Conflict of Interest: Revealing Option & Private Share Holders on CSE Stocks

Rather than focus on a single company for today’s article, we wanted to speak to a topic that has been frequent in the mind of small cap investors as of late: The issuance of options. For one reason or another, this topic has been drawn into focus over the last week. Whether it be a result of investors looking to place blame during the downturn, or the realization that they actually do exist we aren’t overly certain on why the marked interest.

Of particular note, is two Twitter users that are well known in the investment community. They have recently come under fire for not sufficiently disclosing their current holdings in regards to options. While we are not defending these users actions, the onus is on us as investors to discover this information ourselves. Here at The Deep Dive, we are focused on dealing in the facts rather than market hearsay. Due to performing our own due diligence on countless stocks, these revelations across the greater community were of little surprise to us.

In an effort to assist viewers new to the markets, we’ve outlined how to check this data for stocks listed on the Canadian Securities Exchange. Unfortunately, the TSX Venture does not provide the same level of transparency and thus it is significantly more difficult to track this information.


Conflict of Interest: Revealing Option & Private Share Holders on CSE Stocks

1. Check the Form 11’s.

When researching a company listed under the Canadian Securities Exchange, one of the very first things we do is head to the companys filings. Here, you will find a number of different forms that the exchange requires. These include, among others, the Form 11 filing which is for a proposed stock option grant. As per the exchange’s requirements, whenever options are issued this form is required to be filled out.

As an example, lets take a look at Matica Enterprises (CSE: MMJ). We just performed our full analysis on them yesterday (found here if interested), so this data is fresh in our minds. Here is the Form 11 filed for options issued on December 22, 2017.

Options issued by Matica Enterprises on December 22, 2017.
Options issued by Matica Enterprises on December 22, 2017.

Within the Form 11 is the details of the options granted. This includes the name of the option holder, their relation to the company, the amount of options issued, the date of grant, and finally the date of expiry. Although all options being issued are significant to us, we pay particular attention to individuals or companies listed as “consultant.” More often than not, this is a very loosely defined term. Lastly, it should also detail the currently outstanding options near the bottom of the form. It should look similar to this.

Section two of the Form 11 outlining the currently outstanding options.
Section two of the Form 11 outlining the currently outstanding options.

The next thing we want to analyze, is the length of time the options are valid for. Most often, if the options are issued to persons of significance the term will be for twenty four months or longer. The maximum allowable term is ten years.When options are for less than twelve months, they should serve as a red flag for investors.

The last thing we want to do, is compare all the recently issued Form 11’s specific to a company. For instance, after reviewing the options issued by Matica Enterprises on December 22, we would compare this filing to that of the Form 11 filed on January 3, 2018.

Options grant filed by Matica Enterprises January 3, 2018.
Options grant filed by Matica Enterprises January 3, 2018.

Why do we bother with a comparison? This is because as seen above, options previously issued have already been exercised. In this particular instance, options issued on December 22 to Platinum Capital Corp had already been exercised by the time new options were issued on January 3. This provides insight that cannot be obtained otherwise and thus makes this filing a very valuable tool for our investing toolkit.


2. Check the Form 9’s.

After inspecting the Form 11’s for anyone that options may have been recently issued to, our next step is to give recent Form 9 filings a once over. Although data gleaned from these filings tends to be less significant, it’s still good to know who the large shareholders are of an organization. In particular, we tend to focus on the private holding companies listed within.

What is a Form 9? A Form 9 on the Canadian Securities Exchange outlines the proposed issuance of listed securities. In other words, it outlines who bought in to a recent private financing. This information provides insight largely on what known names are interested in the company.

Within a Form 9 is the specific details of the private issuance of securities. Within, it will contain the current share count prior to the raise, the justification for the raise and where the funds will be allocated, along with private investor information. This includes a name and address of the investor, the shares purchased and at what price along with any previous holdings they have the with company. Lastly, it details whether they are an accredited investor and their relation to the company.

For this example, we’ll use a Form 9 filed by Isodiol International (CSE: ISOL) on December 30, 2017.

Isodiol International's Form 9 filed December 30, 2017.
Isodiol International’s Form 9 filed December 30, 2017.

When looking at these documents we want to pay attention in particular to any names that stand out, private companies, or large figures posted. For those that stand out, now comes the tedious part. We now take the information provided and do a quick Google search. In this form for Isodiol International, we noticed that Simon Serruya stood out as a large investor. Further to this he also had previous holdings in the company. With the information provided, we do a quick Google search and end up with the following results.

The yield of a quick search on a large Isodiol International investor.
The yield of a quick search on a large Isodiol International investor.

As can be seen to the left the investor in which we just researched, Simon Serruya appears to be of significance. As it turns out he is part of a private equity firm. More significantly however, he is one of the founders of Yogen Fruz and is associated with many more national brands. In this instance the information provided by scouring the Form 9 revealed that several large investors are currently interested in ISOL. This can typically be viewed as a very bullish indicator for the company.

What it also tells us however, is the bias that individuals may have. With this information in hand, we now know that should Serruya Private Equity come out with a report on Isodiol International the information presented will likely be biased. Thus, the information gleaned from the report would have to be critically examined and not just taken for face value.

Therefore, the Form 9 filing required by the Canadian Securities Exchange has provided its value to the small time investor that has less access to market intelligence.


3. Check the Form 7’s

The last item that we inspect when researching a company is the Form 7. Admittedly, this is the least intriguing of the three forms we frequently inspect however it still does provide valuable information.

The Form 7 required by the CSE is entitled the Monthly Progress Report. It is due in by the end of the fifth trading day of each month, however numerous companies are notoriously bad at filing these documents on time. Essentially it is intended to serve as a one stop update for the companies developments over the past month. Within, it indicates the current outstanding share count, any developments the company has made and most importantly to us, changes to the companies share structure.

Quadron Cannatech's Form 7 filing for January 2018.
Quadron Cannatech’s Form 7 filing for January 2018.

This last item is nearly the sole reason for our interest in the Form 7. Within the report, the filing company is required to state any shares issued and the reason for the issuance. This includes converted options, converted warrants, and common shares issued whether through a private funding or through debt conversion. Given our love for tight share structures, we glean much of our share based information from these filings. Furthermore, it also gives us an insight to the companies cash position based on the value of derivatives executed. This is demonstrated based on the above example with Quadron Cannatech’s (CSE: QCC) January 2018 Form 7.


Closing Remarks

As a result of these filings required by the Canadian Securities Exchange retail investors are able to get a better understanding of the company in which they are investing. The exchange takes a lot of flack for being the lowest tiered exchange in Canada. Due to the transparency required by The CSE, we aren’t exactly certain why this is – we much prefer it over the Venture.

If this information was new to you, we hope that you use this knowledge to your advantage. Knowing who has skin in the game can vastly change the value in which you place on their analysis. And if they do in fact hold a position, demand that they provide a full disclosure.

The onus is on us for our own investment portfolios. Due diligence is key. Dive Deep.


Information for this analysis was found via The CSE. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security.