RE:warrants A Word About Those Warrants - VLNS.WT
A poster has remarked here that those warrants, trading as VLNS.WT, on the TSX, could expire worthless, effective April 10th, 2021. These free trading warrants (VLNS.WT) were born out of a bought deal financing effort, that was concluded by Valens (then GroWorks), on April 9th, 2019. This financing was accomplished through the sale and issuance of 14,618,644 Units, at a price of $2.95 per Unit, for a total raise of $43,125,000.00. Each Unit was comprised of one common share of Valens and one-half of a common share purchase warrant. This results in 7,309,322 full warrants being available for trading and/or eventual exercise, on the TSX. They presently trade in the $0.25 range, effective Monday, May 4th.
Here, IMO, is why I consider these warrants a pretty interesting investment opportunity, over the next year or so, owing to the optionality scenario being provided The Valens Company, as its pertains to the eventual treatment of these warrants. Valens basically has two choices here, as follows:
- They could allow these warrants to expire worthless, on the aforementioned expiry date.
- They could accelerate the expiry date of these warrants and incentivize investors to convert these warrants to shares of the company (VLNS), as per the following:
Each Unit is comprised of one common share (a “Common Share”) of Valens and one-half common share purchase warrant (each whole common share purchase warrant a “Warrant”) of the Company offered at a price of $2.95 per Unit for gross proceeds of $30,000,001 (the “Offering”). Each Warrant will be exercisable to acquire one common share of the Company (a “Warrant Share”) for a period of two years following the closing date at an exercise price of $4.00 per Warrant Share, subject to adjustment in certain events. In the event that the volume weighted average trading price of the common shares for ten consecutive trading days exceeds $6.00, the Company shall have the right to accelerate the expiry date of the Warrants upon no less that fifteen trading days’ notice.
So, what are some the possibilities that we are looking at here, at least from my perspective? First, and foremost, I believe that Valens will make the attempt to have these warrants exercised, at an accelerated rate and date, prior to their expiry on April, 10th, 2021. Why? They’ve successfully, and to their corporate benefit, done it before! Many latecomers to this Valens’ story are probably not aware of the fact that there was a previous and publicly traded warrant of Valens, on the CSE, with the stock symbol VGW.WT. These warrants were associated with a financing completed on October 10, 2018, in the amount of $27,300,000.00. The Units issued for this financing were priced at $1.95 each. Each Unit was comprised of one common share of the company (then Valens GroWorks) and one half of one common share purchase warrant. Each full warrant would permit the holder to purchase one common share of the company at a price of $2.54, for a period of two years subsequent to the above-remarked financing closing date. In other words, this warrant would expire on October 10, 2020. However, in the event that the Valens stock price traded at a volumed weighted average price (VWAP), of $3.81, for a period of ten consecutive trading days, Valens would then have the right to accelerate the expiry date of these warrants upon providing no less than 15 trading days notice. Just such a notice was given to market participants on May 2, 2019, when Valens announced that the Accelerated Expiry Date Trigger on these warrants had been pulled. The early expiry date of May 20, 2019, was thus announced. Interesting to note that purchasers of these warrants, in the mid-$0.50 range, in early March of 2019, were able to off-load some of these warrants, in the mid-$2.00 range, just seven or eight weeks later.
To apply a similar scenario to this new set of warrants (VLNS.WT), would, of course, require that Valens’ shares trade at a volume weighted average price of $6.00, for a period of ten days. Keep in mind, that in order to achieve the $6.00 VWAP, the price of the Valens stock itself could trade into the high $6 - $7 range. How realistic is that? Well, at least five of the seven well-known brokerage houses, providing analyst coverage of Valens, have all provided one-year price targets on Valens, that comfortably exceed the $6.00 VWAP accelerated exercise price. On average, these five analysts representing AltaCorp Capital, Cannacord Genuity, Desjardins Securities, Haywood Securities, and M Partners, came up with and released, just last month (April), an average one-year target price, for The Valens Company, of $8.10. The remaining brokerage houses of Eight Capital and Mackie Research Capital Corp, released their outlooks on Valens, in February of this year, with one year price targets of $8.25 and $8.00, respectively.
Let’s look at a scenario here, for the small retail investor. Suppose that you’ve been successful and have managed to purchase 20,000 warrants at, or near, today’s market close price of $0.25 and have put them away for the next while. It’s cost you $5,000.00 + discount broker commission of $10 or so. Now you sit back and wait for the story to unfold. In Q3 & Q4, of this year, Valens starts to hit their pace, with their rebranding and operational transition to a white label manufacturing company, partnering with their present customers, and new and notable CPG companies, in the accompanying development and roll-out of market-making and game changing SKU’s, that will serve to drive increased revenues and fatter margins. They indicated, during their last conference call, that they already have a number of these 2.0 SKU’s in the pipeline, basically ready to roll, in the back half of this year. BTW, these guys do exude measured but palpable confidence in what they are selling! I like that!
OK, back to our 20,000 warrants. As we get Q2 out the way (probably similar to Q1) and move into the back half of the year, the Valens story starts to gain increased visibility and traction, particularly with the institutional side of the market. Include index funds, etc, here. Revenue numbers are ramping as are margins. The stock price is moving up as Valens brings in the full and strategic deployment of their Normal Course Issuer Bid, which was announced last December. In their announcement, Valens indicated that they could acquire (buy back at market pricing) up to 5% of their outstanding shares, at the time of announcement, or up to 6,275,204 shares, if they deemed their shares as being undervalued or mispriced by the market. As at their last conference call, they indicated that they had not yet used this facility but intended doing so in Q3 & Q4. Valen’s strategic buy backs of their stock could certainly provide some serious fuel and impetus to an upward move of the stock price. This in turn will provide leveraged moves in the pricing of the warrants.
When I look at the Valen’s stock price for the past year - as of May 1st - it registered a trading high of $4.10. The Valen’s warrants had a corresponding trading high, for the same one-year period, of $0.90. Let’s presume that Valen’s achieves an accelerated conversion/expiry date for the warrants in question. This would mean that the stock is trading in the $6.00+ range. This would imply a minimum $1.50 trading area or range for the warrant. I could decide, at this time, to sell 15,000 warrants at $1.50, which would put $22,500.00, into the cash portion of my trading account. I could then contact my discount broker/agent and instruct him/her to convert the remaining 5,000 warrants, in my trading account, into shares of Valens’s, at the $4.00 conversion price. This would cost me $20,000.00 out of the cash portion of my trading account and leave me with a cash balance of $2,500.00. I would also own 5,000 shares of Valen’s priced at $6.00+, which I could sell for $30,000.00, or more. Based on my initial investment of $5,000.00, I could have a potential return of $27,500.00. Or I could hang onto to my 5,000 Valen’s shares and watch it potentially grow into life-changing wealth.
What does the accelerated warrant conversion process do for Valen’s? Well, for one thing, it gives Valens approximately $30,000.000.00 to add to their cash pile kitty. Do they need $30,000,000.00 for anything? After all, you often hear the complaint, from retail shareholders, about “shareholder dilution”. In this particular case, I am of the opinion that Valens is already looking at utilizing this type of money in a very value accretive fashion. Anyone who is invested in the cannabis sector or space, to any meaningful degree, is well aware of the fact that a number of cannabis market participants, including some major LP’s, are in some pretty serious operational and financial straits, that can only be resolved with extensive rationalization of their operations, or bankruptcy. There are going to be a number of great opportunities, for a cash rich and profitable company, like Valens to acquire some serious assets for pennies on the dollar, during the back half of this year, and into next, during the course of this rationalization process. I expect that these acquired assets will show very well on a growing and robust Valens balance sheet. This strategy was alluded to, by one of the Valens executive team, during the last conference call. Additionally, keep in mind, that some of those $4.00 conversion shares, that they issue for the warrants, may have cost Valens significantly less than this owing to the fact that some of those shares could include those purchased by Valens, at lower prices, during the execution of their Normal Course Issuer Bid.
Even if the above scenario does not work out, or materialize, over the course of the next year or so, as described above, I would still anticipate that the Valens share price will easily exceed the $4.10 trading high reported during the past year. This would suggest a return of the warrant price to at least the $0.75 range, or a triple of today’s price. Although I have a high expectation of my original scenario working out - as it did with the Accelerated Expiry date, on the previous set of warrants - on May 20th, 2019, the consolation prize of a triple, on the aforementioned 20,000 warrants purchased, at $0.25, is certainly nothing to turn your nose up at.