Huge dilution of VGFC coming, Am I selling? - YouTube

Hello my fellow investors.

If you invest in VGFC or keep an eye on this company,

you probably notice the share price plummeted

as much as 22% today.

The drop happened following the news of

30 million Registered Direct Offering before market opening

Based on market cap of 200 million last trading close,

it is translated into 15% dilution.

In this video,

I am going to explain what is the Registered Direct Offering,

why the company is doing this

and its impact to individual investors.

According to its Form 6-K filing to SEC,

the company has agreed to offer to institutional investors

approximately 15 million units at price of US$2.00 per Unit.

Each Unit consists of one common share

and half Common Share purchase warrant,

each warrant gives holder the right to purchase one common share

at an exercise price of US$2.35 for five years

from the closing of the Offering.

If you have no idea what warrant is,

think of it as option issued directly by a company to an investor.

In our case, its VGFC to institutional investors.

Registered Direct Offerings or RDOs are hybrid securities offerings,

as the company is listed in public,

but the offer is done through private placement.

There are a few key aspects related to RDO,

1. Registered to SEC

A Registration Statement has to be made

before the offering.

According to FORM F-10 filing to SEC on Oct.5 2021,

the company may offer and issue from time-to-time securities

up to an aggregate initial offering price of $100 millions

during the 25-month period after the filing.

This is basically the quota of dilution

approved by SEC over a 25-month span,

about 50% dilution based on 200 million market cap.

I will talk further about this later.

2. A best-efforts basis,

The participant investors have no obligation or commitment

to purchase a fixed number of securities.

The placement agent will work on a best-efforts basis.

Therefore, the final deal sold could be less than 15 million units

or more, based on the demand,

but could not be more than the quota registered to SEC.

3. Fixed price

Price is usually set at a discount of market price.

I am talking about the price before drop.

The securities will be sold at $ 2/ unit as agreed.

Now that the market price has dropped below $2/ share.

Why don’t they just buy from the market?

The reason behind this is that:

Institutions purchase volume like this will cause a great volatility in price.

. They will have to pay a large premium if they buy from the market.

4. Wall-crossing

Participant investors typically sign a non-disclosure agreement

that allows them to "cross the wall",

thus becoming insiders and gaining access to material non-public information

5. Unrestricted

The security offered under RDO are readily tradable.

Why the company decided to make the offering?

And why now?

According to FORM 6-K filing, VERY GOOD

intends to use the net proceeds from the Offering

to scale its operations, to expand its geographical reach,

for accretive acquisitions within the plant-based food sector,

for research and development, for marketing initiatives

and for general corporate and other working capital purposes.

If you have been following the company,

you probably know the company is ramping up production

in Rupert and Patterson facility

It takes a lot of capital to put things in place.

Here is a part of production equipment purchases

from Q2 2021 earning report

on this page alone, the purchase value is almost 2 million.

And this is only a part of equipment for Rupert facility.

Patterson facility is planned to have a production capacity almost 3 times of Rupert

On the distribution side,

in order to work with large retail store like Costco and Walmart,

the company would have to accept longer payment terms.

It is easy to imagine the urgent need for cash.

By Q2 2021, the company had C$5,9 millions in cash,

cash from operation was C$-9.4 million for the quarter.

Previously, VGFC has secured a C$70 millions credit facility,

of which it has already used almost C$2 million by Q2 2021.

With an interest rate of 9,95%,

it would be a heavy burden for the company’s development.

It would also make the balance sheet look very unhealthy.

Why didn’t the company make the offering back last December,

when the stock was at its peak?

1. Share overvalued

Although I am bullish on the company,

I have to admit the peak price last December was short term hype.

The institution investors know better than us

since they would have insider information.

2. Trading volume

Here is chart of trading volume before Nasdaq listing,

the average trading volume was only 1 million shares.

After the uplisting,

volume in 4 days equals a whole month volume before Nasdaq.

If similar offerings were made before the uplisting,

it would be a liquidity risk for institution investors

since they could not cash out their position

without causing a landslide in price.

3. Voting Control of business

Before the uplisting,

there were fewer institutional investors interested

due to liquidity and company fundamentals.

If offering were made at similar scale around 15% dilution

to only one or two investors,

the two co-founders may have the risk of losing voting control of the business,

since each of them holding less than 14% of the company.

Now it would be possible to spread the shares

among 10 or even more institutional investors.

Management could still carryout strong execution

without hands tied on short term target.

To be fair, in June this year,

the company actually made a similar offer to Canaccord,

probably the only institution interested back then,

with around 4 million units,

less than 1/3 of offering this time.

What if the share price continues to drop considerably next week,

will the offering be cancelled?

In that case, the company and the placement agent

would be very likely to initiate the Green shoe arrangement.

Green shoe is an over-allotment option to stabilize share price.

The underwriters can exercise their greenshoe option

and sell 15% more shares (Short sell).

If share price dropped,

the underwriters can buy back 15% of the shares

(cover short position).

This enables underwriters to stabilize fluctuating share prices

by increasing or decreasing the supply.

Similar arrangement has been applied previously with Canaccord deal.

What is the impact on individual investors?

Let’s first look at the shareholder structure of VGFC and BYND,

VGFC current institutional investor is negligible at 0.5%

while it is more than 50% for BYND.

Stock market is afterall a wallstreet game,

share price can’t have enough push without their big money.

The offering is an invitation

to welcome institutions on board.

Soon you will see analysts raise target price and rating.

That’s how the game is played.

Should we really panic for 15% or even 50% dilution?

Beyond meat went public on Nasdaq in May 2019.

The quarter before Nasdaq listing,

the company had about 7 million shares,

one year later, it increased to 66 million shares.

We are talking about 950% dilution.

Financing at low cost

that was exactly why the company went on public at first place,

VGFC did it smartly so far without losing too much control.

What will I do next?

As the offering closes on Tuesday,

I would love to see that all the 15 Million units or more are sold

It would be a signal that these wall-crossed insiders

are very bullish about the company

and they think $2 /unit is fairly priced.

In that case, I may buy more shares

if price is still around or below Friday closing.

If the deal finalised is way less than 15 million units,

I may consider selling part of the shares.