Nothing infuriates the retail investor more than holding a stock with faith and hope as it drifts downward for months, with the company not doing anything to halt the slide, only for said company to then do a huge bought deal financing at the low price, diluting existing shareholders, locking in that low price as a ceiling going forward, and watching wealthy insiders just chew up cheap paper – and get half warrants into the bargain.
We’ve taken Emblem Cannabis (EMC.V) off our ‘in focus’ list because, though they’ve been a client since they hit the markets, we NEVER HEARD A WORD from them about what their plans were, how they’d like the market to see them, or what information we could help get out there to better inform investors.
Oh, we tried, publicly and privately. But not a word. Nothing.
And the stock just kept falling.
Since January of this year, in a hot weed market that has seen many companies touch a billion dollars in market cap, Emblem has fallen lower and lower. It’s been a shit show. It’s down by more than half.
Hey, slumps happen. When a company gets a nice big pre-listing raise done and everyone is instantly into profit, there’s going to be a sell-off after the four-month trading hold on that early paper is done with. Hence what you see in March/April in the chart above.
But that’s what guys like me are for, out here reminding investors that there’s a bigger picture out there, and things happening behind the scenes that might make keeping your stock an important thing. The company makes the plans, we share the plans, you guys (if you like what you see) buy – and, more importantly, hold.
Of course, in order for us to do that, we need the company to actually have those plans. And to talk about them. And to answer questions, and make moves that help propel the share price.
Emblem made none. In fact, it somehow managed to lower revenue in Q2 of 2017 ($538k for a $2.9m net loss) when compared to Q1 ($903k for a $2.4m net loss).
Only in late October has the news started revving up for Emblem, but it’s not been news small shareholders would be too keen to hear. A $25m bought deal, to help pay for a new grow facility, that doesn’t appear to be profitable to start with.
Eight Capital, which recently had a C-suite turnover when it was accused of shenanigans in the Cannabis Wheaton (CBW.V) pre-listing financings, will buy up $10 million of Emblem stock, at a price close to an all-time low, and get a FULL warrant for every share, rather than the half that’s usually offered. Then they’ll buy another $15 million in convertible debentures from Emblem, payable at an 8% interest rate per year, which can be converted into stock at a later date for $1.95 per share.
A warrant, for those not in the know, is an agreement that the investor can buy another share for an agreed upon price, for a set amount of time. A debenture is basically a loan that pays back high interest, or can be turned into stock if the company doesn’t want to pay up, or the stock surges.
Eight will either hold all that for itself, or sell it to clients.
Eight will also earn a 6% commission ‘as a consideration for its services.’ It’ll get another 3% in warrants, same reason.
The money raised will be used to build a 100k sq. ft. grow facility in Ontario which, right now, is 1/10th of what Aurora has been growing an 1/80th of what Canopy is promising to build over time.
So the sweet insider deal takes emblem to a place that most large LPs are already well past, and most smaller LPs see as a basic phase I. The share price, should it ever poke up above $2 again, will eventually be swallowed by all that $1.75 paper Eight Capital will now be holding (or selling to someone else), and long holders who might have been sitting on $3+ stock expecting that eventually ‘the big pharma play’ would be announced have to decide if they’re going to cut their losses now, or add another year or two to their hold, waiting for the company to actually do something.
Well, today it did something. It shifted the CEO, Gordon Fox, onto the board and made way for a new guy, Nick Dean.
Nick Dean brings more than 12 years of consumer marketing and leadership experience to Emblem’s dedicated team, including extensive work with highly respected pharmaceutical and healthcare brands. Most recently he worked with KBS Canada, a fully integrated creative agency with offices in Toronto and Montreal, where he led the company through two mergers and a number of substantial client wins, resulting in significant bottom and top-line growth.
They brought in an a marketing guy?
In connection with Mr. Dean’s appointment as CEO, the Company has approved the grant of an aggregate of 500,000 incentive stock options of the Company (the “Options”) to Mr. Dean. Each Option entitles Mr. Dean to purchase one common share in the capital of the Company at a price of $1.69 per share for a period of five years from the date of grant.
Natch. That’s $850,000 of stock options at today’s price, or a $150k profit if the stock gets to just $2, before he even sits in the big chair.
Okay, so maybe I’m just being cynical. Does this bring in a new dawn for Emblem? Is this the start of a new way of doing business? Its the swamp being drained?
“Emblem’s Board of Directors is confident this change in leadership will build on the Company’s current success and enhance its position as a leader in the Canadian cannabis market.”
A leader how exactly? Certainly not in growth (at its peak it was a $300m+ company, now it’s $118m). Not in patient numbers (they had over 2000 last financials I saw, which is about the level of business that the average convenience store does). Not in price per gram (they claim prices range from $7 to $12, but the average price per gram in those financials was a smidge over $7). Not in revenue, which is down. Not in technology or revenue deals done with third parties or SHARE PRICE.
Emblem is a $100m company only because it’s a weed company. It has done nothing to attract new investors, and nothing to hold old ones. It’s not an attractive takeover target, nor an attractive option for future profitability.
If you value their ACMPR license at about $40m, the fact that the company is a tin shed with weed in it becomes all the clearer.
I’m not alone in saying this. Check out this tweetstorm from The Wolf of Weed Street, which also held Emblem for a stretch but couldn’t penetrate the wall.
— Jason Spatafora (@WolfOfWeedST) October 30, 2017
Usually, when a company is oversold in a hot sector, I’d be looking to nibble up, but with the size of Emblem’s self-inflicted ceiling, the high likelihood that Eight will blow out massive numbers of shares once they’ve made their vig, and the lack of any ‘new direction’ with the new CEO (along with the old CEO being sideways shifted to the board), I’d rather put my money into rare earths.
And I really don’t have any interest in rare earths.
— Chris Parry
FULL DISCLOSURE: Emblem Cannabis was an Equity.Guru marketing client, but there is no current commercial relationship, share holding position, or personal involvement with the company.