THCA – High redemptions, NAV floor, the best risk/reward trade right now on the market

THCA – High redemptions, NAV floor, the best risk/reward trade right now on the market. SUMMARY UP FRONT: THCA is an optionable SPAC with excellent conditions set for a low float gamma squeeze. Similar to ESSC, the tradeable float has been significantly reduced due to redemptions (2.66m), leaving an extraordinary asymmetric trade compared to other SPAC squeezes as the NAV floor protection (c.$10.32) is still in place. Common shares are a fantastic risk/reward and the best place to park cash at the moment. INTRO: Over the last few weeks we have seen a resurgence of the SPAC low float squeeze. These occur when SPACs go through the merger vote process, during which investors are able to redeem their shares for the Net Asset Value (NAV), thereby removing a significant portion of the shares left in the float. The main risk in these plays is that the NAV floor is removed prior to the vote, meaning that the stock can trade sharply to the downside if there is not enough volume (see QNGY for a fairly recent example – if you zoom out to the 3/6 month view you’ll see it trading around $10 per share for months, before plummeting when the NAV floor is removed – caveated with the fact that it did have a little pump on its way down). The difference with THCA is that, similarly to ESSC, this is an extension vote rather than a merger vote. The result is the same as the de-spac low float squeeze: a significant removal of shares from the float which leads to increased volatility (and if it has options, increased susceptibility to a gamma squeeze) and the squeeze itself. To put this in to perspective, GWH reached $28.92 on a 4.2m float and SPIR hit $19.50 on a 2.3m float. Neither of them had the safety net of NAV protection. BACKGROUND: THCA is a SPAC with no definitive agreement i.e. it hasn’t struck a deal to merge with a company. According to its prospectus it is not limited to, but is focussed on, searching for a company in the Cannabis sector (fittingly for the ticker). However, over a year ago it was rumoured to have struck a deal outside of its target focus, with a company called Transfix – a digital freight platform, which ultimately didn’t work out (with Transfix eventually striking a deal with GSQD, another SPAC). Each SPAC has a certain timeline to complete a merger, and if it doesn’t consummate a business combination within that time period, it will either have a clause to automatically extend that deadline, or require a special vote of shareholders to extend. This was the case with ESSC and is the case with THCA, with a few key differences. Since April 14 2021, THCA has had several special meetings of shareholders to extend, each time resulting in several million shares being redeemed. This is described below in an extract from the most recent vote filing: ‘’As described in the Company’s prospectus for its initial public offering (“IPO”), the charter originally provided that the Company only had until April 16, 2021 to complete a business combination. On April 14, 2021, the Company held a stockholder meeting to extend the date by which the Company had to consummate a business combination from April 16, 2021 to September 30, 2021. At the meeting, stockholders approved such extension and in connection therewith redeemed 2,558,740 shares of common stock for an aggregate cash payment of approximately $25.8 million. On September 28, 2021, the Company held another stockholder meeting to extend the date by which the Company had to consummate a business combination from September 30, 2021 to December 31, 2021. At the meeting, stockholders approved such extension and in connection therewith redeemed 2,284,305 shares of common stock for an aggregate cash payment of approximately $23.1 million. On December 21, 2021, the Company held another stockholder meeting to extend the date by which the Company had to consummate a business combination from December 31, 2021 to March 31, 2022. At the meeting, stockholders approved such extension and in connection therewith redeemed 3,099,310 shares of common stock for an aggregate cash payment of approximately $31.6 million.’’ The most recent vote occurred yesterday on the 29 March 2022. And resulted in 6.7m shares being redeemed. SITUATION: The THCA SPAC IPO’d in July 2019 with an offering of 15m public units, with a further 2.25m units added from the exercising in full of the sponsor’s over-allotment option, leaving a public float of 17.25m shares. Since then, it has gone through 4 extension votes, with the first 3 resulting in the combined removal of 7,942,355 public shares (leaving 9,307,645 shares left in the float). There are 4,737,500 private shares which are not tradeable in any capacity until post-business combination lock-up conditions are met, however they are eligible to vote in the meetings. See excerpts from the most recent definitive filings for the extension vote on the 29 March below for confirmation: ‘Record holders of common stock of the Company at the close of business on the record date are entitled to vote or have their votes cast at the special meeting. On the record date, there were 14,045,145 shares of common stock outstanding, including 9,307,645 outstanding public shares. The Company’s warrants do not have voting rights.’ Results for the most recent redemption rates are in, from page F-25 of the 10-KA filing published today. A further 6,650,100 shares were redeemed, leaving 2,657,545 shares in the float. This has happened as there was a much more limited addition to the trust, offering a scalable, but uncertain new NAV which reduced the incentive for arbitrage funds to hold for the simple fact that arbitrage funds were not guaranteed to be able to make an arbitrage trade on this stock. There will still be an arbitrage sell wall, albeit reduced, in the low-mid $10 range for remaining arbitrage funds in the stock (funds who buy SPACs below NAV and redeem on extension/merger votes for guaranteed, but limited profit. They are not interested in speculation). This leaves us with the following situation: - A significantly reduced float (2.6m) on a low volume (53k average), optionable stock with NAV protection (c.$10.32). The OI on the option chain is low, yes, but that’s because this trade is not yet widely known. April premiums are cheap and it won’t take much to start the gamma ramp. I am not the only one who has started to buy in – there have been other relatively small trades in the last couple of days, including in the options chain. This is less convoluted than the ESSC situation. To limit redemptions, ESSC entered in to a forward share purchase agreement with several arbitrage funds. The convoluted nature of this and the apparent reneging of the agreement by these funds meant that the ESSC float was closer to the 3.3m mark - which was only confirmed when they entered a new forward purchase agreement for their latest extension vote in February. There is no such forward purchase agreement/backstop with THCA. The float is what it is = 2.66m. This is less than half the float required to meet the conditions for options. STRATEGY: Buy common shares. It is low risk. You can redeem or sell before the NAV floor is removed – be careful of share settlement times. If the deal falls through or is not completed by the 30 Jun 2022, a further extension vote will be required or the SPAC will be liquidated and public shareholders compensated at NAV. With common shares you can easily determine your risk i.e. the further you buy away from NAV, the more risk you take. E.g. if you buy at $10.35, you are risking c.1%. If you buy at $11.24, you are risking c.10% and so on. There are other securities available to leverage: Warrants and options. These do not have a NAV floor and are not redeemable, and you could lose 100% of your investment i.e. if the business combination doesn’t occur, then the warrants will be worth 0. The pool of Warrants has also not been reduced – and remains high. Options are higher reward, but higher risk. If you buy common shares close to NAV, you can take on a predetermined amount of risk by buying a set number of call options. This is what I have done. DISCLOSURE: I am long 32,500 shares @ $10.24 average, 1200 April 10C average @ 0.55 and 200 April 12.5C average @ $0.3. REDDIT DISCLAIMER: I am not a financial advisor, this is not financial advice. I do not participate in trading on behalf of, or coordinated with, any other groups or individuals on social media (i.e. discord, twitter etc). LINKS: THCA SEC filings: https://sec.report/Ticker/thca

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THCA – High redemptions, NAV floor, the best risk/reward trade right now on the market

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THCA - High redemptions, NAV floor, the best risk/reward trade right now on the market.

SUMMARY UP FRONT:

THCA is an optionable SPAC with excellent conditions set for a low float gamma squeeze. Similar to ESSC, the tradeable float has been significantly reduced due to redemptions (2.66m), leaving an extraordinary asymmetric trade compared to other SPAC squeezes as the NAV floor protection (c.$10.32) is still in place. Common shares are a fantastic risk/reward and the best place to park cash at the moment.

INTRO:

Over the last few weeks we have seen a resurgence of the SPAC low float squeeze. These occur when SPACs go through the merger vote process, during which investors are able to redeem their shares for the Net Asset Value (NAV), thereby removing a significant portion of the shares left in the float. The main risk in these plays is that the NAV floor is removed prior to the vote, meaning that the stock can trade sharply to the downside if there is not enough volume (see QNGY for a fairly recent example - if you zoom out to the 3/6 month view you'll see it trading around $10 per share for months, before plummeting when the NAV floor is removed - caveated with the fact that it did have a little pump on its way down).

The difference with THCA is that, similarly to ESSC, this is an extension vote rather than a merger vote. The result is the same as the de-spac low float squeeze: a significant removal of shares from the float which leads to increased volatility (and if it has options, increased susceptibility to a gamma squeeze) and the squeeze itself.

To put this in to perspective, GWH reached $28.92 on a 4.2m float and SPIR hit $19.50 on a 2.3m float. Neither of them had the safety net of NAV protection.

BACKGROUND:

THCA is a SPAC with no definitive agreement i.e. it hasn't struck a deal to merge with a company. According to its prospectus it is not limited to, but is focussed on, searching for a company in the Cannabis sector (fittingly for the ticker). However, over a year ago it was rumoured to have struck a deal outside of its target focus, with a company called Transfix - a digital freight platform, which ultimately didn't work out (with Transfix eventually striking a deal with GSQD, another SPAC).

Each SPAC has a certain timeline to complete a merger, and if it doesn't consummate a business combination within that time period, it will either have a clause to automatically extend that deadline, or require a special vote of shareholders to extend. This was the case with ESSC and is the case with THCA, with a few key differences. Since April 14 2021, THCA has had several special meetings of shareholders to extend, each time resulting in several million shares being redeemed. This is described below in an extract from the most recent vote filing:

‘'As described in the Company's prospectus for its initial public offering (“IPO”), the charter originally provided that the Company only had until April 16, 2021 to complete a business combination. On April 14, 2021, the Company held a stockholder meeting to extend the date by which the Company had to consummate a business combination from April 16, 2021 to September 30, 2021. At the meeting, stockholders approved such extension and in connection therewith redeemed 2,558,740 shares of common stock for an aggregate cash payment of approximately $25.8 million. On September 28, 2021, the Company held another stockholder meeting to extend the date by which the Company had to consummate a business combination from September 30, 2021 to December 31, 2021. At the meeting, stockholders approved such extension and in connection therewith redeemed 2,284,305 shares of common stock for an aggregate cash payment of approximately $23.1 million. On December 21, 2021, the Company held another stockholder meeting to extend the date by which the Company had to consummate a business combination from December 31, 2021 to March 31, 2022. At the meeting, stockholders approved such extension and in connection therewith redeemed 3,099,310 shares of common stock for an aggregate cash payment of approximately $31.6 million.''

The most recent vote occurred yesterday on the 29 March 2022. And resulted in 6.7m shares being redeemed.

SITUATION:

The THCA SPAC IPO'd in July 2019 with an offering of 15m public units, with a further 2.25m units added from the exercising in full of the sponsor's over-allotment option, leaving a public float of 17.25m shares. Since then, it has gone through 4 extension votes, with the first 3 resulting in the combined removal of 7,942,355 public shares (leaving 9,307,645 shares left in the float). There are 4,737,500 private shares which are not tradeable in any capacity until post-business combination lock-up conditions are met, however they are eligible to vote in the meetings. See excerpts from the most recent definitive filings for the extension vote on the 29 March below for confirmation:

‘Record holders of common stock of the Company at the close of business on the record date are entitled to vote or have their votes cast at the special meeting. On the record date, there were 14,045,145 shares of common stock outstanding, including 9,307,645 outstanding public shares. The Company's warrants do not have voting rights.'

Results for the most recent redemption rates are in, from page F-25 of the 10-KA filing published today. A further 6,650,100 shares were redeemed, leaving 2,657,545 shares in the float.

This has happened as there was a much more limited addition to the trust, offering a scalable, but uncertain new NAV which reduced the incentive for arbitrage funds to hold for the simple fact that arbitrage funds were not guaranteed to be able to make an arbitrage trade on this stock. There will still be an arbitrage sell wall, albeit reduced, in the low-mid $10 range for remaining arbitrage funds in the stock (funds who buy SPACs below NAV and redeem on extension/merger votes for guaranteed, but limited profit. They are not interested in speculation).

This leaves us with the following situation:

- A significantly reduced float (2.6m) on a low volume (53k average), optionable stock with NAV protection (c.$10.32).

The OI on the option chain is low, yes, but that's because this trade is not yet widely known. April premiums are cheap and it won't take much to start the gamma ramp.

I am not the only one who has started to buy in - there have been other relatively small trades in the last couple of days, including in the options chain.

This is less convoluted than the ESSC situation. To limit redemptions, ESSC entered in to a forward share purchase agreement with several arbitrage funds. The convoluted nature of this and the apparent reneging of the agreement by these funds meant that the ESSC float was closer to the 3.3m mark - which was only confirmed when they entered a new forward purchase agreement for their latest extension vote in February. There is no such forward purchase agreement/backstop with THCA. The float is what it is = 2.66m. This is less than half the float required to meet the conditions for options.

STRATEGY:

Buy common shares. It is low risk. You can redeem or sell before the NAV floor is removed - be careful of share settlement times. If the deal falls through or is not completed by the 30 Jun 2022, a further extension vote will be required or the SPAC will be liquidated and public shareholders compensated at NAV. With common shares you can easily determine your risk i.e. the further you buy away from NAV, the more risk you take. E.g. if you buy at $10.35, you are risking c.1%. If you buy at $11.24, you are risking c.10% and so on.

There are other securities available to leverage: Warrants and options. These do not have a NAV floor and are not redeemable, and you could lose 100% of your investment i.e. if the business combination doesn't occur, then the warrants will be worth 0. The pool of Warrants has also not been reduced - and remains high. Options are higher reward, but higher risk.

If you buy common shares close to NAV, you can take on a predetermined amount of risk by buying a set number of call options. This is what I have done.

DISCLOSURE:

I am long 32,500 shares @ $10.24 average, 1200 April 10C average @ 0.55 and 200 April 12.5C average @ $0.3.

REDDIT DISCLAIMER: I am not a financial advisor, this is not financial advice. I do not participate in trading on behalf of, or coordinated with, any other groups or individuals on social media (i.e. discord, twitter etc).

LINKS:

THCA SEC filings:

https://sec.report/Ticker/thca

read-time
6 min
12.50
Target Price
9/ 10
Confidence
1-2 Weeks
Timeframe
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