What happened to Namaste Technologies (TSXV: N)
QUESTION: What’s happening with Namaste Technologies (TSXV: N). I know it was one of your top recommendations a few years ago and then you cooled on it. Now I read the founder and CEO is fired by the Board and his uncle the Chairman is selling stock.
D. B. from Vancouver
ANSWER: There’s no joy in kicking someone when they are down so that is not my objective. I often talk about the importance of management in the investment decision making process and Namaste Technologies (TSXV: N) is an excellent case in point. But the point of it is although reports by those much abhorred short sellers who write hatchet jobs on companies that describe in graphic terms why they believe a stock is extremely overvalued. But time and time again, they do provide a valuable service.
By way of background, I first recommended Namaste Technologies on February 20, 2017 as a Seeking Alpha blog post because it did not meet the minimum financial requirements for publication on the main section. The stock was $.20 to $.30 per share and subsequently became one of my top performing recommendations when it turned into a ten-bagger. I cooled on the stock around a year ago when the company became overly promotional, in my opinion, and I turned negative when they followed through with the idea that shareholders who agreed not to sell their shares for 90 days would be invited to a lavish party. At the time I reported here that “…in over four decades of active investment analysis, this is the most ridiculous thing [I] have ever seen.” I also advised Namaste management, “If you manage your business properly, the stock price will look after itself.” I also observed, “This is a no-win for Namaste and its shareholders. Stop all this foolishness and get back to work growing the business.”
The information that triggers this commentary is the report that Namaste’s board of directors has terminated the services of Founder, Chief Executive Officer and Director, Sean Dollinger “…for cause.” The term ‘for cause’ means the Board believes there is legal justification for the termination.
The corporate press release said an internal investigation into Dollinger was prompted by allegations made in a report (which is a reference to well-known short seller Andrew Left and Citron Research’s report in October 2018) that concluded, “…Namaste Technologies Inc….is a fraud.” In May 2018, Namaste had been attacked by another short-selling group, Grumpy Bear Research. The action against Dollinger was reportedly taken on the basis of the internal study findings.
The board claims it has identified alleged breaches of fiduciary duty and evidence of self-dealing related to the sale of its U.S. division. It went on to say they have identified subsequent transactions involving assets and companies in which Dollinger and David Huges, the latter being Namaste’s head of marketing, have a beneficial interest. The Directors also said it will take legal action against Dollinger for damages and disgorgement (repayment of funds in question).
Sean Dollinger said in a statement the following day, "I intend to begin setting the record straight and clearing any misconceptions caused by the inaccurate allegations levelled against me. In the meantime, I continue to be committed to the company as a director on the board and as its largest shareholder. I also support the newly appointed chief executive and chief strategy officers.” There appears to be some conclusion here as the Board report indicated Dollinger had been removed as a Director. Dollinger subsequently commenced legal proceedings against Namaste.
I don’t know Dollinger personally but he must be an intelligent person. But many intelligent people, do stupid things from time to time. Here’s something Dollinger did that I would classify as stupid. Namaste had been operating a Normal Course Issuer Bid (NCIB) since last summer. Under an NCIB, a company reports its intention to buy its own stock and retire them in advance of doing so. This action is often motivated by management’s view that their shares are so undervalued on the stock market the company’s capital is better spent in retiring shares than growing the business. Under the NCIB, Namaste purchased 460,900 shares at $1.08 per share on December 19, 2018. The day after, on December 20, 2018, Dollinger sold 2.36 million shares at between $.82 and $.97 per share. The share repurchase under the NCIB was reported publicly on January 10, 2019 and Dollinger’s sale was reported on December 28, 2018. Although the public was not informed of these transactions in total until January 10, 2019, Dollinger was the CEO of Namaste and could have been aware of the timing of NCIB purchase and, of course, was in control of the timing of his sales. Just so I’m clear, there is nothing illegal about these transactions.
So none of this was illegal, but I think the term “clearly stupid” applies. If I was a shareholder, I would be enraged if I was motivated to hang onto my shares or even buy more shares because the Company said the stock was so undervalued it was going to buy its own shares back. Not only that, if Dollinger promised me an invitation to a gala party if I agreed not to sell my stock for a 90-day period and every time I turned around I saw Dollinger in one way or another serving up the same Kool-aide to the public through the press only to find out he dumped over 2 million shares on one day driving the stock down to a 52-week low.
More recently, the situation devolves from stupid to ominous. Sefi Dollinger, Chairman of Namaste and Sean’s uncle, sold 10,000 shares at $1.59 per share on January 28, 2019 which was after all of this information must have been known to known to him as Chairman of the Board in far greater detail than it was by the public. In fact, lacking detailed information it makes an outside wonder if this was trading on inside information. Of course, Sean Dollinger’s uncle is not a newcomer to controversial trading. Back in May 2018, when Sean was rallying his followers to enter the “no-sell” pledge, Sefi was actually selling stock on the market. I guess Sefi isn’t a party animal.
At the end of the week, Meni Morim, interim CEO, issued a letter to shareholders. This was mainly a “pep talk” intended to bolster sagging investor confidence, in my opinion. But in style and content, it was certainly more business-like and not hyper promotional. There was no mention of another upcoming shareholders party for those who hold onto their shares.
So what lessons are there to be learned from this mess?
The first lesson is the Board has made allegations and I have to believe the Board of Directors must have carefully reviewed the information and heard whatever Sean Dollinger and others had to say before taking action. In addition, I am sure they also had the benefit of legal counsel so they are well advised in terms of the law.
Despite this, the Namaste case is evolving in an atypical fashion. Usually the offending management rolls out the list of typical excuses – health, family, stress – and disappears into the night. In the cannabis industry that has tended to be the end of it. But it sounds as if Sean Dollinger will dispute the matter. Personally, I can’t see this being successful. If Dollinger chooses the legal process, all the information comes out and in the modern world of social media, losing in the court of public opinion can be more serious and come sooner than a court judgement. It will stay with you for the rest of your career.
Next, I would not be the first person to say Namaste shareholders, or perhaps more accurately a tiny group of shareholders are almost “cult-ish” in their support of Dollinger and Namaste. I can personally attest to the fact that if you should have the audacity to say anything negative about either or both Dollinger and/or Namaste, your inbox will be flooded with angry emails and you will be criticized to a much greater extent on social media than has been my experience with any other company. It never bothered me but it may have influenced others. This could be a glimpse at the future of business or investment communications.
Negative reports by short seller reports are like cockroaches – if you see one, there are probably more around. Namaste has been the target of others, the most recent previous one coming in May 2018. The best way to avoid the hatchet job problem is to avoid doing things that attract their attention. This particular style of short seller is looking for companies that have done things that can trigger a selloff in a stock price. That’s how they make money. A hatchet job by one short seller can attract the attention of other short sellers. If management doesn’t engage in improper activities or give the appearance they are engaging in improper activities, they’ll leave you alone.
The so-called “hatchet jobs” directed toward companies by short sellers provide a useful service. In the cannabis group such short selling reports have resulted in significant change, most recently, it is not hard to connect the dots between the resignations of Aphria Chief Executive Officer Vic Neufeld and co-founder Cole Cacciavillani with the negative report from Hindenburg Research. As many of us believe that transparency in politics would be a good thing, we should feel the same way about the investment world. The best investor is a well-informed investor.
Finally, situations like this often raise more questions than they answer. The main question I have is why does Canadian cannabis company management get away with activities than in other industries securities regulators would judge serious transgressions? Because none of these have been tested in court, I am just asking questions. In early 2017, Mettrum was embroiled in a scandal involving a pesticide Myclobuntanil. A former employee, Thomas McConville, came forward to say Mettrum used Myclobutanil on purpose and hid it from Health Canada inspectors. When Mettrum was acquired by Canopy Growth, CEO Michael Haines was not retained. Now all the details were never disclosed but it only makes sense some regulations and/or securities laws were broken. After all, there was a witness. I can’t believe there wasn’t even an investigation. There have been intervening cases of scandals leading to management resignations such as Ascent Industries (CSE: ASNT) and Aphria (APHA) that I reported on here. The recent word from Ascent management is alluding to the possibility that Ascent will have its licenses revoked as I suspected and said so here. Now we have the case of Namaste Technologies and Sean Dollinger who has around 18 - 19 million shares. So when Dollinger says “I am deeply sorry and disappointed that this day has arrived after having devoted years and countless hours to build Namaste Technologies Inc. (TSXV.N) into a successful company….” his words have a hollow ring to them. For all his hard work he was compensated around $5 million a year. There won’t be any GoFundMe campaigns for Dollinger. The board alleges “…breaches of fiduciary duty by Sean Dollinger and evidence of self-dealing.” If these are tested in court and Sean Dollinger is found guilty, I believe the securities industry regulators will be compelled to act. These are very serious allegations.
The major lesson to be learned from the Namaste case is there are well over 20,000 listings on the stock exchanges in the U.S. and Canada. This means if you own shares in a company with some reasonable evidence of negative issues, you don’t have to own that stock. There are many others to choose from and you may be well advised to do so. It is hard enough to find a great investment. You don’t need one carrying baggage that might damage your portfolio at some random date in the future.