Update 12/16: I had a chance to speak with RTI's CEO last night. The private placement should close next week, and RTI is not accepting new investors. The CEO expects the private placement investors to be longer term holders and is not worried about the four month hold period expiring for participants from August. This deal will be exclusive to ACB for cannabis, but RTI will maintain relationships with companies outside of the industry.
I have bought shares in Radient Technologies (NYSE:RTI) yesterday after it announced a joint venture MOU with Aurora Cannabis (OTCQX:ACBFF)(TSXV:ACB). I don't know a lot about the cannabis industry and I'm skeptical of it based on the clown in a suit disguised as a Prime Minister running Canada's ability to legalize that industry as promised. However, Aurora is one of the best companies around in this industry and is already earning revenue under Health Canada's Access to Cannabis for Medical Purposes Regulations. So this deal is not one to take lightly, and the market appears to agree as RTI was up over 100% yesterday. I am expecting a spike in the very short term, and I do not expect to be holding onto RTI shares for very long. This is not a long-term investment in an industry I understand or care about, this is a short-term play at what I believe to be an opportunistic price.
Before I get into the good news with RTI, I am going to start with the risks involved so people understand them. The company burns about $1 million a quarter and is pre-revenue, though that may change quickly given this JV. The company's balance sheet also looks pretty terrible and management is trying to fix that with a series of private placement and shares for debt transactions at 10 or 10.5 cents.
Reviewing the MD&A, as of September 30 RTI had 80.5 million shares outstanding and a fully diluted total of 106.4 million. Given that warrants have an average strike of 30 cents, they will most likely be exercised so we should be using the fully diluted total. This also brings in $7 million which should be enough to fix up the company's balance sheet. As of Sept 30, the company has a working capital deficiency of $4 million. There is also long term debt of nearly $7 million, though over $5 million of that is in the form of a royalty obligation.
On July 29, RTI announced a private placement of up to 70 million units at 10.5 cents. That came in three tranches. 3.85 million units on August 19, 7.85 million units on August 26, and 6.5 million units on October 14. That adds up to 18.2 million units, nowhere near the 70 million proposed. This is important when considering the next paragraph. Note that the four-month holding period on the first two tranches are coming due later this month. So that could provide downward pressure on the stock should the participants decide to exercise their warrants and sell their stock.
On November 7, RTI announced a private placement of up to 47.7 million units at 10.5 cents for $5 million. But given the context of the July 29 placement which was closed far below 70 million and the new deal with Aurora, shareholders shouldn't assume this placement will need to be filled by the company. The first tranche of 6.1 million shares closed on December 5. Considering this new deal with Aurora, which includes a $2 million debenture, RTI might no longer be looking to fill the placement as such low terms, or at all.
Now that the financing risk is out of the way, I can get onto the good stuff which I think will lead to a heavy price increase. Aurora and Radient signed an MOU to evaluate an exclusive partnership for the Canadian market with regard to the joint development and commercialization of superior and standardized cannabinoid extracts. RTI's 20,000 square foot, GMP compliant, Natural Health Products Directorate licensed facility in Edmonton is about two hours north from ACB's 55,200 square foot facility, so the synergies are definitely there. ACB's CEO appears to be a particularly big fan of RTI's patented extraction technology.
Could RTI get wrapped up in a bidding war?
I find the tone of the CEO comments to be very interesting. And if the market catches onto this I think RTI could fly. Let's compare what the CEOs of the two companies say. First, Terry Booth, CEO of ACB:
"Radient's technology promises a significant advance in both quality and efficiency of cannabis extract production," said Terry Booth, CEO. "This is especially important considering global market dynamics, which point to strong demand for cannabis derivative products. Importantly, Radient's extraction technology has also been proven to deliver superior preservation of aromatic compounds known as terpenes, which are key to the cannabis consumer experience and the Aurora Standard."
Now Denis Taschuk, President and CEO of RTI:
"We are very excited by this potential partnership with Aurora, given their leadership position in the medical cannabis space and the exceptional quality of their products. The combination of Aurora's recently announced capacity expansion with our proprietary high-throughput extraction technology has the potential to play an important role in meeting the fast-growing demand for quality cannabinoid extracts."
Notice how Mr. Booth speaks as if this is basically a done deal. RTI's extraction technology lives up to the Aurora Standard. Mr. Taschuk's comments were a lot more cautious, mentioning the potential partnership of the MOU. ACB has a market cap of $640 million while RTI has a fully diluted market cap, considering 125 million shares, of less than $40 million. I find it to be unusual that the larger company in good financial shape appears to be a lot more excited about this deal than the smaller company with the great technology, but also battling going concern issues. Is RTI still shopping around before finalizing this MOU?
I think this could signal a potential bidding war. There are many weed companies out there but only one RTI (though other companies may offer their own advantages with their extraction technology). If RTI's patented technology leads to the commercialization of superior and standardized cannabinoid extracts as per the ACB news release, wouldn't it be wise for other companies to try to gain access to that technology as well?
Even though the MOU makes mention of an exclusive agreement between RTI and ACB for development and commercialization of superior and standardized cannabinoid extracts, RTI has already signed four manufacturing agreements using the company's natural extraction technology with clients outside of the cannabis industry. So for ACB or any other cannabis company that wants truly exclusive use to RTI's technology and facility, a buyout might be the only way to go.
Keep in mind that my knowledge of RTI is based on research conducted within the last 24 hours, since I just purchased the stock yesterday. I am hardly an authority on this stock and I encourage people to do their own research. But this stock looks like it could really run, especially if people interpret the news release in the same way I do. They just need to be aware of the recent financing deals to try to fix up the balance sheet.
Additional disclosure: I am long on RTI on the TSX Venture Exchange. I hold positions in securities as disclosed in this article. I have not received any compensation for this article and all opinions reflected herein are my own. The information provided herein is strictly for informational purposes only and should not be construed as a recommendation to buy or sell, or as a solicitation of an offer to buy or sell any securities. There is no guarantee that any estimate, forecast or forward looking statement presented herein will materialize and actual results may vary. Investors are encouraged to do their own research and due diligence before making any investment decision with respect to any securities discussed herein, including, but not limited to, the suitability of any transaction to their risk tolerance and investment objectives.