Dov Malnik
Dov Malnik
NASDAQ:VLONFeb. 25, 2022
Last Closing Price$7.8620-Day Average Daily Volume141,315
50-Day Simple Moving Average$6.01Shares Outstanding6,812,836
Volume Weighted Average Price$7.92Available Borrow150,000
Relative Strength Index71.96Borrow Fee Rate44.76%

Riddle us this: which stock’s price climbed 85% in the past month while every major market index was nosediving? You’re right if you answered Vallon Pharmaceuticals, Inc. (NASDAQ:VLON), which closed down 2% at $7.86 per share last Friday. The greater riddle, however, is what caused the stock’s remarkable run.

The only news Vallon released in the past month was its financial results for 2021, which were not surprising for a pre-revenue biopharma company. Vallon’s annual net loss increased 93% to -$9,303,000 due mostly to increased research and development expenses. The company completed a clinical trial in December but has yet to report the results.

A more significant event was the one-year anniversary of Vallon’s initial public offering (IPO) on Feb. 9, which marked the end of a lock-up period during which some of the company’s largest shareholders were prohibited from selling shares. As of Dec. 31, several of those shareholders owned unregistered shares, which, beginning on Feb. 9, they could sell under certain exemptions from registration specified in Securities Act Rule 144.

Felonious Bedfellows

During the three years before Vallon’s IPO, the company sold unregistered shares in three private placements at prices ranging from $3.04 to $6.40 per share. Investors who bought at any of those prices could have sold shares at a profit last week while Vallon’s stock was trading as high as $8.35 per share, which was a 53% increase from the last closing price before the one-year lock-up expired.

Two investors in one of Vallon’s 2019 private placements were Israeli business partners named Tomer Feingold and Dov Malnik. In 2020, the U.S. Dept. of Justice indicted Feingold and Malnik for allegedly participating in an international insider trading ring. Malnik was arrested in Switzerland in 2020 and was extradited to the U.S., where he pled guilty to one count of securities fraud. He was sentenced to 30 months in prison, fined $50,000, and ordered to forfeit $1,594,779. The SEC brought a civil case against the defendants in 2020, which Malnik settled in 2021. Feingold remains at large.

As of Dec. 31, Feingold and Malnik each owned 509,781 shares of Vallon, which in aggregate represented 15% of the company’s total shares outstanding. In Dec. 2020, the two men entered into a voting agreement with Vallon in which they agreed that on every action requiring a shareholder vote, they will vote their shares collectively in an amount constituting no more 9.99% of Vallon’s total shares outstanding. The rest of their shares will be voted proportionate to the manner in which all other shareholders vote. Nasdaq required the agreement as a condition of Vallon listing its shares on the exchange.

Running on Empty

We are not saying that Feingold, Malnik, or any other large shareholder of Vallon had anything to do with the 85% rise in the company’s stock price in the past month. Nor are we accusing anyone of manipulating Vallon’s stock price. We are simply pointing out that the 85% increase coincided with the end of the one-year lock-up and created an opportunity for anyone who bought Vallon’s stock at pre-IPO prices to profit handsomely.

The cause of the 85% run-up remains a mystery. It certainly isn’t related to any improved forecasts for Vallon (at least not any that are known publicly). As of Dec. 31, the company had $3,702,000 in cash, which it estimated would last through the third quarter of 2022. In Vallon’s 2021 annual report, the auditor Eisner Amper LLP expressed substantial doubt about Vallon’s ability to continue as a going concern.

Vallon plans to release the results of its recent clinical trial by the end of the first quarter. If the news is good, it could boost the company’s stock price temporarily. But with its drugs still years away from commercialization, Vallon will have to raise additional capital by the third quarter. Any new issuance of shares will be dilutive and will put downward pressure on the stock price.

One of Vallon’s largest shareholders–a Swiss pharmaceutical company named Salmon Pharma GmbH–has an investor’s rights agreement that allows it to order Vallon to include Salmon Pharma’s shares in any registration of securities and in any underwritten offering, subject to the underwriter’s discretion. A registration of shares by a selling shareholder would further pressure Vallon’s stock price.

Based on the recent highs Vallon’s stock has attained, its likely direction from here is no riddle.