mCig CEO interview with Alan Brochstein http://se

mCig CEO interview with Alan Brochstein

http://seekingalpha.com/article/1734332-capit...eo-of-mcig

When mCig ( MCIG.OB ) CEO Paul Rosenberg contacted me last month after having read my interviews with two other CEOs of companies in the cannabis sector, I was instantly impressed with several aspects of the story. I tend to be somewhat suspicious of many of the new companies that access the markets via a reverse merger, but MCIG, which is an SEC-filer, pursued what is really an acquisition of an existing technology company that it was considering as a technology provider. MCIG appears to offer transparency and a very simple business model. The company is about to launch its first product, the "mCig", a vaporizer based on the increasingly popular "eCig" (which is pre-packaged with a liquid that is vaporized) but designed for the consumption of whatever plant material the consumer chooses (hint: the "m"is for marijuana!). Given the 2014 implementations of legalized adult cannabis usage in Colorado and Washington, the mCig is launching at what seems like a perfect time. The stock soared recently to unsustainable levels, but it has pulled back:

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I had shared my near-term concern about the high price recently before it corrected based on what appeared to be a case of the stock getting ahead of itself after increasing tenfold since August. I always check OTC stocks for promotions and was concerned that there had been four promotions in early September that had coincided with the peak. I have verified that an independent newsletter rather than the company was responsible for this activity. The bigger issue was that there was a rush of investors who were excited by a new entrant into the field. At the same time, though, the supply of stock which could be traded was constrained temporarily due to Rosenberg's ownership of half the company and the fact that MCIG had split the stock 10-1 at the end of July, which apparently created an obstacle for many holders to be able to sell. Subsequently, long-time holders of the stock have been able to sell shares.

The company had 500mm shares outstanding, but CEO Rosenberg took 230mm of his shares and converted them into 23mm of a preferred stock with 10 votes per share. He also restricted conversion back into the common for a year, so the outstanding share-count is now 270mm. The market-cap, then, is $38mm at the recent price of $0.14, but I would suggest that investors also include the value of the preferred shares assuming conversion in order to calculate the value of the company. Calculated this way, the company is worth about $70mm.

CEO Paul Rosenberg was kind enough to send me a sample, and it matched the description on the company's website:

(click to enlarge)

At 420 Investor, I serve as the "Cannabis Financial Analyst" and, unfortunately, not the product tester, but I was able to see how it worked and to appreciate its elegant design. I also really liked the USB charger that came with it. Given what I see as many positive characteristics, I wanted to share an exchange I had with CEO Rosenberg so that my readers might get a better sense of this potentially attractive story.

Alan: Thanks for taking the time to tell your story to us, Paul. You had a busy summer! Tell us a little about your own background, when you decided to launch mCig and what you have done to get where you are now.

Paul: Thank you, Alan for this opportunity to share our story. My background is in technology, where for two decades I ran an independent consulting business focused on the design and development of distributed software systems for large corporations, essentially upgrading them from the 20th century to the 21st century. I am an accountant by training and started my career working for Toyota USA, where in the early 90's I was given the task of upgrading what was effectively an abacus accounting system into a computerized system. After completing the task and genuinely enjoying the experience of working with software engineers, I decided to strike out on my own, recognizing the opportunity to come in digitizing data for large corporations. For the next 15 years I worked with large private and governmental organizations and enjoyed a relatively successful career. My experience of working with large companies that resisted change helped shaped my view as an investor. Change is a Darwinian process that is inevitable when it is fueled by logic and science. Today I smile when I see large companies previously run by Luddites not only appreciate IT spending but pave the way by engaging in R&D.

The other thing I learned during this period was that investing on the back of a long-term secular trend is a very profitable activity. I got my first taste of that type of investing during the tech bubble of the 1990's. My intimate knowledge of the technology space as well as an ability to sniff out legitimate market opportunity vs. hype allowed me to make some prescient investments that paid off. I was not immune to the crash, but on the whole came out ahead. Starting around 2001, I unwound my consulting business and put more of an emphasis on investing my private capital. My strategy was straightforward: identify secular trends, find the industries that could benefit economically, and bet on the companies or stocks that I believed were best entrenched in those industries.

I have always focused on industries that could/would benefit from a confluence of factors coming together as tailwinds for that industry. Two years ago I took notice of the marijuana decriminalization/legalization trend and found it to be one of the most compelling opportunities I had come across. The idea of an already existing industry measuring in the hundreds of billions being legitimized was an obvious catalyst but for me there was more to this trend than just dollars and cents. What really excited me was more philosophical and can be attributed to my belief that fundamentally marijuana should have never been criminalized in the first place. I have done hundreds of hours of research on this and believe that not only is marijuana not a detriment to humans but it most likely provides a net benefit to our health, specifically if CBD is used in certain health conditions as was finally highlighted by Dr. Gupta in his 'mea culpa' piece on CNN several weeks ago.

Initially I decided to participate in the sector as a passive investor in the bunch as you call them. However, what bothered me as an investor was the lack of a grand design or strategy relating to their business models. What I mean is that they seemed extremely "mom and pop" with respect to the way they were conducting their business and the markets they were targeting. Given my experience in building systems, I felt there was an opportunity, as a first mover, to build something with a more audacious goal tapping into the trend by serving a ubiquitous product.

I have always believed the best businesses are the ones that indirectly benefit from a long-term secular trend by branding themselves and providing a product or service at a disruptive price point. A stock I have long owned and have done very well with is Amazon.com ( AMZN ). What Bezos did was textbook, industry by industry he entered, cannibalized, consolidated, and then re-branded - nobody could compete and eventually he either acquired them (Zappos) or drove them out of business (too many to mention).

When it came to the marijuana trend, I felt there was no such company. I knew that if I were to enter the industry it would be indirectly, erring on the side of business caution. Looking at the opportunity, I found that there was one niche that was completely under-served: The marijuana/cannabis/tobacco - accessories market. This market is extremely fragmented and relies on innovation that is often derived from a manufacturing floor in China. There were some formidable efforts, but nothing that I felt matched the economic opportunity. Around this same time I watched the eCig adoption trends very carefully and had begun to use them myself. The eCig secular trend was one that I believed matched or even outweighed the Marijuana decriminalization/legalization trend. Roughly this time last year, I thought why not invent a consumer product that would serve the intersection of those two trends, an eCig that would be versatile in its heating potential, allowing it to be used by smokers of any plant material.

I spent the next few months working with a team that had experience in the eCig manufacturing market and with vaporizers. Around last February, I was introduced by a lawyer I had consulted with to a fledgling water vaporization company named Lifetech Industries. The company had licensed very promising IP from Japan that allowed for the conversion of humidity to water but failed at raising the necessary capital to move the technology forward. My team felt that a component of that technology could be used to effectively vaporize dry leaf/herbs so I approached the CEO and we began to discuss the various aspects of what was at the time a prototype of the mCig. Eventually, I negotiated a transaction to acquire control of Lifetech from that CEO, promising to develop the mCig within the public company for the benefit of all shareholders. While I had not initially expected to go public so early, I recognized the benefits. That is really how Lifetech became mCig, Inc. (MCIG).

mCig's business model is to be right at the intersection of the two secular trends I strongly believe in: eCig adoption by the world's 1.2 Billion smokers, and marijuana decriminalization/legalization. We will do so by developing innovative consumer devices that serve those trends, and we will sell these devices at extremely disruptive price points, creating brand recognition and awareness, as well as customer loyalty. We will sacrifice high margin profitability in the beginning in order to gain market share and continuously improve our products as well as introduce new ones.

Here is a link to our first device , the mCig. We think of the mCig as being the future of plant material consumption, and hope consumers will adopt it in the same manner they have adopted Zig Zag papers in order to roll customized cigarettes. At just 10 dollars, the mCig competes not only with Zig Zags but with a Pack of actual cigarettes and most eCigs. It is durable, with some of our employees having used it for over 6 months now and, as you can see by our twitter page, we have given away a few leading up to our launch and everyone is ecstatic about the device.

Alan: Thanks for that great back story! You have chosen to create what looks like a category killer, a $10 pen-vaporizer. I don't think investors appreciate that this is only the first in a series of products. Can you tell us anything about the pipeline and your longer-term goals for the company?

Paul: Unlike a conventional eCig, the mCig allows you to place dry leaf, herbs, or waxes meaning that you can heat up the plant material of your choice. The device is going to be sold at a price point that has virtually no competition. The closest device in the industry sells for 60 dollars with most devices being sold for 100-200 dollars (G-Pen). We actually make a healthy profit on the device. Nevertheless, when looking at the target market of millions of units a year, the economics are obvious even at this price point.

Again, we are inspired by companies like Zig Zags, and Apple. Companies that people in the industry trust, and know always comes up with cool, innovative products. For now, we are focusing on listening to our customers and improving the mCig. We are currently in the process of improving the first generation mCig and hope to launch the next generation early next year. The improvements are subtle but meaningful.

Alan: What type of intellectual property does your company have? How will you keep potential competition from encroaching?

Paul: We believe that intellectual property protection for these devices is important but secondary to being a first mover and developing brand recognition. That is why we have applied for a trademark for the term "mCig" for any use relating to eCigarette or heating devices.

We are exploring various opportunities to patent our heating technology, but believe that the various processes involved are already in the public domain. Creating the mCig did not require an inventor developing a new technology, but rather an innovator re-examining how a conventional eCig works and re-engineering that technology for a totally different market that was underserved and ignored by the eCig companies. That is really the essence of what the mCig is, and what we stand for as a company.

Alan: Do you have some sort of estimate of how many $10 mCigs you need to sell to break even? Can you share a projected peak operating profit per pen above a certain quantity?

Paul: We are running a very lean operation. I take no salary from the business, and we have no debt or interest costs. In fact I am self-funding most of the business at this stage and if we do take in capital it will most probably be in the form of straight common equity. I strongly oppose convertible debt financing and am puzzled as to why a CEO who believes in their business would elect to engage in that type of financing .

Given our current fixed costs we would probably have to sell between 30-50k mCigs a year to break even as an enterprise. As far as projected peak operating profit, we pretty much have our production costs down to a science where they are nearly fixed per unit, whether we sell 50k units or 1 million units.

I want to stress that in my humble opinion focusing on standard operating metrics like "peak operating profit" or "break even" would be a grave mistake for mCig, Inc. at this stage of the game. Our market research indicates that there are about 200-300 million eCigs and 100 million accessories used for the heating of plant material (think glass pipes) sold each year globally. This market is enormous, and what we need to be focusing on is getting our device into as many hands as possible as quickly as possible, because those 300-400 million units are repeatedly sold every year. Penetrating only a small percentage of that market would translate into an extraordinary profitable business. That is why my main objective is not focusing on current profitability but rather top-line growth and viral growth. I worry more about our twitter followers and engagement than I do about our margins currently and that is why have a full-time team doing social media nearly 24/7 as opposed to a full-time team of number crunchers. The ultimate market opportunity is to have the mCig become a verb when someone describes heating plant material electronically.

Alan: What is the launch schedule? How many mCigs can you produce, and what's next?

Paul: We are preparing a soft-launch towards the end of this month (October 30). Currently we are providing investors with our secret store password if they email investors@mCig.org and some have already been able to purchase their mCig. We will rotate into a full-scale launch towards the end of Q4 of this year with the introduction of the next generation mCig (improved cleaning mechanism, battery life, same price) around January 2014.

Our manufacturing partners have the capacity to produce as many as 100-200k mCigs per month. We believe our partners are the most reputable group in the eCig space and work with some of the leading eCig manufacturers currently owned by large publicly traded companies. They worked with us because they believed in our vision of serving an untapped market.

Alan: Are you able to share any sales forecasts at this time, and how important is it to you to become cash-flow positive?

Paul: Unfortunately it would be imprudent to do so given the "forward looking" nature of such comments. We will release that type of information as we are allowed to do so by legal counsel and the SEC.

Alan: The eCig market has come under attack from a regulatory perspective for many reasons, though I don't think that this is relevant to your product. Are there any sort of legal barriers that you have encountered or that you fear you may see?

Paul: I have followed these developments very carefully and find them to have little merit, especially in relation to the mCig which isn't an eCig at all. Let me diffuse both the risks to the conventional eCig market as well as to the mCig.

eCigs are safer than tobacco cigarettes. That is not a subjective statement it is a logical conclusion based on the scientific facts underlying what an eCig is: Vapor + Nicotine. Could there be quality issues associated with eCigs? Of course! Should the industry be regulated and quality controlled? Sure! And I for one would welcome that as would most eCig companies (Lorillard, Reynolds). It is important to remember that eCigs are fundamentally an improvement on traditional cigarettes and for this reason they will only grow in popularity and usage. Laws are meant to protect citizens from engaging in an activity that would be detrimental to their health, any laws that will be proposed for the usage of eCigs will only improve their quality and standing over the long-term.

In relation to mCigs, I believe we are in an even better position. An mCig is essentially an eCig without anything inside. Another way to describe it is a heating device, similar to a lighter. Can a heating device be outlawed? I don't think so. That being said, if laws are implemented that regulate eCigs we will be the first to adhere to them even if the mCig falls outside of that category. From my initial conversations with lawyers who are well versed on the subject, the regulation being proposed will most likely involve eCig manufacturers being certified by an independent party to ensure the products carry no health risks. This isn't so different from how things are done today. Our manufacturer is CE and RoHS certified, which already enforce sound traceability and strict enforcement policies. Adding one more certification is something we would welcome given the ultimate market opportunity. In the grand scheme of things the cost would be minimal.

Alan: Let's talk about your marketing approach. Is your company selling exclusively online? What do you expect the acquisition cost per customer to be?

Paul: We have a dual marketing strategy: Online, via our online store where we retail the mCig for $10 plus S&H that ranges from $2.99 for US & Canada and $10 for global shipping. Effectively the consumer is acquiring the mCig at an all-in cost of between $13-20.

Given that our primary objective is to get as many mCig's into the hands of potential customers we will also be wholesaling the mCig to qualified distributors and retailers with minimum orders of 100 units.

The wholesale cost to distributors will be discounted allowing them to retail the mCig at the same price as the "all-in cost" for the consumer on our website, while still earning a decent profit per unit (competing with current eCig brands). That is how we plan to cannibalize shelf space from conventional eCig and tobacco companies.

As far as online customer acquisition cost, it is quite low given the viral nature of our marketing. When you sell a product at a disruptive price point it has a network effect that translates into much higher conversion rates when you market. Marketing at high cost per customer acquisition tends to happen when you are selling the consumer something they don't want to own or don't know they need.

As far as marketing goes, one area we are focusing on is celebrity endorsements. We will be working hard to solidify some key partnerships with well-known celebrities that can become brand ambassadors and partners. It is still early days but we are working with a very impressive group out of New York that shares the vision and appreciates the product.

Alan: How many employees does your company have currently, and can you tell us about any other key individuals at MCIG?

Paul: If we count US-based employees, we are less than 10. With our manufacturing partners in China, it jumps into the hundreds of employees. We also have several dozen grass roots employees which aren't full-time but help spread the word and get paid for performance.

Alan: I know you have a different way of viewing the share-count than I do. We can both agree, though, that your decision to turn the vast majority of your common shares into preferred stock which can't be converted back into common stock for the next year is shareholder-friendly. Can you explain why you did this?

Paul: We were receiving an overwhelming amount of emails about the high share count. I felt the figure was flawed because I had no interest in selling any stock any time soon so I converted my common shares into super voting preferred shares while keeping around 10% of my original common position.

You and I have had our debates about this, and I do believe that the proper way of accounting for the market capitalization of mCig is to take the common figure (270 million shares o/s) and multiply it by the share price. My preferred shares cannot be converted back to common for a year so they are not currently part of the valuation. I may elect to do so in the future but the ultimate impact on the valuation would only occur then. I could also decide to wait several years before doing so.

Alan: What is your current ownership. I know you have the 23mm preferred shares after exchanging 230mm of the 250mm common shares you held, but you also advanced some cash to the company. I assume you have more than 20mm common shares. Is that the case?

Paul: My share position is the same. I have advanced funds to the company as part of my agreement to acquire control of mCig and am still below that threshold. Unfortunately I cannot provide more detailed information about this until we release our quarterly and annual reports as I would be disclosing material information.

Alan: I understand. Finally, then, potential investors in the cannabis space have many choices. Why should they consider your company over other alternatives? Also, what's the best place for potential investors to learn more about mCig?

Paul: I recently read Warren Buffet's biography "The Snowball". There is an interesting story that I would like to share that helps answer your question. During the height of the tech bubble in 1999, Buffett gave a speech at the exclusive Allen & Company Conference to a room of tech executives where he presented a very convincing case that tech companies were extremely overvalued. One example he used was that in the early 1900's there were 200 airline companies in the US and that on aggregate the airline industry produced nothing but losses for investors, with only 3-4 companies surviving 100 years later. To me the lesson is clear: Just because an industry has a strong secular trend driving it doesn't mean investors are going to make a killing. Investors have to do their own due diligence and separate the companies that are simply riding the trend from the companies that are first movers, innovative, and aligned with shareholders.

While I do not think the marijuana industry is anywhere near a bubble, I believe it has the characteristics to become one at some point, not dissimilar to the tech and social media bubbles. The global market for MMJ is between $150-250 Billion which would make it one of the largest industries in the world. The eCig industry is even larger as it will eventually displace conventional cigarettes. Both industries are going to produce winners and losers.

I set out to start mCig because I thought there was an opportunity to build something for the long-term. If you compare how our company is structured relative to others in the space you can see the difference:

• While most of the MMJ stocks have yet to file audited financials, mCig has.


• While most of the MMJ stocks aren't SEC regulated and trade on the pink sheets, MCIG is both SEC regulated and trades on the OTC BB exchange which has higher listing requirements.


• While nearly every MMJ Stock out there has significant insider selling, I have done the exact opposite by locking up 90% of my stock position and reducing the common share count.


• While most MMJ Stocks have convertible debenture financings leading to significant dilution with no floor, I have made it clear that I oppose such financings and have personally funded the business with my hard earned capital.


• While most of the MMJ stocks sell a service or product that is esoteric or conceptual and requires excessive regulation or expertise to validate, mCig provides investors with exposure to the industry via a tangible product they can order themselves and enjoy. Please do so at www.mCig.org

Thanks again for hosting this interview. Any investor inquiries can be made via investors@mCig.org

Alan: Paul, thanks so much for your time. I know my readers will really appreciate what you have shared, and we at 420 Investor look forward to hearing about the success of your launch. Best of luck to you and mCIG.