Tuesday, August 25, 2009

Depends on what the meaning of "owns" is

From Cannabis Science, Inc.'s quarterly report:

In the first quarter of 2009, the Company acquired all of the assets of Cannex Therapeutics, LLC from Cannex and Steven W. Kubby, and committed itself to research and development of cannabis based medical products. The Company owns intellectual property related to a whole cannabis extract lozenge, which has demonstrated some efficacy in non-blind informal testing.


Like all such acquisitions, this one was accomplished by way of a contract.

The thing about contracts is that they generally include considerations by and to all sides. In this case the contractual cost of acquiring assets from Cannex and Kubby was 10.6 million shares of stock in the acquiring companies (1.2 million shares of Gulf Onshore and 8.5 million shares of K&D Equity Investments, a Gulf Onshore shareholder). And pursuant to a subsidiary Control Shareholder Agreement, the bulk of that stock is assigned to Steve Kubby.

Thing is, Kubby tells me he's seen neither hide nor hair of that stock ... which calls into question the claim that CSI actually "owns" the stuff it claims to have "acquired," especially since K & D Equity Investments has since filed suit alleging breach of contract and seeking rescission of the acquisition.

CSI also has yet to comply with SEC rules [PDF] (specifically Item 5.02, "Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers") pertaining to its July 8-K filings:

if the director furnishes the company with any written correspondence concerning the circumstances surrounding his or her resignation, refusal or removal, the company must file a copy of the correspondence as an exhibit to the report on Form 8–K regardless of whether the director requests that the company take such action. The company must provide the director with a copy of the disclosures it is making in response to this item no later than the day that the company files the disclosures with the Commission. The company must also provide the director with the opportunity to furnish a letter addressed to the company as promptly as possible stating whether he or she agrees with the company’s disclosures in response to this item and, if not, the respects in which he or she does not agree. Finally, the company must file any letter it receives from the director with the Commission as an exhibit by amendment to the previously filed Form 8–K within two business days after receipt by the company.


All of which lends credibility to Kubby's claims concerning what's going on at CSI.

From where I sit, it looks like one or more bad actors involved with CSI are simply stalling to keep Kubby broke, powerless and out of the loop while they suck whatever quick cash they can find out of the enterprise before discarding its drained carcass and moving on in search of the next victim. All of which makes for great gossip, but ...

... what about the idea and the product? From what I can tell, Kubby still has every right to proceed with it on his own, since he's never received the contractually specified payment for it -- and since CSI's continued gaming of the situation is likely driving the prospective value of that payment down by the minute.

If I was Kubby, I think I'd just get back to work developing the product and building a new company around it -- a company prepared to lawyer up as necessary to protect its right to produce a lifesaving product that CSI has no plausible claim to, but that it pretends to own and may try to sell off in a final orgy of cashing-out as it circles the drain.

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Some End Notes

I'm neither an employee of, nor an investor in, CSI or any other company alluded to in this piece, but I did do some volunteer work and then some contract work (for which I remain unpaid, but I'm not terribly concerned about that) for Cannex Therapeutics early on.

I'm not a lawyer, I'm not an investment adviser, I'm not omniscient, and I am biased. This piece is my opinion, hung on some factual claims which I've checked but upon which I offer no guarantee or warranty. If you buy (or sell) stock, invest (or decide not to invest) in a company, litigate (or decide not to litigate) an issue, or take (or refrain from) any action whatsoever entirely, or even substantially, on the basis of what you read here, you're an idiot and it's all on you, Bubba.

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