Five years ago, when I first started following publicly-traded cannabis stocks, there was little substance to the small universe of companies that purported to be in or providing goods or services to the industry. Fortunately, now there are many legitimate companies, some generating substantial revenue. Despite this significant progress, there are still hundreds of companies trading as penny stocks on the OTC that have little merit in my view. Today, I want to share my thoughts on just a few of them.
Cannabis Sativa Inc.
CBDS, which files with the SEC, began trading in 2014. The company has 21.2 million shares outstanding as of September 30, 2017 and has not yet produced material revenue ($121,400 in Q3, with an operating loss of $1.14 million). A review of its SEC filings reveals a substantial amount of Form 4s, which represent sales by insiders. The market cap at the recent closing price of $5.35 is approximately $113mm. Tangible book value at September 30th was -$3.47 million.
Cannabis Strategic Ventures
NUGS, which doesn’t file with the SEC, changed its name from Cascade Energy in December 2017 after announcing a business change on July 13, 2017. The company has 284.78 million shares outstanding, though only 3.9mm are free-trading as of 12/31/17. At a recent closing price of $1.71, it has a market cap of $487 million. In 2017, it sold 44.359 million shares for $746,500 ($0.0168 per share), and it entered into a series of private placement agreements in December to sell 2.975 million shares at $0.0666 per share.
The company’s OTC Markets Disclosure for the quarter ending December 31, 2017 indicated that the company has equity of $3.87 million, with sales of just $198,213 in the first three quarters of the fiscal year ending March 31, 2018 ($3.5 million operating loss). It has issued two convertible notes to a single lender, including $164,900 convertible at $0.025 per share and $50,000 at $0.05 per share.
The ownership of stock is highly concentrated, with Chairman and CEO Simon Yu holding 90 million common shares. Yu bought 1 million Series A preferred shares on June 1, 2017 for just $10,000, giving him voting rights equal to 100 million common shares. He was also granted 90 million shares that vest over two years on June 1, 2017. The next day “certain consultants” were granted 126.5 million shares.
CGRW, which doesn’t file with the SEC, began trading as a cannabis stock in early 2015, changing its name from BizAuctions. It operates as a liason between the owner of a Colorado cannabis greenhouse and a licensed entity, Category One Botanicals, providing services for an undisclosed amount of compensation. The company had 102 million shares outstanding as of September 30, 2017 as well as 42 million Series A preferred shares that add 420 million shares upon conversion. There are also additional convertible preferred shares. and convertible notes. Based on 522 million fully-diluted shares, which understates the potential number, the market cap at a recent price of $1.47 is $767 million.
The company’s OTC Markets Disclosure for the quarter ending September 30, 2017 showed equity of -$2.7 million and sales for the first three quarters of the year of $1 million (with net income of $318,823). The cash flow from operations has been -$293,154, as the company hasn’t collected the vast majority of the revenue it has reported. Further, investors should be aware that financial statements are prepared by Brent Crouch, who owns a substantial number of shares of common stock and preferred shares. He and CEO Delmar Janovec own approximately 65% of the common stock and control 92% of the voting rights of the company.
POTN, which doesn’t file with the SEC, owns a subsidiary, Diamond CBD, which it acquired just a year ago. It also reacquired a cannabis news website, PotNetwork.com, in July after having previously sold it in March 2016 to focus on its subprime auto lending business, which is no longer operational. The financial terms for the website acquisition weren’t disclosed in its OTC Markets Disclosure for the year ending December 31, 2017, and the company issued 300 million shares to First Capital Venture to acquire Diamond CBD. Neither of these companies are shown as assets on the balance sheet, which is the first one that I have ever observed that uses the stock ticker rather than the company name:
The balance sheet at year-end showed equity of -$1.7 million. The company reported sales of $14.5 million for the year, but a profit of just $213,802. The company has 570 million shares outstanding, up from 89.57 million shares at the end of 2016, though it has suggested that 300 million shares are in the process of being retired. It also has a convertible note with a balance at 12/31 of $2.856 million that could add 952 million shares based on a conversion price of $0.003 per share. Based on 570 million shares outstanding and a price of $0.429 per share, the market cap is $244 million.
BUDZ, which doesn’t yet file with the SEC but is in the process of doing so after having filed a Form S-1 to register 8.98 million shares held by investors in prior private placements, changed its name to its current one in early 2015. The company had 100.6 million shares outstanding as of September 30, 2017 according to its OTC Markets Disclosure. At a recent price of $5.73, the company has a market cap of $576 million.
Its quarterly financials indicated equity of $656,171, with cash of $265,145. Current liabilities of $753,819 were more than 2.5 times the current assets, suggesting the company will need to raise more capital. It most recently sold shares in September for $0.50 (along with $3 warrants). The company has no sales and used $418,989 to fund its operations during the first three quarters of the year. It acquired Sangre AgroTech almost a year ago for just 500,000 shares valued at $1.004 million.
Investors should be very careful investing in any stocks that trade over-the-counter, though not all OTC stocks are necessarily bad. If a U.S. company wants to trade publicly, it can’t likely trade on a major exchange yet and, unless it lists in Canada, is forced to trade on the OTC. Investors can protect themselves by avoiding companies that don’t file with the SEC, but this isn’t enough. It is important to review the financial statements of those companies that do file with the SEC, as they often reveal a flawed capital structure or a lack of substantive business. Finally, investors should be very careful about companies with cute trading symbols or names that include “cannabis”, “marijuana”, “weed” and other names, as these often get inflated by traders who don’t understand the fundamentals (lack of fundamentals).