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Marijuana legalization give penny stock a wild ride

McClathcy-Tribune Information Services

April 28, 2014


The news releases began to flow in February.

A Mission Viejo, Calif., penny-stock company announced it was leaving behind the world of nutritional supplements to enter "the growing billion-dollar marijuana industry."

The newly rechristened CannaBusiness Group Inc. soon touted its purchase of The NorCal Connection, an online storefront for smell-proof marijuana containers. Next, the company announced it had acquired 17.3 acres in Butte County, Calif., which it said were already leased to a licensed medical marijuana grower.

The push paid off. In a matter of weeks, CannaBusiness’ stock skyrocketed from around 2 cents a share to more than 40 cents per share. On March 17, the most frenetic day of trading, 46.8 million shares changed hands, or 82 percent of the shares outstanding.

The shares have bounced back toward earth since then, losing three-quarters of their value off that peak. They still are priced higher, though, than when the company focused on diet and energy pills.

The wild ride of CannaBusiness and its CEO, Michael Cummings, provides a window into the "green rush" of investment dollars targeting anything associated with the newly legalized business of marijuana.

It also shines a light on the mercurial world of penny stocks — in this case, a company that’s reported a minor year-end profit just once in its 34-year history, using seven names and a series of reverse mergers and acquisitions to bounce among six different industries, from film distribution to professional baseball to marijuana.

"There are going to be some really amazing companies that come out of this," said Troy Dayton, CEO of The ArcView Group, a San Francisco investor network focused on the marijuana industry. "It’s just hard to know which one’s which."

The boom started in early 2013 as more states legalized medical marijuana. Pot stocks surged in over-the-counter markets but then quickly cooled off, continuing that downward trend for the rest of the year.

Then 2014 hit.

Recreational marijuana became legal in Colorado, while Washington started ramping up to allow retail sales in June. President Barack Obama signed a farm bill that loosened rules prohibiting hemp production.

And, despite federal laws prohibiting it, 20 states plus Washington, D.C., had agreed to allow medicinal marijuana in some form.

"That’s when the flood began," Dayton said. "They see this as the next great American industry."

More established pot-related penny stocks began riding the resulting wave of price spikes and valleys. Meanwhile, many new players started jumping on the green bandwagon.

"In the past three months, there have been numerous penny stocks from all kinds of industries — gold and oil mining, biofuels, music rights, to name a few — that have decided to undergo yet another change of their business and came up with announcements about joining the marijuana industry," said Georgi Kamburov, who follows the industry as a writer for HotStocked.com.

CannaBusiness’s CEO, Cummings, didn’t respond to multiple requests over several weeks to be interviewed for this report.

But frequent name changes, scarce financial data and a sudden volley of promotional materials should all be red flags to investors, said Gerri Walsh, senior vice president of investor education with the Financial Industry Regulatory Authority, a not-for-profit organization based in Washington, D.C., that helps regulate securities in the United States.

FINRA issued two alerts in the past seven months warning marijuana stock investors to watch for "pump and dump" scams, where companies drive up prices and demand with lofty promises, then sell their shares and leave investors with worthless stock.

With so much attention focused on the marijuana boom, it’s not surprising that thinly traded penny pot stocks are increasingly drawing the attention of small investors, whipped up by websites such as 420Investor.com and MarijuanaIndex.org.

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Benefiting from that green bubble, CannaBusiness Group recently upgraded from a strip mall in Mission Viejo to a 15-story building across from the Irvine Spectrum.

Cummings, the CEO, leases space in a suite shared by businesses including an estate attorney and a software developer, with a receptionist waiting to greet visitors on the ninth floor. CannaBusiness Group is listed in the digital directory of the building’s lobby under Freebird USA Inc., another company owned by Cummings.

CannaBusiness Group stated in a March 6 news release that it bought 17 acres in Butte County for $275,000. Searches with the Butte County assessor’s office turned up no record of any land deal that size and price range, or any similar purchase under Cummings’ name or the company’s name dating back to January 2013. It could not be determined if a sale wasn’t showing yet because it was still in escrow or for other reasons; Cummings did not respond to repeated requests for details.

NorCal Connection CEO Jeff Jirod also didn’t reply to requests for an interview about being bought by CannaBusiness Group. An April 7 news release promoted Jirod’s plans to move his corporate offices and launch a new warehouse in Vacaville, Calif.

On April 8, CannaBusiness announced it purchased the private security firm National Security Solutions Inc. A news release states the company will help marijuana growers and dispensaries affiliated with CannaBusiness keep their operations secure.

Though reporting requirements for penny stocks are minimal, CannaBusiness filed an annual disclosure statement for 2013 that shows the company ended the year with $17,291 cash. The figures aren’t particularly helpful for new investors, however, because the company listed $1 million in assets that, according to Hotstocked, went away along with a recently divested supplements maker, Muscle Warfare.

Cummings stated in a March news release that he’s having an independent firm audit CannaBusiness, with plans to become a fully reporting company. The company is also looking to raise $5 million from accredited investors through rule 506(c) of the Jump-start Our Business Startups or JOBS Act, which allows companies to advertise shares to the general public.

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A dearth of reliable financial data makes penny stocks, in general, high-risk investments, said FINRA’s Walsh.

Along with reviewing any financial reports, Walsh said investors should compare those figures with what the company is promising in press releases. The filings are often quite forthright, she said, laying out the fact that company revenue is low or even negative.

Pot stocks carry their own set of risks, Walsh added, since the legality of marijuana itself is the subject of ongoing debate.

"For investors that are interested in getting in on the ground floor of any new opportunity, whatever that opportunity is, we always warn about the risks of start-up ventures," she said. "Many are widely successful but many more ultimately fail."

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The company now known as CannaBusiness Group Inc. first incorporated in 1980 as World Wide Motion Pictures Corp., a Huntington Beach, Calif.-based film distribution company. Securities and Exchange Commission records, newspaper reports and interviews with those involved paint a picture of its recent deal making:

—2006: World Wide Motion Pictures Corp. needed cash after years of posting annual losses. A company called Buckeye Ventures Inc. was created to allow a reverse merger, with the film distributor remaining as a subsidiary. Buckeye Ventures bought businesses in the plumbing, heating, ventilation and air conditioning industries.

—2008: As revenue soared from a few thousand dollars a year to $13 million, Buckeye Ventures changed its name to Energy King Inc., one of its acquisitions. That same year, World Wide Motion Pictures split off.

—2011: Energy King bought out Venue Media, a small mobile and social media company based in Mission Viejo and run by Michael Cummings. Cummings was put in charge and the company changed its name to Godfather Media Inc.

—2012: The company name changed to Embark Holdings. A news release said it would move into "entertainment, technology, medical, energy and business services."

—2012: Embark bought a majority interest in the Orange County Flyers baseball team and another team based in Yuma, Ariz. The O.C. team had been formed eight years earlier as the Fullerton Flyers, a charter team for the Golden Baseball League. Cummings announced he was creating a new league called American West Baseball League.

—2013: Cummings left the baseball venture and the league never took the field.

—2013: Embark Holdings issued 1,000 preferred shares to buy Muscle Warfare International Inc. Cummings stepped aside while Muscle Warfare — whose supplements are available in such stores as the GNC chain —rebranded the company with its name.

—2013: Muscle Warfare CEO Daniel Amato returned his stock and took Muscle Warfare back from Embark Holdings.

—2014: In February, Cummings rebranded Embark Holdings as CannaBusiness Group Inc., in the marijuana business.

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