Grey Cloak Set Stage for Rebound
- Performance Based Compensation
- Tiered Vesting based on Sales Generation
- Dilution is not a Factor Going Forward
- Targeting Underserved Medical Practitioner Market
- Inventory in Place
Grey Cloak Tech (GRCK) delivered on its promise to close the Eqova Life Sciences acquisition within 15 days. This also followed on the heels of news of their recent upgrade to the OTCQB. Yesterday in fact the company traded in the top 5 most active on OTCQB with 8,849,907 shares traded. The fact that they drew a line in the sand and delivered on these milestones is very impressive and sets the tone for future news releases. The Eqova acquisition was a very thoughtfully structured deal with the right incentives for management balanced with shareholder protection for non-performance. This management team seems very interested in building credibility with its shareholders.
Terms of Agreement
Employment agreements were struck with Fred Covely, William Bossung, and Patrick Stiles. Both Stiles and Bossung will receive base pay packages of $140,000 annually. The terms of their employment are considered “at will” which means that either party may terminate the agreement at any time. This type of structure allows the board to protect the shareholders if management is not performing. Bossum does have a modest 3 month severance package built into his agreement but it also comes with a 1 year non-compete clause. Fred Covely the CTO settled his obligations with a $30,000 convertible promissory note with a maturity date set about one year from now with a 50% discounted conversion price. Additionally he was awarded 1.2 million 3 year warrants at an exercise price of $.25. Pay based on performance seems to be a central theme.
The Share Exchange agreement permitted the exchange of Eqova stock for 1.1 million shares of Grey Cloak Tech Series A Convertible Preferred Stock. Half the preferred stock vests immediately but the other half is subject to sales performance. Eqova must produce $100,000 in gross sales for 3 consecutive months or $300,000 in sales per quarter. If the shares aren’t vested by next year then the company can buy the stock back at $.01/share. The shares would fully convert into 66% of the outstanding common based on the date of conversion. To put this transaction into perspective, the management team gets 33% to start and within a year if they meet the sales milestones they will have earned 66% of the outstanding stock. From an investor perspective management has a big incentive to produce $300K or more per quarter or sales of $1.2 million annually. If the management team hits these modest numbers they will generate gross profit of $480,000 assuming 40% margins. When you take away their salary the company is left with about $200,000 in net profit which could be considered an accretive acquisition. Anything above this would translate into extraordinary returns for shareholders.
Recent Dilution Tailing Off
The dilution from convertible noteholders appears to be at an end and any new dilution resulting from this deal is at a worst case 9 months away. If management hits its sales targets in the first quarter they would vest the balance of the shares and give notice of their intention to convert. Then these newly converted shares are subject to Rule 144 and could not be sold for an additional 6 months and when they are sold they can only sell 1% of the outstanding shares every 90 days. The shares on the market would be nominal but the real news would be the growth in sales. The Hemp Oil market is in fact growing according the Hemp Business Journal and expected to reach $2.1 billion in annual sales by 2020.
Medical Practitioner – Underserved Market
- Standardized Dosing
- Unique Delivery
Medical practitioners have unique needs and Eqova is exclusively focused on meeting the demands of this underserved market. Eqova feels they are going to “dominate the medical practitioner market.” This means they will take a consultative approach by finding the exact dosages and formulations that practitioners demand. According to Stiles consumers “demand superior products but also want it back up with education.” This means Eqova will source high grade CBD oil and have manufactures blend it into the proper dosages with standardized labeling. The products will have to pass rigorous third-party testing before being labeled as clinical-grade product made in CGMP Compliant Labs. As part of the recent exhibition in Denver, Eqova Life Sciences also debuted its new CannaBio Salve, an innovative topical salve infused with several aromatic natural oils. This unique delivery mechanism is another way Eqova can distance itself from the competition.
Sales Pipeline Bulging
News of the sales and pending sales this calendar year should excite shareholders looking forward to a company targeting a large untapped market. The acquisition terms point to great growth prospects because the sales milestones seem very conservative and easy to meet. Investors shouldn’t be surprised by the lumpiness in the sales as the marketing team gets started.
Inventory in Place
The surprise in this deal is that they have a starter amount of $150,000 inventory to turn. Based on typical metrics they should be able to turn this inventory into about $300,000 in sales by the end of the year. If they reinvest the profits into more inventory they could double sales in the following quarter assuming a constant sales force. This is very big news because investors won’t have to worry about facing dilution to keep sales momentum going.
Upcoming Catalysts
– Sales projections
– Significant Sales
– Regional distributors
– Roll Out New Products
The story of this company is in its infancy but the pedigree of the management and the proven track record in the nutraceutical space should give investors high confidence that this team will be able to execute on its business plan. The company has a simple business model of targeting a high margin product in an underserved market and growing sales exponentially. The inventory is a key ingredient in the maintenance of a successful product launch. The inventory stockpile considerably reduces the amount of dilution risk away. The company will be sales centric so there are many upcoming catalyst that could drive valuation higher. The stock is sitting at about a $1.3 mil market capitalization or close to one times projected annual sales. The supply of stock won’t last long at these levels.
This article was submitted by Mike Sheikh. Mike is a contributor for Seeking Alpha. Mike (or PSinvestor) have NOT been compensated for this article and currently holds a position in the company, but may trade it in the near future. You can follow Michael on TWITTER @breckskifan
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