Coming off a prodigious first quarter, the TSXV traded down and then largely sideways throughout the second quarter. Given growth’s concurrent resurgence on the big boards, we were hoping for this risk-on sentiment to trickle upwards into small caps, but this never materialized. At the time of writing, the TSXV continues to channel trade in the 900’s following the ~200 dip in late February into early March. Though not for certain, we can probably attribute this weakness to a slumping commodities market, seasonal liquidity drawdowns and a hangover effect from the speculative exuberance that ran the market up some quarters prior. Yet, slower times are an opportunity to reflect on our ideas and focus on sourcing and due diligence in preparation for the next leg up. They are also a good time to mull over those deals that did not turn out as expected which helps us identify the blind spots in our process. In this quarterly, report we present three deals that went sideways, and the lessons learned from each– the first being a turnaround story, the second a pivot, and the third TBD.

Cognetivity (CSE: CGN) – The Turnaround

We have known Cognetivity since the company went public in 2018 and participated in their go-public financing. The company – run by exceedingly smart and capable Cambridge PhDs – has developed a test for the detection of early onset dementia using AI. The test takes minutes and can be administrated on an IPad with no language or societal bias while the competition takes hours, must be administrated by a physician and isn’t nearly as effective. The classic “better mouse trap”.

Well, as often happens, things take longer than expected (in this case, regulatory approvals and partnerships) and access to capital was harder than management thought it would be because…. things take longer than expected (see above). With that, after the initial excitement phase that we often see at the beginning of public companies’ life, the stock slowly broke down and languished well below its RTO price for over a year.

Then came the turnaround. Management and their main financial backers did small financings to keep the lights on and wait for their long-awaited catalysts to come to fruition. In late 2020, that finally happened – the company hit some milestones with rumors of partnerships with majors around the corner and it’s been a 10x+ off the lows and nearly a high of a 4x off the $0.30 financing we participated in in December 2020.

Spark RE (private) The Pivot

We got involved in Spark RE very early – in hindsight, probably too early. Spark had built a software platform to help real-estate firms sell, market and manage new development real-estate. A niche (but still sizeable) market with some legacy tech incumbents and a bunch of guys still using excel spreadsheets to build $100m towers. Spark was going to eat their lunch!

They were winning business early, had already gotten in with some large international developers and had some promising (but early) project economics and sales ratios. The plan was to do a pre-public financing then float them as they continued to scale. As often happens with these things, that pre-public financing was followed by another “pre-public financing”. As some time went on, the growth slowed – the revenue and project economics were still solid, but not exponential and the topline revenue was still quite low (especially for a potential public SaaS company).

Going into 2020, the company, in our opinion, was mildly in trouble – financing wasn’t lining up, they had offers of debt (which is always a bit scary for a small company) and the fear was, at least with us, that they were turning into a “meat and potatoes” company – i.e., a company that could probably go on forever operating and selling this software but wasn’t growing quick enough to attract venture capital and wasn’t big enough to be a successful public company.

In 2020 that changed: the company got hit pretty hard at the beginning of the pandemic and cut costs and focused on what was working. After a stressful couple of months and tightening up their team, they got into the black consistently for the first time in their history and had promising growth throughout 2020 as some of their bigger customers doubled down on the Spark platform. This series of events and validation helped a successful Series A of $4m+ get over the line which was co-led by BDC and Pender Fund in Q2 2021. The deal also included a secondary to let any investors that wanted liquidity to get it as most of their shareholders were expecting a public listing. While this isn’t the outcome that we originally envisioned for the company, we are happy management got it done and are supportive shareholders going forward.

Eden Empire (CSE: Eden) – The TBD

We got involved with Eden – a well known retail cannabis brand that was transitioning to the white market – in early 2018. The story was solid: the best retail locations in BC, proven operators and loyal customers, and a Michigan license for US expansion which was a top 3 jurisdiction to be in. Also, if you remember, cannabis was on fire and we were valuing them on the low end of their peers and had structured the deal for success in the market. We ended up advising the company on about ~$7m of funding in May 2018 with a planned direct listing in Q3 of that year.

Then, things went sideways. The broader cannabis market was just entering a serious bear market where money dried up quickly. On top of that, the anticipated imminent approval of stores was anything but. They had 8+ expensive leases draining them monthly and a never-ending list of new opportunities that they wanted to act on, each taking both resources and bandwidth away from the focus of what Eden was supposed to be. The Q3 listing got pushed (and pushed) until the company had run out of enough working capital to list. With the cannabis bear market still in full effect, they had to start selling some of their assets to keep going.

The company finally listed in January of 2021, well over a year later than expected with one store in Winnipeg open and BC still waiting approval. While the stock stayed somewhat buoyant for a couple of months, they are now sitting at around $0.04 which is already well off the “bridge financing” done at $0.12 ~4 months ago (we participated personally).

What happens now? The company needs help (and a bit of luck), but even with its current share price having some promising assets which should be either attractive to someone or if they do come to fruition, should be worth much more than they are valued today. Will Eden pull a Cognetivity and be the “turnaround” in a year’s time? We certainly hope so and will continue to be supportive shareholders in the meantime.