This post is a reprint of one of the three feature articles from the January edition of the 420 Investor Newsletter, which was published on 12/31 and distributed to subscribers at 420 Investor. The monthly Newsletter is part of the broader service at 420 Investor, which provides extensive coverage of the publicly-traded cannabis sector on a real-time basis, including instant analysis of SEC filings and news releases, ten videos a week, model portfolios, a weekly written summary of the highlights of the week and a weekly interactive chat with subscribers. In the newsletter, I try to take a longer-term perspective to discuss topics of interest to cannabis investors on the market conditions, the regulatory environment or the outlook for specific private or public companies. The newsletter is also available as a stand-alone offering.
Another Look at Medicine Man Technologies
Note that subsequent to the publication, the company terminated its LOI to acquire G Capital.
It was a year ago that I first wrote about Medicine Man Technologies (OTC: MDCL) in this newsletter, discussing it and Kush Bottles (OTC: KSHB) as new publicly-traded companies that would soon debut (see “On Deck: Two New Cannabis Stocks That Will Soon Debut” in the January 2016 newsletter). As a reminder, the company offers an array of services to legal cannabis businesses, including pre-license and post-license consulting, the provision of standard operating procedures to growers based on a model called Variable Capacity Continuous Harvest, the provision of standard operating procedures for dispensaries, facility design and training. The company, which has 23 clients in 8 states, also offers seminars.
My initial expectation for MDCL, which came public via the S-1, was that it would trade near $1, which was never the case. The stock opened for trading on January 25th at $1.66 and traded as high as $5 before closing the first day at $3.16. The lowest price ever on MDCL was $1.36 in late April, and the stock traded again to $5 in November during the sector-wide rally.
I also discussed it in the April newsletter (“Following Up on Medicine Man Technologies (MDCL)”), after having added it to the Focus List in March. In addition to providing an update, I compared its valuation to peer American Cannabis Company (OTC: AMMJ). At the time, MDCL was trading at $1.92 ($20mm market cap), while AMMJ was trading at $0.165 ($7.6mm market cap), and I concluded that while MDCL should have a higher valuation, the gap was too high.
The company’s first year as a publicly traded company has been somewhat disappointing based on its financial results. For the first three quarters of the year, the company had sales of $585,388, which represented a decline from the first three quarters of 2015 of about 2.6%. Licensing fees expanded by 3.6%, but seminar fees plunged by 72.8%. The company added a new category, consulting fees, in Q3, which represents about 1% of YTD sales at $6000. More discouraging, the YTD operating loss of $201,702 compares to a gain in the prior year’s first three quarters of $139,783. The company has used $320,198 to fund its operations YTD.
Additionally, MDCL has taken on debt, including some toxic financing:
In October 2016, the Company closed a private offering of convertible notes in the principal amount of $1,000,000. These notes accrue interest at the rate of 12% per annum, with interest payable quarterly. The Notes may be converted into Common Stock at the lower of $1.75 per share or 90% of the five day VWAP upon advance notice provided by the note holder.
While this seems manageable, the $1.15mm total debt leaves it with a debt to equity ratio of 2.53X.
At the same time, MDCL has kept its share-count relatively flat since going public (10.0925mm shares outstanding as of 11/14/16 compared to 9.9725mm at 12/31/15) and has expanded its client roster. Looking ahead, the company has two pending acquisitions that could have a material impact on its future growth. The smaller of the two deals entails the acquisition of G Capital, which owns packaging solutions brands FunkSac, Odorno and Commodigy. The deal, which will cost 1.3mm shares, was announced in August and hasn’t yet closed. The larger deal, the acquisition of Pono Publishing and an associated line of nutrients, Success Nutrients, will result in the issuance of 7mm shares. This is a potentially transformative deal, though it’s not yet clear that the cost is reasonable. Finally, the company has signaled its intent to enter the cannabis cultivation business, another move that could dramatically change the company’s prospects.
The valuation based on 10.66mm shares (10.0925mm outstanding and assuming the issuance of 571K shares against the convertible note) is $29mm . If both deals close, the share-count would balloon to 19mm roughly, implying a market cap of $52mm. When MDCL announced the deal, they shared some financial history for Pono Publishing and Success Nutrients. Based on this information, it appears MDCL believes the addition of sales from the nutrients as well as consulting services aimed at rescuing inefficient cultivation operations could result in sales at a multiple of the current levels. Andy Williams, CEO, said:
“I believe Josh Haupt and Three A LightTM are hands down the best industrial cultivators of cannabis in the world. I could not be more excited to welcome Pono Publications and Success Nutrients to Medicine Man Technologies. The revenue and earnings potential of both products are tremendous. Paired with the leadership and charisma that Josh Haupt will bring to our executive management team and the synergies of our current product and service portfolio, the potential growth on all product and service fronts is exciting.”
Comparing to peer AMMJ again, MDCL is now trading at a lower valuation, a reversal of the premium it commanded a year ago. Like MDCL, AMMJ has seen its business stall, with sales declining a similar 2.7% through the first three quarters of the year. AMMJ reports sales for both its products and its consulting services, and they both have declined and each represent about 50% of the total sales. The YTD operating loss has been $343,632, an improvement from the $508,686 operating loss in the first three quarters of 2015. In contrast to MDCL, which has positive equity, AMMJ has liabilities in excess of assets, with negative equity of -$144K. With about 47mm shares outstanding (and likely to rise as the company taps an equity line), the market cap is $43mm at $0.915.
While MDCL stands out compared to AMMJ at this point, I don’t believe that the current price, $2.74, warrants investment. I will continue to monitor the stock for entry.