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First, let me start with a couple of true stories.

A few decades back I worked with/for an ever so slightly gullible man. He was used to military life where people did what they said they were going to do and there was also, really, only one way of doing things. This left him slightly too open when faced with the nefarity that can be found out there in the wider economy. Lovely guy and he put together some great projects - but it was possible for him to get a little misled at times.

In one such case, we were contacted by someone who claimed to be able to make lead into gold. Silver from lead is old hat, the Romans knew how to do that - certain lead ores do contain silver so it can look like, as you extract it, that the silver is coming from the lead. But gold from lead? And not gold in the ore, but lead that was actually turned into gold?

Well, yes, that can be done, in a nuclear reactor. Two problems, it's very expensive and the gold produced is actually a radioactive isotope itself. So, not a way to get rich (didn't stop a few likely types in Russia trying to sell some but even so).

But this claim was "low energy transmutation" and really was that lead got turned into gold. As it happened we were going to pass by this guy anyway so we went (and I'm never getting in a Cesna again but that's a story of thunderstorms, the American SW, and St Elmo's Fire) and saw him. Good talker, a few tells that I spotted but the boss didn't and we went away with a little spot of lead. Which, upon analysis, contained gold. I sold it, got $100, and thought no more of it. 

The boss asked, well, shouldn't we invest? The lead had gold in it, he could make gold from lead! 

Ah, no Boss. We took $100 off him and that's the end of the story. We won. Because think about it for a bit. If you can - already - make gold from lead then why do you need investment? He's passing out, as proof, those lead nuggets that run 1 and 2% gold. 20 cents of lead is now $100 of gold that is. Why does he need investment? 

But, if we invest, we'll make a lot of money! No Boss, we won't. Because the only reason someone who can make gold from lead would want investment is because he can't make gold from lead but can run away with your investment. 

This was the first time I realized that a lot of people cannot - or do not - turn around a business deal to see if it makes sense. Sure, the opportunity to invest in a business that turns $400 of lead (the price of a tonne) into $millions of gold is great. But why is anyone who can do that looking for outside cash? 

At which point, to me anyway, it becomes obvious that the cash is the point, not the process which doesn't exist. As basic science would say it does not exist as well. But we can check the idea simply by employing basic logic in the business proposal itself. If you can make gold from lead you don't need investment. So, if you're asking for investment you cannot make gold. Simples. 
 

And Prime Bank Guarantee Funds

Back at that time, a common form of advance fee fraud (which was just before email made the Nigerian 419 frauds so popular) was Prime Bank Guarantee funds. The trick here is that prime banks exist, and guarantees from them exist. So, prime bank guarantees exist. It's possible to go find the standardized paperwork for them (umm, IPSA maybe?) and wave these around too. Hey, I've even been asked, straight up and honestly, for a prime bank guarantee on a letter of credit. Provided one too. 

The trick was to suggest that there was some special marketplace where such prime banks traded such prime bank guarantees. At massive margins - 19% per trade is one I recall being told. Hey, woohoo, let's go trade them then!

At which point there was always an entry fee - which is about when you started to see the usual tells. Recitations of memorized facts but no real understanding of the logic being retailed. Because that part is the part that didn't make sense. 

Now, of course, I can claim that prime bank guarantee funds don't exist. But that's not my point. Imagine even that they do. Those frock-coated, top-hatted bankers are trading stuff at 19% margins. And they'll let you in if you just pay this little, leetle, entry fee. No, that's the bit that doesn't make sense if we look at the business proposition the other way around. 

If you're trading something at 19% margins then the last thing you're going to do is let other people in to trade those same things. We all know that more liquidity reduces margins in a trading environment. More people means less profit per transaction. The business proposition doesn't work. No one is going to let you into a market where you can make millions for payment of a $50,000 fee. What is going to happen is that the people you pay $50,000 to head for the hills with the cash. 

Now, I was able to keep that boss out of that proposal except he paid in $5,000 behind my back. He never saw the salesman again of course.

I even know of one stock market-listed company that invested in one of these PBG funds. One of my competitors they were in fact. Issued some bonds, and put all the cash into one of these funds. Lost it all, of course. I have a personal opinion that one of the directors knew about this and that it was actually his pension that got the money but that's libellous so I'll not say who it was. To add insult they even managed to sue their own lawyers for allowing them to do such a thing and gain a payout from their insurers. 

Now that's all fun - and true - stories. The point I really want to make is that for any business deal being offered we have to consider it from the reverse angle. Is this a deal that a rational investor or business would offer to us? Obviously, beliefs here can differ, opinions equally so. But for a deal to be a deal - rather than, say, something more like the above - it has to make sense for the person offering it as well as the person it is being offered to.
 

Novo Integrated Sciences (Nasdaq: NVOS)

Novo Integrated Sciences is too small, with too low a share price, to pass the usual investing tests. But it's also true that the stock doubled last week, trade is huge too. So, well, maybe? My answer is no. For here is the deal that they're talking about. 

Now, recall, Novo does some alternative medicine stuff, reiki clinics, and stuff. Their market capitalization was $40 million or so. They've some ideas about a chain of senior citizen homes. Well, you know, good luck to them and all that. 

But they announced this:

Novo Integrated Sciences, Inc. (NASDAQ: NVOS) (the “Company” or “Novo”), today announced Novo and Blacksheep Trust have signed a One Billion Dollar Master Collateral Transfer Agreement (the “Master Agreement”) for the purpose and general use of monetization by Novo for a period of up to 15 years. The One Billion Dollar collateral transfer is expected to occur in one or more transactions during the current fiscal quarter following the validation and authentication by third-party audit procedures.

Eh? 

Now master collateral transfer agreements do exist. They're the sort of thing a holding company might provide to a subsidiary. Which then starts to do repo on behalf of the entire company's cash. Or hedges on commodity exchanges for feedstock purchases, that sort of thing. The financial markets want to know that the entire company is on the hook for trading debts, not just the $100 in capital that a shell company needs to have (note that the corporate veil, limited liability, does mean that the holding company is not, repeat not, liable for the debts of a subsidiary).

What it's not - not usually about, this legal arrangement - about is providing capital from some outside company to this other company. 

So, let's flip this. What is there to gain for Blacksheep Trust? They've got $1 billion in funds or assets. They want to get into building Canadian senior citizen homes. Or maybe CA reiki clinics. Well, OK. But why on Earth would they transfer the rights to - and that agreement does mean really transfer the risk of the use of those assets - to a $40 million company? If you were really interested in Novo then you'd use a few month's income to buy out the company, right?

This is the power of looking at the contract the other way around. It's not possible to see this as being sensible from Blacksheep's point of view so, perhaps, possibly, you know, it isn't? 

But yes, it gets worse. 

Before this announcement, there was another one. Which contained three different deals that Novo was looking at: 

As previously disclosed, Novo entered into a share purchase agreement (the "SWAG Agreement") with SwagCheck Inc. ("SWAG") and the shareholders of SWAG, pursuant to which Novo agreed to purchase 100% of SWAG’s outstanding shares. SWAG holds a specific right of purchase of a precious gem collection as provided for in an agreement between SWAG and a Court-appointed Successor Receiver for the United States District Court for the Central District of California.

Umm, what? 

Now, against all good sense I am willing to believe in the existence of Central California, I've been there. Even in the existence of courts there - I've been in one (no, different story). There are indeed successor receivers in the US state court system. But, turn this around. Why would a court grant an exclusive right to purchase a precious gem collection to one company? If it's owned by someone then the court is going to give it to the person who owns it on the conclusion of the case. Hey, maybe that's the IRS - but then the IRS sells it. Or even if the court is going to sell it then they'll just send it to an auction house and it will be sold. The bigger the gem collection the further up the chain that seller will be - Christie's or Sotheby's maybe for large diamonds and emeralds.

It simply does not make sense that this contract takes place. Either the court's liquidating the collection for some reason - in which case it just gets liquidated -  or it's an interesting story that doesn't make sense. 

An aside here. I don't know whether this works in America or if it's a British-English thing. But back a few decades there was a standard cartoon depiction of a burglar - housebreaker perhaps. They'd be climbing down the drainpipe from the open window. Flat cap, mask on face, stripey t-shirt - and the bag on their back, perhaps sack, which contained the household jewels just liberated would be marked "SWAG". I think these days, in America, swag means freebie t-shirts gained at a conference, etc. The swag bag given out at the Oscars etc.? To me, with my English hat on, it means stolen jewels. It might just be that linguistic thing of course but is fun all the same. 
 

There's more

Oh yes, there is more:

GIMEG project in early stages of development: Also as previously announced, the Company has a funding commitment for a direct investment in the Company of $40,000,000 from Sheikh Khaled bin Mohammad bin Fahad Al Thanayan through Gulf International Minerals and Energy Group (GIMEG). The funding is expected to result in project-specific joint ventures for development of elder care and senior living community facilities in Canada. This project remains active and is in the early stages of development and implementation.

Well, we can make whatever we want of that one, to be honest. Given the others, I'm not putting much faith in it but then perhaps I'm just prejudiced.
 

But yet more

This I love:

As previously disclosed, Novo entered into entered into a securities purchase agreement with RC Consulting Group LLC in favor of SCP Tourbillion Monaco (the "Buyer"), pursuant to which the Company issued an unsecured 15-year promissory note to the RC Noteholder (the "RC Note") with a maturity date of April 26, 2038, in the principal sum of $70,000,000, which amount represents the $57,000,000 purchase price plus a yield (non-compounding) of 1.52% (zero coupon) per annum. The RC Note is unsecured and there is no provision for the conversion of debt, issuance of any class of shares, or the grant of any warrants by the Company to the Buyer. The Company is expecting to receive an initial draw against the $57,000,000 in the near future.

Unsecured 15-year zero coupon money at 1.52%? No, really, come on. It's not even a convertible. I do think the 0.02% part is fun though. 

Again, think through this from the point of view of Tourbillion Monaco. They're out there offering money at a third to a quarter of the price of the major banks. Unsecured, no recourse, zero coupon, money at 1.52% for 15 years? And the best client, taker, for this they can find is a CA reiki chain. It's just possible, maybe, you know, that the offer isn't quite that simple?
 

OK, so why am I wrong? 

It's entirely true that I've been considerably dismissive of Novo Integrated Sciences itself as a business. Bad me - if reiki is going to work then CA is where it's going to after all. It is also true that considering some odd deals that don't pass the smell test is actually a good thing to do. I've certainly considered all sorts of stinkers in my time. Because that's how you do find the people who are offering a good one. So, giving someone walking through the door the time of day, a cup of coffee as they explain, no, that's a good thing. 
 

But

I don't believe it. Any of these. I'd also be significantly worried about any management (like the bloke I used to work for/with and so protect) that did. 

Now, as I say, I could be wrong here. But no, not for me. It's entirely up to everyone else of course. But I really do think this is one where the greatest value is in looking out for the newspaper headlines in the middle-distance future and nothing else. Those might well be fun.

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