From National institute for cannabis investors Investors were concerned with one number in a recent earnings report, but everything is fine.
Valens GroWorks (OTC: VGWCF), one of the companies in our model portfolio, recently reported its earnings.
The revenue was very good; it beat everyone’s expectations. Margins were a little low, but the company is building its capacity, so there’s bound to be unused assets that cost money and drag those margins down.
Management did a good job explaining all of that on the company’s conference call, and all seemed to be fine.
Before the call, the stock was up nearly 5%.
But after the call, the stock reversed and ended up falling by 5%. It went down another 3% the next day before beginning a recovery.
Old News Causes a Panic
As best I can tell, investors panicked because they didn’t understand an old deal that the company had made. The company made good on the deal during the quarter, leading to a $6 million charge. To investors, something seemed shady.
And it did look shady on first glance.
The company issued over $6 million of stock to acquire a shell company with no assets, and the owner of that company had previously received a ton of warrants to acquire Valens stock at a low price. That’s the kind of thing that penny stock scammers do, not real public companies.
But Valens is no penny stock scam. It was merely living up to an old deal it made.
Here’s what happened.
The Truth About Valens
Before current management came in, they had a consultant who did a lot of work for the company. That work included lining up acquisitions, setting up technology, and even helping with operations. He was paid largely in stock.
At the time, Valens wasn’t much more than an idea and it was still private. The value of the stock back then would have been in the range of around $0.05 per share. To pay this person fairly, Valens promised him a lot of stock.
The consultant was basically betting that his work would lead to the company’s success and that, eventually, the stock he received would be worth more than any cash he would have received.
On the part of Valens, the company didn’t have much cash, so it was also happy to make the deal.
Valens is now a successful company, and that means the consultant’s bet paid off. The stock he received and the stock he agreed to receive in the future became incredibly valuable.
The senior management team is entirely different from the one which made the deal with the consultant.
But a deal is a deal; Valens still had the obligation to produce the shares it had promised that consultant back when things were less certain.
The transaction the company reported was simply the issuance of stock to fulfill its portion of its deal.
However, it looked awful for shareholders who didn’t understand what had happened.
That’s the long version.
The short version will help you easily separate the truth from the noise.
The Short Version
Valens was paying someone who had helped the company become successful. Since then, Valens had become even more successful than anyone thought at the time.
On the company’s conference call, management explained the transaction, but failed to explain the full backstory.
Since management disclosed the deal in prior financial statements, they apparently didn’t think the market would focus on the transaction as much as it did.
It’s hard for me to blame management for that because I would have made a similar assumption.
Still, this incident is an important reminder that you should never be frightened out of a stock when you don’t know what’s really going on.
A lot of people lost a lot of money when they saw other people selling, or they lost money because they believed a report from an analyst they’ve never heard of before.
I don’t often report on events in the cannabis market on the same day they happen. I think it’s more important to be right than first. That also lets me provide you with advice as opposed to just being a news outlet and not letting you know how something will impact your model portfolio.
However, if there’s ever unethical behavior on the part of management or some other reason why you have to sell a position immediately, I’ll get in touch with you right away.