This management team is asking $15mm for 21% of its company. Med-X, based in Los Angeles, is actively pursuing a crowd-funding campaign, the first cannabis-related company to do so via a new program known as Regulation A+. The company, which had received non-binding indications of interest from over 1100 investors for a total in excess of $3.6mm, announced yesterday that it is now accepting orders to buy its stock.
Anyone participating in the offering should read the offering circular. Unfortunately, most investors don’t bother with the fine print. In this case, that would be a very bad idea in my view. I have been analyzing investments professionally for thirty years, with an emphasis on the cannabis industry for the past three years, and this offering concerns me greatly.
Here are 18 key points potential investors should consider before handing over their cash to Med-X:
- The company’s most updated financials, from June 30th, indicate no sales to date and there has never been mention of any sales at all. Why not?
- As of June 30th, the book value (assets less liabilities) was just $369K
- In addition to the 25mm shares the company intends to sell, there are 90mm shares that have been given as founder’s stock to the company’s insiders, mainly COO and President Matthew Mills, who received 60mm shares. About 2.4mm shares have been sold to investors at $0.50), leaving a current total of about 117.4mm shares
- Oddly, the CEO was given only 3mm shares, less than the the company’s lawyer, who got 5mm.
- At $0.60 per share, the company is being valued at over $70mm! “The offering price of the shares of common stock has been determined by management, and bears no relationship to our assets, book value, potential earnings, net worth or any other recognized criteria of value.”
- Of the $15mm being raised, the company will keep only $13mm, with $2mm in expenses (mainly marketing)
- The company will spend all of the money within the next two years, with the largest portion, $4mm, going into its media property MarijuanaTimes.org, which currently heavily promotes this offering
- The company is not focused, with initial efforts aimed at the media property, a natural pesticide, an extraction business, R&D on strains, a cannabis pharmacy automation project and a cannabis cultivation facility
- The people behind the company are all involved with Pacific Shore Holdings (OTC: PSHR), a company that failed in its effort to become a publicly-traded company six years ago
- The CEO is a practicing physician with many additional responsibilities
- Information is very limited with respect to PSHR, which has failed to provide any SEC filings to the public since raising money in 2010.
- “On August 7, 2013, the California Department of Business Oversight issued a Desist and Refrain Order (the “Order”) against Pacific Shore and Matthew Mills. The Order asserted that in June 2011, the respondents had offered shares from the State of California by calling a person with whom they did not have a pre-existing relationship. Respondents believe that this Order stems from the same facts as the Pennsylvania Order that was rescinded. The California Order stated that the respondents were to cease and desist from further offer or sale of securities in the State of California until qualification is made or unless the offer and sale are exempt from qualification. In October 2013, Pacific Shore commenced a private placement of common stock in compliance with Rule 506(c) of Regulation D of the Securities Act of 1933, as amended, which is exempt from qualification in California and permits general solicitation.”
- The first product, Nature-Cide, is licensed from PSHR, which holds a royalty-free license from Matthew Mills, with limited details provided. “Making contracts and conducting business with Pacific Shore Holdings, Inc., an affiliate, creates conflicts of interest in negotiating terms and enforcing covenants, since the agreements are not made at arm’s-length.”
- There is absolutely no guidance or goals given with respect to the revenue potential from any of the operations the company is pursuing, nor does Med-X provide any sort of valuation analysis relative to comparable companies
- The company website presently points only to the crowdfunding website – why is there no website for the company’s potential customers?
- Rather than invest in sales and marketing, R&D or any other value-creating position, the company pays only one employee, its head of investor relations, who earns $120K per year
- There are no protections against massive dilution, with the shares authorized numbering 300mm and the company controlled by a non-independent board of directors
- There is no guarantee that these shares will ever trade on an exchange – investors could be stuck in them just like the PSHR shareholders from 2010.
I have been watching the company for many months now as it has gone through the Regulation A+ process. Med-X appears to be focused primarily on raising a large amount of capital rather than running the business. All of this money will be spent within two years, and it seems implausible that the company will be worth much more, if any, than the total raised, which is $13mm. Assuming 117mm shares, though this could certainly rise, the shares may end up worth about $0.11.
Investors should ask themselves:
- What is the track record of management?
- How sound is the business plan?
- Does it make sense to value a start-up at $70mm?
I like the idea of crowd-funding, as the cannabis industry is no doubt starved for capital. For it to succeed as a funding mechanism, though, the company has to merit investment. From what I have seen, the Med-X deal does not. It has failed to show any tangible signs of progress (i.e. where’s the revenue?), and the founders appear to be very greedy in their generous stock awards to themselves.
To learn why we publish articles like this, visit “Why I Battle Against Cannabis Opportunists” on LinkedIn.