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Sunday, 03 August 2014 22:00

Gone to Pot? Advisers push investors to (puff, puff) pass on fledgling marijuana stocks

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The ongoing liberalization of marijuana laws around the country has essentially created an emerging industry from out of the shadows of the black market.

The sector’s development has created a slew of new opportunity for investors, but with many companies in the budding industry, advisers still say the best policy is “buyer beware.”

Indeed, investors in West Michigan needn’t look far for red flags.

Alternaturals Inc. (OTC Pink: ANAS) — which lists its headquarters as the Grand Rapids suburb of Grandville — claims to produce and distribute health products for a range of ailments, including natural alternatives to prescription drugs. The company also says it is in the process of releasing a line of offerings in the medical marijuana segment, including 5 Hour High, a THC-based product intended to be used like an energy shot.

When MiBiz visited the Sanford Avenue address listed on Alternaturals’ website and in its quarterly filings, the facility turned out to be a company called Mailbox Forwarding Inc. An employee working there said the company handles mail and address services for more than 4,000 businesses.

Executives at Alternaturals did not respond to numerous calls and emails seeking interviews and comments for this report.

“They just don’t seem like they are a real company,” said Grand Rapids attorney Joe Voss, senior counsel in the corporate practice group at law firm Clark Hill PLC. Voss has worked closely with a number of medical marijuana startups and private equity firms looking for investment opportunities. “I don’t think they are very relevant to the discussion of the business opportunities the (Michigan Medical Marijuana Act) is opening up.”

Via press releases and statements on its Twitter feed, Alternaturals has indicated that it is working to develop a full line of natural and medical marijuana products. But at the time this report went to press, the company only listed two available products for sale on its website: Sombium, a natural sleep aid, and Focamine, which it says promotes focus, attention, and memory for people suffering from ADHD.

While the company touts its involvement with the medical marijuana industry, it does not currently offer any marijuana-based products on its website.

“Although putting out medical marijuana-based products is just one small piece of Alternaturals’ business model, the company feels that from a revenue standpoint it is an important tie-in for any company in the supplement or nutraceutical industries,” Alternaturals stated in a June press release announcing 5 Hour High.

In the statement, Alternaturals said it had partnered with Kush Creams, a grower and distributor of medical marijuana products based in Gig Harbor, Wash., to produce 5 Hour High. Kush Creams owner Megan Schwarting confirmed the partnership in a conversation with MiBiz but declined to comment any further on the relationship between the two companies.

“Sorry about the silence everyone, we have been very very busy preparing for announcements and growth,” Alternaturals stated July 1 via Twitter, its most recent communications.

From outlaws to executives

A July report in the Wall Street Journal, “The pot industry puts on a tie,” highlighted marijuana’s emergence as a legitimate industry, despite its recent history of being “dominated by networks of outlaws.” As a growing number of marijuana-based businesses go public to access capital to grow, they must ensure that they hire competent executives and focus on investor relations all while navigating the murky legal environment in which the sector operates.

“Disregard for the demands of being a public company is still a problem,” the report noted.

Despite operating under its current name and trading symbol since April, the actual business entity for Alternaturals dates back nearly 20 years. The company was incorporated in 1995 in Nevada as Premier Mortgage Resources Inc., a mortgage lending house and telemarketing firm. Last December, Alternaturals acquired PMRI in a reverse merger that allowed Alternaturals to become publicly traded without the high costs of going through an initial public offering.

Alternaturals’ stock is traded over the counter on the pink sheets. Pink sheet stocks — which were at the center of the storyline for last year’s film The Wolf of Wall Street — don’t trade on typical indexes such as New York Stock Exchange or Nasdaq. Rather, they are traded over the counter (OTC) and typically do not meet minimum requirements to file with the SEC, which should raise a “yellow flag” for investors, said Alan Brochstein, the founder of Houston-based 420 Investor, an online community evaluating various marijuana startup companies.

Brochstein has worked closely with investors looking to capitalize on the increased liberalization of pot, which he described as “likely to be a persistent and powerful investment theme over the next several years.”

But in looking at Alternaturals’ financials, “(I) didn’t like what I saw,” he said.

For the first quarter that ended March 31, Alternaturals reported sales of $8,100 and net income of $1,224. The company’s balance sheet includes $18,974 in total assets — including $1,244 in cash — and $170,000 in liabilities in the form of short-term loans. The company had nearly 2.36 billion shares outstanding at the end of the quarter. Its stock has never traded above 1 cent.

While Alternaturals issued a statement in May that it planned to institute a share buyback program as a means of increasing shareholder value, the move raised a red flag for Brochstein given the little cash the company holds on its books.

“The press release that mentioned share repurchases was hard to take seriously as the company doesn’t appear to have the financial capacity to do so,” Brochstein said.

Growing pains

With the 2008 Michigan Medical Marijuana Act, Michigan is one of nearly two-dozen states that has liberalized marijuana laws for medical or recreational use, and a handful of states and the District of Columbia are considering similar measures this year.

The changing legal environment has spawned an industry that either directly caters to marijuana users or provides equipment and services to pot-based companies. Marijuana-related businesses run the gamut from marijuana vending machines to electronic vaporizers, testing services, hydroponics stores, and delivery services.

As the nascent industry taps into traditional funding sources such as venture capital, private equity and the public markets to raise the needed capital to grow, companies have had to mature quickly and focus on becoming more sophisticated in their traditional business functions such as financial management and investor relations. To date, companies have had mixed results in attracting qualified executives, largely because the industry operates under the cloud of possible federal prosecution, according to the recent Wall Street Journal report.

But that hasn’t completely stanched marijuana companies’ growth. Cannabis industry stock-tracking website Marijuana Index follows more than 40 publicly traded companies that deal in products related to medical or recreational marijuana. Alternaturals was not listed on the site.

In May of this year, the Securities and Exchange Commission (SEC) issued a warning for investors regarding medical marijuana stocks because of their “potential for fraud.”

“For marijuana-related companies that are not required to report with the SEC, investors may have limited information about the company’s management, products, services, and finances,” according to the warning. The SEC has also suspended trading on at least four different companies claiming to have ties to the medical marijuana industry.

While there is no indication that Alternaturals appears in any danger of having trading of its shares suspended, experts MiBiz spoke with for this report said the company and many others in the industry raise a handful of concerns.

“(Marijuana) is a relatively small segment,” said Taylor West, deputy director of the National Cannabis Industry Association based in Denver, Colo. “The area is growing and there are some legitimate businesses moving in, but the space is still quite speculative. … Anytime you have a market that is booming like this, you will have some actors without a true business plan.”

Despite the potential for fraudsters, experts say some marijuana companies do appear to pass the smell test.

In Michigan, entrepreneurs are finding some success in ancillary aspects of the industry, such as manufacturing equipment used in marijuana growing operations, said Voss of Clark Hill.

Madison Heights-based Creative Edge Nutrition Inc. (OTC Pink: FITX) in January launched a Canadian subsidiary to grow 1.3 million pounds of marijuana annually for that country’s $1.2 billion medical marijuana market. The company built a $12 million, 58,000-square-foot addition to its 27,000-square-foot hydroponic grow station in Lakeshore, Ontario, outside of Windsor, according to a January report in Crain’s Detroit Business. In May, the company announced it had purchased a nearby 25-acre site for its second grow location. In recent months, Creative Edge has also assembled a bench of global finance and Wall Street veterans on its board of directors.

Another Canadian company, Tilray, produces medical-grade cannabis and has received an investment from Privateer Holdings, a Seattle-based private equity firm that invests specifically in the cannabis industry. Privateer, which in recent SEC filings said it expects to close on a $50 million fund by the third quarter, declined to comment for this report.

Additionally, British company GW Pharmaceuticals PLC manufactures marijuana products and regularly trades above $80 per share with a market capitalization around $1.5 billion.

Opportunity knocks

Even in the absence of federal deregulation, the industry will continue to grow and mature as more states consider marijuana law liberalization or outright decriminalization, sources said.

In Washington, where legal marijuana sales for recreational users launched on July 8, stores sold out within days as the small number of approved growers struggled to keep up with demand. The Colorado Department of Revenue, Marijuana Division, estimates demand in the state to be about 130 metric tons, legal or otherwise, this year.

The ArcView Group, a San Francisco-based cannabis industry research and investor group, estimates the size of Michigan’s medical marijuana market to be just less than $70 million in 2014.

At the end of the 2013 fiscal year, there were 118,368 medical marijuana patients and 27,046 caregivers registered in Michigan, according to a report from the Michigan Department of Licensing and Regulatory Affairs Bureau of Health Care Services.

Nationwide, ArcView says legal marijuana was a $1.53 billion industry in 2013, and it’s expected to grow 68 percent this year to $2.57 billion and reach $10.2 billion within five years.

“The fastest opportunity for profitability in some states centers on wholesale cultivation, whereas in other states vertically integrated cultivation and dispensary operations take the lead,” ArcView stated in its recent “State of Legal Marijuana Markets” report, which noted those kinds of businesses often have the most risk of federal enforcement. “Ancillary businesses, which are at least once removed from the cannabis plant, carry less criminal risk, but have longer ROI horizons, and some are still exposed to the risk of customer attrition resulting from enforcement actions.”

But given the market potential related to marijuana, there is plenty of space for new companies and legitimate investment opportunities, sources said. However, Voss of Clark Hill doesn’t expect Alternaturals to contribute much to the Michigan economy and its growing marijuana industry.

“(They are) not likely to be doing anything directly involved in providing goods or services that were enabled by the Michigan Medical (Marijuana) Act,” Voss said, “so (they are) not a good poster company for creating Michigan jobs.”

SIDEBAR: Alternaturals Inc.

  • Headquarters: 2885 Sanford Avenue, Grandville
  • Stock Ticker: ANAS, traded over the counter on the Pink Sheets
  • Founding: Alternaturals formed in a reverse merger with Premier Mortgage Resources Inc. in December 2013.
  • Executives: Emmanuel Gyamfi, president and CEO; Christopher Graybosch, vice president
  • About: Alternaturals plans to develop a full line of natural health care products, including alternatives to prescription drugs, as well as medical marijuana-based products.
Read 5034 times Last modified on Sunday, 03 August 2014 15:25

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