Quantcast
Capital vs. Cannabis: The First Major Investment Deal Between Capital and Cannabis Fails - By - December 9, 2014 - SF Weekly
SF Weekly

Capital vs. Cannabis: The First Major Investment Deal Between Capital and Cannabis Fails

43

Bhang Chocolate is one of the fledgling marijuana industry's most recognizable brands. The company's tasty and potent cannabis-infused chocolates come in snazzy packaging that make them instantly recognizable to a seasoned edibles consumer and just as alluring to a first-timer without brand loyalty.

Bhang is Oakland-bred, but licenses production out to other firms. This means Bhang products are sold in Colorado, Washington, and other places where cannabis is legal. This makes Bhang one of the few national brands in the weed game and one of the only major marijuana businesses operating across state lines.

As such, Bhang is exactly the kind of opportunity investors are salivating for right now, as marijuana in America continues its transformation from an outlaw cottage industry to a multibillion-dollar, multistate big business.

Bhang is also now part of a cautionary tale. Following a lawsuit filed in federal court, Bhang and its onetime financier, Mentor Capital, are headed to arbitration after an investment deal between the two entities soured.

Under the deal, publicly traded San Diego-based Mentor was to invest $39 million in the company in exchange for a 60 percent ownership stake — which valued Bhang at an eye-popping $65 million.

The landmark deal was sealed in February and announced with considerable fanfare. It was, after all, capital's first major foray into the marijuana industry.

But by June, Bhang had pulled out, claiming that Mentor never ponied up $7.5 million in promised seed money, despite the capital firm making public claims that it was now part-owner of the company.

Mentor countered with an August lawsuit, alleging Bhang failed to sell Mentor the requisite amount of shares and failed to adequately “publicize” the deal, according to court documents (despite press coverage of the deal in the East Bay Express and elsewhere).

Mentor is also demanding that the $1.5 million allegedly paid upfront to Bhang executives Scott Van Rixel and William Waggoner be returned (on top of attorneys' fees, of course).

The two sides sparred in federal court in San Francisco until November when a judge approved Bhang's request for binding arbitration.

The deal may have been doomed from the start. There were warning signs: About six weeks before the Bhang deal, Mentor announced a plan to sink $7 million into HempCon, Inc., the organization that hosts weed trade shows in San Jose and elsewhere. But just 11 days after making the announcement, Mentor issued a press release saying that the plan was terminated. From the outside, it appears Mentor was looking for something to sink money into and something to publicize, quickly.

In other words, it had the hallmarks of an aborted “pump-and-dump” scheme, when iffy stocks get a boost long enough for certain investors to make their mint.

And as it turned out, the Bhang deal wasn't all bad. Anyone paying close enough attention to short stocks at the right time made out like a bandit.

Mentor's stock skyrocketed after the deal was announced. Shares in the firm soared from $2.74 in February to as high as $8.99 a share on March 11. That's when the crash began.

A month later, shares had plummeted to $1.51. Mentor lost steadily throughout the year and was hovering at around $0.80 last week.

Voicemails left for Chet Billingsley, Mentor Capital's CEO, were not returned. Van Rixel and Waggoner, who according to court documents reside in Miami and New Mexico, could not be reached by press deadline.

Watching how quickly Mentor's stock surged and then imploded, it looks as if Bhang was indeed the bait in a pump-and-dump hustle, as East Bay-based activist and cannabis businessman Mickey Martin first noted on his blog.

Prominent cannabis industry insiders and would-be investors contacted by SF Weekly declined to go on the record. However, privately, some point to the complicated terms of the deal — still posted online for all to see — and ask if it was designed to fail.

But if the reaction at the recent Marijuana Business Conference in Las Vegas is any indication, nobody cares.

The Bhang-Mentor saga wasn't mentioned once at the conference, one attendee told me, not in the scheduled presentations or in casual conversation.

Business is going on as usual. Investors are wooing marijuana firms, and weed businesses are going around looking for funding in anticipation of more states going legal.

But after this “deal,” whether Bhang or Mentor will be around to enjoy full legalization is open to question.

MORE UBER OF MARIJUANA, MORE PROBLEMS

Yet another service offering medical marijuana on order via Web or smartphone launched in San Francisco.

This one, Nestdrop, is similar to predecessors Eaze and Meadow, both of which launched to headlines heralding the “Uber of Marijuana.” But of the three, Nestdrop probably deserves the “Uber” title the most.

For one, it has an app (the other services are still web-based only). More importantly. it's been sued by regulators.

Nestdrop started offering marijuana delivery in Los Angeles in October. On Dec. 2, the L.A. city attorney filed suit, alleging that the company violated local dispensary regulations and lacked the necessary permits.

The company vowed to hold fast, claiming that it's a technology company, not a cannabis business, and therefore needs no permits… just like the unlicensed deliveries that have been doing business in Uber's hometown for years.

Uber of marijuana, welcome home.