Highly Promotional Cannabis Company TransCanna Holdings Makes Bid for Related Party Ahead of Lock-Up Expiration

TransCanna Holdings (CSE: TCAN) (OTC: TCNAF), a relatively new California-focused cannabis company that began trading in January and promptly launched a very aggressive stock promotion campaign during the rally early in the year as its stock went from C$0.80 to almost C$8.00 after its C$0.50 IPO, announced an acquisition on Saturday, June 29th. The company intends to acquire Lifestyle Delivery Systems (CSE: LDS) (OTC:LDSYF) in an all-stock deal that would value the company at C$51.66 million. The deal, which still requires further negotiation, would be a relatively large one for Transcanna, as LDS shareholders would own 29% of the combined company. LDS currently owns 1.08 million shares of TCAN, and the press release indicates that “certain directors and officers of LDS own shares of TransCanna, and certain directors and officers of TransCanna may own shares of LDS.”

For TransCanna CEO Jim Pakulis, this pending transaction culminates years of involvement with LDS and its CannaStrips. Pakulis, before launching TransCanna, served for three years as President and Director of LDS. In a scheme from 2016, Pakulis, while employed by LDS, tried to market the CannaStrip through his penny stock, Wisdom Homes of America (OTC: WOFA), where he still serves as CEO (though this isn’t disclosed on the TransCanna website or its investor deck but is in its filing statement).

In April 2015, Pakulis, who was an early investor in WeedMaps (and tried to take it public), was talking up the prospects for Wisdom Homes of America, then focused on selling pre-fabricated homes. Less than a year later, the company issued five press releases in just a few months:

As promising as this may have sounded to penny stock traders, it apparently amounted to absolutely nothing. WOFA now trades at $0.0004, down 85% from when that first press release was issued in February 2016. Worse, the company hasn’t filed financials with the SEC or even OTC Markets since February 2013, so investors aren’t able to determine what happened with the licensing agreement the company heralded. The company just quit talking about it. Lifestyle Delivery Systems doesn’t mention WOFA in its filings.

A History of Stock Promotion

Pakulis, a veteran penny stock operator, engaged in an extremely aggressive stock promotion campaign after the TCAN IPO, as described in its filings. The MD&A for its quarter ending February 28th, filed in April, detailed the substantial investment in investor relations and stock promotion:

  • On January 2, 2019, the Company engaged Purple Crown Communications Corp. (“Purple Crown”) of Vancouver, BC and an unrelated party, to act as an investor relations consultant to the Company. Purple Crown will assist TransCanna in broadening its shareholder base and creating effective communication tools for communications with shareholders and potential investors. Purple Crown will be paid $7,000 per month for a period of 12 months commencing in January 2019.
  • On January 4, 2019, the Company engaged Woodman Capital Corporation, a British Columbia company and an unrelated party, to provide strategic advisory services. Woodman will be paid $5,000 per month for a period of 12 months commencing in January 2019.
  • On January 8, 2019, the Company engaged Circadian Group Ltd., an Ontario company and an unrelated party, to provide public awareness services. Circadian will be paid $10,000 per month for a period of 6 months commencing in January 2019.
  • On January 10, 2019, the Company engaged Nison Consulting LLC a New Jersey company and an unrelated party, to provide public relations, media relations, and consulting on cannabis industry trends to the Company. Nison will be paid $7,500 per month for a period of 6 months commencing in January
    2019.
  • On January 11, 2019, the Company engaged Loud Media and Awareness GmbH (“Loud”), a Salzburg, Austria company and an unrelated party, to act as an media consultant to the Company. Loud will provide TransCanna with advertising on social media and on premium ad networks for communications with the European public. Loud was paid 65,000 Euros for the period from January 25, 2019 through February 8, 2019.
  • On February 21, 2019, the Company paid Loud Media and Awareness GmbH, a Salzburg, Austria company and an unrelated party, to act as an media consultant to the Company. Loud will provide TransCanna with advertising on social media and on premium ad networks for communications with the European public. Loud was paid 10,000 Euros for the period from February 18, 2019 through March 3, 2019.
  • On January 14, 2019, the Company engaged Network News Wire (“NNW”), a New York company and an unrelated party, to act as a media consultant to the Company. NNW will assist TransCanna with public relations and communications.
  • On January 15, 2019, the Company engaged bullVestor Medien GmbH (“bullVestor”), a St. Valentin, Austria company and an unrelated party, to act as a media consultant to the Company. bullVestor will provide digital advertising services to TransCanna for communications with the European public. bullVestor was paid 85,000 Euros for the period from January 25, 2019 through February 8, 2019.
  • On February 21, 2019, the Company paid bullVestor Medien GmbH, a St. Valentin, Austria company and an unrelated party, to act as a media consultant to the Company. bullVestor will provide digital advertising services to TransCanna for communications with the European public. bullVesor was paid 140,000 Euros for the period from February 20, 2019 through February 24, 2019.
  • On February 1, 2019, the Company engaged Stonebridge Partners LLC, an unrelated New York company, to provide oversight and execution to the Company in matters relating to the creation, management, strategy and optimization of or access to information and business processes. Stonebridge will be paid $7,500 US per month for a period of 6 months commencing in February 2019.
  • On February 11, 2019 the Company signed an agreement with Midam Ventures, LLC., an unrelated Florida company, to provide business advisory and consulting services for a period of three months. Midam will be paid a fee of $100,000 US.
  • On February 15, 2019 the Company signed an agreement with ROK Marketing Inc., an unrelated Georgia company, to provide advisory services, investor communications and financial and investor public relations for a period of one month. ROK is entitled to a fee of $150,000 US and 25,000 restricted common shares.
  • On February 19, 2019 the Company signed a contract with Blue Sun Productions Inc., a British Columbia company and an unrelated party, for advertising spaces on BNN Bloomberg Broadcast and BNN Bloomberg Stock Ticker. Blue Sun will be paid a fee of $9,900.
  • On February 26, 2019, the Company engaged TSM Talk Shop Media Inc., an unrelated British Columbia company, to provide North American Media Relations to the Company TSM Talk Shop Media will be paid $10,500 per month for a period of 6 months commencing in March 2019.

The company, which has never reported revenue and had just C$1.05 million in cash at 2/28 after its C$4.4 million IPO, altogether committed to spend approximately $954K on these activities. This disclosure omits $60K paid to CFN Media thus far in 2019 (per its disclosure on its website). The stock rose from its debut, fueled by a rallying market and likely aided by its tight float (just the IPO shares) and the aggressive stock promotion:

Lots of Shares Issued Well Below the Current Price

Following the promotion, the share price soared for TCAN, which enabled the company to sell 2 million shares at C$5 (along with C$6 warrants) in a deal announced in April that closed on June 7th. This financing is already underwater, but investors should be aware that prior financings were done substantially below the current price.

The IPO, 4.4 million shares at C$0.50 along with C$1.00 warrants, raised C$2.2 million, closing January 8th.  Prior to the IPO, the company sold 3 million shares at C$0.005 and 3.9 million shares at C$0.05 in November 2017, 1.92 million shares at C$0.10 in January 2018, 240K shares at C$0.10 in February 2018 and 360K shares at C$0.25 in March 2018. Additional shares were issued for non-cash consideration. All 12.2 million shares issued in these financings for less than C$0.50 per share had lock-ups that expire six months from the time of the IPO. Thus, in just a few days, many shares will become unlocked.

Additionally, the company sold 8 million shares in a private placement at C$2 along with 4 million C$3 warrants, raising C$16 million in a deal that closed  on April 4th. These shares and warrants are locked up until early August. Note that in addition to these warrants there are 1.68 million options and warrants at C$0.50, 3.48 million warrants at C$1.00, 219K options at C$1.37 and 640K compensation options at C$2.00 as well. In all, there are 30.6 million shares that could hit the float over the next five weeks with a cost of C$3 or less, far below the current price of C$4.10:

Outlook

The timing of this related-party transaction, just ahead of the lock-up expiration for all 12 million of the shares issued prior to the IPO, is interesting, as if the company hopes to attract investors by buying the revenue-generating LDS, which produced sales of C$2.7 million in Q1. Unfortunately, the business performed quite poorly, with a gross margin of -17% and an operating loss of -C$2.8 million. For 2018, LDS reported revenue of C$3.9 million, with a gross margin of -43% and an operating loss of C$8.5 million. The stock has gone nowhere in three years:

Given that the TCAN pre-IPO shares were all sold for less than C$0.25 per share, investors should expect pressure on the stock when this substantial number of shares becomes unlocked in early July. Compounding the potential sales from early investors is the unlocking a month later of the 8 million C$2 shares as well as the 4 million C$3 warrants. Another factor that could weigh on the stock is that the company is promising LDS shareholders the maximum of either 1 share of TCAN for each 10 LDS shares or C$51.7 million in its stock. This means that if the TCAN price were to fall, the company will need to issue more shares in order to close the deal.

The bottom-line is that TransCanna Holdings appears to have aggressively promoted its tight-float stock, helping it to raise capital, but investors must now deal with a lot of cheap shares about to hit the market. We don’t expect the potential acquisition of LDS to halt this inevitable selling pressure. In fact, we don’t expect that deal to close on the current terms.

Note: We updated the article on 7/1 to correct for the share exchange ratio being 1 share of TCAN for each 10 shares of LDS

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Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online communities 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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