I break laws sometimes. I speed on the highway. I possess more than the 30 gram legal limit of weed products. I sneak food into the cinema, or used to when the cinema was a thing we did in polite society. I’ve been drunk and disorderly, broken noise bylaws on a Saturday night, and I once put a softball bat through a guy’s headlights in a McDonalds drive-thru when he kicked my door in for supposedly cutting him off. But I never, in my life, borrowed money at 55% interest rates while running a public company, because I’m not a complete fucking asshole.
Speakeasy (EASY.C) came into the public markets like a redheaded stepchild that wasn’t prepared to stay under the stairs. Dragged through six levels of hell by virtue of its connections to the scanadalous (and still doing business, regulators!) Bridgemark Group, I met with Speakeasy’s management team after they’d broken away from the ‘we’ll raise you $4m if you give $3m of it back to us in marketing programs’ scumbags, and they looked me squarely in the eye and said, “We learned a lot of things.”
“You need to show the markets you’re real and not either total dumbasses or total crooks,” I told them. “Let me tell your story and we’ll tackle it all head on. No excuses, total transparency. You respect the investors by answering every question honestly, even if it hurts. We won’t write about you unless you’re ready for that process. You in?”
They nodded and thanked us and we started doing the work to show what Speakeasy actually was, what it could be, what it should be. And, just as Bridgemark collaborators Abattis (ATT.C) did under similar circumstances, they never spoke to us again.
Because Speakeasy is, when you get right down to it, rubbish. This is confirmed by the fact they’ve just agreed to a financing deal with a series of numbered companies that will front them $2 million in return for $3.8 million (that’s 55% interest) to be repaid over the next two years.
It is flying pretty close to the legal limit, that’s for sure. pic.twitter.com/NNXx34stJe
— Michael Miller (@Porters6thForce) March 24, 2020
If you’re an investor in Speakeasy, that should piss you off, not just because they’ve agred to a loan that’s just 5% below the point where the government considers it loan sharking, but because Speakeasy management have tossed in first rights to their facility in the event they fail to pay the loan back.
As security for the Loan, the Company has caused the grant of a first mortgage over the Guarantor’s property in Rock Creek, British Columbia and a first-ranking general security agreement over all of the present and after-acquired personal property of the Company and the Guarantor.
So, as an investor, you get what’s left after they’ve handed over their only assets to 1244726 B.C. Ltd.
The loan was initially going to be just over $3 million, but either Speakeasy had second thoughts on repaying close to $6 million on that number or they realized their deal was making them a laughingstock in the financial world, so they did the ‘responsible’ thing and only took $2 million.
At payday loan interest rates.
They didn’t back out of the deal completely, and they didn’t offer up a debenture to you and I and every other investor at, say, 40%, which many of us would have gladly taken because it’s insanely in favour of the lender and, frankly, bonkers.
No, they grabbed their ankles for a couple of numbered companies, even as everyone who heard about the deal coughed up their Pepsi when they saw the details.
Speakeasy $EASY sets a new high bar for the cost of borrowing.
Don’t think anyone’s going to top that. https://t.co/BjUTeCGkvA
— Scott Willis (@ScottW_Grizzle) March 23, 2020
Guys the lending window is open in potstocks land! Just ask $EASY who just got themselves a loan at a 55% interest rate! Buy companies that have a tiny bit of foresight not ones that routinely do desperate financings and never learn! $easy.c
— Zack Morris (@smallcapstacks) March 24, 2020
Speakeasy either did this because nobody else would give them money, which should give shareholders extreme pause for thought, or because, as has happened previously, people involved are making side deals that you and I aren’t privy too.
Whether it’s wilful ignorance or ignorance stemming from malfeasance doesn’t really matter, as the result is the same – investors get screwed.
The winners in this deal are a group called Bhayana Ventures, who are fronting the cash and seem pretty comfortable with usurious interest rates because they’ve literally owned check cashing stores in the past. Though the company says little about who owns it on its website, a Preetinder ‘Sunny’ Bhayana previously owned and operated a chain of illegal Vancouver dispensaries called The Herb Co (now closed), and shows up on a lot of poker tournament websites. If he’s connected to Bhayana Ventures, which currently runs a chain of Chinese food restaurants in BC’s Fraser Valley, he’s bluffed the shit out of Speakeasy.
Think about this for a second: Speakeasy needs money; no problem with that. A lot of weed companies need money. And a lot are taking loans with interest rates at 10%, 15%, even 20%.
But for Bhayana Ventures, this deal is stupidly one-sided. All they need is for Speakeasy to stumble, miss a payment, find itself underwater, and Bhayana gets the asset for just $2 million.
Traditionally, if Bhayana wanted to buy Speakeasy out, they’d need to start accruing shares on the open market, maybe drive the price up a little in doing so, maybe even put in an acquisition offer that pays a premium to shareholders, who could use a premium right now because their stocks are down from $1.20 a bit over a year ago to $0.40 today.
But that might mean paying a premium on the current $42 million market cap.
Why bother when you can just loan the company $2 million and wait for their inevitable default?
If Speakeasy manages to somehow find their asses with both hands and pay the loan off, Bhayana makes bank. And if they fail, Bhayana takes their money back by selling the asset. Win/win.
But you know what’s going to happen? Speakeasy WON’T pay off their debt, because the Bhayana crew (if they’re smart) are going to ‘MMCap’ their deal and short the hell out of it, driving the share price down, and make it impossible to raise any money going forward while guaranteeing the eventual default of the loan.
And when they have to cover their short, they’ll just force the conversion of Speakeasy’s debt into newly cheap stock.
In the best case scenario for the borrowers, Speakeasy is fucked. In the worst case scenario, shareholders are fucked.
Publicly, Speakeasy is bragging that it’s going to be a big year.
The Company has completed the preparation of its 2.6M sq. ft (60 acres) outdoor facility and received Health Canada approval for the facility on April 3, 2020, which will enable the production of approximately 70,000kg of cannabis in 2020.
That’s cool, except it goes on to say it will cost $10 per sq. ft. to get that outdoor grow finished. That’s $26 million which, at current financing rates for the company, would require $14 million a year in interest and another mortgage.
So there won’t be a giant outdoor grow at Speakeasy this year.
The Company’s operations to date have been financed by issuing common shares. The ability of the Company to arrange such financing in the future depends in part upon the prevailing capital market conditions as well as the business performance of the Company. If additional financing is raised by the issuance of shares from the treasury of the Company existing shareholders may have their interest diluted. If adequate financing is not available, the Company may be required to relinquish rights to certain of its interests or terminate its operations.
Last quarter, Speakeasy lost $2m and had just $600k in cash left, which might explain the panic to sell grandma for another $2 million.
It should also be noted, Speakeasy still owes $2.9 million in liabilities, including $100k+ to the aforementioned Bridgemark Group and Anthony Jackson, the former CFO who led Speakeasy and multiple other companies into that regulatory meat grinder. It also owes founder and head honcho Marc Green a lot more, with him not taking a salary right now and loaning the company interest free-amounts of $250k, with another $250k on the way.
Say what you will about Green, but at least he’s going to go down with his ship.
Problem is, the water is up to his waist and he just sold the lifeboats.
— Chris Parry
FULL DISCLOSURE: Not a client. Don’t own stock. Wish them all the best because they’re going to need it.