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“Med-X: When you don’t like the business plan, but like the opportunity” By Chris Parry

Med-X: When you don’t like the business plan, but like the opportunity | By CHRIS PARRY

Published previously on March 16, 2016 via Equity Guru

Up in Canada, I’ve got quite the readership in the weed space, but a lot of you US-side types may not know my deal yet, so here’s the Cole’s notes version: If I like a company, I’m going to kick the shit out of it before I tell you why I like it. And if I hate a company, I’m going to shiv it in the neck and look it in the eye as it bleeds out and passes from this mortal coil, uttering old testament lines and giving it a few kicks as it goes.

There are plenty of folks out there who will turn the crank and let their monkey dance for this company or that, but you don’t believe most of them and barely give credence to the rest because you know you’re being worked. You see the disclosures and you know the game and it all has the scent of something greasy.

I don’t play that way. Like a soccer coach who makes his kid work double hard to earn a place in the starting lineup, if I like you, I’m coming at you like a spider monkey, because only then will those on the sideline feel like you’ve earned your trophy. Med-X is a company in the marijuana services and side products industry that has many notable plans. Among those, it apparently wants to sell an all-natural, EPA-registered insecticide to weed producers, it wants to start an online magazine, and it wants to run a lab to find new strains of high-CBD plants. And it wants to grow its own though it only talks about that in mumbles.Let me be clear here, I’m not a fan of three of the four business goals outlined above. But I still think you should think hard about whether you have some spare coin to toss at the company. That doesn’t make sense? Stay with me here, it’s going to make sense by the end.

I think. Let’s start with the magazine plan. Man, do I hate that plan, even as a guy who makes his living working with the written word, and as someone who has started and run and sold magazines in the past. I’ve had consulting clients in the weed business that have floated this ‘we’ll start a marijuana news website’ plan, and I’ve always told them the same thing: It will fail, and it will fail from day one, and when it fails it will implode and leave you covered in guts.

Sure, it ‘can’ work, but only if it’s all you do and you know that business inside and out, and you’re prepared to lose a lot of money for several years while you build a critical mass of audience and brand. Spend all the money you want on it, put all your time into it, write acres of great content, but at what point will it have been worth your effort? Are you hoping for millions in banner ads? Going to use the viewership to market your own products? Build it up to flip it for a profit?Guys, these things just don’t happen. They won’t happen. The media plan is terrible and I don’t care who hears me say it, but that’s no reason to write off Med-X. For a start, that website already exists. It’s out there. And, it’s not bad, truth be told. Granted, it’s filled with stories about Med-X and is basically a conduit for their financing, but I’ve seen worse – and I’ll predict the company never spends one more dollar on the media plan because, as they get more serious about it, they’ll begin to see just how hard it is to staff, enact, and make profitable. There’s another reason, but I’ll get to that below because it’s a bit more cynical.

Either way, I’ll repeat, while I hate the media plan, I don’t hate Med-X. Let’s continue to explore why.

The insecticide product they want to get out there to the wider weed growing community: It’s been registered for sale by the EPA in the 39 states that require such a thing, it’s on the ‘approved for weed’ list in Colorado, and on the approved list in Oregon and Washington State, where much weed growing is happening and rules dictate what you can and cannot spray on your plants.That’s all good. I don’t know how well the Med-X product works, or if it does, or if they’ve sold much yet – I suspect not – but I don’t hate a plan to eventually supply growers with top-of-the-line stuff, if that’s what they’re selling and if that’s your entire business focus. Certainly there are companies out there with similar plans, that don’t have the EPA registration and state-specific approvals, that have much higher market caps than Med-X without any of their additional side plans that might kick on. But getting a product like that just into the general consumer market dominated as it is a few chain stores, is tough by itself. You have to work long lead sales plans and convince guys to take a chance on you and test it in several markets and then you need to buy shelf space at Home Depot and… urgh. Retail is a terrible world in which to ply your trade.

Now, if you move that product to the cannabis niche, where the current US production market is pretty widely fractured, being as nobody can build a national brand yet... that’s even tougher. Now you have to work that sales angle to individual farms that may only buy a small amount of your product and don’t necessarily want to test it on valuable plants and maybe run late with their invoice payments and require hand-holding and… urgh.

Look. Someone is going to dominate the weed insecticide supply space. I just don’t know if it’ll be a company you haven’t heard from yet, and I don’t know how much they’ll need to spend to get there. It may be Med-X, it may not. Probably not.

But I don’t hate Med-X. I know it sounds like I do, but skip along with me here, it’ll all make sense eventually.

Med-X is a company that, among those other things, wants to set up a half-million-dollar lab and figure out the key to a bunch of high-CBD strains that it can own and license and make serious doughbucks from going forward. Sounds great? Sure, and that lab is reportedly a lot more than a pipe dream – it has already been set up and is currently generating strains. But if I think really hard, I don’t know of any other company that has managed to turn this business model into big bucks yet, and there are lots out there who have floated the plan and either started and failed or never got off the ground.

And while it doesn’t hurt to have your own lab, and be cranking out hybrids and science experiments, what would it take to make back that half million from lab profits?

That said, and I’ll repeat it so we’re clear, I DON’T HATE MED-X.

I know I’m kicking them about at the moment, but that’s what I do. I find the things short sellers will start yelling about on messageboards and, if they’re right, we talk about it openly because you need to have all the info before you go in with your hard earned dinero.

Okay, so far we have the media plan (pfft), the product plan (too early), and the lab plan (no guarantees). Rough start but, frankly, it’s easy to poke these holes in just about any weed company in the US, from Dixie on down, so we’re not at panic stations just yet. So what’s good?

Well, three things actually.

First, Med-X has a patent application submitted that covers ‘soil with naturally occurring insecticide.’ I’d be lying if I said that application is a gimme, or if I know whether the company has done anything with this idea beyond filling in and filing a patent doc. But, guys, that may just be enough by itself. A strong and broad patent approval in an area that you know everyone is going to have to be engaged in eventually is far prettier than a million bucks on a balance sheet for an early stage startup. That application may well be something that can be stretched outside of the weed world, into cucumbers and tomatoes and bananas and which will bring the company a cut of every agri deal that happens with some future product that uses the soil itself to deliver pest control. If they get that application approved, every dollar in the company should be focused on making that a reality, and those dollars will be worth many times more than they are currently if that takes place.

Second, and this could be the most important thing of all, Med-X has stumbled head first into what could be the biggest marketing coup in the weed world to date: It’s the first cannabis company to be accepted for the new Reg A+ crowdfunding initiative.

What’s that? Glad you asked: It’s something the feds have come up with to allow guys like you and me to actually invest in privately held startups in the early rounds, which used to be the exclusive domain of what’s called ‘accredited investors’, or people you may know as ‘the filthy rich.’

The rich get calls. They get calls from guys who stand at their desks all day long and phone up dentists and retirees and bankers and ‘legitimate businessmen’, offering them early stage access to companies you’re not allowed to invest in. They’re the ones that get that 3c paper that blows out when they list publicly at 35c and you sit there wondering why your investment went nowhere. Reg-A+ allows you guys to start taking those calls and, if you think you’re clever enough, put your hard earned dollars into the early deal.

Remember all those times you wanted to invest in Twitter and Facebook and Alibaba before their fat IPOs came along? Remember feeling frustrated seeing venture capitalists get Uber or Zillow or Evernote stock privately for pennies per share, a year before they IPO and sell you that same stock for a life-changing profit? Ever spotted something fantastic on Kickstarter and thrown down your credit card number, only to think to yourself, “I don’t want to be sent a hoverboard, I want a piece of the company that’s making them…”Reg-A+ puts an end to that annoyance by letting you say, “Sure, Med-X, I’ll buy a thousand bucks worth of that financing now, at 60c per share, and I’ll sit on that for a year or two until you IPO and then I’m going to wear velvet robes and eat steak with hookers in Vegas until it all runs out.”Well, that’s my thought process, anyway.

Med-X already took part in a test round, where folks could ‘reserve’ their spot and say, when the offering actually happens, I want in. That test round total hit the $3.6M mark, which is totally bad ass. Think about this for a second: Would you sign up for some crowdfunding website just so you could tick a box that says “yeah, I’d be interested in that thing if it ever happens, maybe, no commitments or anything but, ‘shrug'”…? Because I wouldn’t. I’d wait until the financing actually happened.

Well, that financing is happening now.

The fact that Med-X is first out of the gate for this kind of deal is notable, and should bring them a big kick in terms of interest and media coverage and brand awareness and first mover advantage. You just know there’ll be a ton of people out there who will drop coin on this just to see how it works. You know there’ll be a ton of weed industry fans who’ll get into it because it’s the only early stage financing deal a regular joe CAN get into right now. But there’s another reason to be positive about all this. Involvement in the Reg-A+ program requires more than just a filled-in application form; the SEC and FINRA ran the rule over the applications and said yes – TO A WEED COMPANY.

And YOU KNOW how much the SEC hates weed companies. I mean, they’re like Wile E. Coyote over there, trying to drop a boulder on any Growlife or CEN Biotech or Uncle Krunky’s Weed Cookie Emporium that shows its face and steps outside the lines. They view weed companies like Donald Trump views fat women. They love weed companies like Noam Chomsky loves reality TV. If Med-X got approved as just the third company EVER, across all industries, to take part in this program, that’s a huge vote of confidence.

In addition, Med-X had to agree to run audited financials to take part in the program, which sets it so far aside from the general dross of the OTC that it’s worth spending a moment on. Actual audits and paperwork filed and transparency, you guys! You normally have to go to Canada for that stuff.

The third thing I like about this deal is my honest belief that all of the stated reasoning for raising money through REG-A+ is complete and utter bullshit, which will leave the company (if they get all their financing done) eventually sitting on $12m cash with the ability to literally do anything they like with it going forward.This is where my cynicism kicks in: Take note – none of the plans Med-X announced as reasons for why they’re raising money are future plans. They’re past plans. They already have their website up and are using it to aggressively push the crowdsourcing opportunity. They already have their insecticide produced – it’s been around for a while now. They already have their lab making weed strains.

So all the talk of ‘we’re raising money for this, that and the other’, in my opinion, was a smokescreen for the feds. They knew the SEC would never approve a plan to crowdsource millions to buy a weed farm, so they’ve hung out all the little non-weed-touching things they were already doing on the side as their rationale for the raise. By saying, hey, we’re not actually going to be handling weed per se, they got their approval. Now, if they choose to dive headlong into a bucket of change and do backstrokes around it, no big deal. That approval isn’t going to be taken away. You couldn’t suddenly tell hundreds of registered investors they’re not getting their shares. You can’t suddenly turn off a program that just got turned on.Med-X played the system, and they won.

So what can you do with $12M in today’s weed industry? Ooooh, that’s where it gets real interesting, to me.

Golden Leaf (GLH.C), the Canadian-listed cannabis oil dominator based in Oregon, just agreed to merge with Washington State’s largest weed producer in BMF Washington, and that deal landed at a cost of $12M, the vast majority of which came in stock. Now, imagine Med-X, having run its eye over all the realities of its existing hopes and dreams, realizing, “We don’t need to sell insecticide and banner ads… we could just buy the biggest weed producer in Nevada.”

But would they? Well, yes, because ‘reason to take it seriously #4’, for me, is something I noted earlier: Med-X wants to establish its own weed supply. This means, grow house. Or Dispensaries. Or oils. Or edibles. Or all of it.

Look, being the first cannabis company to make a run at reg-A+. to me, is enough to make this an interesting deal. Yes, I could find all sorts of reasons to shrug and walk away and note that the company says the words “$5 billion industry” far too much in its promo material, but, the fact remains, if Med-X had NO plan for the money it’s raising, and was just planning to buy something down the road when a great opportunity came its way – if they only wanted to be a capital pool company that will look for opportunities later on – the novelty of how they’re drawing in investors alone is enough to warrant the price they’re charging, in my opinion. And the potential patent approval makes it even tastier.

“We’re going to roll up dispensaries:” Sold. “We’re going to buy a big, operating, weed grow that needs expansion capital:” Sold. “We’re going to grow a bunch of green stuff in Nevada and sell it at garage sales:” Sold.

Which is not to say that Med-X will definitely get it’s $12M or that they won’t push on and try to start a real online magazine with a million of that or that they won’t get left with a warehouse full of insecticide nobody wants. All of these things may happen. Some of them probably will. But I don’t care.

While every other weed company in North America was looking at the new financing regulations and thinking “that’s too hard,” Med-X was diving in, expecting the laws to streamline by the time their approval came to pass, and ultimately getting the timing 100% right. While others assumed the SEC would never allow a weed company to sell directly, privately, to Joe and Jane Average, Med-X went headlong in and got the approval to go right ahead with their offering.

Med-X has nailed one thing, and it was the most important thing; the $12M thing. And that’s even before they get near a public listing, where all those early private equity guys make their bank.

Let’s be clear one more time, I do not like Med-X’s business model as they’re currently touting it. It’s unfocused, it’s unproven, it’s three non-core things out of four, and it’s too much for a staff of seven to do at once. BUT if they can pull in $12M of financing, selling private equity to people like you who are normally shut out of the private stuff and eventually sold the overpriced public markets shit when the value has all been squeezed out by brokers and dentists and Trump kids, that’s a really big deal. That’s something that is worth a lot more than just the cash they’re raising – it will build a nationally recognized brand owned by hundreds, or even thousands, of evangelists who are all cheerleading the thing on, hoping it goes to IPO in the next year or two so they can unload for beaucoup bucks. If you’d prefer to buy into something with a rock solid business plan right now, that you can flip out of at the drop of a hat, I can’t fault you for that. To be sure, Med-X is a gamble, and the fact that it’s private equity and not public means you’re not going to be in and out of it – once you’re in, you’re basically in until they exit or IPO. But the first man through the wall always either gets a broken rib or first dibs on the cash, and Med-X just went through that wall.

In this market, where weed license holders in Washington and Oregon are giving away as much as 90% of their future profits in return for facility financing, having $12M in your pocket is a really strong position. You can acquire the hell out of this market for that sort of cash. And for you guys to be able to get in at the pre-IPO stage, even if it’s for just a few hundred bucks worth of stock, that’s something worth talking about seriously.

So, it all comes down to this: I don’t like Med-X’s business plan. I think the stated reasoning for their raise is bullshit. But if you read between the lines and go in with eyes open, it may just be a unique and pioneering investment opportunity worth seriously considering.

–Chris Parry

http://www.twitter.com/chrisparry

NOTE: I don’t own a stake in Med-X, I haven’t spoken to management of the company, and the company hasn’t paid for this coverage. I may take a piece of that financing at some point in the future. If you invest and lose, that’s on you. If you invest and win, you owe me beer.

Original article can be viewed here: http://www.equity.guru/2016/03/med-x-dont-like-business-plan-like-opportunity/

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