tax Act and Controlled Substances Act (among other legislation). Below are links to the official government position on hemp and marijuana.

http://www.fda.gov/regulatoryinformation/legislation/ucm148726.htm

http://www.justice.gov/dea/druginfo/ds.shtml

What most people are not aware of is the changing status of cannabis, both for medicinal and recreational use. As the medical marijuana (MMJ) movement has gained some notice across the US, most Americans, especially those in non-medically approved states, have no idea the extent of the MMJ growth. So far, 18 states have enacted medical marijuana measures with 2 states, Colorado and Washington passing state amendments allowing for recreational legality.

Residing in California, I can attest to the explosive growth of the MMJ market. At one point Los Angeles had more MMJ dispensaries than Starbucks. The city has made significant strides to curb further expansion of dispensaries and the number of shops has since decreased. However, the demand for cannabis has not. In 2003, when I first became a MMJ patient according to legal standards, having a MMJ recommendation was rare. Today, I am proudly one of many.

Of course, there are many detractors of MMJ in California as well, typically entities that receive some sort of financial compensation for their anti-marijuana persuasion. Ironically, in 2010 when CA had full recreational legalization on the ballot, it was the MMJ community that fought against it because they were afraid of losing the tight grip they held on the cannabis market. Sadly, the measure for recreational use did not pass but the medical status has not changed.

Since 2003, CA residents can receive a doctor's recommendation allowing entrance into a retail establishment to buy a variety of cannabis products, from flowers or buds to drinks, food and candies. Most importantly, patients can access medicines that fit their specific needs. There is endless advertisement for erection pills, pain medication and mood altering drugs, all with potentially lethal side effects. Traditional drug providers, doctors and advertisers (and pharmaceutical sales reps, pharmacies...) make billions pushing drugs onto patients with little concern, much less knowledge towards long term side effects. Today, many doctors are like auto mechanics looking for every opportunity to sell you something you may not actually need. Having used cannabis for almost 2 decades, I can tailor my use to my needs with limited if any side effects, but absolutely no fear of death from overdose or an adverse reaction.

Marijuana and Hemp Markets - Investment Opportunity

The developing medical status of marijuana has gained momentum nationwide giving way to legal investment opportunities. Today, there are a handful of publicly traded companies involved in the cannabis industry. It is important to stress that while these companies are involved in the traditionally black markets marijuana, as of right now, investing or trading the equities present absolutely zero legal risk to individuals. Unfortunately, the same does not apply to financial institutions that are unable to profit from potentially illegal activity and therefore cannot be involved with the cannabis industry. Yet.

Despite the lack of revenue for development, the industry is flourishing, as it already exists on a long established black market. According to a 2005 United Nations World Drug Report, the estimated worldwide market for cannabis is $141.8 billion, with an estimated 164 million users. The UN Report can be accessed at the following link (as well as the specific pages with the estimates);

http://www.havocscope.com/global-marijuana-market-value-and-users/

Additionally, a 1998 crop report by NORML estimated the annual US crop production of marijuana had a street value of more than $43 billion. Marijuana growers drew approximately $15 billion "on the wholesale market."

http://norml.org/component/zoo/category/norml-report-on-us-domestic-marijuana-production

Keep in mind those are 1998 and 2005 figures, and both US and worldwide estimates are for underground black markets of cannabis. Regardless, those numbers indicate an enormous market. Despite being illegal, marijuana is the number one cash crop in many states according to the NORML report.

Cannabis is now changing from black markets to grey and even white markets. There are three major sectors where the cannabis industry is gaining footholds;

Medical - Cannabis has long been used as a medicine. Today's medical uses include stress and pain relief, insomnia, lack of appetite, and glaucoma. Unfortunately, clinical testing for cannabis has been banned for decades, but current legal testing is showing promise treating a variety of conditions; cancer cell reduction, epilepsy treatment, Parkinson's treatment, burn relief. Cannabinoids (CBDs) are being tested in ways previously unheard of and the compounds are extracted with or without the psychoactive, intoxicating elements of THC, depending on the treatment. The potential for revenue in the treatment of the conditions listed above are in the untold tens of billions.
Recreational - There is no doubt of the sizable market for recreational use as evidenced by the black market figures above. But those numbers only tell a part of the story. Pending the federal legal status and reaction to Colorado and Washington's legalization effort, the market could explode. Recreational legalization will pave the way to possible sales of cannabis in a variety of outlets. The legal liquor industry produces roughly $140 billion annually (http://www.alcoholpolicymd.com/pdf/AMA_Final_web_1.pdf). Just a small piece of that market would bring a lot of revenue to cannabis related interests. There is also speculation about "pot tourism" and other residual industires that could spring up from recreational use.
Industrial - Hemp is finally being grown in the US after decades of being outlawed. The uses of hemp are practically unlimited including; paper, nutritional supplements, construction material, textiles, plastics, fuels. The industrial market potential is likely greater than both the medicinal and recreational uses combined. Obviously the possible revenue figures are specualtive but the few uses listed above are enough to draw billions of dollars in revenue.
There are several positive economic impacts on domestic state and national levels. The positive economic impacts include increased tax revenue from seed to sale. The tax revenues come from production, distribution and consumption. The increasing cannabis and hemp market not only offer tax revenue, but also may also greatly benefit employment. Barren farmland could be brought back to use.

Risks of Investment

Obviously, the legal status of hemp and cannabis is a major concern for investment. Aside from the legal status, there are other concerns going forward. Many of the publicly traded companies are not fully SEC reporting entities. Despite ongoing efforts to become fully compliant, the companies discussed below are inherently risky being "penny stocks" on OTC and pink sheet exchanges. The financial reports of these cannabis-based businesses are not as thorough as those of corporations traded on the NYSE or NASDAQ. I strongly recommend potential investors do plenty of due diligence before committing any capital and do not recommend buying MMJ stocks on margin, using only discretionary income for any transactions.

The cannabis market is a "high barrier to entry" market despite various erroneous reports. The federal legality is probably the largest obstacle. There are also other competitive interests whose very existence depends on prohibition. Privatized prisons, police departments, rehabilitation centers, textile manufacturers are just a few of the groups drawing revenues from outlawing marijuana and hemp. The liquor and pharmaceutical industry are also highly threatened by a competitive legal intoxicant that can be grown in the consumer's backyards or closets. Drug cartels are also not happy to see a major product be taken from their realm. Cannabis is also fighting nearly a century of systematic propaganda including people like Ronald Reagan's drug czar who is quoted saying marijuana use leads to homosexuality.

Another barrier to entry is the media. There has been rampant speculation regarding officers at many of the companies. Some of the accusations have merit, however, there are many Fortune 500 companies with executives that have spotted legal and professional histories. Should this be a concern, I would recommend contacting the companies with any questions to get an answer directly from the source.

Many of the wild aspersions cast recently, by one financial website in particular, lack any credible journalistic merit. The authors of these articles have admittedly not contacted the very companies in which they seek to expose for fraud, leading to poor journalism at the absolute least. These authors have also disclosed they have only been following the MMJ field since the explosion in February 2013. None of them have done any traditional analysis performed by even the most amateur analysts such as channels checks, site visits, or contacting management. The only investigation these "journalists" have performed is rooted in search engines and company PRs, something that can easily be performed by any individual with an internet connection and computer.

Medical Marijuana Inc - MJNA

MJNA is perhaps the most recognizable name in the MMJ field, not just because of the name but because of the recent press attention described above. MJNA is at its core an "umbrella" company, holding interests in various entities in the MMJ field. The company does not physically produce cannabis but it does have interests in hemp production. In conjunction with subsidiaries, MJNA does draw revenue from THC based products with limited legal risk. The company has taken strides to mitigate legal jeopardy, but the potential cannot be overlooked.

In February 2013, MJNA went parabolic, skyrocketing from .02 to .50 in a few weeks. Part of the reason for the boost is because the company is reporting significant growth and profit, as well as plans for expansion pending the legal status of cannabis in several states. Unfortunately the parabolic gains were unsustainable and the stock has since retraced to a low of .12 as of the end of April. In March, I posted on the InvestorsHub message board that .18 was a likely upcoming share price with a strong base at .09. As of now, I would be a large buyer if the stock continues below .10 (AGAIN ONLY WITH DISCRETIONARY FUNDS).

MJNA has a market capitalization of barely $100m at the current share price of .12. According to MJNA's earnings reports, the company projected $47m in revenue for 2013. For a highly speculative stock, showing YOY growth, trading just over 2x forward earnings seems pretty cheap. Going off 2014 projected earnings, MJNA is actually trading well below estimates.

There has been some heated debate about the legitimacy of MJNA's earnings report, mostly via opinion-based articles that have not been corroborated with the company. The question you must ask yourself is do you believe management, the auditors and lawyers who are legally obligated to report the truth? Or do you believe opinion-based journalism who's only sources are web searches, with no sources or even contact with the company?

Tranzbyte Corporation - ERBB

ERBB is highly speculative and the one company that faces the most legal peril due to their association with 2 dispensaries in Colorado. Altitude Organics is ERBB's outlets for selling THC based products. Tranzbyte also has a subsidiary, ProximaRF, developing MRI machines and other radio frequency devices. ERBB recently announced the Altitude Organix Network and entry into the popular medical vending machine market.

Of course, ERBB does not have financial reports making this stock nothing short of a lottery ticket. Part of the reason I believe ERBB cannot report earnings is beacuse the company is profitting from MMJ and does not want to paint a traget on the company for the Feds to take aim. However, having discussed revenues with current dispensary owners here in Los Angeles, I have invested in ERBB. Colorado is a test market for recreational use and ERBB is the only publicly traded stock with actual medical marijuana dispensaries. The Amendment 64 task force has also recommended allowing existing medical dispensaries to stay open while new recreational sales dispensaries may have to wait before establishing a location, giving ERBB a jump on sales. At a meager share price of less than .01 and a market cap, I have been buying in 100,000 share lots on a weekly basis.

Cannabis Science - CBIS

CBIS is hemorrhaging money and has not made money since inception. CBIS had a parabolic run back in March 2012, blasting off from .01 to .24 in just a few weeks. The rise was predicated by an announcement that CBIS had anecdotal evidence of their product being used to reduce skin cancer ailments. Unfortunately, the excitement was premature and the stock quickly retraced.

Currently, the company is facing insolvency and buying the stock may not be wise until a little more clarity is provided. Having said that, CBIS is approaching cannabis from a clinical direction, working with the NIH and FDA for clinical trials. CBIS also has a presence in Europe and is working hard to be compliant with their medical standards.

PHOT, SKTO, MDBX and the rest

PHOT is an interesting stock as it manufactures and sells equipment related to cannabis cultivation. Obviously as the industry booms, residual interests such as PHOT should theoretically expand as well. The company is SEC compliant and is fully legal to sell goods in all 50 states.

MDBX is a conundrum. At its peak, MDBX's market cap was nearly $2 billion but the CEO wisely came forth to say the valuation was too high. Since then the stock has dropped and the business model is still unclear.

SKTO is not a stock I really follow. It has gained momentum recently as the company announced a foray into medical marijuana. NTRR is another stock in a similar situation. I will be taking a closer look at these equities in the future.

Conclusion

In the end, the cannabis market is growing like a weed. It is truly exciting to be able to legally invest in the marijuana and hemp markets. Many of the companies involved are highly speculative investments, but have excellent potential to become premiere providers to the public demand for cannabis and hemp. The legal status of cannabis and hemp may be tenuous but society tends to progress rather than digress as it has with so many other wrongly imposed legislation such as slavery, women's suffrage, civil rights, abortion.......For myself, I am willing to commit capital in an effort to profit from the dismantling of outdated cannabis prohibition.