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The cannabis industry is the hottest industry in the United States and it is growing at a rapid rate. This growth has led to a surge in the number of publicly traded cannabis companies. There are more 300 such companies and most of them will dissolve or shut down over the next two years.
When it comes to marijuana stocks, you cannot analyze them like your typical investment. These are developmental companies and a lot of them do not even generate revenue yet. For this reason, you cannot look into metrics like Earnings Per Share (EPS), Price to Sales (P/S) or Price to Book (P/B). Many investors do not have the time to perform thorough due diligence and look into all of the necessary factors, so we are going to focus on the most important ones. These are:
- Who makes up the management team
- Share count and capital structure
- Company history and financial stability
I want to highlight a few announcements made by a few publicly traded cannabis companies during 2015 so you can better understand the importance of due diligence.
Management related issues: Medbox Inx. (MDBX)
On February 14th, P. Vincent Mehdizadeh, founder and majority shareholder of MDBX, decided to comment (voluntarily) on recent sales of MDBX stock by company insiders.
Mehdizadeh said he secured a credit line and used shares of MDBX as collateral. He then loaned MDBX an undisclosed amount of money. After Mehdizadeh tried to remove MDBX’s current management team because they wanted to re-audit the company’s books, shares of MDBX sold off and this caused a margin call on the collateralize stock.
Mehdizadeh said, “Medbox was not in a position to pay back my note so these involuntary sales were transacted by my bank to recoup the loan. The credit line has been fully satisfied as of today’s date. In addition, I have ceased any and all trading activity on my regularly scheduled trading plans until further notice. I am also looking into re-investing into the company to recoup some of the shares I was forced to liquidate over the last couple weeks. I am still a long-term believer in this company and feel Medbox is positioned perfectly to be a leader in this new industry.”
Since making this statement, Mehdizadeh and his affiliate companies have sold more 650,000 shares of MDBX. Investors need to evaluate a company’s management team before investing in the company!
Financial Structure: OSL Holdings Inc. (OSLH)
On June 1, 2015, OSLH announced that it filed an amendment and increased the number of authorized shares of common stock from 649,000,000 to 1,947,000,000.
Between April 10th and June 2nd, the company issued 103,286,059 shares of common stock related to the conversion of convertible promissory notes that were previously issued to accredited investors. The issuance did not bring in any capital to the company because they were paid when notes were issued.
When OSLH made this announcement, they had 733,470,037 shares of common stock outstanding. Less than six weeks later, OSLH had 1,079,447,477 shares of common stock outstanding.
OSL Holdings has an issue that can only be fixed by conducting a reverse split (also not good for shareholders) and investors need to look into the number of shares a company has prior to investing.
Balance sheet and Operational issues: Mountain High Acquisitions Corp. (MYHI)
On March 31, 2015, Mountain High Acquisitions Corp. (MYHI) entered into a share exchange agreement with Freedom Seed & Feed, Inc., where MYHI agreed to purchase all issued and outstanding shares of the company On June 30th, MYHI and Freedom Seed & Feed mutually agreed to rescind and terminate the share exchange agreement.
This move comes after MYHI’ subsidiary entered into a master property purchase and sale agreement with Deep Blue Enterprises, LLC, on April 30, 2014. Under the agreement, MYHI was supposed to acquire three properties for $12,500,000. The company raised $850,000 to meet the initial payment requirements, however, in August 2014 MYHI decided to stop making payments and allowed the agreement to expire. MYHI decided not to pursue recovery of the payments due to the legal costs and the low probability of recovering the payments.
During the years ended March 31, 2015 and 2014, MYHI did not generate any revenues and the company’s current assets include $45 in cash and a $50k advance to GreenLife (a potential acquisition).
Do your due diligence
Since, the emergence of the cannabis industry has created opportunities for fraudsters, investors need to do their due diligence before investing in a cannabis company and evaluate the source of information before acting on it. Technical420 is an independent provider of cannabis stock research and analysis. We do not accept money from companies for favorable ratings and no employee is allowed to own any cannabis stocks. These rules are in place so that Technical420 can provide investors with non-biased, accurate and independent research.
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