The S-1 Review: Framing Filings and Federal Changes

filings

We recently took a look under the hood of a couple recent S-1 filings with the Securities Exchange Commission. These filings are a prerequisite for a company to list shares on public markets, either for the first time or as an additional offering to an already-listed security. Today we’ll be looking under the hood of two more companies, but before we do it’s worth spending a moment to take note of how the cannabis industry could be massively reframed as a result of recent news out of Washington, D.C.

 

Glass Half … Something?

Reading through cannabis-related S-1s is a rather uninspired activity right now. Many of the filings are from companies with nebulous business models, sloppy filing habits and amateur financial forecasting. Also, there just aren’t that many companies able (or willing) to list public securities under the present cloud of federal bans against cannabis production, distribution and sales.

But change—a definite horizon but at an unknown distance—may have moved a great deal closer yesterday. A breakthrough piece of bipartisan legislation was introduced by three high-profile U.S. Senators, and while it is far too early to tell if this bill is DOA, there are several promising factors to consider here. First and foremost, the CARERS Act doesn’t try to go for the moon by legalizing marijuana. Instead it seeks to reschedule cannabis from a drug with “no medicinal value” to a scheduling that would allow for broad medical research. We have discussed in the past how this was the most important (and likely) first step the United States could make. Specifically, the bill would allow for no less than three alternate licensed sources of cannabis for medical research (currently there is only one in the United States, located at the University of Mississippi.)

Secondly, the bill is being pitched as an offering to Veterans Affairs; efforts to have cannabis be a therapeutic option for veterans haven’t been endorsed by the VA, but this bill would permit doctors to prescribe it in states where it’s legal. There is no shortage of research on the possibly efficacy of cannabis as a treatment for PTSD and other ailments, and Senator Cory Booker, D-N.J., noted in a press conference that he’s heard interest amongst veterans in having access to medical marijuana.

Another key aspect of the bill would be the lifting of restrictions on the providing of banking services to cannabis dispensaries and other companies participating in the periphery of the industry. In cannot be overstated how important removing this roadblock would be to the growth of the cannabis industry as a whole. It would also allow for more efficient tracking of taxable revenues—something that politicians on both sides of the aisle would likely appreciate equally.

If this bill were to pass (and it’s still quite a long shot), investors can expect to see a tidal wave of S-1 filings for cannabis-related companies. So our exercise here in reviewing the guts of recent S-1s should be considered just that, good exercise by investors interested in making long-term bets on the space.

 

Northsight Capital

Today we will examine two companies seeking to profit from growth in the cannabis industry in very different ways. The first is Northsight Capital, an Arizona-based company that is essentially an aggregator of cannabis-related internet domains and web properties. The S-1 filing is for an offering of up to 23,046,800 shares, which could raise a maximum of $23.25 million. Northsight already trades on the OTC Bulletin Board under the ticker NCAP, but it has an extremely illiquid and volatile trading history.

According to the S-1, Northsight currently owns and/or operates over 9,600 domain names, most related directly to cannabis industry and culture. Several of the properties have been rolled out with content, such as:

WeedDepot.com
RateMyStrain.com
420Careers.com
MJBizWire.com
MarijuanaRecipes.com

However the S-1 states that the company has been experiencing a very rapid cash burn, necessitating the large capital raise. Northsight states that it incurred a net loss of over $6.35 million in the three months ended September 30, 2014, and over $7.5 million in losses through the first three quarters of 2014. It has also stated rather dire warnings about the short-term need for cash, even admitting that it had to operate on a “scaled back” business plan just to make it through year-end 2014 with the cash on hand. The company had stated, “we have an immediate and urgent need for additional funds,” and that “If we are unable to raise additional funds in the near term, we will not be able to implement our business plan, and it is unlikely that we will be able to continue as a going concern.”

Raising capital via the issuance of over 20 million shares will dilute current shareholders to a very large degree, but as Northsight had no operating revenues at the time of filing, this is really its only option to stay afloat. It remains to be seen if the strategy of cobbling internet domains can be profitable, even in such a quickly growing space as the cannabis industry and its cultural ecosystem. The company’s highest-trafficked sites have a lot of fierce competition, but if the industry pie continues to expand, Northsight’s assets could have value to just the right buyer looking to build out a specific message.

 

OptiLeaf, Inc

Kansas-based Optileaf filed an S-1 on February 10, 2015, for a first-time offering of public shares. Up to 4.46 million shares could be sold at a price of up to $1.00/share; however, investors need to note that this S-1 has not yet been deemed effective by the SEC. As such the OptiLeaf S-1 can be amended prior to any initial listing of shares, and the effectiveness of the latest version of the S-1 must be timestamped by the SEC before any shares trade hands in public markets.

OptiLeaf is a development stage company looking to step into the lucrative opportunity for “seed-to-sale” software and tracking systems. OptiLeaf claims to offer solutions that assist cultivators, dispensary owners, and caregivers in maximizing yields and lowering costs with less manpower. The company seeks to utilize a combination of analog sensors and software to do real-time tracking of variables such as light, soil moisture, CO2, temperature and humidity.

The sensors and the software suite to track and control them would be sold together as a turnkey package. While OptiLeaf claims it has created the product suite, it has yet to generate any revenues or sign any clients. It intends to use the proceeds of the share offering to aggressively market its products and services, although it does not currently have agreements in place with any suppliers nor any customers. The company expects to have revenue-generating products available by the third quarter of 2016, and in the meantime the founders have ponied up their own cash to fund operations.

There is bound to be a lot of creative destruction in the “seed-to-sale” sub-space over the next ten years, but also a very large end market. Every large industry spends a significant portion of its operating expenses on information technology; new industries tend to spend even more. Cannabis hits both of those qualifiers, but companies like OptiLeaf will need to innovate rapidly to protect against what is bound to be a tsunami of competition from S&P 500 companies, if and when full national legalization occurs.

 

Parting Disclaimers

As we have noted in our previous discussions of companies that are development-stage, or seeking funding through equity sales, our coverage is by no means a recommendation to invest. Investments in any startup industry will be much more likely to experience losses, including the total loss of capital. The odds of this outcome increase greatly when looking at a companies with zero revenues that aren’t leading in market share. So as always, let our information be a stepping-off point for your own due diligence.

 

*Author holds no shares of any companies mentioned in this, or any of his articles. All opinions stated here are for informational purposes only. Investors should do their own due diligence before investing in any industry, especially in high-risk areas like cannabis.

Ryan has spent nearly 20 years analyzing financial markets and investment opportunities for institutional and high-net worth investors. He specializes in determining the size and scope of new markets, changing industry trends and the market potential of new companies, products and services. Ryan has also published hundreds of articles on investment topics, market commentary and macroeconomic analysis.

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