5 Overvalued Cannabis Stocks - Part 2: Funky Capital Structures In The Marijuana Industry

Benzinga recently had a chat with Alan Brochstein, founding partner at New Cannabis Ventures and founder at 420 Investor. In the first part of this series, we took a look at overvaluation and hype in the general marijuana market, as well as at General Cannabis Corp CANN, a stock with roughly 70 percent potential downside.

Below, we’ll go into other stocks that seem overvalued at current prices.

CANNAGROW HLDGS IN COM USD0.001 CGRW

In an article published on New Cannabis Ventures in October, Brochstein shared a look at CannaGrow. “This is a company that I’ve followed since the beginning of 2015,” he told Benzinga. “They came out very promotional, they did a big stock promotion.”

Brochstein: The guy that runs it, Delmar Janovec, has a very checkered past. It’s the same company that used to be called BizAuctions. They ended up doing a reverse split of 17,000–1 in 2012, when it was BizAuctions.

Then, they saw the cannabis opportunity — To their credit, there is a real business there, there is a business in Huerfano County — But, here’s the problem: The company (a) doesn’t really have a lot of control in that business, they are kind of in the middle of two parties that are really where all the revenue would go, and (b) these guys do not file with the SEC, which, to me, is a big red flag [especially because] they’ve been around for a very long time.

Some other interesting things I mentioned in my article. Their auditor owns a big chunk of the company — very biased — Crouch & Associates [...] If you look at their balance sheet, there’s nothing on it except for this really funny asset, it’s a license, the Candwich [which has nothing to do with cannabis, it’s a canned sandwich]. So then, they say, “well, there’s a facility…” But, their partner [Nugro Industries] is the one who owns it.

Source: Eater.com

Then, on the other side, there is a license holder, which used to be an employee of BizAuctions, so it’s a very related party. So, they have a greenhouse [...] The part that blows me away is that, even if they didn’t have this crappy share structure, the stock would be super overvalued, in my opinion. There’s 100 million shares roughly, which equates to a $200 million market cap around current valuations, but they have no revenue and no assets, and they never really explained how their business actually works, what are the payment they are getting from their grower [...] So, very difficult to justify this price [...] But, well, it’s got the “canna-” in its name.

Helix TCS Inc HLIX

Brochstein then went into Helix TCS.

Brochstein: I prefer companies that are going public to use the S1 route or though Form 10, not via a reverse merger, the way these guys did — although, to be fair, most people seem to go through [...] they buy some shell and do a reverse merger.

This company has a funky capital structure, although, to their credit, they’ve taken advantage of weakness at a competitor, Blue Line Protection Group Inc BLPG, and done a good job in the one market they are in, Colorado. So, the company is not a scam.

However, they set this thing up with a really weird convertible preferred [stock] and that convertible preferred basically gives the CEO 60 percent of the company, no matter how many shares there are, which is kind of a dangerous tool— When you do the conversion, it’s about 65 million shares, so you’re talking about a $500 million market cap, or something like that, which is very difficult to justify, given where they are in their revenue [...] But, it’s a new stock, thin float.

Want to know which other two stocks in the cannabis industry are overvalued? Check out Part 3 of our three-part series following this link coming soon!