The Week’s Largest Closed Equity Transaction:

• On February 16, 2023, 1606 Corp. (CBDW: OTC),  which offers nicotine-free and tobacco-free alternatives to traditional cigarettes and vaping products using industrial-grade hemp, closed a $20M equity financing agreement with GHS Investments Inc.
• GHS has agreed to purchase shares of 1606 at 80% of the market price. Following an uplisting to Nasdaq, the equity purchase price will be 90% of the market price. 1606 is obligated to issue 400,000 shares to GHS as “commitment shares.”
• The use of proceeds is to purchase CBD companies.
• Sounds vaguely exciting, right? But there are several problems with this picture:
  • 1606 is a tiny company. Total assets as of its September 10Q were $114,652. Q3:22 revenues were $3,762
  • The company’s statements have a going concern qualification for a good reason. Total assets are composed of $1,543 in cash and $113,109 in inventory. Current liabilities total $718,506, including a $655,050 “Note Payable to related party” (the CEO)
  • 1606 had -$468,000 in cash from operations for the nine months ended 9/30/22
• Curiously, the company has 37.1M shares outstanding, which at the closing price of $2.50 gives a market cap of a whopping $92.75M! How can this be? The answer lies in the average daily trading volume of 9,640 shares ($24,100). Given the thin trading, it is impossible to discern the actual market cap of this company.
• The financing in question is commonly known as a ‘death spiral” financing, and as the name implies, they rarely turn out well for shareholders. GHS already has 400,000 shares up front as a cushion and is only required to pay 80% of the market price for stock put to them by 1606. But what do you think GHS will do with these shares? We think you are probably on the right track if you said to sell them as fast as possible. For illustration, suppose 1606 put $1M worth of shares to GHS tomorrow. GHS would pay 80% of $2.50 or $2.00 per share and get 500,000 shares for its $1M. With $24K of average volume, what will be the impact when GHS starts selling those shares? Hard to say, but the direction is down sharply. Where will the next set of shares be put to GHS?
• Suffice it to say that we doubt that anywhere close to the $20M headline commitment will ever be realized, but it will be a fun one to watch.

Public vs. Private Raises: 

• Five of this week’s six capital-raising companies are public. Four trade in Canada (three on the CSE and one on the TSX), and all five trade in the U.S. on the OTC.

Equity vs. Debt Cap Raises: 

• Equity accounted for 32.9% of capital raised this week.