Medical Marijuana, Inc (MJNA) has transformed its business model from that of a pure portfolio company to one that also markets the products of its subsidiary partners and those of CannaVest Corp (CANV). The products are marketed direct to consumers through its exclusive master distributor HempMedsPX™. It’s a synergistic business model that has investors wondering how this expanding relationship will shape the company’s growth.
This conversation could take on many forms; however, what most are wondering about today is how the relationship with CannaVest will evolve and if MJNA’s investment in the company proves to be one of the biggest diamonds in the company’s eclectic portfolio. There is even talk about whether MJNA and CANV could possibly outgrow their symbiotic relationship or if CANV could take over MJNA altogether. These are all fanciful scenarios which are highly unlikely, given the reach of MJNA in the cannabis community; however, with so much sensationalism in the media, it can be hard for investors to make heads or tails of so much hyperbole.
The most recent investor dialog concerns the value of the sale of the PhytoSPHERE assets to CANV in light of CANV’s recent funding initiative to support continued growth. Before I discuss the effects of the transaction, here’s a little history on the transaction.
The two companies began their relationship when they inked the Dec 31st, 2012 agreement in which the sale of MJNA’s PhytoSPHERE assets would transfer to CannaVEST for the aggregate payment of $35M which would be paid for the all the subsidiaries’ assets and intellectual property. The deal was outlined in the CannaVest’s Feb. 12, 2013 8-K filing that outlined the terms of the deal, and can be also be referenced in the MJNA press release on the company’s website.
The payments could be paid in either cash or stock, which could be reported in either cash value or number of shares. The first payment was calculated based on $5.00 per share with remaining payments thus far calculated based on $6.00 per share. These values are not arbitrary, as they are based on a collar that designates that shares would not be priced at more than $6.00 or less than $4.50 per share. Payments were or are to be paid on the dates outlined below:
§ Jan 31, 2013 – $4.5M – Cash (NA), Stock – 900K (Cash value $4,500,000)
§ Mar 30, 2013 – $6.0M – Cash (NA), Stock – 1M (Cash value $6,000,000)
§ Jun 30, 2013 – $8.0M – Cash ($726,157), Stock – 1,212,307 (Cash value $8,000,000)
§ Sep 30, 2013 – $10.M – Cash ($200,000), Stock – 1,633,333 (Cash value $9,800,000)
§ Dec 31, 2013 – $6.5M – Payment has not been reported
The total values are $926,157 in cash and a total of 4,745,640 shares. The September 30, 2013 CannaVest Form 10Q listed the number of issued and outstanding shares of the company to be 11,744,167. These values baseline the MJNA ownership value based on stock ownership at 40.41%.
Now back to CANV’s funding initiative. Under ordinary circumstances, most businesses have a multitude of options to finance business operations and expansion. This is not the same for businesses in the cannabis industry. However, in this case, CANV has secured further investment interest with seemingly little effort as its success in the media has become more apparent.
CANV’s previous funding stream was provided by Roen Ventures, LLC (Roen Ventures) in the form of a credit line up to the amount of $6,000,000. The credit line contained a provision that allowed Roen (with board approval) to convert the outstanding debt to stock based on an independent valuation of the CannaVest stock. The valuation determined that the “fair market value” of the “restricted common stock” was 0.68 cents and that the note (with board approval) would convert at a 12% discount for a total of 10M shares into common stock being issued to Roen Ventures. This effectively eliminated the company’s debt on the note but, of course, added to the share count.
While having this burden of debt repayment removed and the confidence of one of its largest investors is also appreciated, CANV still needs capital to continue growth. Now expecting to “achieve profitable operations,” the company is perusing a private placement offering up to 10M shares at a price of $1.00 per share, which of course is at a premium to the current “unrestricted common” valuation of $1.13. With the payoff of the Roen credit line and the new funding initiative, a potential 20M shares could be added to the current CannaVEST share count.
The Roen Venture credit line conversion to 10M shares would bring the CANV share float to 21,744,167 shares and MJNA ownership to 22%, by my armchair calculations. The loss of ownership percentage comes at the expense of eliminating debt. Then there are the 10M shares that could ultimately be added to the float. Both transactions would erode ownership, but would ensure that the business can continue to thrive.
To date, the Nov. 13, 2013 8K only registers 5M shares of the 10M share private placement, of which only 1.2M shares have been issued. Keep in mind that none of the calculations take into consideration the final payment for the PhytoSPHERE assets to MJNA.
Now here is what I didn’t understand about the brilliance of the PhytoSPHERE deal: By selling off the PhytoSPHERE assets to CANV, MJNA could eliminate the operational risk and cost by allowing in other investors that would have the option to pay them the $35M in cash or stock. But if CannaVest failed and had to pay MJNA in a majority of stock, then MJNA would retain ownership of the PhytoSPHERE assets as a fail-safe to protect those assets.
Now that CANV is thriving on its own and can garner investor interest, MJNA has helped evolve its strategic partner to success and has still secured a significant ownership stake.
Often times, sensationalistic media tries to grind down complex business transactions into negative or positive bites of information that only serve the purpose of increasing readership. These short-term exaggerated views are fuel for the day traders or momentum traders of the world and, ultimately, amount to nothing more than noise that is ignored by savvy investors.
The relationship between MJNA and CANV, which I initially thought to be synergistic, is in reality more symbiotic. While many businesses rely on one another for sales and marketing, MJNA and CANV share a common resource in HempMedsPX™. As for more money coming into CANV and the effect on MJNA’s investment, ask one question: Would you like more of nothing or a little less of a growing company in its infancy?