mCig Inc.: High On Smoke

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About: mCig, Inc. (MCIG), Includes: VTCQ

Informer Research
Hedge fund manager, long/short equity

Summary

No assets, operating income, or business plan, yet a $25 million valuation.

Hidden shares, fake partnerships, and a history of other shenanigans.

Company facing cash squeeze.

mCig Inc. (OTCQB:MCIG) is a failed e-cigarette company surviving on a cloud of smoke. mCig started as a simple e-cig brand that audaciously described itself as a “Technology Company“; now the company calls itself a “Cannabis Product Distributor,” despite having no distribution assets. With no cash or gross profits to speak of, the company has been using its inflated stock as a currency to cover an unexplainably massive overhead: five of the six million dollars of overhead expense the company spent over the past 2.5 years was paid in shares! But with the stock price collapsing, capital has become scarce: last quarter, the company was too cash-strapped to even pay for its inventories. The company has no credible business plan, is riddled with all sorts of shenanigans, and at the current $25 million market capitalization, is set for a sober crash.

No Buzz

MCIG still sells its e-cigarette, the mCig 4.0, but nearly three years after its launch, the product is an obvious flop. In a 2013 interview, mCig’s CEO Paul Rosenberg said that “intellectual property protection for these devices is important but secondary to being a first mover and developing brand recognition.” Fast forward three years later, mCig has neither intellectual property nor brand recognition.

Among the countless pages of e-cigs on amazon.com (NASDAQ:AMZN), the mCig is nowhere to be found. Maybe they sell the product directly through their website? A simple Google search for MCIG yields a barrage of websites hocking the stock, but none selling the product; telling. Google trends says that MCIG’s homepage has too little traffic to even track! Searches for the mCig product correlate almost exactly with the stock price – now on a precipitous decline. The lack of web traffic is especially ironic given the company is now marketing itself as an expert in SEO and SEM services.

Revenue has grown, but the outrageously hyped growth (a) was off of a stupidly low base, (b) came with a big gross margin decline, and (c) is suspicious given accounting irregularities. While conveniently obfuscated by the pointless Vitacig (OTCPK:VTCQ) spinoff, a simple cleanup of mCig’s standalone financials reveals oddities including massively negative Q4 2015 gross margins (same pattern at VitacCig – see discussion below). A theory: since MCIG aggressively reserves $0 for obsolescence and warranty reserves (see MCIG 10-Q), management may have been stuffing write-offs, product returns, or warranty claims in Q4. The accounting policies haven’t changed, so this year’s revenues could also be overstated. Also worth noting, last quarter the company switched auditors – from a Salt Lake City firm to a China focused firm, which is odd.

A Thin Cloud

With the e-cigarette a flop, MCIG is now supposedly ‘focusing’ on selling $50k cannabis grow rooms, initially called mCig CannaPods but recently renamedmCigPods. The renaming is not insignificant: after noticing the change (and the fact that the mCig logo was obviously Photoshopped on the product photo) we found and called the real CannaPods company. According to a CannaPods representative, CannaPods has no affiliation with mCig,has patents pending, and their lawyers are involved with the “MCIG Situation.”

In a recent press release, mCig seems to have touched on this change, chalking it up to an inevitable progression from Pods to proprietary products. This is balderdash: the company has nothing proprietary and – as discussed further below – mCig’s only progression has been the surfacing of one bogus deal after another. Add this one to the list.

On the company website, MCIG claims to have diversified into other business lines including:

As a side note, MCIG’s supposed affiliation with CodeKush.com – a domain troller – is also ironic considering MCIG.com is currently held hostage byanother domain troller. MCIG has had to settle for the ‘.org’ site – mcig.org

  • MCIG is now supposedly in the “Finance” business. Given the fact that mCig couldn’t even afford its $50k of inventories last quarter (see $28.8k advance from related party on latest cash flows statement), this is clearly a joke. Like a 2007 mortgage broker, the company claims to be offering loans with no pesky credit checks, documents, spending restrictions, or assets required (see program description below). Shareholders should pray that this ‘business’ never becomes real!

MCIG Business Cash Flow Loan Program Description: “Banks may require lengthy applications and documentation; stipulate how the capital is to be spent; or deny applications based on FICO criteria or asset collateralization requirements. Our flexible cash flow business loan program is perfect for businesses that are looking for something more than a conventional bank loan.”mcig.org/services/financing/

  • The company claims to be involved in a poorly reviewed rolling paper company called Blanks. Nowhere on Blanks’ website, or any MCIG filing, is this relationship mentioned.
  • mCig claims to have an exclusive marketing agreement with an oil extractor called Emotek Labs; yet Emotek seems to have their own marketing person on their company Facebook page.

All of this is flimsy, bogus, and misleading to shareholders, and it doesn’t stop there. According to the mcig.org About Us page, the company has “the industry’s largest sales team,” but in the company says in their latest MCIG 10-K that “as of April 30, 2015, we had no full-time employees.” While the company may have some ‘independent contractors’, a simple LinkedIn search for mCig Inc. shows only eight people ever affiliated with the company. Most are gone and only lasted a few months.

Over the past two and a half years, the company has spent over $6 million on overhead. Where have those expenses gone? The money was clearly not invested in the business: the company has no assets and over its entire life has only spent a whopping $53k on R&D and Advertising (see latest MCIG 10-K). Despite claims to have offices in multiple states and countries, the company has just this virtual office; likely the Bronze package at $99 per month. With no IP, assets, and infrastructure to speak of, the 10-K’s list of G&A items suggests that a majority of the expenses have been blown on Paul Rosenberg’s dining and entertainment budget; i.e. shareholders are effectively funding Rosenberg’s fun and games. Don’t expect anything in return.

High on Hype

Soon after mCig became public – via a reverse merger at the end of 2013 – the stock soared to an eye-popping $400 million valuation. Since then, the stock has dropped like a lead weight, only to be intermittently propped up by bouts of outrageously hyped press releases. Examples include bogus partnership and product announcements, moonshot revenue targets, and a seemingly endless stream of illusory opportunities.

The SEC even asked Rosenberg to tone it down in this letter. Below is a scorecard analyzing ten mCig announcements over the last two years, the result of each announcement, and the stock price moves around the news. While we can only speculate about the shenanigans going on around these stock price moves, we can know for sure that – since the company pays a vast majority of its expenses in stock – Rosenberg needs that high stock price in order to keep rolling. Let the hype flow!

Links to news articles:

Vapolution Acquisition: $1.3 million in sales

Rick Ross Partnership

New Product mCig+

Vitacig Spinoff

Strategic Partnership with Force Fuels

Climagrow Partnership

1.2mm order for CBD products

7-10mm FY16 Rev Guidance

Q2 16 Revenue Guidance: 850k

Grant County, WA Grower Facility Contract

1.25 million Vaporized

On January 23, 2014 mCig ‘purchased’ Vapolution for $1.25 million; mCig’s stock soared 52% on the news. mCig’s press release claimed that the transaction “set the stage for significant synergies,” and “consolidates an industry leader with over $1.3 million in sales.” But according to this SEC inquiry, the transaction was bogus: mCig acquired none of Vapolution’s assets (then what did it include? – inquired the SEC), plus allowed Vapolution to retain 100% control of its business, the first $110k of EBITDA each year, and an ability to rescind the transaction at any time until 2019! In effect, nothing was acquired!

Vitacig: Burnt Out

Last year, mCig spun-off its Vitacig business, and as discussed above, the spin helped cloud shenanigans at both companies (see chart below for same negative gross margin in Q4 15). Perhaps fogging-out the financials was the purpose of the spin, which seems pointless otherwise. Maybe the transaction provided some strategic or operational benefit? It appears not: in the three quarters post-spin, revenues have fallen off of a cliff (along with the stock), and the company has burnt through nearly all of its cash ($130k in total); only $3k remains. Earlier this week, the CEO wrote a letter announcing yet another re-launch of the Vitacig brand; don’t hold your breath.

More Puffing

In another press release this week, management claims to have used their ‘expertise’ from “hundreds of previous cultivation projects” to get involved in constructing growing facilities that would start at $100k but supposedly grow to $550k, and then $2.4 million. What do these numbers even mean for mCig? What does mCig even bring to the table? The company has nothing proprietary, has no building experience, and – as we discussed above – has been falsely masquerading as a distributor of CannaPods’ products. The press release goes on to mention that mCig “currently [has] over $6 million in construction contracts being negotiated.” The stock is up over 80% on this nonsense.

Just to shed a little more light on this ‘transaction’: mCig’s counterparty isTravis Nyman, who has a company called Evolution Design Concepts and ownsthis 21-acre property in Mattawa, Washington, where – as the release suggests – he plans to lease parcels to growers. Cue the trumpets, chatter about multimillion-dollar figures and voila – mCig’s market capitalization is up $12 million! Back on planet earth Travis Nyman is three years behind on this property’s taxes and spent two years trying to sell the property for less than $200k; obviously unsuccessfully. It is disingenuous and misleading for Paul Rosenberg to suggest that involvement in this scheme will somehow translate to millions for the company.

Secret Stash

Speaking of sneaky business, Rosenberg converted 207 million of his shares into preferred stock that does not show up on the register. This means the stock is actually 70% more expensive than it looks on the screen! In a 2013 Seeking Alpha interview, Rosenberg said, “My preferred shares cannot be converted back to common for a year so they are not currently part of the valuation.” This is pure malarkey and shows how lowly he thinks of his shareholders’ intelligence. He was also called out by the SEC for trying to not disclose that the shares are convertible. In reality – including his preferred shares, which can be converted at any time – there are 508 million shares outstanding, so at the current stock price the market capitalization is nearly $25 million! Someone must be smoking something!

The Blunt Truth

MCIG has no assets, IP, credible team, business plan, or operating income. Management has demonstrated a clear track record of failure, bogus acquisitions, deception, manipulation, and shenanigans. The company has only $100k left in cash; yet the market cap is still $25 million. Shareholders are effectively funding Paul Rosenberg’s antics and escapades as a wannabe cannabis executive, while in the meantime he manipulates the stock price and destroys value, ultimately at shareholders’ expense. This is a zero. Steer clear before it goes up in smoke.

Disclosure: I am/we are short MCIG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This report was written under a pseudonym, Informer Research. The author of this report may have short positions in the company covered herein and stands to realize gains in the event that the price of the stock declines. Following publication, the author may transact in the securities of the company, and may be long, short, or neutral at any time. The author of this report has obtained all information contained herein from sources they believe to be accurate and reliable. The author of this report makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice, and the author does not undertake to update or supplement this report or any of the information contained herein. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction.

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