Innovacorp’s ‘Unicorn’

Innovacorp, the province’s venture capital crown corporation, has won the VC lottery — it bet $3 million on a Dartmouth firm that makes “high-performance materials used in the defense and aerospace industries” and collected $104 million when that firm went public in the US (it’s Meta Materials NASDAQ:MMAT).

How pleased was Innovacorp with itself? So pleased it made a public announcement about the exit, something it doesn’t seem to do when an investment just peters out, as VC investments have a tendency to do.

Meta Materials Logo

There’s no denying the victory, the entire VC fund, created in 2016, was just $25 million, but is this Innovacorp showing its investment acumen by betting on an up-and-coming startup — or is this Innovacorp profiting from a meme stock?

A meme stock, for those of you lucky enough not to know, is a stock that gets hyped by social media in general and investors on Reddit, a popular collection of online forums, in particular. (I hear your snickering at that school-marmish definition of your community, Redditers, and I accept it.)

Even those of you who pay no attention to the stock markets probably heard about GameStop, the brick-and-mortar video game rental company that Reddit investors drove to outrageous heights in an effort to force a short squeeze and punish the hedge funds shorting the stock (or make money or both, it’s complicated).

Investors “short” stocks they think will lose value. In simple, verging on simplistic terms, if I think the ACME company’s stock is going to lose value, I might borrow your ACME share (for a fee) and sell it for, say, $10, then when ACME falls to $5, buy it back. I return your share and pocket the $5 difference between the selling and repurchase prices. That’s if all goes according to plan. If, say, a group of Reddit investors were to drive the price of ACME shares to $100 — in a move called a “short squeeze” — I’d be in deep trouble, as short sellers panicked and started buying the stock to cover their bets, thus driving the price up even more.

But back to Metamaterials.

 

Pole dancing

The CBC story about Innovacorp’s triumph says the provincial entity made its money when Metamaterials (which already traded on the Canadian Stock Exchange) listed on the Nasdaq, making it sound as though Metamaterials staged an initial public offering (IPO) and investors were so excited by this innovative Canadian tech startup, they drove its market capitalization past $1 billion, the definition of a “unicorn.”

This would be dodgy enough in itself, given “first-day” returns, as the proceeds of an IPO are known, can be highly exaggerated, but what actually happened was that Metamaterials went public by means of a reverse takeover (also known as a “backdoor listing”) an alternative to an initial public offering (IPO) in which, per Investopedia:

…a private company buys enough shares to control a publicly-traded company. The private company’s shareholder then exchanges its shares in the private company for shares in the public company. At this point, the private company has effectively become a publicly-traded company.

The publicly traded company in Metamaterials’ case was Torchlight Energy Resources, a Texas-based oil and gas concern that itself had gone public in 2010 by means of a reverse takeover of Nevada-based Pole Perfect Studios, a company incorporated in 2007, according to Bloomberg, “to offer fitness classes it said were ‘centered around a ‘fireman’s pole’ often found in gentleman’s clubs.'”

You really can’t make this stuff up.

Torchlight did not fare particularly well in the oil and gas industry and in September 2020, it announced plans to merge with Metamaterials and divest its oil and gas assets. As Molly Taft explained in Gizmodo:

…Torchlight announced it would merge with a company called Metamaterial Inc., which produces, according to its website, products including “the world’s highest-performance Indium-free transparent metal-mesh” and is developing “a non-invasive glucose monitor that will help you take control of your life.” (Why they’re choosing to merge with a shale gas producer is unclear.)

SPOLIER ALERT: It never really becomes clear, although analyst Dana Blankenhorn at InvestorPlace thinks it was for “$160 million in new cash and a debt-free balance sheet.”

When the merger was complete, Metamaterials shareholders would own 75% of the new entity and Torchlight shareholders 25%.

The two companies signed a definitive agreement in December 2020, which stated that Torchlight would pay a special dividend to shareholders immediately prior to the transaction closing. As it turned out, the deadline to complete the merger was extended to June 30 and the special dividend was paid on June 24 to allow Torchlight to float a $250 million share offering to take advantage of an “irrational share price,” about which, more below.

 

Short squeeze

That “irrational share price” was driven largely by social media, as Reddit investors suddenly got very interested in Torchlight. While the stock had been on their radar since the merger announcement, it wasn’t until June that the run on it really began — and business media started to take notice. Especially after Torchlight rose 58% in a single day (June 21) to a record high $9.92.

But why the interest? As Market Realist reported on June 22:

Two of the major reasons for retail investors’ newfound interest in the stock could be due to the announcement of its special dividend following a merger and the high short interest in the stock. According to data from Fintel.io, the stock has a 26 percent short interest volume. On WallStreetBets, traders were excited about the opportunity to make money from dividends and a short squeeze.

(Torchlight had attracted the interest of short sellers back in April 2019, when an outfit called White Diamond Research published a report questioning the backgrounds of its management team and the value of its main oil project.)

A third reason was a rumor, fueled by the fact that Metamaterial shares a Dartmouth address — 1 Research Drive — with Tesla’s battery-related research and development center, that Metamaterial had a deal with Tesla. (This seems to be just a rumor, the two both occupy Innovacorp premises.)

Whatever was behind the run on Torchlight, the result was an increase in the stock price from under $2 in January to $21.76 in June.

 

Success?

On June 30, the reverse takeover closed and the new company — Meta Minerals (MMAT) — was listed on the Nasdaq.

At some point in July — the CBC doesn’t say exactly when, but I’m guessing earlier rather than later based on this graph of MMAT’s share price — Innovacorp sold its Meta Materials shares and made $104 million.

MMAT stock prices, Nasdaq

Source: Nasdaq (https://www.nasdaq.com/market-activity/stocks/mmat)

But the value of those shares had nothing to do with the fundamentals of the company Innovacorp helped nurture, as many analysts have been at pains to point out in the wake of the reverse takeover.

From where I’m sitting, Innovacorp’s win looks like a fluke.

And I’d also note that there’s apparently no agreement as to what now happens to that $104 million — does it stay with Innovacorp or go to general revenues? As a commenter on the CBC story noted, you’d think they’d have nailed that down before now — I mean, having no rule makes it look like they didn’t expect to ride a meme-driven short squeeze for fun and profit.