Replies to post #22036 on Health Sciences Group Inc (HESG)

[yessum]

good news ..
http://pennystockgurus.blogspot.com/2009/11/hesg-good-news.html

[tommy 9 fingers]

Hey Neo,

I had to actually work myself this week, actually got busy. Got a awarded a new job through a PR Firm I work with, something that 7-11 and State of CA are doing together for a DUI campaign. I can’t help but laugh that my little one man firm works with some of the biggest logos in town. Ever since the recession my customer base has gotten smaller but the client names keep getting bigger.

As a matter of fact I was so busy Friday I did not get a chance to put in sell orders to get out of those positions I mentioned to free up funds for HESG. Actually it worked at well as HESG seemed to drop a bit after the morning and we are getting a chance to test this new support level to see if it is real. So I will be watching carefully on Monday. Plus I wanted more time to do DD anyhow and I have done just that.

So bare with me on this one, it’s more of a Pro vs. Con piece (no pun intended) and I know it’s long but I think worth it.

I am not 100% sure that I am all Red Flagged out on HESG totally as of yet, remember I just said it smells funny. In a perfect world you would like to see legitimate experts in the field leading this company, but I guess Mr. Perlowin is one in his own right for MJNA. As far as the Ex-con thing I think sometimes they actually have better morals than the guys that ran AIG and I would trust ex-cons before I would a politicians.

I keep going back and forth in my head on this as to how and who I would imagine would lead the way on the corporatization of Mary Jane. Just maybe this is how it begins and who starts it, as legitimate corporate leaders never take this type of risk. They always let others take the risk and then once it is proven successful they come in with their big money and usually ruin it. I sure wouldn’t mind being in this stock when that happens.

So if you look at what I think are the most current reports on these companies they both look like they manufacture dilution to pay CEO salaries and that’s about it

MJNA Last report:
MJNA in its previous forms with VISA card products and related stuff looks to have been totally mismanaged and poor performing. From what I can tell they have pretty much abandoned that business model so I would not expect revenue from it. So under the current form consulting in the Medical Marijuana Dispensary industry there is no real info but it does look interesting and could be an actual business model. Now I kind of like this at this point because they do not have the risk of actually being a dispensary and being raided and losing all their assets if the DEA and Gov change their mind about enforcement. The major risk here is if they advise clients that are actual drug dealers trying to get around the system the DEA could charge them on conspiracy charges. So they would be walking a tight rope in my opinion and there is a lot of risk for your money, but potential high rewards as well if everything goes as planned.
http://www.pinksheets.com/otciq/ajax/showFinancialReportById.pdf?id=21110

HESG’s Last report: The Shugr and Sequesterol aspects appear to not even be a player in that market and it looks like they gave up on it in 2005. I think I was right when I said that all they look like they have is the website. I think this company is the perfect example of dilution to pay CEO and BOD machine. The only thing I see as positive about this company is that at one time they did look legit and tried to bring a product to market. But if you look at the filing the year ending 2005 they had net sales of $60,142 with a gross profit of $22,913 around a 30% GP margin. But they had Selling, general and administrative expenses $ 7,505,132.00 which was about $3 mil more than 2004. How do you justify that, my god!, that says run and run fast when looking at this company by itself. So basically they are in shell status IMO?
http://msnmoney.brand.edgar-online.com/DisplayFilingInfo.aspx?TabIndex=2&FilingID=4742075&type=html&companyid=81543&ppu=%2FDefault.aspx%3Fticker%3DHESG

So of the two companies I think actually the one ran by the ex-con MJNA is actually the more honest of the two and is in a stronger position. I would think if a merger happened that MJNA would merge HESG into it, rather than the other way around and a good name for the company would be Health Sciences Medical Marijuana Inc.

So why would they want to do this. Thomas Gaffney, President and CEO of Health Sciences Group looks to have at one point made an honest attempt at getting a product started in the health supplement industry that covers herbs, although he failed, it did at one point look like a legitimate try and he has a least some experience at trying and may know what the pitfalls are and have some experience that Mr. Perlowin does not have. Marijuana would fall into the health supplement herb category currently in its medical use status, and if legalized all together it fits in this market as well. Marijuana has become like tea, they make a type and flavor to suite your every mood and need. Mr. Perlowin seems to have a handle on the Dispensary issues and the related laws and if Marijuana is legalized altogether he will likely know all the suppliers that can meet the demands and he likely has the clout with them to convince them to go legit. Mr. Perlowin’s idea of starting off in Vegas is actually a good one and may actually be a stoner stroke of genius. What better place to start, a state where the Feds would feel comfortable letting this fledgling enterprise experiment with the social morals of this concept. The right wing Christian conservative groups that would be the biggest threat to this business succeeding have all but given up on trying to stop legalized prostitution in Sin City and that state. The state itself is already comfortable with the reputation of Sin City and have benefited greatly with the experience of legalizing gambling. Sin City has given up on trying to be the family destination and is now focusing on the adults only aspect. They would be a powerful ally in this Endeavour.

Another reason to think MJNA will be the lead company in this merger is evidence by HESG retiring 1.5 billion of its shares, makes it cheaper and easier for MJNA to pick them up.

So now the hard part, the math. So how do you see this going down? MJNA trades at $0.225 and HESG trades at $0.0013 as of 11/20/2009, so if a reverse merger happens then it should come out to be a 1 to 173 to a 173 to 1 share exchange depending on how it happens. So personally and based on what balance sheet info I can find I think MJNA is the stronger company and HESG is merged into it. That means if you just put $1000.00 into HESG at $.0013 p/s you will have 769,230 shares. Merged to equal one share of MJNA means you end up with hopefully 4446 shares of MJNA or (4446 x $0.225 = $1000.00).

So if these guys are successful at this and no one else is brave enough to try it and the drug cartels think this is a win for them as well, what would be the future value of those shares and how soon would they reach the value? I would think if they legalize it, it could break records in growth rates. But let’s just say $5.00 p/s could be reached within a year? And 4446 shares become valued at $22,230.00 dollars. Then what’s next a buy out from a major pharmaceutical at $10.00 p/s making that same 4446 shares worth $44,460.00. Or maybe they are bought by groups that own casinos who knows.

Take the example of MMA fighting as a business, no one thought that would fly and there was too much resistance yet it is becoming one of the most popular sports and exceeds and leads in pay per view revenue over its competitors currently .

Plus what a great product to sell and look at the market, you couldn’t ask for a better product it really sells itself. And America is really at the end of this prohibition thinking in my opinion. I see Sheriffs on TV all the time saying how it is a waste of their resources to fight marijuana as a crime and they advocate legalizing it to some degree.

NEO I think your thinking on this investment is right on and I think it is a very good risk vs. reward play. There is every reason to believe that these two CEO’s would actually run a legit operation as there is much more to gain by doing so than not doing so. But, at the same time if this company gets stalled by a rethink of prohibition I think these two will ride the dilution train to the end.

I think I will try to get in next week.

Good luck to you Sir.

[tommy 9 fingers]

Neo,

Now that the Pro vs. Con is out of the way I think the next experiment in the evaluation or opinion building process should be this.

Figure out the share structure as best you can for both companies. From what Pinksheets.com show it look something like this:

MJNA:

• Estimated Market Cap
$48,557,302 as of Nov 20, 2009
• Outstanding Shares
215,810,233 as of Jul 31, 2009
• Authorized Shares
5,000,000,000 as of Jun 30, 2009
• Float(shares)
14,777,980 as of Jun 30, 2009



HESG:

• Estimated Market Cap
$2,860,000 as of Nov 20, 2009
• Outstanding Shares
2,200,000,000 as of Mar 9, 2009
• Authorized Shares
5,000,000,000 as of Mar 9, 2009
• Float(shares)
600,000,000 as of Mar 9, 2009

Now the retired share for HESG doesn’t matter and we will assume if they are picked up by MJNA then HESG will retire all shares in the reserve as why would MJNA want to increase its share count to pay for them.

Now the purpose of this experiment is to estimate what MJNA share count would be if they merged with HESG and exchanged shares based on the share exchange rate and pps I described in the PRO vs. Con piece to how this dilution would affect MJNA share price.

First how many shares does MJNA have available for capital, so add the O/S and the float and minus it from the A/S it = 4,769,411,787 shares in reserve or capital

If HESG retires its entire reserve you are looking at 2,800,000,000 shares (that includes HESG float) that MJNA will need to buy.

So based on the Pro vs. Con ratio of 173 to 1 MJNA would have to issue 16,184,971 shares from their reserve to do that conversion to make all HESG shareholder right.

That means MJNA would spend $3,641,618.00 of its own capital to acquire HESG this would still leave them with $4.7 bil A/S hardly dents it.

Now remember I am including the float in these calculation so this is a bit of voodoo math. I still need to learn how float works in calculations.

But if you take MJNA’s current 0/S and multiply it by the 11/20/2009 current share price you come up with the same MKT CAP value listed above. So to see an estimate of what this deal would do to MJNA’s share price you would add the additional shares I just figured out above to the O/S of MJNA and then divide the current MKT CAP by that total to get the new adjusted share price of $0.2019 pps.

So the $0.209 pps would be the new diluted share value for MJNA after absorbing HESG including its float (which I am not sure if it needs to be included in the equation vs. just doing it based on the market value, but did for a worst case scenario)

So I think this would not hurt MJNA do this and it is better than doing the same test if HESG absorbed MJNA, HESG would suffer way more dilution. So this is why if there was a merger why MJNA would absorb HESG.

So the big question is; Is it worth it for MJNA to do this and what does it gain and how will they benefit. HESG benefits as they really don’t have a business model to profit and grow from. But does MJNA need HESG to grow. Maybe you can answer that question for me.

Also would you come out better as an investor to just wait and then buy MJNA after the merger than buy into HESG now.

It wouldn’t be the first time that a company like MJNA bought someone out to get that CEO on their board at a price tag of $3.6 mil. Keep in mind I have not gone through HESG’s balance sheet deep enough to see what the debt situation is that might add to the cost of this. But this does include common shares that the CEO of HESG might hold and replaces them with MJNA shares. Not sure on or if there are preferred shares involved.

My opinion is that this is not an unrealistic deal at all and if my Pro vs. Cons assumption are right MJNA could benefit from this deal.


What do you think?