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6/13/17

The basic numbers at Cannabis Wheaton (CBW.v)

I've had a few inquiries as to why I'm so sure Cannabis Wheaton (CBW.v) is a scam. Well folks, apart from the fact that it is and drips with all the self-serving, underhanded, insider, undisclosed, retail rape moves you can possibly imagine, even if we assume the people who set it up really want to build something of worth and long-lasting value, its numbers simply do not add up. And to understand that, you need to take a trip to the wonderful world of balance sheets. So consider this a CBW balance 101 primer, it's simplified for sure but it's based on solid math (rather than unicorn sprinkly stardust that Rifici is palming off as a wonder opportunity). We start with basics:

Right now, CBW has 146.7m shares outstanding. It also has 133.1m warrants which are all enormously in the money. There are also other things playing against people stupid enough to buy in at $1 in the current placement, such as the right to emit up to 20% of share count as incentive options for insiders and management (normally, even the self-serving and greedy Canadian junior miner companies limit themselves to 10%), but we'll try hard to ignore that corner of the scam and keep things simple.

Now for the current placement effort, being brokered by Mackie, that's a sale of 50m units (unit = 1 share + a full warrant with a $1.50 strike) at $1 per unit. Assuming the current placement closes without the overallotment facility, that means they sell another 50m shares, 50m warrants and adds $50m to treasury. Then the share count goes to 196.7m S/O and 183.1m warrants respectively.

Today, the current share price $1.02, which means this company is being valued at $200.6m market cap. But as those original 133.1m warrants are so far in the money now, we are obliged to assume they'll be exercised and turned into fully paid-up shares. So the real world market cap as stands today is $336.4m. That's the math, that's the way it is, so what do you get for your money?

  • 14 deals that CBW put together for less them $1m in cash total (in other words, very minor deals)
  • Around $1.5m in cash before the current placement.
  • $50m in cash assuming the current placement closes.
  • A proposed deal to spend $30m of that money on a streaming deal (with people that you can hardly call arms-length, either).
  • Errr...that's it.

And so let's play balance sheet and put that in simplified balance sheet terms:
  • Current Assets: $51.5m
  • Fixed Assets: $5m (the $1m in deals and then i assume they have an office, some computers, coffee machine etc)
  • Goodwill: ??????
  • Current liabilities: $0.2m (normal run of company number)
  • Long-term liabilities: $0 (Best to assume the best case, looks likely too
  • Equity: $56.3m
  • Equity per share out: $0.286
  • Equity per "real world" share out: $0.171
You'll notice I put the line item "goodwill" in, and gave it a row of underpants gnomes type question marks. That's because in order to square this circle, the goodwill or "intangibles" in this company would have to come to around $280m in order to justify its current share price even if they manage to add the upcoming $50m into treasury (because without that, there's straight plain peanuts in CBW).

Now I'm not saying goodwill is at zero, but what it amounts to here is the business model, the "bright idea" and the different, new, market-changing plan CBW has come up with. The story, in other words. So even if you are a fan of this idea, I ask you to consider whether coming up with a company structure that gives cash to small companies (all but three of them without any sort of permit to enter the cannabis market yet) in return for a share of their future cash flow if/when they get into operation some years down the line is worth $280m? And even if we assume CBW meets with some early success, its first-foot advantage is going to be fleeting as its hardly a model that can't be quickly replicated by other start-ups (no moat, as Warren Buffett would say).

Feel free to pick a number on that goodwill value; $20m, $50m perhaps? Want to be ultra generous and believe this is the next Uber? Okay, $100m as stands today but please don't tell me it's $280m. However, that 280m number is exactly what the sales desks at Mackie has been telling the poor saps they're trying to get into this deal. It's madness. Utter madness.

Even if this scam works and the people behind have the best interests of retail shareholders at heart (which they most certainly do not), it's wildly overvalued. My best guess right now? It's worth 15c to 30c, tops. A true believer could self-justify a case for 50c if they're stupid enough not to understand the true intentions of the sharks behind CBW. But personally, I think it's worth zero cents. A Loonie? Gimme a freakin' break!