As one who has followed the cannabis sector closely for over six years, I have seen lots of ups and downs for its publicly-traded stocks. Investors today have, in my view, the opportunity to own some companies that have bright futures, but that wasn’t so much the case even three years ago, when most retail traders were still focusing on companies that were just silly penny stocks. Because these greedy opportunists continue to try to exploit retail investors even now, despite the vast improvement in the sector, I want to share some history from the past few years with the hope that readers will learn that they should just ignore these fraudsters and wannabees.
When I transitioned my professional focus to the industry in the nascent days of the cannabis stock market, all of the stocks traded “over-the-counter”, meaning that they weren’t listed on a major exchange, like the NYSE or NASDAQ. Today, while these exchanges are off-limits to American companies that grow, process, sell or distribute the federally illegal substance, they have opened to similar Canadian companies as well as some ancillary companies that serve the industry. Most of the primary listings for U.S. and Canadian cannabis operators are in Canada, mainly on the TSX, TSX Venture or Canadian Securities Exchange but also the NEO Exchange. Almost all of these companies also maintain a listing in the U.S.
Trading exclusively on the OTC is a yellow flag, though there are several leading ancillary companies and CBD manufacturers that currently trade there while attempting to list on a higher exchange. While I track hundreds of companies, I focus my efforts most intensively on 28 companies that belong to my “Focus List”, and there are only 4 that trade exclusively on the OTC. 3 companies trade exclusively on the NYSE or NASDAQ, while the balance have primary listings in Canada or Australia.
The timing of this perspective was heavily influenced by some news regarding one of the failed penny stocks that I will detail below, the jail sentence given to fraudster James Farinella, who plead guilty to charges of conspiracy to commit securities fraud in October and was sentenced to 25 months in prison in June. I called out Farinella publicly in 2015 for infractions that extend beyond those for which he was convicted. Over the years, I have shared my views in writing publicly on many questionable cannabis companies and have reported several companies to the CFA Institute, the SEC and even the FBI, but justice is rare and certainly slow. Pazoo, the company where Farinella committed his fraud, is in the cannabis stock graveyard, which is populated with zombies for the most part, as these silly companies never seem to just go away.
While I could probably write about more than 100 failed penny stocks in the sector, including some that showed up in 2014, went away and then later came back, time constraints require me to pick only a few examples, which I will share in alphabetical order, beginning with American Green, which has been trading as a cannabis company since 2012. Trading now at just $0.0002 per share, it has lost 96% of its value since spiking in late 2016 to $.005. ERBB has an incredible 29 billion shares outstanding as of March 31st, and the secret here was that the company, which never had a substantive business and generated revenue in the last quarter of just $397,064, used toxic financing allowing its convertible debt holders to convert into stock at 50% of the 52-week low, a doomed capital structure to say the least.
Cannabis Sciences is another of the “OG” cannabis stocks, trading publicly under the name since 2009. The company, which is now quite delinquent on its filings, had revenue of just $6,302 in the first three quarters of 2017. At $.03, the stock is down about 96% over the past decade as it has put out questionable press releases and has failed to accomplish much at all beyond boosting its share-count.
Cannagrow Holdings was a big stock promotion from early 2015 that traded briefly above $3.00 in late 2016 but now trades at $0.375 with very light volume. This company had a big red flag: The person responsible for preparing financial resports, Brent Crouch, is self-interested, as he owns a big chunk of the company, which has no real assets beyond receivables from its customer but stands between the owner of a facility and a Colorado license holder that leases the facility.
CannLabs is one of many companies in the lab testing sector that have failed. It went public in 2014 with the leading share in the Colorado market and had a license in Nevada. While the stock still trades, surprisingly, there is absolutely no business after Colorado shut it down for violations in 2015. The company hasn’t filed a financial report since 2015. Founder Gen Murray, who was ousted, claims that the she was the victim of fraud conducted by the person who put together the reverse-merger, Steven Solomon, who was accused of fraud at Palmaz Scientific as well.
Creative Edge Nutrition was a company I thought had a chance to execute on its plans to build a massive cannabis cultivation facility in Ontario, though there were always lots of reasons to be skeptical. I actually visited the company headquarters in Detroit in 2014 and realized it was even dicier than I had figured. That should have been enough to make me run, but, I was slow to do so. When I caught management in a lie a few months later, I abandoned all hope that the company would ever succeed and avoided in my model portfolios the almost 100% decline since then. The guy who was running the show, Bill Chaaban, is a lawyer licensed in both the U.S. and Canada. The facility was never licensed and was being marketed a couple of years ago as a movie studio.
FusionPharm was a company I never trusted due to several issues, including some accounting irregularities that I uncovered as well as a bad capital structure. The company, which retrofitted shipping containers as pods for cultivators, looked very busy when I visited it in Denver in 2014, but it turned out to be a fraud, with the stock suspended by the SEC and the CEO charged in a criminal complaint for illegal stock sales.
Generation Alpha, previously known as SolisTek trades down 96% from where it traded at the beginning of 2018, and was one about which I was optimistic at one point given its substantial revenue. The founder’s decision to bring in an outsider to run the company proved to be a grave mistake. The company’s lighting business imploded, and it decided to pivot into the direct cannabis industry and change its name. The good news on this one is that investors had plenty of time to figure out what was going on and sell.
Golden Leaf Holdings isn’t quite dead, but it certainly appears to be headed in that direction. The company was struggling when it merged with a leading Oregon cannabis company, Chalice, changing its business model from exclusive focus on extraction to one that involved cultivation and retail as well. The founder was named CEO, but he departed earlier this year, with now 3 different CEOs since he left. Revenue in the most recent quarter grew 34% to $4.1 million, but the company continued to post big losses. The challenge for the company is a balance sheet laden with convertible debt.
GreenGro Technologies is another former high-flyer that trades at about .01 after spiking to $1.20 in early 2014 and then $0.16 in late 2016. The company has never delivered on any of its initiatives, with sales of $93,327 in Q1.
Growlife was the biggest stock in terms of both market cap and investor interest in 2014. I had some concerns with valuation, but the business model of expanding its footprint of hydroponics stores seemed promising. The SEC suspended the stock out of the blue in April 2014 for reasons that have never been disclosed, and there was never any sort of litigation subsequently. The company managed to regain its OTC listing, but it has struggled with its toxic convertible debt.
Hemp, Inc. has a great ticker but no real business. Its founder, Bruce Perlowin, was charged by the SEC with illegal stock trading in 2016, a case that remains open. I have called out many issues with this company publicly since 2013. It hasn’t filed its financials with OTC Markets in over two years. The lesson on this one is to look past the ticker!
Indoor Harvest held early promise as it pursued its aeroponics technology. After going public through the S-1 process rather than a reverse-merger, the company failed to execute. The CEO, Chad Sykes, was formerly a stock promoter, which was probably a good sign that the organization wouldn’t succeed.
Marijuana Company of America has seen an incredible amount of selling by insiders and little progress in its business. The people behind it had ties formerly to Medical Marijuana, Inc., which I discuss below.
MassRoots is one of the biggest failures the sector has seen to date. The company hyped its app but was never able to monetize and drowned in toxic debt.
Medical Marijuana, Inc. has been a very controversial company since it began trading in 2009, founded by Bruce Perlowin before new management took over in 2011. The person behind the company, who died in early 2018 when he crashed his Lamborghini, Michael Llamas, had to step down as CEO when he was indicted for mortgage fraud, but he ran the company surreptitiously by many accounts. While MJNA has and continues to generate substantial revenue, it has relied upon toxic debt to fund its losses, diluting shareholders along the way quite substantially. At $0.05 per share, the stock trades on volume that continues to erode and is down 90% from where it was in early 2014. The company promised in 2013 to begin filing with the SEC, a promise it has yet to fulfill.
Notis Global, better known by its predecessor name, Medbox skyrocketed in late 2012 to over $100 per share but now trades at $0.0002. The company’s founder, Vincent Mehdizadeh, took on toxic financing and also got squeezed in his personal investment account along with CEO Bruce Bedrick by margin calls on the stock. The company also had to restate its financials, and it was never able to recover. The details are spelled out in the SEC litigation with the company.
Pazoo struck a deal to open a Steep Hill cannabis testing lab in Nevada, but struggled to do so. I actually visited the facility in 2015, which finally was licensed in 2018 but not under the Steep Hill name. The company relied on toxic debt financing, which was its ultimate downfall.
Sunset Island Group is a more recent cannabis play that failed. The guy behind it ultimately, Joseph Wade, used a different company, 1PM Industries, before trying to exploit investors with this one, which I called out publicly and then followed up with additional information about how the insiders cashed out $3 million. The company was delinquent on its filings for 2017 until just recently, and the filings revealed that the company never booked a dime of revenue despite claims to have generated it. This is a prime example of why it is so important to know the financiers.
Terra Tech investors might not agree that the company is dead, but the prospects are grim in my view. Earlier this month it revealed it is borrowing money at 5% per month! I was both a critic of the company but also a supporter until late last year, when yet another lawsuit was filed against the company, which has been plagued by not only legal issues but also incredibly poor financial decisions. The company failed to see how the industry was getting financed in Canada and continued to rely on toxic debt, which left it disadvantaged to rivals. The regulatory transition in California challenged the company, which also operates in Nevada, and its sales have been in decline as losses expand.
Hopefully my review of this subset of the many cannabis stocks that have failed has helped readers to better appreciate the risks of investing in the sector and has encouraged them to do extensive due diligence before investing. I am often asked how investors can minimize their exposure to the risk of penny stock fraud, and I will conclude by sharing some ideas. First, many don’t realize this, but companies that trade over-the-counter don’t have to necessarily file with the SEC, as surprising as that sounds. For example, Hemp, Inc. and Medical Marijuana, Inc., both some of the earliest companies in the sector, file only with OTC Markets. This is a red flag, and I encourage investors to totally avoid any company that doesn’t file with the SEC or on SEDAR for Canadian-listed companies. Second, I encourage investors to actually read those filings and not to rely solely on press releases. If one is going to read press releases, make sure to review them from the past to see how the company lived up to its promises or failed to do so. Third, when you read those filings, make sure that the financials are solid. If the company is burning cash and doesn’t have substantial assets, then it is unlikely to be able to execute. Fourth, investors should be especially careful to look into the backgrounds of management. Fifth, be aware if the company is promoting its stock, as this is typically a sure sign that problems exist. Finally, it is essential to review how the company raises capital. What is the structure, and who are the financiers? I recommend avoiding companies that issue convertible debt with a variable conversion rate, as this can lead to death-spirals. It’s important to be aware that certain financiers have terrible track records.
I remain dedicated to calling out bad actors in the cannabis space, though fortunately there are plenty of good companies now too. It used to be almost a full-time job! At New Cannabis Ventures, we have an easy way to find articles about questionable companies, which helps our readers stay vigilant against the opportunists that will inevitably try to take advantage of the interest in an exciting theme like cannabis legalization.
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