Shareholders ofMedical Marijuana Inc. (NASDAQOTH: MJNA), a company traded over-the-counter, have had a stellar year. So far, shares are up over 300% since February of last year.
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Is this spike simply investors trying to take advantage of the Election Day marijuana legalization in states like California, Maine, Massachusetts, and Nevada? Or have the fundamentals of this business dramatically changed? It's time for a deeper dive.
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Overview of the business
The first things investors should know about Medical Marijuana Inc. is that the company doesn't actually manufacture and distribute medical marijuana. Instead, the company is broadly focused on the development and sale of hemp oil and hemp oil-derived products. Rather than manage this all under a single company, Medical Marijuana Inc. operates through its 8 partially or wholly owned subsidiaries:
1. HempMedsPX -- Medical Marijuana's primary distributor of hemp oil-based products
2. Wellness Managed Services -- a management support and services company
3. Red Dice Holdings -- a retail consumable products company
4. CanChew Biotechnologies -- a licensing company based on the development of chewable cannabis therapies
5. Hempwire -- a company focused on the marketing and distribution of hemp oil foods and nutritional supplements
6. Kannaway -- a multi-level marketing company which distributes hemp oil-based products
7. HempVap -- a company which manufactures a hemp oil vaporizer pen
8. HempMeds Brazil -- a company which sells cannabis products to the Brazilian healthcare system
The company also owns sizable investments in KannaLife Sciences and Axim Biotechnologies.
Growth and earnings
While the company does not disclose which subsidiaries generate what percentage of overall revenue, the company does break out financials by U.S. Operations (including Puerto Rico), Kannaway LLC, and Wellness Managed Services. For the most recent quarter (3Q:16), U.S. Operations generated $1.6 million in revenues, Kannaway generated $600,000, and Wellness Managed Services generated no sales. In total, Medical Marijuana made around $2.2 million in sales and had a net loss of $3.8 million for the quarter. For comparison, in the thirdquarter of 2015, the company did a total of $1.8 million in sales and had a net loss of $5.7 million. While this represents sales growth of a healthy 22% year-over-year, earnings are still deeply negative.
Medical Marijuana currently has a market cap of roughly $463 million. While a PE for this company cannot be calculated due to negative earnings, if we annualized the $2.2 million in sales for the third quarter, Medical Marijuana Inc. would be trading at a whopping 53 times sales. In addition to the valuation, there are several other risks as well. Due to the negative earnings, the cash position of the company has been continuously falling. Moving from $1.2 million at the end of the first quarter, the cash position dwindled to $262,000 at the end of the third quarter. The company will need to raise more cash, either through an equity raise (diluting current shareholders) or by raising debt.
Debt, however, is already an issue. The company currently has total long-term liabilities sitting at $12 million and current liabilities at $5 million. For a company with negative earnings, this balance sheet seems unsustainable. In fact, with current liabilities well above net cash, I'd be surprised to see this company solvent in a year's time.
Overall, while marijuana is sure to be a growing industry, I would look elsewhere for investing opportunities. As the company itself says in its SEC filings, "The Company is not in the business of selling or dispensing either recreational or medical marijuana, directly or indirectly, so long as marijuana remains a federally controlled substance." I believe the confluence of a misleading name along with this year's record number of marijuana legalizations have stoked investors' desires to invest in the marijuana space. For myself, it is often a heady debate whether to buy or sell a stock, but the combination of an astronomical valuation along with a highly leveraged balance sheet make this one an easy call: Avoid at all costs.
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