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Mushroomstocks recently posted a free report that highlighted the operating results of two Nasdaq-traded cannabis companies. Today, we want to highlight the operating results of two over-the-counter (OTC) traded cannabis companies.
The growth of the cannabis industry has led to a surge in the number of publicly traded cannabis companies. As of today, there are over 275 publicly traded cannabis companies and most of these companies will be out of business within two years. Investors must perform thorough due diligence prior to investing and we recommend looking into factors such as revenue growth, institutional investment, dilution potential, share count growth, and recent trading activity. The companies we are going to highlight today are Pazoo Inc. (PZOO) and CannaVEST Corp (CANV).
PZOO is focused on the cannabis testing industry and CANV is focused on developing, marketing, and selling products that contain cannabidiol (CBD).
Pazoo Inc. (PZOO)
Yesterday, Pazoo filed their 10-K operating results for 2014 and we had mixed feelings about the report. We are favorable on the partnerships the company has created and the industry they are focused on. PZOO’s success will ultimately come down to execution. Some sections of PZOO’s report, however, raised red flags.
Our main concerns with PZOO are: 1) The number of shares that entered the market in 2015, 2) Cost control issues, and 3) Potential dilution risk.
Financial highlights
- PZOO generated $111,287 in revenue during the year, a 110% increase when compared to the prior period. Advertising sales increased by 259% from 2013 to 2014.
- PZOO incurred $541 in cost of goods sold expenses.
- PZOO incurred $2,479,057 in operating expenses. Selling, general and administrative expenses accounted for $1,639,228 of expenses. Professional fees accounted for $642,740 (expenses associated with investor relations and generating awareness),
- PZOO generated a net loss of $4,889,583 during the year.
Liquidity highlights
- As of December 31, 2014, PZOO had $733,637 in cash and cash equivalents.
- PZOO’s net cash used by operations was $ $1,273,707. The increase was due to the company issuing more stock for services and increases in SG&A.
- During the year, PZOO incurred $3,634,572 in liabilities (included $84,189 in accounts payable and $2,576,025 in derivative liabilities).
Harris Lee and MA and Associates Operations
In January, 2015, PZOO entered into a membership purchase agreement with Harris Lee. PZOO acquired 100% of Harris Lee for 450,000 shares of Series B Preferred Stock, and 300,000 shares of Series C Preferred Stock.
- Harris Lee is in the process of becoming a licensed medical marijuana testing laboratory in Colorado and Oregon. They plan to expand into other markets over the next year. Harris Lee is a 100% owned subsidiary and is a complementary business to MA and Associates, which received a license from Nevada in November 2014 to become a licensed testing laboratory.
- In March, Harris Lee signed a licensing agreement with Steep Hill Labs. The purpose of this agreement is to take the Steep Hill licensing to other states to test marijuana outside of Nevada, specifically Oregon and Colorado.
- In March, Harris Lee signed a letter of intent with Front Range to take over their Colorado marijuana testing laboratory. PZOO expects to sign the definitive agreement in the next 2 months and be operational shortly after.
Dilution highlights
During 2015, over 330 million shares of PZOO flooded the market through the conversion of convertible promissory notes or Preferred A shares (over $750,000 worth of convertible notes and 490,000 Preferred A shares which were converted into 49 million common shares). During 2015, PZOO paid off $225,000 worth of convertible promissory notes.
- PZOO still has 825,000 Preferred A shares outstanding
- PZOO still has 450,000 Preferred C shares outstanding
- PZOO still has over $250,000 worth of outstanding convertible promissory notes
Outlook
This report highlights one of our main concerns for shareholders which is dilution. We understand that cannabis companies need to issue stock to pay employees and to pay for services/agreements, however, the company needs to be cautious when it comes to the number of shares they issue. PZOO recently saw a favorable reaction from the market when the company announced it paid off a few notes, but the company still has a lot of dilution potential. PZOO’s preferred A shares will flood the market with 82.5 million more shares when converted.
CannaVEST Corp. (CANV)
Today, CannaVEST filed its 10-Q financial results for the quarter that ended on March 31, 2015. We are favorable on this report because CANV reported stronger top line numbers (i.e. revenue) which is a testament to the success the company has had executing its business plan.
Many investors will not be impressed by the company’s 3% revenue growth (compared to last period), but during this period last year CANV’s revenue was derived from one customer, HempMeds. The company terminated its agreement with HempMeds in the 3rd quarter of 2014 which initially had a negative impact on CANV’s revenue. We were favorable on this decision when it happened because the agreement gave HempMeds the exclusive right to sell CANV’s products online.
Now, CANV can control its sales channels better and focus on increasing brand awareness and future profitability without having to rely on a single customer relationship. Currently, CANV has over 2,000 customers and the company plans to continue to grow and diversify its customer base.
Quarterly Financial Highlights
- CANV generated $2,714,051 in revenue and $1,630,970 in gross profit (60.1% gross margin). This represents a 3.1% increase compared to the same time period last year.
- CANV incurred$3,993,675 in selling, general and administrative expenses ($924,365 last year). This increase is due to the expansion of operations, increase in headcount, marketing and legal expense, and stock-based compensation. SG&A expenses includes $1,743,327 of stock-based compensation, a non-cash expense.
- CANV incurred $323,145 in research and development expenses. These expenses are related to the cost of process development, rental of its laboratory facility, payroll expenses, laboratory supplies, product development and testing, and outsourced research personnel for the period.
- CANV generated a $2.6 million net loss ($0.08 per share). During the same period last year, the company generated a net loss of $0.1 million.
- As of March 31, 2015, CANV had $2.2 million in cash and cash equivalents. Also, stockholders equity equaled around $22.8 million.
Liquidity Highlights
- CANV needs to raise approximately $15 million over the next 12 months in order to adequately fund its business. In January 2015, the company commenced a private placement with accredited investors where CANV plans to sell up to 12 million shares of restricted common stock at $2 per share. As of March 31, 2015, CANV sold 1.26 million shares to 27 investors for $2,520,000.
- The company needs the capital to fund working capital, infrastructure and expenses. CANV will raise capital through the issuance of equity, acquisition of debt, or by selling off a segment of its operations.
Options/Warrants
- On July 23, 2014, CANV shareholders approved the amended equity incentive plan. Under the plan, CANV can grant up to 10 million shares of new stock. As of March 31, 2015, CANV had approximately 3.61 million shares available for issuance under the plan.
- During the quarter, CANV incurred $1,165,994 in expenses that are related to stock options and the company incurred another $590,000 in expenses related to the issuance of common stock to employees, non-employees, officers, and directors.
- As of March 31, 2015, the total unrecognized compensation cost related to non-vested stock-based compensation granted to employees, officers, and directors was $5,886,474. This amount is expected to be recognized over a weighted-average period of 2.11 years.
- CANV is authorized to issue up to 10,000,000 shares of preferred stock with designations, rights and preferences to be determined from time to time by CANV’s Board of Directors. As of March 31, 2015, there was no preferred stock issued and outstanding.
Outlook
We are favorable on the long term outlook of CANV due to its improving fundamentals, high quality products, and the increased demand from retailers. Shares of CANV have been in a downward trend and trading near its 52 week low. We recommend being patient and waiting for shares to bottom before investing.
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Disclosures
Mushroomstocks LLC is not a FINRA member firm. Mushroomstocks LLC is responsible for the preparation and distribution of research created in the United States. Mushroomstocks LLC is located at 40 SW 13th St. Suite 1002, Miami, FL 33130.
Technical 420 LLC, and any of its directors, officers, employees, affiliates, or subsidiaries does not accept any form of compensation from companies in return for writing reports on them. Also Technical 420 LLC, and any of its directors, officers, employees, affiliates, or subsidiaries do not hold any stock positions in companies covered by MushroomstocksLLC.
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