renault

In Search of Inoculum

“No country should be allowed to lie to the American investors to create an unfair advantage, especially when operating in American markets”

Keith Krach, Under Secretary of State in reference to China, June 2020

If you tell the truth you don’t have to remember anything

Mark Twain

This is a tale of capital liberated from American markets on the promise of a Covid Vaccine. The names have been changed. The plot and conduct of the actors drawn from SEC filings, public statements, and press releases. The tale is in the words of the company with unrestrained commentary for color. 

The company has been named Renault to honor Inspector Renault who was shocked to find illegal gambling at Rick’s in the movie Casablanca while an attendant handed him his winnings.  Renault is NASDAQ listed in the business of cannabis, medical devices, tests, and peered into the abyss of insolvency with $190 million in accumulated losses over thirty years.

For Renault pandemic fear was reincarnation. The pursuit of a vaccine was a tale that could be half told to an audience willing to believe the promise during the next news cycle without regard for the $500 million and 13 years that real science advised was required to develop a vaccine for anything.  

Renault separated the public from $13.1 million between March and May of 2020. The tale told promised the licensing of science from a smart foreign company but did not mention a shell company that would live a fourteen-day life to house the license and divert two-thirds of the proceeds until one of the actors gave the money back. Renault had to tell the story right.

In the beginning

In 2016 the founder of Renault disagreed with management over accounting practices and resigned. Renault was by 2018 a permanent defendant in the courthouse where it paid more than its annual revenue in legal fees to defend the suits. 

The allegations ranged from Securities Fraud (settled for $2.25 million), Intellectual Property theft (settled for 930,000 plus a permanent injunction), unpaid bills to a telemarketer, wrongful termination of an executive, product liability (loss of a leg, $1 million), and a Chinese outfit with a claim of $1.5 million.  The mortar rounds of suits and settlements reached a crescendo in 2019 with a delisting notice from NASDAQ.

In December 2019 Renault decided that cannabis was the future paid for with other people’s money. Renault sought an Underwriter and promised to pay it ten percent of monies raised plus warrants, free options to buy more shares at a favorable price.  Ten percent is a lot to pay an intermediary for a public offering but is the going rate for companies drawing up business plans on cocktail napkins to finance Underwriters purchase of New York penthouses. 

The Underwriter group chosen by Renault were alumni of brokerage Rodman and Renshaw featured in the documentary The China Hustle that exposed the listing of fraudulent Chinese companies on US exchanges without complying with US accounting standards. 

Retired General Wesley Clark was the Chairman of Rodman and Renshaw who resigned after the documentary was released.  Through the efforts of Rodman and the conduit community for American capital over 156 Chinese firms are listed on US exchanges with a market capitalization exceeding the GDP of Mexico, $1.2 trillion.

in March 2020 Renault's new journey became the search for a Covid Vaccine.  Renault did not hold a board meeting or file an SEC disclosure about this decision because clearly its expertise in cannabis and defending securities fraud qualified it for vaccine development, the domain of well-capitalized pharmaceutical companies since Edward Jenner's tryst with James Phipps and cowpox in the 1800’s. 

The Plan

Renault needed a license for vaccine development or at least the appearance of vaccine development. The legitimate licensors of vaccine candidates were expensive and Renault, losing $3 to $10 million a year, could not afford legitimate.   

So, and this is speculation, Renault management reached out to a board member who knew a company, Insco, that had raised $20 million, February 2020, for a Phase III trial in oral insulin.  Insco sourced one of the ingredients for the insulin product from a foreign company, Forco, that had an aspiring DNA sequencing and contract research business. 

Insco introduced Forco to Renault and the Underwriter. Forco had neither a vaccine nor vaccine candidate but was an expert in the sequencing of baker's yeast which could identify a vaccine candidate that offered enough of an appearance of the pursuit of a vaccine candidate to liberate public capital with the blessing of the SEC.  

Renault had to negotiate the license fast because over 1000 vaccine trials were percolating through the legitimate vaccine community. The Renault vaccine tale could not marinate. 

In general License Agreements take time. The Licensor wants to be paid for its developed thought assured that a well-capitalized Licensee will not disappear into the night with the secret sauce.  Encyclopedias have been written about the adversarial negotiation that provides bar associations around the world with billions in legal fees to contest the inevitable post License disputes when the prospect of commercial success springs. 

The Rub

Renault was fortunate. Forco agreed to an immediate, exclusive, global license.  On 10 March 2020 intrepid lawyers formed a shell company, Shellco, that bound together the CEO of Insco, the Underwriter, and Forco as the shareholders.  

The Shellco was conspicuous by its presence. If Renault was a legitimate Licensee and Forco a legitimate Licensor why would it be necessary to form Shellco, which lived a 14-day existence, to include the CEO of Insco and the Underwriter in two-thirds of the consideration created by the IP of the Licensor?  And, why would the Licensor agree?

The plan was for Shellco to License the science from Forco. Renault would then acquire Shellco for cash plus 19.9% of the shares in Renault.

At the receiving end of the rainbow the Underwriter, Insco, and Forco would be shareholders in Renault.  At the paying end the public would deliver monies to Renault for the acquisition of Shellco. But the public would not know Forco as a shareholder of Shellco and as the Licensor was negotiating the license with itself.  

Forco agreed to receive monies as a shareholder for the sale of Shellco to Renault, monies under the License Agreement for the achievement of science milestones, royalties if a product was developed, and a share of future public offerings by Renault. 

On 24 March 2020 and Renault paid Shellco $1 million in cash plus 19.9% in Renault shares. 

On 25 March 2020 the CEO of Renault and the CEO of Forco gave an interview which appeared to the public to be a discussion between Licensee, the CEO of Renault, and Licensor, the CEO of Forco in an arm or at least thumbs length relationship.  The discussion concerned a novel approach to vaccine development that would be executed quickly and could capture expedited regulatory approval. 

There was no mention that the interview participants were shareholders in common venturing to separate the public from monies sharing in the proceeds or that Renault had paid Shellco $ 1 million the day before the interview. There was no mention that vaccine development on average required $500 million and 5 to 13 years.

The interview transcript was nine pages long and was posted on Renault's website one week before the public offering, the same day that the United States was declared the global center of the epidemic and India went into lockdown.

To be or not to be

The SEC on 7 April gave effect to the Renault request to sell shares to the public. On 8 April Renault sold 766,000 shares at 6.00 a share to the public raising $4.6 million. 

This caused great excitement in capital markets. The message boards of communities that share considered thought on the prospects of business models, Seeking Alpha, Stock Twits, dreamed of billion-dollar market capitalization for a three million dollar company.  Renault shares traded over 100 million shares in two days, one thousand times its daily average, in a range of  $2-$9 a share.

From the offering proceeds Renault paid the Underwriter $460,000, Shellco $250,000, and kept the remaining $3.8 million for itself. The $250,000 payment to Shellco was divided between the shareholders of Shellco: Underwriter, CEO of Insco, and Forco. Renault went out of its way to explain its share of the monies was not for vaccine development.

On 8 April 2020 Renault announced a science milestone achievement by Forco and paid Forco $500,000 bringing the total paid out from the offering to Shellco and Forco of $750,000 plus shares.

Fiction is obliged to stick to possibilities, Truth isn’t.

Mark Twain

A concerned minority shareholder in Forco received a confidential assessment from an independent consultant that opined on the colorful history of Renault and observed that Forco was both Licensor and shareholder in the Licensee without disclosure while raising money from US markets.  The advice was to make full disclosure immediately and consider options in the event Renault was to declare bankruptcy.

The report was delivered on 20 April and forwarded to the Board of Forco which convened on 21 April. On 22 April Forco returned $290,000 of the proceeds from the Shellco acquisition (24 March 2020). On 30 April Forco returned $83,000 of the monies received from the 7 April offering though Forco kept the $500,000 payment for the science milestone.

The net effect of the fancy math was that Forco received roughly $500,000 in cash instead of the $1.4 million it was owed plus shares in Renault. In the process Forco may have made US Capital market history with the first-ever voluntary refund by a foreign recipient of monies from a public offering.

The financial distinction between the acquisition of Shellco by Renault and achievement of Science Milestones by Forco is theoretical. In practice Renault raised monies from the US public markets to pay for both so a refund of one and acceptance of the other by Forco brings to mind the relationship between the deer and the headlights, or, what is behind the headlights, with Forco cast as the deer.

Historically actors have been ordered to return monies after lengthy civil and criminal investigations.  The immediate refunds by Forco raised more questions than the conscience it answered:  in light of the refunds, what was the validity of the License agreement and the acquisition of Shellco ? If Forco had returned the money then what had Renault purchased ? Did it own Shellco and the License ? In fancy legal terms were the contracts executed, executory, void, or, pray tell, illegal ? Should Renault fight or flee ?

Renault chose flight.  On 14 May 2020 Renault sold 1.36 million shares at 3.53 a share, a 40%  discount from the 7 April offering, raising $4.8 million. Companies in earnest pursuit of vaccine candidates witnessed share prices untethered to gravity and raised money at multiples of original offering prices while Renault sold shares on the precipice of a black hole paying the Underwriter $500,000 for the privilege of the down round.  

Mark Felt said Follow the Money

Tales about money and who gets it are best understood by boring ledger accounting that bring to life inspired conspiracies while revealing cover-ups that go to excruciating lengths. 

The gritty of Renault’s story began with its 15 May 2020 SEC quarterly filing for the period ending 31 March 2020 the highlight of which was Forco returning money to Renault along with details on shareholders of Shellco.

These shareholders were now insiders of Renault and wanted to sell their Renaut shares to the public. Renault had little choice but to identify the sellers and seek permission from the SEC for the sale of the shares.                                         

               Shares 

Shareholder (CEO Insco)          207,564

Forco                                              207,564

Underwriter 1                               103,913

Underwriter 2                                  3,298

Underwriter 3                              409,299                    

Underwriter 4                                 16,223

Renault mentioned that one million warrants had been exercised at $4.00 share raising $4 million between the period 6 April to 20 April, 2020 though nether the exercise nor identity of the warrant holders was disclosed at the time despite the warrants being for over 25% of Renaults shares outstanding. 

In eight weeks from March to May Renault raised $13.1 million or three years of operating losses.

The Fancy Math 

Of the $13.1 million Renault kept $11 million specifically not for vaccine development. the Underwriter received $1.4 million-plus shares in Renault for being the Underwriter. The CEO of Insco received 207,000 shares plus cash of $400,000 for what is not clear. The reason for the offerings and the new business plan, Forco, received $400,000 in cash, 207,000 shares, and $500,000 for science milestone payment, of which it refunded the $400,000.

Impunity

Renault shareholders stretch from Florida to Lichtenstein and include one respected multi billion dollar hedge fund that was selling shares up to one month before the tale. 

That Renault is permitted to foist ever more imaginative tales in American public markets is a testament to the impunity granted by SEC permission. 

As a coming attraction when the trough runs dry It is not difficult to imagine Renault exhausting its conjuring in this tale and timing a bankruptcy petition to a capital schedule juggle that confers secured, preferred status to select shareholders and leaves the rest contemplating credulity. 

A certainty is Renaults belated admission that vaccine development takes time and that they have done precisely nothing to begin the process because they simply do not have the money, the expertise, or a product worthy of an application to regulators.