Underweight: Unfocused Natural Products of Every Kind

Key Stats:

Summary

The Med-X team has been selected as an “Underweighted Deal” by KingsCrowd. If you have questions regarding our deal diligence and selection methodology, please reach out to hello@kingscrowd.com.

Problem

Today we are exposed to greater levels of synthetic chemicals than we were merely one human lifespan ago. In well under a century, our rate of chemical production has increased 400-fold. The number of new chemicals introduced each year is in the thousands. Out of the 80,000+ chemicals registered for commercial use in the US, a shockingly low one-third of one percent have been safety-tested by government agencies. 

This leaves society in a state of complete dependency on potentially dangerous artificial chemicals. This dependency extends from industrial uses to ingredients in pharmaceutical products and even our food.

Solution

Med-X is a consumer product company that markets a diversified catalog of proprietary, wellness-focused products made from natural, plant-based ingredients. 

Its two flagship product lines are:

• Nature-Cide, a collection of naturally derived pest control, repellent and insecticide formulations.

• Thermal-Aid, a suite of heating/cooling packs for management of pain or swelling that feature specialized varieties of corn as the filler material that’s heated or cooled prior to application on the body.

The two product lines listed above can rightly be regarded as the company’s premier divisions. They each have meaningful distribution partnerships in place (Nature-Cide through vendors such as Target Specialty Products and Univar and Thermal-Aid through outlets such as Cardinal Health).

The company also sells homeopathic pain relief creams through its Malibu Brands line as well as aromatherapy shower sprays under the Home Spa marque. Finally, Med-X also maintains two non-product offering lines: a marijuana-focused periodical and a business news site. 

The Team

Med-X’s current CEO, Dr. David Toomey, spent much of his career as a family physician and Medical Director in the hospice industry.

Many members of the Med-X team – likely including the company’s President & Chief Operating Officer; its Chief Financial Officer, and its Chief Media Officer – appear to have joined Med-X by way of its 2018 merger with consumer products vendor Pacific Shore Holdings. 

In fact, prior to that time, Med-X was a self-described cannabis cultivation company. However, the company discovered that its natural pesticide products, although originally intended mainly for application to their own cannabis crops, actually had commercial potential in several industries unrelated to cannabis.

Growth Plan

Med-X asserts that the markets for its two core product areas – namely, pest control and pain management – have each been enjoying healthy year-over-year growth. Such assertions appear to be borne out by independent analyses of the pest control and pain management markets, respectively. 

Within this environment of growth, the company anticipates that it will be able to expand its Nature-Cide sales footprint across an increasing number of commercial client types. Med-X plans to sell to janitorial companies, property managers, and landscapers while also promoting a line of retail-focused Nature-Cide products for direct consumer purchase through big-box stores. 

Meanwhile, the Med-X team aspires to pull off a similarly broad expansion campaign for its Thermal-Aid products, by promoting them across a progressively broad set of retail vendors, over-the-counter pharmacies, and healthcare enterprises.

What We Think

Unfocused Product Portfolio Strategy: Although some major consumer product companies (e.g. Procter & Gamble) have found tremendous success in taking diversified product catalogs to market, Med-X has struggled to define or articulate a coherent logic for the jumble of product lines that it has assembled. The company’s attempt to frame its corn-filled heating/cooling pads sold via its Thermal-Aid brand, as being “all-natural” in the same sense that their pesticides are free of artificial chemicals, strains credibility. 

Meanwhile, the company’s product strategy for its Malibu Brands homeopathic pain relief creams is even more muddled – as the company’s own materials state that they seek to position Malibu Brands to compete with cannabis and CBD-based pain relief products… Yet also declare that they wish to pursue their own cannabis formulations. 

As for the company’s informational lines of business (its marijuana periodical and its business news site) – it’s not evident that these digital properties have solid prospects for driving interest in the company’s core products. Nor is it clear that they stand to generate meaningful revenues in their own right. 

Wildly Overvalued Deal Terms: The company’s offered pre-money valuation of $88M is outrageously high. 

While the Med-X team understandably aspires to emulate the success of breakout natural product companies such as Seventh Generation (sold to Unilever for a reported $600M) or The Wonderful Company (privately held with a multi-billion-dollar valuation), the fact remains that these success stories grew to point where they were generating hundreds of millions, or even billions of dollars in annual revenues, thereby justifying their lofty valuations. The $88M valuation offered in the current deal would be more appropriate for a company growing at breakneck speed and undertaking something like a Series B funding round. This nearly nine-figure valuation is not even close to justified for a company such as Med-X that has been around since 2014 – but that, according to its Form C, only managed to generate $646K and $801K in revenues for 2018 and 2019, respectively. 

Prospective investors should also be aware that Med-X had one of its previous equity crowdfunding campaigns suspended, due to the company’s failure to submit required filings to the SEC in a timely fashion.

Company Continues to Generate Massive Losses: Med-X’s messy product portfolio and high sought valuation, as described above, might have been easier to stomach, if the company was delivering solid earnings or growing rapidly while keeping the level of corporate losses within a reasonable range, relative to revenues. Unfortunately, this has not been the case with the company’s recent performance. Med-X generated a net loss of $3.4M in 2018 – followed by an even bigger loss in excess of $4M in 2019. These widening loss figures, which utterly dwarf the company’s revenue amounts, make it impossible to regard the Med-X investment opportunity with anything other than skepticism.

Rating

From an ethical consumption perspective, the efforts of companies such as Med-X to introduce all-natural, plant-based products into the market, and thereby wean society off its dependency on petrochemical-derived products, should be applauded. 

However, from the standpoint of assessing the Med-X deal as an investment opportunity, it simply doesn’t appear that the company has yet hit upon a formula for business success. None of Med-X’s (individually quite distinctive) product lines appear to be currently capable of generating even meaningful levels of gross profit, much less positive net profits. 

And there’s no clear logic for why any of those individual product lines would be expected to complement one another. This makes it unlikely that Med-X will be perceived any time soon as a trusted comprehensive provider of a consumer’s entire list of household product needs – in the way that all-natural powerhouses such as Seventh Generation (or even incumbent brands such as Procter & Gamble) are viewed by their loyal fans. 

Lastly, the fact that Med-X is holding out for a sky-high valuation that’s an order of magnitude above prevailing market valuations is itself another red flag that the Med-X team is not applying good judgment or a sense of realism to its business or fundraising strategies.