If you look at the stock chart, you can see exactly where Chlormet hit the wall, and how hard.
April 4 was the day Chlormet Technologies (CSE:C.PUF, Stock Forum) had the rug pulled out from under it by the TSX Venture Exchange, halted for exploring new ways to make money for shareholders, stopped in its tracks for a stock price running too hard.
Chlormet, which had been a resource company before it saw opportunities in the newly regulated field of Canadian medical marijuana, was the third such company to announce it was weighing options in the ganjasphere.
There had been around 20 other companies following its lead in the months since. But Chlormet was running hardest. It was a bona fide six-bagger over the course of a single month.
That’s $0.07 to $0.47. In one month.
Why was it running so hard? Because they announced they had an option to buy 100% of AAA Heidelberg, a private 8800 sq. ft medical marijuana growing facility moving toward MMPR approval in London, Ontario.
Back then, that was a pretty big deal. Lots of companies were joining the fray, but few had actually started due diligence on a deal. Most were talking to any pothead they could track down and offer options to, or looking for the biggest warehouses they could find in which they could tell the market they’d grow Scarface levels of kush.
The market was liking what it was hearing from Chlormet and was buying in aggressively (myself included) when the equivalent of a Trading Armageddon fell upon the company as the Venture Exchange decided having an option to buy a weed facility constituted a change of business.
Obviously it doesn’t. But as a means of putting ‘the fear’ into the then-hypercharged mining-to-weed sector, the Chlormet halt did the job. The market slumped. Companies like Satori Resources and Papuan Precious Metals all but stopped talking about their weed exploration ideas (a situation that persists to this day) and guys like me had to start writing about oil and gas again as weed news dried up to a trickle.
“I was in New York when I got the call saying we got halted,” says Yari Nieken, President and CEO of the company. “We had cleared our news release through IIROC, they gave us a week, the stock moved nicely and then the Venture came out of nowhere, deeming it a change of business. It was ridiculous because we didn't have a business until that transaction would have occurred. It was only an option, so they were going to leave us with no business, which makes no sense at all.”
Nieken believes the exchange needed to send a warning shot over a whole lot of bows, and his company just happens to be the one the cannonball landed on.
The aftermath slammed Chlormet. With a month long halt and the TSX infamously refusing to complete changes of business before an MMPR is received, the only course of action was to move the company to the ever-welcoming arms of the CSE.
But even that took time.
“I have to say, the CSE is an easy exchange to work with,” says Nieken. “Direct communications, they email back within hours, but we got halted April 4 and had to wait for year-end financials to come out before we could make the CSE switch. That killed our momentum. It was very frustrating.”
When Chlormet finally came back to the market, investors who had their money stuck in V.CMT stock while competitors were doubling and tripling were keen to get their funds out.
In addition, a financing overhang added to the downward momentum.
“We did a private placement that closed March 9, so a month after we started trading again we had selling pressure as those people took profits,” says Nieken. “We had 2m shares traded in the first week of July when we resumed trading, there were obviously a lot of people looking to free up their money. Even at the ultimately low 12c level, it’s still a great return on a 5c placement, especially when you can ride the warrant.”
“Obviously Tweed had a license and was fine with the exchange, but when we announced our option to buy and that we were doing due diligence, they looked at us and thought it was over-promotional,” he says. “We were post consolidation, low share count, the big stock movement came in an instant, there was only 7.2m shares, so it was primed for a rise.”
One man’s over-promotion is another man’s solid marketing strategy. But for investors of the company at that time, and management now, the whole sorry episode still stings. If the company had been left to its own devices, it would have been able to raise money at $0.40+. Instead, the company is now rebuilding its market cap, having fallen to as low as $0.115.
“It’s funny,” says Nieken. “You never see them halting a stock when something drops 80%. We went up 4c last week and got a call from IIROC asking to explain it.”
That 4c jump is not an anomaly. Chlormet has recently begun ramping up nearly as quickly as it did in the ‘old days’ of Q2. A 35.2% jump this morning sees the company at $0.23 now, double where it was a month ago, with a long steady rise through the day. Nieken sees that as indicative of the lack of overhang on the stock now that Chlormet’s warrants are gone.
The exercising of those warrants brought in $700k, which is being put to good use.
“I’m going to Toronto Thursday to visit the AAA Heidelberg facility,” says Nieken. “We own 15% of that right now, and I’m looking to see if we can get the rest. The MMPR process is in the final throes of completion. I’m looking to get my hands into the dirt to make sure the facility is all up to standard. We’ve been through the enhanced screening process from Health Canada, so we're in the mix with the legitimate applicants. Communications with Health Canada are good.”
To get the remaining piece of AAA locked down as Chlormet-owned, the company has to issue up to 16m shares to the owners. They paid $120,000 in March for the first 15%.
The AAA Heidelberg facility operators have been background checked twice now, a situation stemming from a recent incident with Richmond B.C.-based Medijean when, after completing a successful background check, an executive got himself into subsequent legal trouble. That saw Health Canada set secondary checks in place, just another example of how the rules in this space continue to change midstream.
“We have 8800 sq. ft of which the application calls for 1320lbs of product per year,” says Nieken. “The safe is in, electrical is in, plumbing is in, we’re resealing the roof to make certain that’s never going to be an issue, floors are all epoxied. There are a few finishing touches, at which point AAA will be on Health Canada's tail beating the drum for final approval.”
Though 8800 sq. ft doesn’t seem much compared to the mega-grows being touted by others, in reality, most growers are only using around 10k sq. ft of actual grow space right now, despite building sizes deep into the six figures and market caps of as much as $100m.
Chlormet’s cap is $4.8m, though it was $3.7m yesterday, and half that last week.
Nieken doesn’t see a need to go locking up his cash in hand (and future financing) on expensive maintenance of a facility he can’t fully use right now. He says he has growth options nearby, and will expand as needed, rather than covering a gigantic monthly vig in the hope the business scales quicker than the bank balance bleeds out.
“We’re in a business park setting, and there are three other locations within a block radius with the exact same layout that are available if we need them for a low cost build-out. We can cookie-cutter it to grow as needed. That’s a simplified application process to expand the MMPR, just needs to be the same configuration and we should be good.”
So there you have it – a solid operation on its way to something good that can almost be ‘franchiseable’ to other places once it is proven out. Low risk, low expense, scalable.
If that were Chlormet’s entire business model, I could get behind it. But, as they say in the infomercial game… wait. There’s more.
There’s a growing thinking in Canadian weed, that it makes little sense to put all your eggs into the great northern basket. Why wait for Health Canada to tell you that you can grow weed locally for a tiny market of people with actual prescriptions, who you’re not allowed to advertise to, when just over the border there’s a thing called Washington State?
Chlormet is there. Boy howdy, is it there.
In a recent interview, Nieken pointed out that, even if all of Canada’s 40,000 MMAR weed users went out and got a prescription from a doctor and chose a local supplier, there are 400,000 users in Washington State – right now.
“We’re working on 8 or 9 licenses right now,” says Nieken. “One is close to go, it’s a license for 21,000 sq. ft. We’re still looking for the right space. Under the rules, you can't directly share in the proceeds of production unless you're a resident, so we have set up a Washington State LLC which we will fund the build out of, and the acquisition of a facility, and we’ll do a leaseback arrangement with a grower. We’ll mark-up labor, management, equipment and facility leasing to share in those proceeds legally.”
Chlormet is looking at three areas in WA; Tacoma, Skagit County, and Snohomish, as these are considered the most liberal jurisdictions in the area, with municipal councils on board.
“I dont see any issue with a Canadian pubco investing in real estate or equipment with growers,” says Nieken.”The biggest problem they have right now is finding the capital to put these deals together. Canadians actually present a solution, and the state wants the tax revenue so it’s not about to refuse free capital.”
At issue is, unlike Canada’s system of slow, long build out and inspections aplenty, the WA regulators insist on a fast build and license approval. That requires capital and fast.
“Any Washington State license holder has to prove financial capabilities to get their license in good standing, then they have 120 days to build out, and 180 days to get 50% completed. There’s no time to sit around. This is why we’re seeing lots of leaseback deals, because banks and brokers are still a bit scared of the space down south.”
“In Washington State we have someone working in the space who is very familiar with the WA Liquor Control Board, who is in charge of recreational weed policies being put in place,” says Nieken. “In my opinion, Washington State will be our focus, because we don't know when we'll get a license in Canada. It's done as far as I'm concerned, we're just waiting for Health Canada to come give us our license, but you just don’t know about timelines. It could be six months - we don't know. In Washington State, we should be in revenue by mid to late May. On economies of scale, it's a great opportunity. Bigger customer base, faster process.”
Chlormet is aiming for year-one per-quarter revenues of $1.5m. And the plan is to make fast use of that money.
“When we receive revenue, we'll have financing opportunities and will be acquiring further buildings, both in the US and Canada,” says Nieken. “We’re going to need to do a financing shortly on one of the three opportunities we have in Washington. The build out is about $1m-$1.3m, there’s a 90 day window in which we need to pay salaries, hire up. We’ll be raising around $1.5m to be clear.”
The company plans to have between 12 and 15 strains in Canada, and 12 more strains in the US. In terms of Canadian distribution, it’s not looking to dominate the industry. Currently, the company has a pharmaceutical rep talking to doctors in the geographical area around AAA in London, Ontario, looking to establish a local core customer base and keep expenses low until they have need to grow, owning the local market rather than being stretched thin in places like Moose Jaw and Abbotsford. There’s an IT consultant working on an ecommerce approach the company feels will let them get the word out without breaking HC rules on advertising, and there’s always the option of farming product to bigger players.
“We need between 800 and 1200 customers to be profitable,” says Nieken. One would have to think adding the US market to its customer base should make that target very easy to hit.
But the big selling point, for Nieken, is one that a lot of companies don’t consider: He wants Chlormet to be the ‘grown up’ play.
“Our major point of difference is that you have an early stage company with the right expertise in place, good personnel, really solid advisors, tight share structure, we’re growing conservatively, and narrowing our focus while broadening our horizons. We’re looking to prove a concept that we can take and roll-out aggressively down the line. We believe we’re a management play. We’re de-risking, being fiscally responsible, and if others begin to fall under the weight of their promises and high operating costs, we think we’ll be here in a really good place to pick up the slack.”
Nieken, who was a broker previously, says his circle of friends in that space is constantly dealing with sub-standard weed deals, and is actively looking for the few legitimate plays.
“At first, the majority of my friends thought, hey, a weed play is a cool idea. Now it's ‘God, not another fucking weed deal..’ That’s a reflection of the market. Our opportunity is to break with that convention and build a real business in a responsible way. That’s what we’re doing, and it’s why our stock is heading back to a great place.”
--Chris Parry
https://www.twitter.com/chrisparry
FULL DISCLOSURE: Chlormet Technologies is a Stockhouse Publishing client