May 28, 2013

Quarterly Financial Reports Highlight Challenges Facing Publicly Traded Medical Cannabis Companies

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Medical marijuana sales are expected to grow by 15% this year to hit $1.5 billion, dispensaries are launching in several new markets across the country and retail cannabis stores are gearing up to open in Colorado and Washington.

Expectations for – and excitement surrounding – the future of the marijuana industry are understandably high. So it would be reasonable to assume that publicly traded companies involved in the cannabis space are growing gangbusters.

But quarterly financial documents released by several of the more prominent firms paint a decidedly different picture, showing that the industry’s recent growth and its future potential aren’t necessarily translating into huge profits for public cannabis companies. At least not yet.

The results highlight the difficulties these companies face as they try to capitalize on an expanding – yet highly unpredictable and volatile – market centered on a product that is still technically illegal.

Consider:

– Medical Marijuana Inc., which owns several companies involved in the cannabis and hemp industries, recently released audited first-quarter results that differ greatly from the initial, unaudited results provided several weeks prior0. Although sales grew by more than 20% on a year-over-year basis, revenue came in much lower than previously reported ($2.19 million in the audited results vs. $8.45 million in the unaudited results) The underlying business therefore isn’t nearly as strong as it seemed to be, and some investors remain highly critical of the company. And while Medical Marijuana Inc. reported a roughly fivefold increase in net income, most of it was tied to “extraordinary” one-time items that the company likely won’t benefit from in future quarters. Without those items, the company’s income would have fallen by 50%.

– MedBox Inc., which has made headlines over the past year for its automated cannabis vending machines, reported a healthy 20% increase in revenues during the first three months of 2013 but saw its profit cut in half. A big reason for the earnings decline: increasing expenses for marketing and commissions – a sign that the company is having to spend more money to generate each sale.

– GrowLife Inc., which provides cultivation technology and equipment, saw its net loss widen significantly in the first quarter. While its overall revenues rose sevenfold, that growth was tied solely to recent acquisitions. On a pro forma basis – which can provide a better measure of performance by factoring in the financial data of the acquired companies for the first quarter of 2012, not just for the first quarter of 2013 – revenue actually declined more than 40%.

SecretstoMMJSuccess Quarterly Financial Reports Highlight Challenges Facing Publicly Traded Medical Cannabis CompaniesOther publicly traded companies also posted mixed or disappointing results. Terra Tech Corp., for instance, generated revenue of just $66,121 – a sharp decline from half a million a year earlier – and also swung to a loss. Some publicly traded marijuana-related companies either don’t report quarterly data or haven’t filed them yet, making it difficult to tell how they’re performing. Cannabis Science – which struggled last year, posting a significant revenue decline and a large net loss – missed its deadline to submit its Q1 report.

It’s difficult to pinpoint why publicly traded marijuana firms haven’t been able to take off. But several factors are likely at play, including the inherent challenges of operating in this industry, the difficulties in developing a truly national MMJ company given the legality issues and patchwork of laws across across the country, and the specific products and services offered.

Investors certainly seem to be concerned about the financial health of these companies, sending their shares down in recent months. Most public cannabis firms are now hovering near the lower end of their 52-week range.

This could change later in this year if the industry takes off as expected and continues to mature. But it could be a long time before any publicly traded marijuana firm really gains – and holds – substantial momentum.

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