New Reverse Merger In Cannabis Space Worth Getting To Know

Posted on Sept. 20, 2013, 12:05 p.m.
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Earlier this week, I was approached by Paul Rosenberg, CEO of mCig, which recently reverse merged with Lifetech Industries.  He was impressed with my interview of Sterling Scott   CEO of GrowLife (PHOT), and wanted to tell me his story.  This is a huge benefit to being the "Cannabis Financial Analyst" at 420Investor.com

His company is about to launch a $10 vaporizer that could become a category killer.  The current symbol is LTCHD, but it will change to MCIG on 9/24.  Having exchanged some emails with Rosenberg, reviewed the corporate website and the company's press releases and having read the three SEC filings, I am impressed with many aspects of the story. With Washington and Colorado getting close to implementing legal marijuana for recreational purposes, this stock could get a lot of attention.  With that said, I think that the current price is too high and expect it to fall.  I am sharing some initial thoughts today and plan to follow up with a more comprehensive interview with Rosenberg.

Company

mCig is based in Bellvue, Washington.  CEO Rosenberg's description from its filings:

Mr. Rosenberg is a serial entrepreneur and private investor focused on the technology space with experience in procurement, outsourcing, research, and manufacturing. Previous to Lifetech, Mr. Rosenberg focused on seed-stage venture capital for private and public companies.

He has shared some more of his background with me, and I am satisfied that he is qualified to pursue his venture.  I will share some of those details in the future to justify my view.

According to the company, Rosenberg approached Lifetech Industries earlier this year and was going to license its technology for use in his mCig. Rosenberg ended up buying out Benjamin Chung, who hadn't really done much over two years.

So, what is mCig?

mCig, Inc.  is a technology company focused on two long-term secular trends sweeping the globe: (1) The decriminalization and legalization of marijuana for medicinal or recreational purposes (2) The adoption of electronic vaporizing cigarettes (commonly known as "eCigs") by the world's 1.2 Billion smokers. In 2013 the company will be launching its first product the mCig -- a purpose built loose leaf eCig retailing at only $9.99. Designed in the USA the mCig provides a superior smoking experience by heating (not burning)plant material, waxes, and oils delivering a smoother inhalation experience


Here is a picture:

The product should launch very soon and will be available in black or white. 

Here is their advertisement:

http://www.youtube.com/watch?v=bS8vgPPyqck


For a company that hasn't sold a single thing, I find this impressive:

I would note too that the company has over 5K likes on Facebook - here is a link to their page.  

If you want to read a nice perspective from the company, here is their investor presentation.This is highly disruptive, given the very low price point.  It's no wonder that Rapid Fire Marketing (RFMG) has been crushed!  

Capital Structure

On June 18th, the former CEO of Lifetech transferred 25mm shares to Paul Rosenberg, who also invested $100K and ended with 71.4% of the voting control of the company.  On July 30th, Rosenberg forgave $173K of debt owed to him by the company and then loaned $24K for operating purposes on July 31st.  The company also did a 10:1 split (which was effective 8/29), such that there were 500mm shares outstanding instead of 50mm.  It also increased the authorized shares from 200mm to 1 billion.  The company has a small cumulative loss and showed a current equity of about -$45K.  After the quarter, Rosenberg exchanged 230mm shares for a preferred stock (23mm shares that convert into 230mm shares). So the current float is 270mm common shares.  According to my discussion with Rosenberg, the preferred stock, at this time, is solely voting rights, though there is a possibility that it might be converted to common stock at a later time.  I look forward to the next 10-Q, which should detail the specific nature of the security.

Valuation

The way to think about the valuation of the company is to take the common shares (270mm) and convert the preferred shares (10 X 23mm = 230mm), which is possibly too conservative.  This results in 500mm shares, again possibly overstated but a good "worst-case" approach.  The price near $0.20, then, is $100mm for a company that hasn't even made its first sale.  This is crazy, in my view.  

If you had $50mm and Paul came to you and asked you to buy his company, would you?  I would bet that he would sell it to you!  This is how one must think, though that doesn't mean that the stock will trade at this kind of valuation (the real "value").  MJ stocks are trading expensive because the demand is high.  

When I think about the valuation, I expect that the stock will trade at a very high valuation relative to where it should trade, as there are many positive attributes to the story.  It's simple, and the financials are quite clean for this SEC filer.  It's not hard to envision nice uptake from the mCig launch. 

Before I come up with a true forecast, I need to get more information.  For now, though, I will say that decent MJ biz models get at least $25mm in market cap, which would be $0.05.  In this market, that would be a good entry I would estimate, but I also don't know if it gets there.  The upper end of what I would expect would be $0.10-12, or $50-60mm.

With more information in the coming quarters, the valuation exercise will become less challenging.  In any event, this is a start-up with extremely high risk.

Chart

The stock has exploded this month:

Keep in mind that the volume is light compared to the 270mm shares that are outstanding.  The company executed a 10:1 split, and many of the holders of LTCHD likely are unaware of the huge price rise.  This is just a 30-day look.  It appears that there are some bag-holders already!  As you can see on the left, lots of volume above .20. It's hard to call, but I would expect a dip back towards $0.10-.12.  The stock was promoted four times at the beginning of the month (unpaid). I guess no one pays attention to the FINRA warnings !

Conclusion

I think that this is worth following closely.  I like the CEO's background and approach.  The space is very crowded, no doubt, but establishing oneself as the low-cost producer while simultaneously creating a strong brand is promising.  The capital structure is friendly in my view, though the stock needs to see the old shareholders distribute their shares before I will trust the price action.  

I intend to interview CEO Rosenberg in the near future and encourage you to share with me any questions you might have.  I expect to learn more about the patents, additional products and product extensions, and the financial model and any goals he might share.

Free Offer

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We will be kicking this off on October 1st at 6PM EST, and I have to admit that it may be difficult to top our first guest, Jamen Shively, founder of Diego Pellicer.    In case you aren't familiar with him, he has very ambitious plans to create the leading global brand of premium marijuana.  He intends to "mint more millionaires than Microsoft", where he was a corporate strategist.  As excited as I am to kick off with Jamen, he is even more excited and is promising to blow everyone away as he reviews the space and updates the world on his plans to become the "Starbucks of pot".  Please join us - click here to register .



Source Documents

  • CavemanInvestor — Strikes a nice tone Alan between general long term optimism and tough love for the stock in the near term. Posted 7 months ago
  • CavemanInvestor — I'd really like to know what the margins look like on a $10 ecig before I would even consider dipping my toes into this one. Posted 7 months ago
  • AlanBrochsteinCFA — Thanks, CavemanInvestor. I will be in a position to judge if either we get a much lower price (which I expect) or find out its bigger than I might anticipate based on current information. Yes, I will be looking into the economics more closely - thanks for the input Posted 7 months ago
  • Pot$tocker — looks like a Cannacig. Posted 7 months ago
  • AlanBrochsteinCFA — Hopefully it works better! Posted 7 months ago
  • Pot$tocker — mCig unfollowed me on Twitter :( Posted 7 months ago
  • AlanBrochsteinCFA — Seriously? What were you doing to have that happen? Posted 7 months ago
  • Pot$tocker — I guess they don't like that I think Cannacig and Mcig look similar. Posted 7 months ago
  • Pot$tocker — I followed them :)\ Posted 7 months ago
  • Pot$tocker — Any CEO that has enough time to read and respond to blog post and unfollow people on Twitter has too much time on their hands. Any CEO that respond to blog post in such an unprofessional manner is a company I want no part of. You can compare yourself to your competition without insults or be-littleing. I want a CEO with more than a Junior High mentality. Posted 7 months ago
  • AlanBrochsteinCFA — I think you may be missing the point. Any CEO who cares what's said on 420Investor is someone who knows the importance of this community! I think that people always need to be careful with what's said in public, but those comments were directed to our private community. I really appreciate the input quite frankly. We can determine if his views make sense or not. Posted 7 months ago
  • Pot$tocker — maybe I feel his comments were unprofessional based on the interview you have previously done with actual professionals from PHOT and TRTC. I expect the upcoming webinar with Diego Pellicer to be nothing less than professional. Shively seems pretty sharp and I can't wait to hear what he has to say. Posted 7 months ago
  • Pot$tocker — just saw the 1st video add from Mcig on Twitter. Very professionally done I'm impressed. Posted 7 months ago
  • Pot$tocker — Here is the problem with Vape Pens in general, they are too small and a pain to refill, very messy and not discreet. The biggest plus to a Vape Pen is being discreet. No way to fit enough weed or wax in a pen to last more than 1 or 2 hits. The company that will go to the front of the Vape market is the company that can convert the weed or wax to a liquid so it would last longer similar to an Ecig. So essentially a pre-loaded Vape Pen would be an big winner. All the ones currently on the market are fill-your-own. Posted 7 months ago
  • Pot$tocker — most modern companies have a Director of Social Media and its not the CEO. Posted 7 months ago
  • AlanBrochsteinCFA — He actually told me that he does have someone performing this role - his name is Ryan. Posted 7 months ago
  • AlanBrochsteinCFA — On the pen, given the state-by-state landscape, it would require having physical plants in each individual state to do what you suggest, which would be a great idea but probably not practical for many years. Posted 7 months ago
  • Pot$tocker — the only reason I mention it is because they have Ecigs that will hold up to 1 packs worth of Nicotine. These pens need to be able to hold 1 gram of wax or 4 grams of leaf. I think you would be able to manufacture in CO or WA to keep the cost down and export only to MMJ approved states. Posted 7 months ago
  • Pot$tocker — So Ryan felt in necessary to unfollow and re-follow me on Twitter? hmmm.. interesting concept for customer acquisition. Posted 7 months ago
  • Pot$tocker — I mean manufacture the weed into liquid in CO or WA. Doesn't really matter where they build the pens. Liquid or wax is best because the smell is not so pungent. Almost but not quite odorless. Posted 7 months ago
  • Pot$tocker — and it 10 times more potent than leaf Posted 7 months ago
  • Pot$tocker — mCig needs to acquire a central grow facility to process their own weed into liquid and be the 1st mCig on the market that already has the "m" in it. They would be like Marlboro or Camel because they would be the 1st in the space. Even before leaf does. Make em disposable just like the eCigs because refilling can be a messy burden. I think that is what Diego Pellicer is trying to do, become the 1st MJ brand but I think they are focused on the leaf not the wax. Not sure but thats the feel I get. Posted 7 months ago
  • Pot$tocker — just left the gas station. they were selling eCigs advertised to contain 800 puffs. Put 800 puffs in a mCig and you got a homerun Posted 7 months ago
  • AlanBrochsteinCFA — Again, PotStocker, this won't fly. The federal government is very clear about interstate commerce for MJ. This is really big for PHOT as a supplier of "picks and shovels". Posted 7 months ago
  • Pot$tocker — gotcha. the reason they can is because it doesn't contain any meds. Whatever it is they have to make it a better option than rolling a J. Posted 7 months ago
  • Pot$tocker — make the medicated version only available in WA and CO as a test market and wait for the laws to catch up. Posted 7 months ago

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Alan Brochstein

I have worked in the investment industry since 1986 and earned the CFA charter in 1997. I worked for Kidder, Peabody in bonds from 1986-1992 and then First Boston's investment management subsidiary from 1992-1994, both in NYC. I then joined Criterion Investment Management (later acquired by Nicholas Applegate and then West LB) as a portfolio manager helping to manage $10 billion in fixed-income investments. In 2000, I made the move to stocks, joining a small firm in Houston as an analyst and portfolio manager. I left in 2006 and formed my own business, AB Analytical Services.

From 2007 until March, 2014, when I made the decision to devote my time exclusively to the cannabis sector, I worked as a research consultant to several investment advisors. Additionally, I offered a model portfolio service to individual investors from 2008 (www.InvestByModel.com), adding a private blog in 2011. In 2009, I began working with an independent research firm that focuses on evaluating the management teams of publicly-traded companies. In 2013, I came to the Marketfy platform and launched The Analytical Trader, with the goal of providing swing-trading ideas that would offer 4:1 reward-to-risk over a two-week time-frame. Later in the year, sensing an unmet need in the market for objective information on cannabis-related stocks, I launched 420 Investor as the go-to place to help investors capitalize on the "Green Rush". Finally, I have been one of the most successful bloggers at Seeking Alpha since early 2007. You can access my 600+ articles at http://seekingalpha.com/author/alan-brochstein/articles

I am very dedicated to the idea that people can manage their own money and get market-beating performance at a reasonable all-in cost, avoiding costly middlemen who tend to deliver mediocre performance, at best. My goal is to help you by providing ideas that are based on sound processes and decades of experience, letting you make the ultimate judgment regarding the commitment of capital. I enjoy interacting with subscribers and look forward to working with you.

You can find me on LinkedIn: http://www.linkedin.com/pub/alan-brochstein/1/182/165