A Note On the Carebook (CRBK) Selling Pressure & RTO Listings

Carebook is a brand new publicly-listed telehealth company. There is a ton of value from their partnership with Rexall/Mckesson (+$4M revenue stream) and then there is the blue-sky potential of their ‘MyVitals' screening technology which they have just submitted to Health Canada. In my last article, I was very skeptical of the technology. But I have been researching it further and am starting to believe that Carebook may have a decent shot at getting Health Canada’s approval.

An Israeli technology company, Binah.ai, developed the underlying tech for Carebook's COVID-19 app. Fitness trackers like Fitbit rely on light pulses against the skin to monitor for things like one’s heart rate using PPG or photoplethysmography. This Israeli company takes this a step further with remote PPG (rPPG), with the app using a smartphone’s camera to capture the light on a person’s cheeks below the eyes.

Carebook's version of the application was designed and tested in collaboration with the Jewish General Hospital in Montreal, Canada, and is based on up-to-date COVID-19 guidelines from WHO, the Government of Canada, and the Government of Quebec.

Carebook is currently seeking approval from Health Canada for the My Vitals tool.

The Selling Pressure

Since going public less than two weeks ago, there has been a lot of interest in Carebook's stock. Canaccord came out with their $2.50 price target and volumes picked up, but for some reason the stock stayed flat. So, there has been a large amount of buying but also an equivalent amount of selling pressure.

So who could possibly be doing the selling if they have only been public for two weeks?

Well, the private equity firms that have been backing Carebook privately (the same ones who put up $20 million at $2.50) are not going to be selling at $2.10. Some of that private equity money is new (only raised in August, 2020) and came from Medtech LP, the largest CRBK shareholders. They are holding 55% of Carebook stock but most of that is in escrow and they are long term backers of the deal, regardless. So the selling is definitely not coming from them.

Then who else could it be?

There is really only two other options and those are: un-escrowed shares from the private company as well as legacy shareholders from the shell company, Pike Mountain Minerals.

Carebook went public through a RTO (Reverse Take-Over) as opposed to an IPO (Initial Public Offering). Often times, companies will choose to take the RTO route when going public because it is more cost-effective and faster than the IPO route.

During the RTO process, a de-listed TSXV or CSE company (Pike Mountain Minerals) will enter into a qualifying transaction to acquire a private company (Carebook) and will then apply to re-list.

But the RTO process does have a downside....

There will be legacy shareholders from the de-listed company who will be holding shares, likely at a cost of pennies. There will also be shareholders from the private company (Carebook) who will have positions in the newly formed public company with a portion of their positions being 'un-escrowed'.

This is the case with every RTO and there is no workaround. But the best private companies will not want to go public through an RTO unless they can find a shell that is tightly held and has a small number of outstanding shares.

The best shell structures and RTO transactions will also require shareholders from private rounds to agree to temporarily 'lock up' some of their shares through an 'escrow release'.

In order to figure out how much pressure this may be putting on the stock , we need to look at the capital structure of the shell company as well as the structure of the RTO transaction.

Below is a cap table for Carebook post-RTO.

Approximately 20,707,244 securities of the Resulting Issuer anticipated to be held by principals of the Resulting Issuer are expected to be held in escrow after giving effect to the RTO. This leaves 9,803,384 un-escrowed shares.

The rows which are highlighted in yellow are shares and warrants which are post-consolidation shares from the initial Pike Mountain shell company. It seems the Pike Mountain shell was tight (under 1.5m post-consolidation shares), which is a good sign, but there also seems to be some stragglers who want out.

This is the case with almost every shell company and there is no workaround. But the best private companies will not want to go public through an RTO unless they can find a shell that is tightly held and has a small number of outstanding shares.

What is important for a retail investor is to be aware of the structure of the shell company and the escrow release periods on any pre-RTO shares.

Given the daily volumes since CRBK started trading, I would expect another million or so shares of volume before the weak hands are flushed out.

The shell paper stuff is part of the game, Canaccord and other groups would have already known about this from the start.

If we look at the trading pattern, we see this is likely the case, as there has been a significant amount of selling pressure but there has also been buyers ready to soak up that paper.

This would also explain why Canaccord was quick to the draw with that 45-page analyst report just a week after CRBK got listed.

It is also a possibility that the selling pressure is due to holders of the $2.50 financing who are unhappy with the way the stock price is trading since their investment in August.