Short Recommendation: Marijuana Stock Basket (CANV, HEMP, MJNA, CBIS)
CannaVEST Corp (CANV)
Stock Price $20.00 Market Cap $656 Million Rebate -27%
Hemp, Inc. (HEMP)
Stock Price $0.07 Market Cap $340 Million Rebate -8%
Cannabis Science, Inc. (CBIS)
Stock Price $0.09 Market Cap $75 Million Rebate -1%
Medical Marijuana (MJNA)
Stock Price $0.19 Market Cap $180 Million Rebate -11%
I recommend shorting a basket of marijuana stock scams. Marijuana stocks entered a bubble shortly after legalization in Colorado and Washington state. Liberalization of marijuana laws is a strong and most likely unstoppable long-term trend, but while it makes for a great narrative to promote in penny stock scams, there’s no indication that any marijuana business is poised for large-scale success. The 12 million residents of Colorado and Washington account for fewer than 4% of the US population. Medical marijuana is legal in 20 states, but again accounts for a small fraction of the population. Marijuana remains illegal under federal law under the Controlled Substances Act, which does not recognize the legitimacy of medical use. As a practical matter, it will be nearly impossible to scale any operation that violates federal law in an area that has historically faced very serious enforcement effort. All of this background is mostly irrelevant, however, since the companies in question are not building marijuana distribution businesses. Three of the companies listed below sell hemp products, which are not affected by marijuana legalization, but simply have used recent policy changes as selling points.
Why short now? The bubble has popped and most of these stocks are already down 50%+. I would rather short on the way down than on the way up, and these stocks are all headed to zero and yet retain significant market caps, with a total cap > $1 billion in the basket. So I think the timing is as good now as ever.
CannaVEST is perhaps the most ridiculous of the marijuana bubble stocks. In the first place, although it has clearly ridden the marijuana wave, the company itself is not involved with any THC related products, but rather with hemp products and cannibidiol, an active cannabinoid that some people have speculated may be medically useful, although there is little to no clinical evidence to support this.
All cannibinoids are defined as controlled substances under federal law, but CANV appears to be attempting to use a loophole for hemp products produced abroad to extract hemp oil that contains cannabidiol. It’s almost certain that if this product ever became popular, multiple federal agencies would crack down on CANV for their dubious medical claims and/or violation of the Controlled Substances Act. Total sales were only $2 million in 2013, of which cannabidiol most likely accounted for a very small fraction. At this point they are flying under the radar.
Should cannabidiol prove in the future to have therapeutic value, contradicting the currently known science, it is a naturally occuring substance that "grows on trees" that will be unpatentable and the extraction process of which is well known.
CANV is a type of stock promotion known as a stock dilution scam.
Shares outstanding Dec 31, 2012 7,000,000 Dec 31, 2013 15,580,000 Mar 28, 2014 32,832,500
In recent months, CANV has been selling shares at prices ranging from $0.68 per share to $1 per share in a series of private sales and related party transactions. Not only does this make clear management’s view of the value of the shares, but we can expect the dilution to be endless. There are 190 million authorized shares and more can be authorized at any time.
The people behind CANV have significant histories of fraud and criminal activity. The CEO, Michael Mona, was a partner in Roen Ventures (a vehicle for related party transactions with CANV) with Michael Llamas. Llamas is under federal indictment for fraud in a combination Ponzi scheme / mortgage fraud scheme and the ringleader of the fraud has been convicted. Llamas goes to trial in October.
Llamas also is (or was) a shareholder of CANV via a transaction CANV did with PhytoSphere, an entity indirectly owned by Llamas.
Mona himself was sued for fraud in California by a Far West Industries. The court awarded Far West a judgment of $17.8 million. Far West now alleges that Mona made a fraudulent transfer to Roen in order to shield $3 million from this judgment. Litigation on this is now ongoing.
Hemp, Inc. is also a stock dilution scam.
Shares outstanding Common 1,827 million Preferred 215 millilon (convert at 2.5:1) Preferred K 250 million (convert at 10:1) Fully diluted s/o 4,864 million
The current f/d market cap is therefore $340 million. Sales were $2.3 million in 2013, Net loss was ($1.2 million), and book value was $2.4 million.
The CEO, CFO, and Chairman of Hemp, Inc. is Bruce Perlowin, a convicted drug smuggler who served 9 years in federal prison.
After his release from federal prison, Perlowin teamed up with Jim Folsom in a medical scam called “Energy Wellness”, selling machines that they claimed provided health benefits. Folsom was convicted and sentenced to prison but apparently Perlowin was not.
“I know these stocks are going to go through the roof... The smart investor will start accumulating now before that explosion begins” “Everybody wants in on 'the next big thing'. Think of it as another dot.com explosion without the crash for at least another decade or two, if ever” — Bruce Perlowin
Medical Marijuana, Inc (MJNA) is yet another stock dilution scam
Shares outstanding Dec 31, 2010 245 million Dec 31, 2011 558 million Dec 31, 2012 808 million Dec 31, 2013 948 million
This producer of hemp-based gum and hemp-extracted cannibidiol had a net income of $211K in 2013 against its market cap of $180 million. Medical Marijuana, Inc., despite its name, has indicated that it will not be selling any marijuana products until marijuana is legalized at the federal level. Key players include former CEO Michael Llamas, mentioned above. Current CEO and Chief Medical Officer are two “Dr.”s who are actually oral and facial reconstructive surgeons in the Netherlands — a specialty whose relevance to medical marijuana is dubious. A short seller on Seeking Alpha last year discussed the questionable backgrounds of other members of the management team, some of whom can no longer be found on the MJNA homepage or annual report.
Cannabis Science (CBIS) is a smaller version of these other scams. Shares outstanding grew from 571 million to 834 million in under 2 years. They aspire to cure HIV, cancer, autism, Influenza, PTSD, and “other ailments”. CBIS does not have any drug candidates and has not reported any progress toward a treatment of any medical condition.
The author of this report holds short positions in the stocks contained within this report and may transact in these securities at any time without notification. This report was prepared for the Value Investors Club for use only by investment professionals. Securities trading involves a high degree of risk, and should only be undertaken by investment professionals.
I do not hold a position of employment, directorship, or consultancy with the issuer. Neither I nor others I advise hold a material investment in the issuer's securities.
Why short now? The bubble has popped and most of these stocks are already down 50%+. I would rather short on the way down than on the way up, and these stocks are all headed to zero and yet retain significant market caps. So I think the timing is as good now as ever.