March 25, 2019

Redfund Capital Corp (CNSX:LOAN) Bridge Financing Model Operating in the Cannabis Space

Midas Letter
Midas Letter
Redfund Capital Corp (CNSX:LOAN) Bridge Financing Model Operating in the Cannabis Space
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Redfund Capital Corp (CNSX:LOAN) (OTCMKTS:PNNRF) (FRA:O3X4) incubates and accelerates growth and primarily serves companies operating in the cannabis space. CEO Meris Kott explains that Redfund Capital is a bridge financing model to help second stage companies reach the next phase of development. Redfund provides clients with a promissory note in exchange for an equity kicker and warrant coverage. Kott explains that the company takes a stake in its clients and has begun to convert its stakes into equity, growing its net assets. Redfund also provides business development services and helps take private companies public. Redfund Capital has 8 companies in its portfolio currently with an additional 11 in its pipeline.

Transcript:

James West:   Meris Kott joins me now. She’s the CEO of Redfund Capital Corp., trading on the CSE under the symbol LOAN – which leads me to suspect that you’re in the lending business.

Meris Kott:   Absolutely. How’d you guess?

[stock_chart symbol=”LOAN:CNX” align=”left” range=”5D”]

James West:   It’s pretty easy with that symbol! Meris, why don’t we start with an overview – what exactly is the business model of Redfund Capital Corp.?

Meris Kott:   We are a merchant bank, but we’re mainly a debt facility. What we did is, we’ve created a facility that works with companies at second-stage, what I call almost revenue, some revenues – not just visions. And we help them get to the next valuation in their cycle. So we provide them a promissory note; generally, there’s a convertible option to it. We have an equity kicker and a 20 percent warrant coverage, and we just help them, whether they want to grow organically to look for target acquisition, or they didn’t want to go to the public markets. We’re the bridge. In the old days, we called the bridge financing model.

James West:   Sure, okay. So then, if I’m a public company and I want to borrow money, you’re looking for an equity kicker, you’re covered 20 percent of the face value of the facility in warrants, and what general rate of interest are we talking?

Meris Kott:   Well, right now we have no public companies that we’re funding; most of the companies that we’re funding are private companies looking to go to the public market.

James West:   So that’s the bridge you’re providing, is funding during that process.

Meris Kott:   Correct.

James West:   Oh, that’s interesting. That’s actually a pretty critical place where I’ve actually just got clients popping into my head who I’m going to tell you about after the segment. So, how much money do you have deployed currently? I mean, as a public company and an investor interested in your public company, I want to know what kind of, like, what kind of momentum and volume have you got?

Meris Kott:   What’s interesting is, we decided to do it in stages. Our first stage we closed close to $4 million, and now we’re looking for our next $10 million. What we’ve basically done is, right now we have promissory notes out there for close to 35 million, and the reason that we don’t have it all deployed is, like a real bank – oh, I shouldn’t say that – like a debt facility, we provide the promissory note, and most of our clients are wanting the debt facility to bring down tranches, almost like a credit line.

James West:          I see. So they can do things when they have a debt facility in place, that they couldn’t otherwise do, but they don’t necessarily need the capital right away.

Meris Kott:   Correct.

James West:   So you’re acting kind of like a fractionally banked capital pool, which is really interesting.

Meris Kott:   You probably made it sound much better. For me, I don’t – basically what we do is, some of our clients want a promissory note for a million dollars. So we’ll sign a promissory note for $1 million; one of our clients, we signed a promissory note for a little over $1 million, we funded them for $400,000 USD right now; they’re waiting for the next milestone. Because our loans are paid with interest compounded monthly, so some of the companies want to make sure that they’re able to pay the interest payment. And you know, it’s almost like, they’re not really looking at milestones, but they’re looking at positions and cash flow and EBITDA, and we’re a collateralized loan.

James West:   I see.

Meris Kott:   So they have to have some collateral, and we don’t secure any of the revenues; they’re mainly assets.

James West:   Wow. So you’re covered six ways till Sunday. The company has a promissory note that they can now leverage. That’s a really interesting business model. The only threat I would see as an investor would be that you might find yourself over-extended if there was a sudden general downturn in the whole marketplace that took all valuations lower? But then I guess maybe not, because you’re covered by the assets and you’ve got your kickers, as well. That’s really interesting.

Meris Kott:   What’s exciting for an investor in Redfund is, we generally, right now we have eight companies signed. So we have eight companies, so there’s eight opportunities to look at these companies going forward. We have 11 companies in the pipeline. Some of these companies look to us for business development services as well, so we help them find clients, you know? That’s a little bit on the side of it, but as a new company, as a startup, for these companies, they need that help, so they need introductions to the marketplace.

So for an investor in Redfund, you’re covered; the risk is less, but the exciting part for us is, we went public in August, and so what’s happened now for us, coming on our next half year, is we’re starting to convert into equity in the companies. So Redfund will start having equity positions in some of the companies, so we’ll have a bigger upside for our investors, and some of the clients that aren’t ready for us to convert, we just keep our cash flow coming in every month with their interest payments.

James West:   So you raised $4 million through the issuance of equity in the public vehicle?

Meris Kott:   Yes, we did.

James West:   Okay, what price?

Meris Kott:   $0.30. We’re traded about the same price as we started at; we’ve gone up to as high as, I think it was $0.40, $0.50. The market corrected itself, and now we’re back where we’re trading nicely, and we’re hoping to go forward. We trade in three exchanges: we trade in Germany, in the next day or so, we’re hoping to be able to announce our next status on the OTC markets. We’ve worked to create a different footprint in the US; we don’t fund any THC, we’re mainly medical cannabis, CBD and hemp.

James West:   Interesting. Well, that’s a great business model. So then, all of your funding is from equity, so you don’t have any pressure from a debt to worry about in the future.

Meris Kott:   No, no.

James West:   And your net asset value is continuously rising as the companies mature in your portfolio?

Meris Kott:   As we convert into – the next quarter will show a different situation, because as we convert to equity in the companies, and some of the companies do look to the public markets if they choose to, our net asset, it’ll grow. You know, it’s a different model – it was an interesting model to start with; we find that there’s a rise in it, because as companies start realizing more revenues as small companies, there’s really not that much money out there for small companies right now, unless they have, you know, $100 million valuations. And especially in Canada it’s different, because we funded one of the companies that came out of the gray market. And they really didn’t look to money, so we funded her transition out of the gray market.

James West:   Wow, that’s fantastic. So that’s just a really interesting business model. Who came up with that idea?

Meris Kott:   We have a team of bankers; they’re mainly in the banking industry, and it was something that they did in corporate finance. So it was something that it was a contribution of a team of players. Most of our Board members are ex-bankers, private bankers.

What’s interesting is, we try to footprint companies throughout, outside of North America, as well.

James West:   Okay, so how big do you envision this fund becoming?

Meris Kott:   We have two strategies. One is, we’re hoping that a lot of the companies do transition to the public markets, so that Redfund will then become a true bank. The custodian will have, you know, more of a hedge fund look to it. And the other concept that we have is, perhaps a bank will acquire us because of our loan portfolio, down the line.

James West:   Right, interesting. Well, I’ve got to tell you that I’m interested in investing in your company the next time you do a raise. I’m serious, I love that business model.

Okay, so then, you’re focused on the cannabis industry as a lender, and just cannabis companies, or other businesses, as well?

Meris Kott:   Our main focus, as we call it, our first focus, is cannabis. I think we’re looking to emerging markets, and emerging technologies. When I say emerging technologies, emerging sectors.

What’s really exciting is, our first focus is cannabis and it’s such an exciting sector. You know, recently today we met with a company that we’re not going to announce right now, but they’re in the technology part of cannabis. So I think in cannabis we all thought it was one sector; I think there’s so many different areas or industries within cannabis that, for right now, I think we may stay in the cannabis industry – I like to call it the industry.

You know, and it’s exciting because, you know, there’s all different countries coming on in South America. There’s all different countries coming on in Africa. You know, and it’ll be very interesting; based in Canada, we like to see Canadians, we like to see ourselves strive to the top, and we like to see the market soar here. But I think we’re going to be very surprised by some of the little countries, you know, in particular Israel coming on eventually.

You know, their technology has been exported for years. You know, with the vote in Knesset, it may be, it’s imminent that they’re going to be able to export some of their, you know, pharma products. I think South America and Colombia, when they’re going to start exporting; I think when you look at Chile and you look at Mexico and you look at Peru, I think we’re going to be very surprised that some of these countries that are used to growing, they’re used to agriculture, are just going to be, you know, are just going to come on, and it’s going to be very exciting.

For me, being in medical cannabis, it’s exciting when recreational became legal here, because it helped medical cannabis. It helped people realize that recreational was going legal. We should actually embrace the medical community, as well.

James West:   I couldn’t agree more. That’s great. So you’re looking for, you’re kind of on the cutting edge of the cannabis industry’s evolution, looking for opportunities that are as yet unexploited thoroughly, or unknown, I guess?

Meris Kott:   You know, being a collateralized loan, having to collateralize, we have to be very innovative. So we look at companies that are past the mystery stage; they’re past the guessing stage. You know, we look at companies that either applied for their patent, have their patent. We also look, you know, right now we look at the management of the company. Before, when we were looking at different areas in cannabis, we looked at how many years people were in cannabis; it’s become mainstream now, so I think we look at the management and who they put on the management, and if they’re actually actively working management.

James West:   Okay, so management for you is key.

Meris Kott:   Management for me is key, history of what they’re doing, history of the management, and I think past the dream stage, you know? We can all make a 40-page presentation, but it’s what you have in the first three or four pages that dictates if it’s going to succeed or not.

James West:   Right. Wow, okay, well that’s really – I’m very pleased with having met you, because this is so far outside of what we normally talk about in here every day, that it’s very refreshing. And as I said, I would be interested in considering participation in your next raise.

So thanks very much for coming, and we’ll follow up with you again soon.

Meris Kott:   Thank you very much for having me. Nice to have met you.

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