CSE Performance

Navigating Shifting Landscapes: An Interview with Richard Carleton, CEO of the CSE

Richard Carleton, CEO of the CSE
Richard Carleton, CEO of the CSE

The first half of 2016 has been eventful for the CSE as well as for early-stage securities markets more broadly. With a return in trading activity and prices in the shares of early stage companies, investors are once again shifting focus back to  growth stage firms.

While price action is one part of the story of any publicly listed entity, there are also other forces that influence the health, competitiveness and overall sustainability of the growth stage marketplace.

In a recent interview with Peter Murray of Kiyoi Communications, CEO of the CSE Richard Carleton discussed some of the milestone achievements at the Exchange for Entrepreneurs thus far in 2016, as well as his take on the forces shaping capital raising structures and participants.

Below is the transcript of their interview:

(PM) Earlier this year the Investment Industry Regulatory Organization of Canada (IIROC) requested written proposals for addressing market structure issues facing small-cap issuers.  What were some of the important themes identified in the CSE’s response?

(RC) IIROC asked a variety of participants in the small capitalization space – exchanges, issuers, broker dealers and other stakeholders – to comment on, and propose potential solutions to, a number of specific issues raised over the last few years within the industry.  This took place on a couple of levels, one being the technicalities of such things as short sale rules, tick size and board lots.

The CSE thought it was also important to look at the bigger picture and where the industry can go over the longer term to address what we think is a significant issue, which is a noticeable reduction in buyer interest.

When we look at what has happened to the junior capital space in Canada over the last five to seven years, the decline in commodity prices has clearly had a major influence.  For certain, it has encouraged some investors to look at opportunities outside the small-cap space.  But we think that the problems afflicting small-cap formation in Canada go beyond the decline in commodity prices.

Broad industry change is continuing to take place, a big one being the decline of the independent brokerage firms in Canada, and a rising concentration of assets under management at bank-owned dealers.  The independent firms have long been an important part of the community helping to finance resource exploration, technology research and other forms of business development important to the Canadian economy.

What we see in the current environment, however, is that many of the independent firms have disappeared, with the remaining firms experiencing extreme pressure on their business models.  These firms are an important source of retail investor interest in small-cap stocks through the support of their investment advisors, where a dealer will commit to an underwriting or participate in a dealer syndicate supporting an underwriting or capital raise.  And in the secondary market they support trading through stock recommendations and research.

That model has broken down to a significant extent over the past five years and instead what we increasingly see is corporate finance being conducted through the exempt market.  Speaking from the perspective of the CSE, we see about 90% of the money raised by our issuers coming from the exempt market.

So-called accredited investors are the primary source of capital in the exempt market.  But accredited investors in Canada only represent about 1-2% of all households.  This sharply narrows the number of investors eligible to participate in small-cap financings and, needless to say, limits the amount of money available for companies to raise.

The industry has adjusted to the decline of the independent broker by leaning more and more on the exempt market.  But at the CSE, we are concerned that this is far from a complete answer to corporate finance challenges moving forward.

(PM) What do you see as some of the solutions to reinvigorating the early stage capital formation process in Canada?

(RC) One of the things we really need to do is engage the next generation of investors.  The industry is not doing a good job of encouraging the next generation of investors to come into the Canadian equity markets.  One approach to consider is providing a very clear set of guidelines for early stage crowdfunding.  It is a potential source of modest amounts of money, say around $1 million to $1.5 million, but the funds can be acquired at relatively little cost to the companies raising the money.

The problem in Canada is that we have a fragmented regulatory regime with different sets of rules dictating how crowdfunded offerings can be marketed, depending on the residency of the potential investor.  This makes it confusing for people to know if they can participate or to what extent they can participate in a given offering.

It also makes it difficult for those managing the websites that people use to find out about different investment opportunities to carry out compliance activity on a national basis.  The whole process becomes complicated and the likelihood of making mistakes rises significantly.  You have to decide between limiting an offering to a province or group of provinces that have the same rules, or taking on the compliance risk associated with doing a national offering across Canada.

That’s a real problem that adds cost, complexity and confusion for everyone involved.

The other issue is that once a company is beyond the crowdfunding stage, there really isn’t much other than the accredited investor exemption to help companies to raise funds.

The CSE is looking very carefully at new legislation in the United States that has come into force just recently under the JOBS (Jumpstart Our Business Startups) Act.  The objective in that case was to provide a relatively simple means of raising equity capital from the public that eliminated the necessity of having to file a prospectus with the Securities and Exchange Commission (SEC) or become a reporting issuer with the SEC.

In the United States, companies will be permitted to raise up to $50 million per year and to market these offerings to individual investors subject to participation limits of $1,500 per opportunity and an aggregate of $10,000 per year for each investor.  These rules are in place across the United States and require a relatively limited amount of work on behalf of an issuer.  For companies on the CSE it would be a very cost effective means of raising capital from individual investors because our companies already meet most of the requirements to participate in such offerings.  They file quarterly financial statements, their audits are subject to annual review, secondary trading is monitored by an independent third party, plus they have continuous disclosure requirements and are regularly providing updates to the investing public.

With all of those benefits available, CSE companies are positioned well to take advantage of such funding opportunities.  In fact, we already have one company in the process of marketing an offering under the JOBS Act right now.

We would really like to see a similar mechanism put into place in Canada because it would provide a bridge between crowdfunding and full-blown prospectus-led offerings, which have to be reasonably large before the associated cost begins to make sense.

One of the key things to understand here is that instead of limiting participation to accredited investors – people with large investment portfolios or substantial annual incomes – the new rules actually present the opportunity to engage a whole new generation of investors in the equity market.  And really it is that generation that we have to bring into the market in order to provide a successful and healthy ecosystem for capital formation in the coming 15-20 years.

When I go to industry events, I am often surprised at the average age of people in attendance.  The average is quite high and that is not a sign of an industry positioned to continue supporting the needs of growing enterprise in Canada for the next generation.  We need more young people engaged and we feel that a clear-cut means of permitting them to invest in companies directly and trade the shares afterward is very important.

(PM) What specifically is the CSE doing to help ensure this new environment is fostered?

(RC) I think one of the challenges we have in Canada is the fragmented regulatory regime when it comes to equities.  It is pretty clear if you look where we are with crowdfunding rules and how different they are across Canada that we don’t have an awful lot of commitment to broadening access to the equity markets from the various securities commissions.  I think what we are going to have to do is engage the political side.

When you look at any of the provincial governments, and certainly the federal government, they frequently talk about supporting innovation, new technology development and entrepreneurship.  You can’t read a press release from any of the governments over the last little while without seeing those ideas held up as a means to promote economic growth in Canada.

The problem is that none of this is going to happen if these new companies can’t get funding.  And there is a limit to the amount of public funds that can be devoted to the space, so we are going to have to figure out ways to engage the private investor in these companies.

This is a long-winded way of saying I think we are going to have to actively engage the political side, which is exactly what happened in the United States with the JOBS Act.  That in fact was not an initiative of the Securities and Exchange Commission, but something that came from Congress as a means of promoting investment in early stage enterprise in the United States.  We think there would be substantial political will for a similar approach at the provincial and federal levels in Canada.  I think that is the path to genuinely reforming the investment process here in Canada.

(PM) The CSE recently launched a new website that clearly was created with a specific vision in mind.  How has the reaction been so far?

(RC) The response has been almost universally positive.  People really like the modern, clean design and particularly how easy it is to navigate on the website using a mobile device.

We are learning a lot about where visitors go and what types of information are most important to them.  This enables us to be responsive in making sure it is easy to get to the most popular types of information.  You can plan all you want, but when the real-life data comes in you always see things you were not aware of.

I’m also excited by our greater use of social media, which includes promoting our blog through Twitter plus posting photos, and sometimes even real-time video, of specific events.  That is an area where I think we will continue to extend our presence as the website evolves.

Actually, social media is a topic worth discussing further.  Most, if not all, dealers in Canada prevent their investment advisors from using Twitter, Instagram and other social media platforms for communicating with existing and potential clients.  From a compliance perspective, they want the ability to control and edit messages before they go out, but the immediate nature of social media makes it a difficult fit for that type of tightly controlled environment.

Now, contrast that with the US JOBS Act provisions, which allows securities to be marketed over the Internet.  That is something perhaps the older generation may not be so comfortable with, but it is how younger people get their information and shop and interact with the rest of the world.  If we as an industry are not prepared to engage with people using social media, we’re in trouble.

(PM) The new website and social media are not the only ways in which the CSE interacts with its audience.  You are doing quite a bit to help issuers tell their stories via the CSE Quarterly magazine, company-specific articles, video opportunities, an extensive blog and person-to-person interaction at CSE Days.  What is the ultimate objective of these activities, as they obviously require the exchange to commit significant resources?

(RC) We want to provide multiple platforms on which issuers can tell their stories.  One of the challenges you have as an early stage entrepreneurial company is that there are not usually a lot of specialized public relations and investor relations professionals around to help out.  Everybody at the company is too busy trying to build the business.  Whether it is development of a technology, or if it is to advance an exploration program if you are a resource company, they often don’t have the time or resources necessary to engage with those in the community who are potentially interested in their story.

As an exchange, we can help our issuers to help themselves by providing all of these different vehicles for conveying their excitement about their businesses to a broader community than they might otherwise reach.

(PM) Toward the end of February, the CSE requested comment on proposed changes to its listing requirements.  What kind of feedback have you received and how close is the exchange to implementing some of its ideas?

(RC) We received approval from the Ontario Securities Commission in late June to implement the proposed changes, so you’ll be seeing them take effect shortly.  We had not amended our listings criteria since we launched in 2003.  With the benefit of over a decade of operating the exchange, and also given the price inflation that has taken place over that time frame, we felt it appropriate to update a number of the financial measures in the original rules.  We have also provided a lot of guidance around certain types of transactions, whether it be reverse takeovers or companies creating reporting issuer subsidiaries through plans of arrangement.  We want to provide very clear guidance about what our approach is to all types of prospective applicants.

We first worked with the securities commission on the proposed amendments, and then put them out for public comment.  The comments were quite supportive and we also received some questions that were addressed through minor amendments to the proposals.

I would point out that we expect to shortly be proposing further amendments to our listings policies and requesting comment on them as well.  The new proposals will mostly focus on continued listing requirements so that we have certain financial and other measures companies have to meet if they are to remain listed on the exchange.

By and large they are not focused on the price of the shares or trading activity because that can be a result of factors beyond a company’s control.

The exchange’s list of issuers continues to expand and we are seeing more and more fast-growing, high-profile companies choose the CSE as the exchange on which they want to build their business.  It is important that we keep pace with this interest and expansion by continually reviewing how we operate as an exchange and make sure we are serving our user community in the best way possible.

Industry Insights

Market Structure Issues Affecting Small‐Cap Issuers: CSE Submits Comments to IIROC

As part of a number of initiatives undertaken this year  to enhance the stability and integrity of Canadian capital markets, the Investment Industry Regulatory Organization of Canada (IIROC) sought comments from capital markets stakeholders on factors impacting micro and small-cap issuers.

With well over 300 publicly listed small-cap securities, the Canadian Securities Exchange (CSE) serves as an important bellwether for forces impacting this vital segment of the securities ecosystem. As such, the CSE provided its perspectives on a number of regulatory as well as operational items that could provide direction on improving capital formation for stakeholders in the micro and small-cap space.

Below is the full text of the letter submitted to IIROC detailing the CSE’s comments. All submissions, when published, will be available on IIROC’s website.

Introduction

The Canadian Securities Exchange (the “CSE”) is pleased to submit its observations and recommendations in response to the Investment Industry Regulatory Organization of Canada’s (“IIROC”) request for proposals on “Market Structure Issues Affecting Small‐Cap Issuers”.

The CSE’s view is that many of the market structure concerns voiced by small‐cap market participants over the last number of years are symptoms of a fundamental problem: an absence of buyer interest and participation in these markets. Some of the reasons for this challenge are beyond the control of industry participants. The collapse in the price of many commodities during the current business cycle, and unfavourable demographic trends in the retail investment population who have historically participated in these markets are a big part of the challenges faced by issuers, advisors and marketplace operators in the small‐cap space. The CSE believes, however, that there are a number of measures that can be adopted by the industry to address issues under our control. These measures fall into two broad categories:

  • Address the capital formation challenges faced by issuers and their advisors, and reduced participation rates from retail investors in initial finance transactions. The exempt market in Canada should be enhanced with measures similar to those now in force in the United States as a result of the implementation of Regulation A+ of the JOBS Act. Doing so would provide a bridge between the attempts to create a crowdfunding regime for very early stage capital raises and the traditional prospectus‐backed IPO market. The current exempt market, which provides the majority of small‐cap finance, is by its nature limited in scope in both the dollars that can be invested and the number of potential participants. The CSE believes that many of the market structure mechanisms proposed will not provide any long term relief to the problems identified, unless the buyer problem is addressed. Unless new classes of market participants are able to enter the small‐cap finance and trading space, we are concerned that technical changes to the trading rules will not bring about the anticipated benefits.
  • In the second part of our submission, the CSE will provide its views on many of the issues raised by industry participants and cited by IIROC in the Request for Proposal.

Importance of Canada’s Small‐Cap Finance Community

It bears repeating that Canada’s early stage public capital market is an important component of the country’s economic success. Entrepreneurs from every industry group have benefited from their ability to finance business development from the public markets at a lower capital cost than would be available from private sources. Where businesses in other countries have to rely on expensive and restrictive private sources of finance (e.g. bank debt, private equity, venture capital funds), Canadian companies have been able to raise billions of dollars at reasonable cost from public market investors. Canada’s investment dealers and marketplace operators have supported this primary capital formation process with fair, efficient and accessible secondary market trading services. Investors from all income brackets have historically been able to share in the growth of the country’s capital markets through their ability to buy and sell small‐cap stocks. The liquidity, and resulting price discovery efficiencies, that these investors contribute to the market has further supported the ability of companies to raise needed capital from the public markets. Unfortunately, the traditional primary and secondary market model for small‐cap finance in Canada has broken down. The days of an IIROC member investment dealer advising a company and assisting on the placement of its initial distribution of securities under an offering document, while supporting secondary market interest through the provision of research coverage and investment advice via a network of advisers are irretrievably past. The vast majority of funding raised by companies listed on the CSE and the TSX‐V now comes from the exempt market. Advisors at IIROC member investment dealers are increasingly less likely to recommend client participation in both primary and secondary market small-cap investment. Secondary market trading activity comes principally from retail investors through the discount brokerage networks. Dealers are committing less and less capital to market making and other proprietary secondary market trading activities. While we will leave it to the practitioners from the sell side to enumerate the reasons for the shift, we do not believe that any of these trends are positive for the Canadian capital markets.

In current small‐cap finance, the principal source of exempt market funds is the accredited investor exemption. Covering a minute percentage of Canadian households (approximately 1 – 2%), accredited investors account for a major percentage of funds raised by CSE issuers. The CSE believes that to address the capital formation challenges faced by small‐cap issuers, access to the exempt market should be expanded. At the same time, the industry needs to collectively come to an agreement as to the role that new forms of investor engagement can and should play in the capital formation process. Many registrant firms, citing compliance concerns, will not permit their advisors to use social media to communicate with clients and a broader investor audience. Small‐cap issuer firms and their advisors are also reluctant to employ social media for similar reasons. Given that an entire generation of potential market participants consume news and information via social media sources, the industry is cutting itself off from the future. Accredited investors skew older than the population as a whole (which is itself aging rapidly), and ultimately represent a declining pool of market participants. Unless we can collectively engage a younger, less affluent, group of market participants, the public capital formation process is doomed to irrelevancy.

Small-cap investors may need to brace for lower returns There is also an important public policy reason for broadening participation rates in the small‐cap finance and trading markets. A report published by the McKinsey Global Institute on May 2, 2016, (Diminishing Returns: Why Investors May Need to Lower Their Expectations) suggests that investment returns in developed markets in North America and Europe are likely to be significantly lower in the coming 20 years than they have been in the preceding 30 years. The two principal reasons cited in the study are the prospects for lower overall growth in these economies and the lack of population increase. If this forecast is accurate, investors seeking higher than developed market returns will have look to investments in the small‐cap markets. If we continue to, effectively, limit participation in the small‐cap capital formation process to the accredited investors, we are denying the opportunity to access these investment opportunities to the vast majority of potential investors. This harms not just the investors themselves, but the companies looking to raise growth capital from the public markets.

To build a new constituency of younger and engaged small‐cap market participants, the CSE recommends the following steps be taken across the industry:

  1. Harmonize the crowdfunding rules across Canada. The current crowdfunding regime in Canada is too complicated: the steps required to ensure a compliant national offering are extensive, and eat into the modest potential proceeds of the process. The likelihood of a company unintentionally breaching the guidelines in a particular province or territory is high. The fragmented rules also raise compliance costs for portal operators hoping to conduct business across multiple jurisdictions. Economies of scale are more difficult to achieve, raising capital costs for their clients. The United States, in contrast, has a set of rules in place under Regulation A of the JOBS Act that provides for a clear set of guidelines across all 50 states.
  2. Implement a new means of prospectus‐exempt financing modelled after Regulation A+ of the United States JOBS Act. Unless we extend participation in the exempt market beyond the accredited investor exemption, the small‐cap finance industry will fail to gain the engagement of a new generation of potential investors. The success of television shows like “Dragon’s Den” in Canada and “Shark Tank” in the United States suggests that there is an appetite for entrepreneurial stories that extends far beyond the small segment of population represented by the accredited investor class.
  3. Regulation A+ permits issuers to promote participation in their fundraising initiatives through a variety of non‐traditional means. Canadian regulators, investment dealers and advisors, and small‐cap issuers have to come to grips with appropriate uses of social media and other communications media to engage with the broader investor population. As an exchange, the CSE can provide guidance and specific training to its issuers in these opportunities, if the rules are well understood.

If we are unable to engage a new generation of investors, whose numbers and potential investment resources are significantly larger than the few accredited investors relied on by the industry currently, then all of the technical measures designed to improve the operation of the small‐cap markets will prove irrelevant. While IIROC cannot alone implement any of these changes, the organization can be an important focal point for reform in assisting the industry in developing new means of engaging with the broader investing public.

Marketplace Operation Issues

As indicated in the introduction, the CSE has a number of views and comments on the marketplace operation issues cited in the Request for Proposal.

Short sale proposal

The CSE is sympathetic with issuers and their shareholders who believe that the current short sale rules, combined with the absence of buyer interest in many small‐cap stocks, provide a low risk opportunity for short sellers to profit. Allowing the short sale to create a new downtick, particularly in the case of sub‐10 cent stocks, results in a material decline in the market cap of the company. When the short position is covered, ideally (from the short’s perspective) at a still lower level, an even larger slice of the market cap of the company has disappeared. This is particularly frustrating for companies that are attempting to conduct a financing. The ability of companies to raise funds at greater than 5 cents per share (the minimum threshold for TSX‐V and CSE‐listing companies absent an exchange exemption) can be compromised by short selling pressure in the secondary market.

The CSE is prepared to support rule changes that will place restraints on the ability of short sellers to create a downtick on the initial trade. We do not support, however, a re‐institution of the former rules that were enforced at the trading system level of the exchanges. Bringing back the former rule, which involved a significant amount of programming and testing, would take a lengthy period of time to institute. In our view, the rule should be that a declared short sale may only be entered when accompanied by the “passive only re‐price” tag. The tag will enforce the requirement that a short sale has to be booked; it may not cross the spread to execute. If an order crosses the spread to trade against the short sale order, the likelihood is that the new sale price will represent an uptick from the last traded price. All of the Canadian markets currently support the passive only re‐price tag; instituting the new rule would not be held up by a lengthy technical implementation process. We would also support the standard exemptions (for example, exchange appointed market makers should be able to sell short without restriction), as were present in the former short sale rules. At first blush, we do not believe that firms using the “short mark exempt” tag (“SME”) should be exempt from this requirement. In general, these firms are computer aided, proprietary, high frequency trading firms that are not generally active in the small‐cap markets.

Settlement discipline

IIROC should examine whether firms are properly enforcing the short sale covering requirements. As a general rule, small‐cap stocks are not available for loans, nor are they margin eligible. For many stocks, there may be no assurance that a short position may be covered within the time limits required under UMIR. If firms are not enforcing the requirements properly, the economics of predatory short selling activity would improve to the detriment of the issuers, their shareholders and the broader market.

Tick size

We do not believe that modifying tick size for low priced stocks would have a material impact on liquidity or price continuity. The experience of the broader market when decimals were introduced suggests that overall liquidity would not change, but order size at each increment would decrease. Because more price levels would have to be accessed to fill orders, volatility would increase by reducing price continuity. Our experience for CSE‐listed stocks is that, in any event, the typical spread for the majority of small‐cap stocks is not at the minimum half‐cent or penny increment. Proponents of smaller tick size suggest that the measure would reduce the impact of short selling activity. In the CSE’s view, instituting the “passive only” requirement for short sales would have a more powerful impact on the identified problem. Proponents of larger tick size suggest that their plan would increase potential profits for market makers and other firms committing capital to trade a particular stock. The CSE suggests that IIROC and industry members study the results of the “Tick Pilot” in the process of being implemented in the United States before considering amendments to UMIR’s tick size provisions.

Board Lot size

Increasing board lot size is cited by a number of parties as a means of restricting short sale activity in small‐cap stocks. As described above, the CSE believes that the better measure is to prevent a short sale order from crossing the spread to execute the trade. Increasing the board lot size would have a significant negative consequence: many retail shareholders might find themselves holding an odd lot position in the stock. Odd lots receive no price protection in the secondary market, and, as a result, may trade at any price without violating UMIR or the national instruments. Execution quality for odd lots is a regular customer service issue for dealers: the CSE often deals with complaints from clients on the price that they received when trading an odd lot. The CSE has appointed odd lot market makers to address this concern, as odd lots orders are now automatically executed against the market makers book at the bid or the offer price. The fact remains, however, that handling customer odd lot orders effectively is a challenge for retail oriented investment dealers. Expanding the number of client odd lot orders would be harmful to the goal of increasing investor confidence in the fair and efficient operation of the small-cap markets.

Electronic trading

A number of industry participants have cited the advent of electronic trading as a major disruptor to the fair and efficient operation of the Canadian small‐cap markets. The CSE has supported research efforts by IIROC and other entities over the years aimed at identifying the impact of market participants who use computer driven strategies on the markets. From a CSE perspective, we have not been able to identify significant participation by these traders in the small‐cap names. We know these accounts from their activity in the highly liquid Canadian large‐cap stocks that the CSE posts alongside its listed companies. The CSE is in a position to say that these firms are not active in the CSE‐listed market. In general, the small‐cap market is simply not liquid enough to support strategies which effectively require the trading account to be flat at the end of the day.

Day trading activity

An area that has not been carefully studied to date is the impact of so‐called “day trader” activity on the operation of the small cap markets. Distinct from the high frequency trading firms, the day traders are generally individuals trading from their own account through a small number of firms established specifically for the purposes of supporting this kind of trading activity. Although these individuals may use computers to aid their trading, they do not rely on low latency strategies to achieve their trading goals. They also, unlike the high frequency traders, appear to be prepared to hold significant positions in a particular stock over a period of days. The CSE would welcome further study of the activities of these day traders, and encourages IIROC and the securities commissions to encourage this effort.

Conclusion

The CSE thanks IIROC for the opportunity to discuss these vitally important issues in an industry forum. As we have stated throughout this paper, our basic concern is that modest reform to the trading rules will not address many of the issues cited by market participants in the current state of the small‐cap markets. Unless the industry, which includes IIROC, the provincial securities commissions and (shortly) the CCMR, regulated dealers of all types, advisors, and issuer companies, is able to develop a model capable of engaging a new generation of potential investors, all of our mechanical changes to the markets will not produce the intended results. The CSE supports the development of a new, significantly broader, exempt market with two key components:

  • harmonized crowdfunding regulations across Canada, and
  • a new category of offering modeled after Regulation A+ of the United States JOBS Act, enabling companies to raise larger amounts of capital from a broad group of potential investors
CSE Issuer Stories, CSE Quarterly

VirtualArmor – advanced network and cybersecurity

This story was originally published at www.proactiveinvestors.com on May 26, 2016 and featured in The CSE Quarterly.

VirtualArmor debuted on the CSE in November of last year at $0.25.  It sat quietly for its first couple of months before starting to build a following that has since seen the stock close as high as $0.75 (a 200% gain), and more recently at $0.65 (up 160%).

A basic analysis of the company yields some familiar themes, including experienced management and rapid growth underscored by hard-won advantages in a large, fast-growing market.

Founder and Chairman Christopher Blisard explains the challenges facing every entity with a presence on the Internet, and thereby the opportunity for VirtualArmor, in a manner hard to dispute.  “Where we are going as a world is that everything is being moved to the edge,” Blisard explains.  “You as a consumer or business want everything available all the time at any location.  We’ll continue to grow because technology is pushing the boundaries of where data is stored and those areas can become very vulnerable very quickly.  You really have no choice but to call companies like ours to take care of your problems.”

Established in 2001, VirtualArmor has crafted a business model over the years that Blisard says literally has no peer within the industry.  It involves working closely with hardware manufacturers so that the VirtualArmor team can go beyond providing a security overlay “a mile wide and an inch deep” and get inside the actual hardware, where the most talented of hackers often go to lay their traps.

“We work hand in hand with the manufacturer, plugging their software into our platform so we can go incredibly deep into every piece of equipment we are managing on your network.  It is not just a reactive environment at that point, but also a proactive environment.”

When VirtualArmor discusses security with a potential client, it insists on bringing the hardware that will serve as the backbone of the entity’s computer network.  Instead of trying to fix the myriad bugs inherent in a system that should have been designed better in the first place, VirtualArmor brings in what it knows will work.

Looking at the financial picture, accrual earnings were skewed in 2015 by non-cash items related to the go-public effort, but cash flow was positive for the year, and that’s the number that really counts.  Fiscal 2016 should be more indicative, and thus far is shaping up nicely.  The company announced on March 8 that it had booked US $2.4 million in sales in the previous 90 days.  Given that revenue for full-year 2015 was US $7.4 million, VirtualArmor is so far on pace to beat handily year on year.

Matthew Brennan, Vice President of Sales, points to the importance of convincing investors that growth in revenue and earnings is sustainable.  “When you have an organization as successful as ours and all of that revenue came from two salespeople, to know we are going to end the year at between six and eight salespeople suggests you will see things move in a positive direction,” he says.

Blisard adds that part of the benefit of listing on the CSE has been to broaden the understanding of VirtualArmor and give it new tools to conduct the full extent of the expansion it envisions.  “Looking at 2016 to 2017, the objective will be to expand our reach internationally,” he says.  “That includes going into Canada and Europe, and particularly the London market.”  Blisard goes on to explain that the company has a 10-person Security Operations Center, or SOC, just outside of London that can play a very helpful role in landing and serving local customers.

The revenue outlook is further enhanced by the stickiness of the client base, which is actually very easy to assess: “We have never lost a managed services customer and our longest one has been with us for 10 years,” says Blisard.

Also helping the share price was the announcement March 16 that the company was cancelling just under 3 million of its shares outstanding, and that several third-party shareholders had agreed to put a total of 3 million shares into escrow.  The resulting reduction in dilution, not to mention clear vote of confidence, set a positive tone that the stock price responded to immediately.

Blisard is happy with the way the stock has performed to date but points out that he knows education is a process and that it will take time for the company to build the following it thinks it ultimately deserves.

“For the Canadian markets a company like this is unique,” Blisard explains.  “The investment community understands the importance of cybersecurity in their lives.  The people we talk to understand the way our company is structured, how it drives revenue, how it drives profit, and where it sits within the cybersecurity world.”

Concludes Brennan, “It is very important that an investor understands there is a roadmap.  We made a good decision in not growing too quickly, taking our proceeds and placing smart bets on particular territories and hiring the right people.  I think it is key that the investment community understands this.”

Learn more about VritualArmor International Inc. at http://www.virtualarmor.com/ and on the CSE website at http://thecse.com/en/listings/technology/virtualarmor-international-inc

CSE Issuer Stories, CSE Quarterly

Pudo – Pick it up. Drop it off.

This story was originally published at www.proactiveinvestors.com on May 26, 2016 and featured in The CSE Quarterly.

PUDO Inc. debuted on the CSE on July 28, 2015 at $0.70, proceeded to drop to $0.18, yet within two weeks was conducting a private placement of 1.1 million shares at $0.63.  Using that as a reference price, the stock has closed up as much as 443%, and as of publication date is up a still respectable 280%.

“While you are out and about, we’re here accepting your deliveries” reads the tagline on the company’s website, and that pretty much captures the essence of the PUDO service.  We all know how frustrating it is to be waiting for a package, only to arrive home and find that someone tried to deliver it, but unable to do so left a sticky message indicating that you cannot obtain your parcel until the following day.  Even more annoying is learning that the package had been delivered, only to be stolen off the front stoop.

PUDO completely eliminates this inefficiency by creating locations called PUDO Points where customers can specify their parcels be dropped off so as to be picked up at their convenience.

The benefits to all participants in a transaction run deeper than that, but at its core the service makes life more convenient for consumers.  It is the simplicity and connection to all of us that PUDO CEO Frank Coccia believes is behind the impressive performance by the company’s shares in the short time the company has been public.

“It is a story that everyone understands,” says Coccia.  “It is not a biotech company or mining exploration where it can be difficult to see the real potential.  I enjoy going out and speaking with investors.   They see that couriers, retailers and consumers can have a field day with this.”

Digging a little deeper, one learns why the concept would have more natural allies than competitors.  Coccia explains that PUDO seeks nothing more than to provide pick-up points inside convenience stores and other established physical locations.

Couriers thus know they have a guaranteed delivery and save money by not having to attempt re-deliveries after a failed visit.  Retailers that ship product to fulfill customer orders gain flexibility to negotiate with multiple couriers and thereby reduce their shipping costs.  The consumer gains the peace of mind that comes with knowing a parcel is available to pick up at a convenient location whenever they like.  Convenience stores and other PUDO Points not only earn fees for holding and putting parcels in the hands of their owners, but also from impulse buys thanks to the extra foot traffic.

Coccia says that investors also like the fact that PUDO keeps its costs under control by needing little more than to maintain and support the technology behind the service.  “The beauty of PUDO is that we don’t own anything outside the technology,” explains Coccia.  “The bricks and mortar is already there.  We are just taking advantage of the elements in an ecosystem that already exists.”

Growth on the ground has been quick to date, with Coccia saying that the company has already established some 800 PUDO Points in Canada and the US and over 6,000 registered locations, this latter category being locations signed up that have yet to go through training so they are fully ready to roll.

“Once we hit 3,500 to 4,000 locations in Canada then we should be exactly where we want to be,” Coccia says.  “In the US we have over 3,700 registered locations at present and ultimately want 16,000 to 20,000.  Once we reach those two numbers we will have a fixed cost with a control centre that manages everything.”

Experience helps small companies avoid costly mistakes, and fortunately for PUDO Coccia has been at this for 35 years.  “I built niche courier systems, which basically are courier systems for one industry.  We did it for the travel industry and the financial services sector and for lawyers serving one another documents and papers.  It is all about consolidation where people can pick up mail and drop off their mail.”

Coccia expects growth to continue apace, thanks in part to several potential partners he is talking to in the US.  “We’d suddenly have a network in the US that could rival that of any national carrier – UPS or even the post office,” he says.

With just 15.6 million shares outstanding, PUDO has plenty of room to maneuver if Coccia deems it necessary to raise equity capital for supporting growth.  And while the company is not flush with cash, liabilities are fairly low as well, so with revenue beginning to come in Coccia has a good shot at preserving a nice share structure until PUDO reaches the point at which it becomes self-funding.

Experienced management, enviable share structure, rapid growth, consistent communication.  Does that qualify as a formula?

Learn more about Pudo Inc at http://www.pudoinc.com/ and on the CSE website at http://thecse.com/en/listings/diversified-industries/pudo-inc

CSE Issuer Stories, CSE Quarterly

Urbana’s mix of private and public holdings beats street, appeals to deep value investors

This story was originally published at www.proactiveinvestors.com on May 26, 2016 and featured in The CSE Quarterly.

One would think that with a track record like Urbana Corporation’s (CSE:URB; TSE:URB) the chance to buy its shares at a discount would be almost non-existent. At an annual return based on net asset value exceeding 14% since it was launched in 2002, Urbana easily ranks as one of the better performing investment companies on the block.

Puzzling then that its stock is priced around $1.97, while its per-share net asset value is closer to $3.50. “Since October 2002 the rate of growth has been just under 14.54% but the share price is at a significant discount to the asset value, to an extent due to lack of coverage,” explains Thomas Caldwell, Urbana’s President and CEO.

Caldwell, of course, is also Chairman of investment dealer Caldwell Securities Ltd. He is well known on Bay Street and Wall Street for making big returns from investing in stock exchanges. “At one point we owned 37 exchanges,” Caldwell notes.

That legacy remains a major part of the Urbana investment approach, reflected these days more so in the heavy portfolio weighting in companies involved with the financial industry, be they major banks or service providers to the mortgage business. “That is where I spent most of my career and is an area we like to think we understand,” Caldwell says.

In many ways, Urbana is structured to offer investors the best of all worlds. It has just shy of $200 million under management, about 55% in public investments, plus 45% in private investments that its shareholders would almost certainly be otherwise unable to access.

Another benefit is that the closed-end nature of the fund is a perfect fit for Caldwell’s investment strategy. “A closed-end investment corporation like Urbana is a great way to manage money because the capital we have is permanent,” he explains. “The problem with mutual funds is that you get your money at the worst time – at the top of markets – and you lose it at the best time – at the bottom of markets. But that is when you should be doing the opposite – you should be selling at the top and buying at the bottom. If a market is going down I am not worried about a run-off of assets and that’s where I make our money. I’m a bargain hunter.”

Well-represented sectors these days include US financials, which Caldwell says make up 32% of the portfolio, while a recent move into a set of holdings he calls “Canada Inc.” saw Urbana take meaningful positions in Barrick Gold (TSE:ABX), Suncor Energy (TSE:SU) and Teck Resources (TSE:TCK.B). “Our Canadian banks are up 10%, Suncor is up a few percent, and Teck is up 100%,” Caldwell explains.

One of the CEO’s favourite holdings is a private company called Real Matters. Real Matters runs a technology platform and network of more than 100,000 independent field agents that help financial institutions and other entities in the real estate business perform appraisals, insurance inspections, title searches and mortgage closings. Its customers include 60 of the top 100 mortgage lenders in the US and a number of large insurance companies.

“Real Matters is run by an extremely bright executive named Jason Smith,” says Caldwell, noting that he invited the Real Matters President and CEO to speak at Urbana’s annual general meeting this year. “I say now that I am not interested in ideas anymore. I am only interested in people who can execute on ideas. He can do that.”

Caldwell sees Real Matters eventually listing in the public realm via an IPO, a path that Urbana likes its private investments to move along as they grow and mature.

Another successful holding on the private side that anyone who follows Urbana will be aware of is the Canadian Securities Exchange, in which the investment company holds a major stake. Caldwell also serves as the exchange’s Chairman.

“The CSE fills a role that I believe, and my directors and partners believe, is important to Canada,” explains Caldwell. “Canada is an entrepreneurial country but it is very hard to build a company here because we are losing a lot of independent dealers and don’t have the big venture pools like they have in Silicon Valley. So what the CSE can do as an exchange is to simplify the role of accessing capital.

“Ned Goodman (Deputy Chairman of the CSE and founder of Dundee Corporation – a significant shareholder in the CSE) and I both say the same thing – we feel the CSE is an extremely important link in Canada’s prosperity going forward. We pursue this with almost religious fervor because both Ned and I feel so strongly in terms of helping Canadians. Remember, the large financial institutions and many of the resource companies are going to be generators of unemployment in the years to come. New jobs and head offices are only going to come from new enterprise. That’s where the CSE lives and that’s what we try to nurture.”

Fervour certainly is an apt word to describe the way Caldwell feels about the industry he has built his life around, and it troubles him to see certain pillars of the financial community struggling so mightily. “Independent brokerage firms are being massacred and that is going to impact Canada’s standard of living, the number of head offices and new companies,” he explains. “It is a difficult environment right now for new companies trying to raise money. Regulators don’t see that they are addicted to evermore regulation and the damage they are doing to the economy.”

Asked about the possibility of Urbana seeing this as an opportunity, Caldwell suggests he needs to know more. “I’d love to sit down with regulators at some point and find out what their intention is. If they are planning to wipe out an industry, which it appears they are, then naturally I would not be doing bargain hunting in it.”

In the end, he suspects the over-regulation he witnesses does not even achieve its intended objective. “Quite often in an onerous environment the people who will work hard to jump through the hoops are the ones with the more speculative deals. So it does not even mean that you are thinning the ranks of the villains because those are the ones that will bend the rules.”

Regulation run rampant is an issue Caldwell sees as a threat to the Canadian economy but, paradoxically perhaps, he sees strict regulation of the financial industry in the US creating an investment opportunity. “There has been tremendous regulatory pressure on US banks and it is the shareholders who suffer,” says Caldwell. “Our feeling is that they will have to ease up, which would be good for the banks. If they don’t then US banks may unilaterally break themselves back up into commercial and investment banks, which I think would also be good for the stocks. If history has shown us anything it is that when you break up a company, the parts are usually worth more than the whole.”

With the discount to net asset value at Urbana so significant, it makes sense to use a portion of the corporation’s capital to buy back its own shares. “We have been very aggressive buying back stock and cancelling it,” says Caldwell. “We have bought back about 37 million shares at a discount, and this has benefited the remaining shareholders.”

The buyback has doubtlessly contributed to share price stability, but there still remains a gap wide enough to present opportunity for new investors. “The great bargain right now with Urbana is that for $2.00 you get $3.50 working for you, and that $3.50 has been growing at over 14% per annum for the last 14 years. The stock price will eventually catch up with it but I think in the meantime you can get pretty good management and assets at a discount.”

Learn more about Urbana Corporation at http://www.urbanacorp.com/ and on the CSE website at http://thecse.com/en/listings/diversified-industries/urbana-corporation

Event Review

Event Review: CSE Day Toronto & Vancouver Spring 2016

In markets, timing is everything. With re-energized commodities prices and an evolving regulatory landscape, the spring edition of the CSE Day events in Toronto and Vancouver offered a well-timed opportunity for CSE-listed company representatives and investment professionals to assess the capital raising environment for emerging public companies.

The value proposition for attendees of these events continues to ring true. CSE Day sessions this year attracted strong participation from CSE-listed companies and investment professionals who look forward to the opportunity to  share knowledge, get connected, and be inspired.

CSE Day Toronto: Focus on Finance

CSE Day Toronto took place in the heart of Bay Street and once again drew a diverse audience representing the spectrum of the investment community.

This slideshow requires JavaScript.

Based on feedback from attendees of previous sessions, this year the CSE decided to evolve the agenda to focus on addressing issues relevant to companies looking to raise early stage capital.

Specifically, two discussion panels as well as a presentation on the RegA+ roll out in the US comprised the first half of CSE Day Toronto followed by a ‘Pitch Reception’ and networking event to close out the day.

Navigating the Terrain

The first of the two presentations entitled “The New Realities of Public Company Financing” discussed investment dealer and prospectus exemptions, crowdfunding trends and an overview of the Ontario Offering Memorandum (NI 45-106).

Moderated by Michael Dolphin (WeirFoulds), panel members Raj Dewan (WeirFoulds), Jason Saltzman (Dentons), Richard Jozefacki (Foster & Associates), Ari Todd (Frontier Merchant Capital) and Stephanie Mann (Stockhouse) discussed new prospectus exemptions as well as the current opportunities and challenges facing crowdfunding in Canada.

CSE Day Toronto Panel Discussions

In the second panel discussion, entitled “Enhancing Liquidity – Challenges and Options” moderator Elizabeth Naumovski (Caldwell Securities) explored different aspects of markets including the role of IR in facilitating liquidity, market makers and their role in marketplaces as well as the impact of electronic trading on junior markets. Participants on this panel included James Beattie (D&D Securities), Cathy Hume (CHF IR), Adam Schmidt (CSE) and Dave Houlding (Independent Trading Group).

To complement the financing panel discussion, Jason Paltrowitz, Executive VP of the OTC Markets Group in the US, provided an overview of Regulation A+, which has introduced equity crowdfunding in the US as the last stage of the JOBS Act. Reg A+ allows companies to raise up to $50 million in a public offering traditionally only reserved for participation by accredited investors.

A noteworthy example of the promise of this new funding mechanism cited by Paltrowitz was Elio Motors. Elio Motors raised US $17M and reached a market cap of approximately $1B shortly thereafter.

CSE Day Vancouver: Succeeding as an Entrepreneur

West of the Rockies, CSE Day Vancouver featured a slightly different format than Toronto. An exclusive executive lunch presentation was held at the historic Vancouver Club in which attendees were treated to a great meal as well as food-for-thought on entrepreneurship and business success from renowned entrepreneur and speaker Peter Legge.

This slideshow requires JavaScript.

Among the highlights of his presentation were numerous anecdotes from his own business experience, each revolving around a common theme of “becoming what you think about the most.” All the attendees of the executive lunch also received a complimentary copy of Legge’s book entitled “Lunch with Joe”.

In addition to the presentation, Richard Carleton, CEO of the Canadian Securities Exchange provided a brief update on the exciting online initiatives being undertaken by the CSE, including enhancing the Exchange’s digital presence.

CSE Day Vancouver Spring 2016

To that end, there was a new feature of the CSE Day experience which was broadcast live via the app Periscope.

CSE Twitter followers and many more from across the globe were able to tune in to the live broadcast of the networking session and engage directly with VP of Listings Development James Black as he navigated the event venue. Live broadcasts of the pitch presentations were also provided online.

Pitching for Success

In keeping with CSE Day tradition, several CSE-listed companies also presented their company pitches to event attendees.

For those not familiar with the CSE pitch presentations, company representatives have the opportunity to tell their firm’s story to attendees within two minutes. Not only do firms who present benefit from the practice of their pitch to an important audience, the CSE also records and makes these ‘pitches’ available on the CSE YouTube channel here.

In total, CSE Toronto saw 13 companies present while CSE Vancouver had 12 provide company pitches. Below is a list of those firms who participated in each city as well as videos of company pitches.

Toronto – April 28, 2016

  1. Augustine Ventures Inc. (WAW) – Bob Dodds, President and CEO
  2. Urbana Corporation (URB) – Thomas S. Caldwell, President and CEO
  3. Supreme Pharmaceuticals Inc. (SL) – Zach Stadnyk, Corporate Finance
  4. BacTech Environmental Corporation (BAC) – Ross Orr, President and CEO
  5. Beleave Inc. (BE) – Roger Ferreira, CEO
  6. Dundee Sustainable Technologies Inc. (DST) – John Mercer, CEO
  7. PUDO Inc. (PDO) – Frank Coccia, CEO
  8. West Red Lake Gold Mines Inc. (RLG) – John Kontak, President and CEO
  9. Taku Gold Corp. (TAK) – Zachery Dingsdale, President and CEO
  10. Victory Nickel Inc. (NI) – Sean Stokes, VP – Public Affairs
  11. Metalo Manufacturing Inc. (MMI) – Francis MacKenzie, President
  12. Robix Environmental Technologies Inc. (RZX) – Nathan Hansen, CEO
  13. BitRush Corp. (BRH) – Karsten Arend, President

Vancouver – May 26, 2016

  1. Mag One Products Inc. (MDD) – Nelson Skalbania, Chairman
  2. West Isle Energy Inc. (WEI) – Arthur Skagen, CEO
  3. Biomark Diagnostics Inc. (BUX) – Brian Gusko, Director of Corporate Relations
  4. ParcelPal Technology Inc. (PKG) – Jason Moreau, CEO
  5. Asante Gold Corporation (ASE) – Douglas MacQuarrie, CEO
  6. Enertopia Corp. (TOP) – Robert McAllister, President
  7. Qwick Media Inc. (QMI) – Ross Tocher, CEO
  8. New Age Farm Inc. (NF) – Richard Cindric, Investor Relations <- Missing from photos
  9. Hello Pal International Inc. (HP) – Ryan Johnson, Investor Relations
  10. International Wastewater Systems Inc. (IWS) – Lynn Mueller, CEO
  11. CopperBank Resources Corp. (CBK) – Gianni Kovacevic, Executive Chairman
  12. MGX Minerals Inc. (XMG) – Jared Lazerson, President

Sharpening the Saw

Regardless of which side of the country the CSE traveled to, the challenges facing entrepreneurs trying raising early stage capital are very similar.

By providing a forum for CSE-listed issuers to learn alongside one another as well as to engage with thought leaders and innovators in the capital raising space, the CSE continues to change the paradigm of how a securities exchange can support its clients. Commented Barrington Miller, Director of Listed Company Services:

“We are excited about the evolution of our CSE Day events – having welcomed well over 200 guests to our two most recent events in Toronto and Vancouver and attracting our strongest slate yet of presenters. What really stands out is the diversity and entrepreneurialism of the audience that joins us at these events. There is always a palpable sense at these forums that the next game changing company could be there in the crowd, potentially making its next critical connection on its path to success.”

With no shortage of potentially market moving events on the horizon, investors, markets and publicly listed companies will have a great deal to digest. Fortunately, the CSE Day events will be back again in Toronto and Vancouver this fall. Despite the uncertainties in the marketplace, continuing to invest in knowledge and development is always a sound bet, regardless of the timing.

CSE Issuer Stories, CSE Quarterly

Lite Access lights it up

This story was originally published at www.proactiveinvestors.com on May 26, 2016 and featured in The CSE Quarterly.

Lite Access Technologies listed on the CSE in a transaction that saw the company raise just over $1.84 million at $0.25 per share, with its first trade printing on June 1, 2015.  Since then, its stock price has closed as high as $1.80, up 620%, and at time of publication was $1.61, or 544% higher.

Lite Access could hardly have chosen a better time to go public, what with a worldwide “supercycle” in optical fibre installation by large telecoms driving growth for the company’s products and services.  And if that cycle is, as the company suggests, merely in the second inning, it is easy to understand why investors have gotten so excited about the prospects for strong, sustained earnings.

“Everyone today is touched by the digital world and realizes that high broadband speed and capacity is essential to a modern economy, economic growth and the daily lives of most consumers,” says Michael Plotnikoff, Lite Access co-founder and Chief Executive Officer.  “And as rapidly as fiber optic deployment is growing in a general sense, the micro-trenching and air-blown fibre sub-sector that Lite Access specializes in is growing faster.  We not only offer pure-play exposure to the space, but our total integrated solutions are based on both proven technologies and widely accepted installation methodologies considered to be the solution of choice for fibre-optic connectivity – that is pretty difficult to find.”

Lite Access uses specially designed proprietary equipment to create “micro-trenches” into which it places exclusive crush-proof microduct (micro-conduit) designed for all types of telecom applications, both for today’s needs and those of the future.  The microduct serves as a medium through which optical fibre is blown using compressed air to create high-speed broadband connectivity in a matter of minutes and at a cost far less than with traditional cable installation methods.

The beauty of the system, and a main factor driving demand, is the lack of interference with the local environment and archaeologically sensitive areas both during initial installation and any subsequent upgrade cycle.  As the micro-trenches are narrow, Lite Access installation teams can be in and out of a site quickly (micro-trenching and installing up to 1 metre per minute of microduct) and at a cost much lower than more disruptive conventional methods.

Later, when fibre needs to be replaced due to technological obsolescence or upgraded in support of future growth requirements, there is no need to dig up the roadway again.  Lite Access simply blows new fibre from the starting point through to its destination at the other end and, voila, there is your upgrade.  Nobody outside of the companies involved even knows it took place.

As Plotnikoff explains, Lite Access is a pioneer in the micro-trenching and air-blown fibre business, and as the industry shifts into high gear he has a proven team behind him that has successfully completed dozens of projects globally, some quite challenging from an engineering perspective and at times not possible using traditional installation methods.  Well-rounded project and management experience is serving Lite Access well from both an operations standpoint and in the market with investors.  It is one of several important boxes it has ticked.

Good people?  Check.  And that includes over a dozen partners around the world certified to install microduct and handle air-blown optical fibre installation.  These partners will contribute to a re-balancing of the revenue stream in future years as they collectively come to install more of Lite Access’s patented equipment and supplies than the company does itself.

Good financial management?  Check that box, too.  Lite Access has just 30.6 million shares outstanding and no financing has been conducted since the initial $0.25 round.  A corporate update released February 1 explained that milestone payments had been received on a $7 million project for BC’s Haida Gwaii community, plus there was over $1 million in receivables and inventory on the most recent balance sheet.

Another key point to note is that with the types of customers Lite Access has – which include cities and municipalities, First Nations and Native Americans, as well as private enterprise and local governments – odds are the company rarely, if ever, finds itself chasing anyone for payment.

Plotnikoff speaks warmly about shareholders he has interacted with over the past year, saying some have essentially become advocates for the brand, helping build awareness and even calling in with business opportunities.  Shareholders are welcome to visit the company’s headquarters and main warehouse in Richmond, British Columbia, if that level of contact is important to them.

“Our shareholders are comfortable because they have an open line of communication and clear, transparent access to information,” explains Plotnikoff.  “I like to think that if we preserve that approach as a principal component of our corporate culture and continue to deliver growth, we will always have a strong degree of support in the market.”

Learn more about Lite Access Technologies Inc. at http://liteaccess.com/ and on the CSE website at http://thecse.com/en/listings/technology/lite-access-technologies-inc

CSE Issuer Stories, CSE Quarterly

Supreme Pharmaceuticals Inc shapes medical marijuana strategy around Canada

This story was originally published at www.proactiveinvestors.com on May 18, 2016 and featured in The CSE Quarterly.

Legalising marijuana for medical use can still be a thorny topic in some countries.

But Supreme Pharmaceuticals Inc. is hoping to lead the way in harnessing its acceptance and benefits in Canada.

Supreme obtained regulatory approval to grow medical marijuana at its site in Kincardine, Ontario, in March.

The company is on track to harvest its first crop in the summer and hopes to get final approval to sell it in September or October.

In the US, four states have legalized the plant for recreational use and 12 others allow its consumption for medical purposes, although that remains a relatively small proportion of the country as a whole.

But in Canada, the medical marijuana business has legalised progressively in the last 15 years.

A key milestone came in 2014 when the government’s Health Canada arm introduced the Marijuana for Medical Purposes Regulations.

The government also said last month it will press ahead in 2017 with plans to legalise marijuana for adult recreational use.

That market is expected to be worth US$5bn a year by 2020 according to leading industry analysts.

Supreme is targeting a domestic medical market, which it expects to be worth about US$100mln by the end of this year and US$1.2bn by 2020.

Supreme’s president and chief executive, John Fowler, said he believed Canada was doing better than some other countries in overcoming concerns about using the plant for clinical purposes.

“I wouldn’t say the stigma has gone but we’re moving in the right direction,” he said.

Fowler began working in the medical marijuana sector more than 10 years ago.

He pursued a legal career to help medical marijuana patients with legal challenges relating to access, jobs and tenancies, working on major cases.

He now sees his mission as being not only to provide Canadians with access to high-quality, low-cost medical marijuana, but to work with physicians to improve their awareness and support for it.

“The hope is that the doctor will be more educated and more willing to subscribe to the company’s products,” he said.

Bottom line

Supreme and its wholly owned subsidiary, AMMCan, have set up a federally-licensed, seven-acre greenhouse in Kincardine on the shores of Lake Huron.  When fully operational, the company expects to be able to produce in excess of 50,000 KG per year.

Supreme has obtained exclusive rights to work with international seed supplier Dinafem.  The arrangement will provide Supreme with access to over 100 unique cannabis strains to put into production in the Kincardine greenhouse.

“Choosing the right genetics is one of the most important aspects of producing high quality cannabis for both medical and recreational markets,” Fowler said.

“It was important we seek out a partner like Dinafem to ensure we grow only the best genetics in our greenhouse which will maximize output, increase quality and have a direct impact on our bottom line.”

Supreme has raised more than US$10mln, three quarters of which it has spent on fitting out the greenhouse and the rest of which it still has in the bank.

It expects those reserves to sustain it until it starts earning revenue from marijuana sales later this year.

Supreme is among about 25 companies holding 31 licences to produce medical marijuana.

The current market of about 45,000 patients is increasing at a rate of about 5,000 per month and is on track to more than double in this calendar year.

Supreme’s primary aim was to supply the consumer market direct by mail order.

But it is exploring the possibility of becoming more of a business-to-business supplier of licensed marijuana to other companies that would retail it.

Fowler said: “The benefits of that are long-term, stable revenue based on supply agreements, rather than volatile revenues from retail.”

Supreme has had to take extensive security precautions at Kincardine to prevent theft, such as high fencing and cameras, and the end product is stored in a vault.

“We like to joke that our marijuana in the vault will be more secure than our money in the bank,” Fowler said.

Fowler also acknowledges the general risk of abuse of the product. However it is worth pointing out marijuana consumption is seen to be less dangerous than tobacco or alcohol with few reported side effects, he said.

Strict regulation compels the company to ensure its products are not contaminated by pesticides or other substances that may be in marijuana bought from street dealers.

Supreme has international ambitions and is eyeing opportunities in countries such as Australia, Germany and Austria.

Canberra recently legalized marijuana for medical use and Berlin and Vienna are considering doing the same.

The company believes it will be able to generate US$200mln in annual domestic revenues within the next decade.  This keeps the company’s focus on executing on its domestic business as a top priority.

Fowler said: “It’s very important to me as the chief executive that we don’t allow the prospect of new markets to in any way negatively affect our primary market, which is right here in Canada.”

Learn more about Supreme Pharmaceuticals Inc at http://www.supreme.ca/ and on the CSE website at http://thecse.com/en/listings/life-sciences/supreme-pharmaceuticals-inc

CSE Issuer Stories, CSE Quarterly

MGX Minerals thinks outside the box in pursuit of grand goal

This story was originally published at www.proactiveinvestors.com on March 1, 2016 and featured in The CSE Quarterly.

The stated goal of MGX Minerals (CSE:XMG) – to put seven to ten mines into production over the next decade – is as ambitious as they come.

But speaking to the company’s CEO, Jared Lazerson, a philosophy begins to show itself that is different than that typically followed within Canada’s junior mining community.　It is certainly one that fits the company’s objective.

MGX does not embrace an exploration model aimed at defining an ever-expanding resource, but rather a more standard business model with near-term profit as its core objective.  Thus the vision of bringing multiple mines on-stream, and doing so as quickly as possible.  Or what Lazerson refers to as a “right into production model.”

The first property scheduled for production is Driftwood Creek, a 776 hectare magnesium project located in the East Kootenay region of British Columbia.

Magnesium is a mineral most people have heard of but few probably know what makes it useful.

In different forms, magnesium can do everything from strengthening steel to fortifying vitamins, and is also used for wastewater treatment.

Lazerson believes magnesium oxide (what the magnesite at Driftwood Creek would become after beneficiation and secondary processing) is suited to yet another application which is still emerging but could grow to be huge.

“One of the potential game changers in the magnesium oxide market is that it can be used as a replacement for gypsum in drywall,” Lazerson explains.  “There is in Asia very heavily produced magnesium oxide wallboard and this is a market we are moving on quickly.”

He goes on to explain that wallboard out of China is characterized by “a wide variety of qualities,” which means there is opportunity for a company with a reliable source of high-quality magnesium oxide to address North American demand for wallboard.

“It is being used in high-rise buildings and also in Florida and other areas where flooding is common,” says Lazerson, explaining that drywall containing magnesium oxide has parallels to cement products, absorbing some moisture but not losing its structural integrity when it dries out.

“In terms of where the massive growth in market demand for the commodity is, we are betting on that,” he says.

Magnesium alloy is a different story and, for the time being, not something MGX wants to target.

Like various other commodities, magnesium alloy’s is a market somewhat controlled by large players and governments.  Lazerson explains that the US maintains high tariffs to discourage Chinese and Russian imports, leaving the country with the highest magnesium alloy prices in the world.  “You have one market that is fantastic and then the rest of the world is reasonably priced.  It fits more into that space where there is sufficient supply globally to support demand.”

With the end user equation seemingly figured out, the question of what hurdles are left to clear before reaching commercialization at Driftwood Creek is an obvious one.  MGX announced in January of this year that a mining lease had been awarded for the project by the province. Separately, it received a permit to conduct bulk sampling of 100 tonnes of material at the site in the fourth quarter of last year.  Its road permit came around the same time.

“In terms of getting stakeholder sign-off – government, First Nations, local community – the mining lease required everybody to sign off, so that is a big step in terms of not running up against any major delays,” says Lazerson.

The bulk sample, he explains, “will allow us to put some hard economics to it – we will see really what it is and what it costs to operate in a true mining environment.”

Major steps to go include construction, meeting capital requirements, environmental permitting, and then obtaining the actual mining permit.  Anyone who knows anything about mining understands that while that might be a short list, the timeframe to check all the boxes is almost always tremendously long.

But Driftwood Creek has a major advantage in that production will not result in any tailings to speak of.  “We don’t have any tailings – we will essentially sell 99.8% of our product,” says Lazerson, adding that “our permitting will be tied largely to showing the public and government and other stakeholders that there are no tailings issues.”

If all goes according to plan, the mine could be in production before the end of 2016.

Looking beyond Driftwood Creek, MGX recently entered a purchase agreement to acquire a 100% interest in 96,000 hectares of property in Alberta.  The land package contains multiple oil and gas wells that the company says contain brines rich in lithium, potassium and magnesium.  It comprises six permits and six permit applications.

Like Driftwood Creek, the Alberta properties reflect an approach of acquiring projects with fairly well outlined deposits that can be put into production for initial outlays of no more than $50 million.

Lazerson explains that lithium, similar to magnesium, is a fit for the company mandate: “industrial minerals, Western Canada, low barriers to entry, low capex.

“We are going back into existing oil fields that are essentially barren.  You are at a 98% water to oil ratio, so there is some oil in there, but it is nominal compared to the level of brine.”

Risk management is another theme that runs throughout a discussion with Lazerson.

In discussing MGX’s commitment to operating in Western Canada he references his team at length.  “Everybody on the ground in terms of geology and engineering has done a tremendous amount of work in Western Canada and I can’t overstate how important an understanding of the local geology, community and infrastructure is – these are what allow　us to do things relatively inexpensively, but more importantly than anything, quickly.

“That’s what maybe sets us apart about the way we do business.  We consider time as the most expensive thing, and really the enemy of all that we do.”

Another pillar of the MGX strategy is a focus on industrial minerals with “a small footprint,” the reason being, according to Lazerson, that these types of projects tend to require smaller amounts of capital to put into production.  Driftwood Creek is a good example, and because it is a magnesium oxide resource there should be minimal environmental impact at the mine or in the processing.

Implied, if not directly stated, in all of this is the vision of establishing MGX as a company that walks the walk, if you will.  A company that gets mines up and running efficiently and makes money.  Once that track record has been established, attracting new projects and financing, not to mention all the other tasks that need taking care of in order to accomplish corporate objectives in this incredibly challenging business, would become that much easier.  Ambitious to be sure, but worth the effort.

Learn more about MGX Minerals at http://www.mgxminerals.com/ and on the CSE website at http://thecse.com/en/listings/mining/mgx-minerals-inc

CSE Issuer Stories, CSE Quarterly, Listed Issuers

The CSE Quarterly – Issue 9 is Now Live!

CSE Quarterly Issue 9The CSE Quarterly – Issue 9 is Now Live

The CSE is proud to present the latest edition of the CSE Quarterly.

This edition of the CSE Quarterly contains a special feature on four ‘difference makers’ listed on the CSE.

Specifically, this issue explores the stories behind these popular CSE-listed companies and the entrepreneurs who are helping them grow.

The companies profiled in this issue include:

RESAAS Services Inc. (CSE:RSS)
Lite Access Technologies Inc. (CSE:LTE)
PUDO Inc. (CSE:PDO)
VirtualArmor International Inc. (CSE:VAI)
Urbana Corporation (CSE:URB)
Laguna Blends Inc. (CSE:LAG)
Captiva Verde Industries Ltd. (CSE:VEG)
Supreme Pharmaceuticals Inc. (CSE:SL)
Beleave Inc. (CSE:BE)

In addition, be sure to read the latest message from the Canadian Securities Exchange CEO, Richard Carleton, for updates on the Exchange for Entrepreneurs.

Missed a previous edition of the CSE Quarterly? Click here to access previous issues.

To have The CSE Quarterly delivered directly to your inbox, sign-up below:




Click below to access the full issue:

(Trouble accessing the publication below? CLICK HERE TO ACCESS THE ISSUE)

Thanks again to our advertisers Davidson & Company LLP, Global Uptick Publishing and Synergy Management Consulting.