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There’s many forms of due diligence out there for the investor. Financial statement analysis is foundational, but, so are other activities. Like watching the foot traffic of competitors. Or of dissecting sales data and regional insights.
When I was a young(er) lad starting out in the oil and gas industry, I found out about a job role I had never heard of: ‘Spotter’.
The ‘spotter’s’ job? Pitch a tent in the bush for 4 months during drilling season, watch a nearby lease with telescopic lenses, and see what competitors are doing on the formation right next to yours. Are they going big? Small? Are they bringing up hydrocarbons, or brine? (FYI – salt-water coming out of a well means you missed the target, and the money put up has been wasted). In many cases – particularly in deeper formations near the mountains – a $100k spend on a spotter can save $15MM punching an empty hole. It’s very hush-hush in industry, but not uncommon.
In cannabis, we could look at facilities or outdoor grows. We can hang around our favorite LP and count semi-trucks taking product to market.
Another way is via the courts – public record and all. And yesterday, we find out that Zenabis ($ZENA) had a builder’s lien placed on $800k in HVAC equipment:
I found it here. Similar sources on legal can be found both provincially and federally. If this was a consultant’s fees or some sort of G&A claim, I wouldn’t view it the same way. But HVAC is infrastructure – and it’s supporting either their weed or horticultural business….both core business lines.
The point for the DIY investor: one won’t see a press release out of $ZENA about this. We might see a dozen words about it in a ‘subsequent events’ note, but without conversancy in financial statements, something this notable would not be highlighted nor easily noticed. I encourage the interested reader to explore how they can find out resources like this, and how to be notified when a target company comes up.
That $ZENA is in this state….well. I’d been looking for a shoe to drop since their raise in June, and it took a full 90 days for this one to land. Unless I was looking, it would never have been noticed.
Just some thoughts for you on due diligence. And it should inform why assets are a dime on the dollar in situations of financial distress: there are often multiple claims to assets and equipment in the event of dissolution. It take a lot of lawyers and time to sort it out, and they get paid by the very assets being parsed off and fought over. In $ZENA’s case, their entire facility has been pledged to RCM Capital as collateral.
To sort out who’s obligated to who….the retail investor should want none of it, nor have a position if it begins. The outcomes are unpredictable, the money left over negligible, and if the business is viable/able to continue – ownership will have been largely transferred elsewhere (see $JWC).
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $ZENA
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