The market loves a juicy steak, and nothing comes closer to a Wagyu than talk of a big financing not passing due diligence.
Lifestyle Delivery Systems (LDS.C), makers of the cannabis breath strip product Cannastrips, which, admittedly, has had issues with previous financings not being everything they were advertised to be, was the subject of an intense whisper campaign last week as brokers all over town shared the inside word that Canaccord had not been able to get the company through due diligence, because it’s a US weed company and that’s not strictly legal on a federal level.
That talk was, as usual, close but not quite correct.
I just got off the phone with CEO Brad Eckenweiler, who says the financing was indeed delayed, but that talk of it being killed is off the mark.
He tells us the due diligence has been more intense, certainly, because it’s the first time Canaccord has done a raise for a weed company based in the US, and the rules and regulations are very different from Canada, or even established US weed states like Colorado and Washington.
“Canaccord told us they have their portion of the financing in place, they are spending Tuesday and Wednesday in California at the site, meeting with all of the execs there, for a physical inspection,” said Eckenweiler. “They’ll be at the facility seeing what we’ve built, and meeting with Dr Sanderson.”
I’m predisposed to double-checking anything about LDS that I’m unsure of, but that does make sense. California’s a different animal because of the way the system was designed, back in 1996. Licenses are held by non profits, but operators of those non-profit-owned facilities can be profitable, so (in Eckenweiler’s words), “it’s a goofy system.”
“The new rules should be out in march, though now they’re saying September – either way, they will be in effect by January 2018,” says the CEO. “We went back and retrofitted our building for the green building code, title 24, to do with insulation, power, type of lighting in the building, etc. We went back and handled that, and it’s now all completed, and we’re looking at this month for our final inspection for the manufacturing side. We’re still about 2.5 months away on the nursery and cultivation end, so there’s obviously a lot of things that Canaccord’s legal team have to roll through.”
LDS stock is down, but Eckenweiler isn’t concerned about that being a problem with the financing as, “the money is all committed and in escrow.”
“Raising the money has not been an issue,” he said. ‘Just the legal side. But I think we’re likely to see that move forward in days, not weeks. Their attorneys just have to spend time with ours to understand the laws and regulations.”
The expectation is, “within the next five to six business days, we should have the funding done. If they have additional questions, we’ll get to those and wrap it all up quickly.”
Eckenweiler bore the brunt of some heat from newsletter writer Danny Deadlock last week, who he said was concerned about the delays and wasn’t a big fan of $12m worth of stock dilution. The stock took a beating for a few days as a result.
“If it was a Canadian deal it wouldn’t take so long,” he says. “If you’re comparing regulatory systems, Canaccord’s lawyers understand the industry in Canada very well. This is more complicated, but it’s not a showstopper. It’s just what you do to move forward.”
In addition, the process has been good for the company, he says, especially as competitors are now faced with the same retrofitting his company has already completed..
“90% of the companies in California’s market would not pass this due diligence, because most of them are not operating under the laws as they exist now. We’ve gone way overboard as far as the regulatory side, in anticipation of what’s coming, because if you’re not compliant now, you won’t get a license net year. Our competition is going to disappear, to a great extent, when the new rules emerge.”
— Chris Parry
FULL DISCLOSURE: Lifestyle Delivery Systems is an Equity.Guru marketing client