Sometimes we’re the first ones into a fight. Sometimes we hang back and let the dust settle.
When it came to Cannabis Wheaton (CBW.V), Chuck Rifici’s new cannabis production streaming company, we decided to take the middle lane.
The fur has been flying over the last few weeks over how CBW came to be, and some of the bigger names in the Canadian junior markets commentary space have got very loud and confrontational about it.
At odds is the fact that some bankers who got in way early on the deal, far far earlier than you and I were allowed, and managed to get themselves shares for less than two cents, post forward split. A really short time later, that stock went public and was selling for more than a buck.
A mega-bagger is a nice thing, and apparently a thing that some involved in the deal felt like they couldn’t keep to themselves, which started, according to what I’m told off the record, a round of inter-corporate gamesmanship at the outfits running the book on CBW that resulted in the deal coming apart.
At the centre of the kerfuffle is VIII Capital, whose compliance guys shut down the subsequent $50 million cum $80 million financing that was due to go forward through them and Canaccord, because of the obvious conflicts of interest.
Here’s The President’s Club’s Fabrice Taylor, on BNN:
— 🇨🇦CanadaPotStocks (@CanadaPotstocks) May 30, 2017
Here’s James West from Midas Letter:
I say unsurprising because members of lead underwriting investment banks such as Eight Capital and Canaccord Genuity Corp. have been identified as shareholders in the company from a previous financing round with a post-forward-split $0.018 cost basis. The now-cancelled $80 million financing was part equity priced at $1.15 per special warrant, and part debenture. No matter how you slice it, the conflict inherent in the underwriters selling $1.15 paper that they own for $0.018 is a huge conflict of interest, and it is a stunningly ill-conceived that will likely have repercussions for both firms going forward.
The $80 million deal was duly pulled, Canaccord and VIII Capital sat down, and a conflict-free Mackie came in with plans to raise $50 million in their place.
Cannabis Wheaton weathered the storm over the weekend, and was trade halted through Monday as the news filtered out. It resumed late Tuesday and by Wednesday morning was thudding hard down to under a dollar, from $1.17 pre-halt.
That’s going to be its ceiling for a while, because the $50 million they’re trying to raise now is set at a buck per share, with warrants tossed in.
We talked to Chuck Rifici on our livestream a few weeks back about the deal, and he flat refused to talk about the share structure of the deal, though he was up front and candid about just about everything else. It was no secret that a lot of guys in the deal got in real cheap and were watching their money blow up, while the share structure of the company was nine figures from day one, and we talked both during that interview and after about how that situation was enough for us to sit it out – even though we like the underlying business concept.
In essence, I don’t care about a blown out share structure and guys getting auto-rich if I think the company stock is going upwards from massive market interest and I can make money on that market momentum.. I’ll hold my nose and play, but this was a business model that the market was going to need explained to it, a long term business plan with no short term revenue, and a distinct need for a LOT of financing going forward, so kicking off with 160 odd million shares already out there was a darn weird way to set the thing up.
News of buy-ins to Abcann (ABCN.V) and Beleave (BE.C) didn’t hurt the deal and likely were expected to prop it upwards against the controversy, but CBW came out to the market at a time when there was already concern about inflated market caps in the weed business, and institutional concerns over where they were actually putting their hundreds of millions in investment dollars, so the faintest hint of insider tomfoolery was all that was needed to put a chill on the entire space.
Chuck Rifici is a smart guy. He’s been one of the dudes that has been one of the bigger influencers on the Canadian weed space, and his reputation counts for a lot among many, myself included.
But, let’s be clear – this deal has hurt that reputation. Nobody can suggest Rifici should be tarred and feathered because inside guys made bank on a deal – that happens all the time, because the inside guys usually take the early risk. But statements like this, to James West, make it harder to hang with the ‘Rifici is a straight talker’ ideal in this case.
Chuck Rifici, in response to an email seeking comment, said, “the termination was by mutual agreement and was by no way due diligence related, the financing is still on and we will be releasing further news to the market on Monday.”
At the same time, CBW was putting out news releases that said they have had enough with the innuendo and would be vigorously dealing with naysayers through lawyers.
That’s the sort of bullshit you put in a news release when you’re playing damage control, but coming from Rifici’s mouth makes it rougher to digest, because we KNOW the initial financing went down because VIII Capital’s conflicts didn’t pass muster with compliance. That’s just flat out reality.
Rifici is being careful with his words in saying it wasn’t an issue with CBW passing due diligence – that’s definitely correct. It was VIII Capital insiders passing due diligence with their fat holdings in CBW that was the problem, but the statement regarding the cancellation reads as if we’re supposed to believe the gang went into a boardroom one day and said, “this is a great deal, folks are dying to buy in, but let’s not raise $80 million because we’re, like, really busy with other things, let’s hand it to our competitors.” That’s clearly not the case. Ending that financing was a massive problem for all concerned.
Here’s what Chuck should have said, and he should have said it before going public; “Yep, a lot of guys involved in the company bought in early at the founder’s level, and they’re escrowing that stock because it would be brutal for it to all come out at once, and those same guys are going to buy in at the next financing because they believe in the long term future of the company, and that it’s undervalued here.”
I would have bought in on that, regardless of $0.018 paper, regardless of inflamed stock structures, because now we’re all on the same team.
But that’s not how it has rolled, and a lot of people will be steering clear of CBW precisely because they know 160 million shares are going to get blown out, at some point, if the stock price is anywhere north of $0.03. It will be hard to get the stock moving upward against that likely seller movement, and the short sellers know it, so they too are all in.
— 🇨🇦CanadaPotStocks (@CanadaPotstocks) June 2, 2017
That’s a lot of shorting right now. And with shorting comes distorting, which means CBW is going to be facing a lot of negative criticism in messageboards and stock forums. They’re going to see paid-for short attack pieces on places like Seeking Alpha and Stockhouse’s bullboards. And they’re not going to be able to shake those criticisms because the criticisms have MERIT.
From a CBW news release last week:
Finally, further to the Company’s press release dated May 31, 2017, we wish to confirm in the strongest possible terms that no law enforcement or other regulatory agencies have contacted the Company and that any allegations to the contrary being published online are entirely without merit.
This is an interesting line, because it only mentions law enforcement action at CBW… not the companies that were running book on their deal. I’ve been hearing buzz that VIII has indeed been contacted by law enforcement, but I’ve not been able to confirm details from enough sources to go deeper than sheer rumour. If I hear more, I’ll talk about it here.
Look, there isn’t a stock promoter in Vancouver and beyond that doesn’t have ten shell companies that have been rolled back enough times to bring the market cap down to $300k, so they can clean up all the stock in preparation for when said shell moves into a new deal that they own almost all of. This is how the market works in Canada, and the same people criticizing CBW for how it was put together have – again and again – put companies together in a similar fashion.
Here’s the difference: They roll the stock back, not forward, before they go public, so they have a tight little share structure they can utilize to raise future dollars. And they tie up that cheap paper a little so the company doesn’t hit the markets in the midst of a full-on cash-out.
And when people ask them about said share structure, they don’t say, “We’re not answering questions about the share structure at this time.”
MedReleaf (LEAF.T) has taken heat for a similar situation, which Ted Ohashi lays out pretty firmly.
Of the $100 million to be raised, only $80 million is being raised to finance LEAF’s growth potential. The other $20 million is being raised to buy shares from existing shareholders taking advantage of their first opportunity to get out.
Existing shareholders selling as part of an underwriting is called a secondary offering and is often interpreted to mean that “smart money” is selling shares they bought at a much lower price.
A secondary offering as part of an Initial Public Offering is almost always problematic. The optics are all wrong. The selling shareholders may not be bailing out but the best case is it looks wrong for insiders to be selling at three times the price they agreed to sell shares at just six months ago. It also puts those sellers, many of whom are insiders, in a position of encouraging investors to buy the shares some of which they, the insiders, are selling.
I like MedReleaf. It’s legit. That company on the public markets is a thing that is good for both the markets and the company. But how it got there? Ew.
Of note, it went public today, and rather than settling in at the $9.50 or so expected, it landed at $7.40. To put that into context; the early guys are still up over a double.
I like Cannabis Wheaton (as a concept) the same way I like MedReleaf. The market struggles with their plan, but it’s a great way to get into the marijuana sales game without having to be an applicant and deal with Health Canada’s foibles and drop $20 million on construction. They’re removing risk, paying a premium for that, and accelerating hard as a result.
But these insider deals that make the merchant bankers and brokers rich before a share hits the market – holy shitsnacks. At least take on some of the risk, and carry your shit for the long haul, guys.
Ten speedboats is enough. Doubling down for fifty is taking the piss, and if anything is responsible for the current weed market chill, it’d be that drive to pre-enrich every second deal going. If the retail investor can’t come with you on that multi-bagger ride, the retail investor will inevitably decide, “Fuck you, I’m out.”
And then your fat insider deals that rely on new money coming in to keep them alive? They go underwater and we enter the death spiral.
Now, I know some will see CBW as a buy at less than a buck and don’t care how it got there, while others will accuse it of being the Bre-X of ganja. The truth is in the middle, but the optics of all this have been horrific, not just for CBW, but for the greater industry.
Retail is pissed, and the unwritten rules, that guys who do deals don’t talk about other guys who do deals, are officially out the window.
— The Presidents Club (@clubresearch) May 31, 2017
UPDATE: Globe and Mail is reporting that VIII Capital (formerly known as Dundee, in case you didn’t know they had an employee buy-out) has replaced their CEO, Mark Attanasio, who is one of those insiders that held a massive position in CBW.
— Chris Parry
FULL DISCLOSURE: Cannabis Wheaton is not an Equity.Guru marketing client, though Abcann is. We hold no stock in either company, nor do we short any company or recommend a buy or sell on any company.