Valens scales up and begins to show what it was 'made to do'

Canada's most profitable public cannabis company A vertically integrated group with global reach Moving towards sales of higher-value distillate and white-label products Global legal marijuana market expected to reach US$146.4 billion by 2025 What Valens Company does: The Valens Company (CVE:VLNS) (OTCMKTS:VLNCF) is a profitable British Columbia-based producer of cannabis products, medical and recreational, and it is scaling up operations. Previously named Valens Groworks, the company rebranded its name to reflect the fact it is no longer just a cannabis cultivator. The firm can process over 425,000 kilograms of biomass per year and its services include numerous types of proprietary extraction, analytical testing, formulation, cultivation, and research, as well as white label product development. In 2019, the company said it became the largest white label product development, manufacturing, and third-party extraction firm in Canada. It offers CO2, ethanol, hydrocarbon, solvent-less, and terpene extraction. Its products include tinctures, two-piece caps, soft gels, oral sprays, and vape pens as well as beverages, edibles, injectables, and natural health products and it has a strong pipeline of next-generation products in development. Valens broadened its offering to include white-label product development and it now produces a portfolio of products to help partners build brands. The group has five wholly-owned subsidiaries - Valens Agritech, Valens Farms, Supra THC Services, Valens Labs Ltd, and Southern Cliff Brands Inc. Valens Labs is a Health Canada licensed, accredited cannabis testing lab providing sector-leading analytical services and the firm has partnered with Thermo Fisher Scientific to develop a Centre of Excellence in plant-based science. How is it doing: In April 2021, Valens announced that provincial cannabis sales increased in its fiscal first quarter despite restrictions on storefronts being a drag on the Canadian cannabis market as a whole. For the three months ended February 28, provincial sales climbed 7.6% quarter-over-quarter. Overall, net revenue increased 24.7% quarter-over-quarter to C$20 million. Valens’ estimated its share of the extract-based market increased to roughly 5.5% in Alberta, British Columbia, and Ontario in the quarter, up from about 4.9% the prior quarter.  Valens also ended the quarter with C$49.3 million in cash on hand. Meanwhile, the company has entered into an extraction and custom manufacturing agreement with Rubicon Organics, where it will leverage its full complement of proprietary extraction capabilities, including organic certified CO2, ethanol, and other extraction technologies to deliver customized consumer experiences in a variety of 2.0 products under the LP's product portfolio. Valens also recently struck an agreement with the Manitoba Liquor & Lotteries Corporation to supply and distribute a wide range of cannabis products to LGCA-licensed private retailers in the Canadian province of Manitoba. Its distribution network has now expanded to five provinces, with its business already sending products to Alberta, British Columbia, Ontario, and Saskatchewan. Additionally, the company recently reached a custom manufacturing agreement earlier with Experion Biotechnologies Inc to provide end-to-end pre-roll manufacturing services and product distribution services, with continued discussions to expand the existing agreement to include additional product development and manufacturing services for a range of next-generation products. In early February, Valens said it had received an amendment to its existing Health Canada standard processing license, permitting the sale of dried cannabis products to authorized provincial and territorial retailers in Canada. The company noted that the license amendment allowing it to sell and distributing pre-rolls and dried cannabis derivative products. It had previously reported shipping its first cannabis derivative products from the company’s new K2 facility in Kelowna, which manufactures white label and custom products. Valens recently acquired premier edibles manufacturer LYF Food Technologies Inc, based out of Kelowna, British Columbia, in a cash-and-stock transaction valued at C$24.9 million, plus up to an additional C$17.5 million in consideration payable upon the business achieving certain earn-out EBITDA milestones.  Valens also announced the launch of its nuance branded CBD 100 product, a high-potency CBD-dominant oil that will be available in the Medical Cannabis by Shoppers marketplace in the coming weeks.  And, the company said its third Canadian manufacturing facility, which is located in the Greater Toronto Area (GTA), is now in the final stages of construction and will provide an additional 30,000 square feet of capacity while focusing on the formulation, co-packing, and manufacturing of cannabis-infused beverages and other customized Cannabis 2.0 and 3.0 products using SōRSE by Valens emulsion technology.  Inflection points: Strike more deals, contracts Grow provincial sales through FY21 Expand edibles and topicals segments What the broker says: In the wake of the company’s upbeat FY1Q results, Stifel Nicolaus Canada Inc on April 15 said Valens’ stock remains a Buy with a $3.75 price target. “VLNS posted in-line Q1FY21 results, which we view as positive given the significant challenges in the Canadian market, with declining retail sales to start 2021 in addition to provincial boards reducing internal inventory levels, namely in AB,” the firm wrote. “Despite the above, VLNS grew net revenues by an impressive ~25% Q/Q, with brand partner REC channel sales up ~7.6% Q/Q while some LP peers have reported declining sales over a similar period, indicating strong market share capture.” Stifel added: “Overall, we believe investors could react well to this news and continue VLNS shares strong recent momentum.” Valens’ stock trades around C$2.56 a share in Toronto and around US$2.04 in New York. What the boss says: "In the first quarter of 2021, Valens built upon the solid foundation that was laid in 2020 as we continue to lead the Canadian industry as a highly trusted third-party manufacturer of cannabis consumer packaged goods,” CEO Tyler Robson said in a statement after releasing 1Q results. “Despite a slowdown in Canadian cannabis sales early in the year as a result of storefront restrictions and provincial inventory management due to the pandemic, we had strong sales growth with provincial sales increasing quarter-over-quarter.” He added: “We expect to grow our provincial sales through fiscal 2021 as we continue to manufacture winning SKUs across all Cannabis 2.0 categories, including the newly-entered edibles and topicals segments, and an evolving portfolio of Cannabis 3.0 products. With the addition of the LYF Facility and the GTA Facility nearing completion, our strengthened manufacturing platform allows us to efficiently launch new SKUs, increase our market share alongside our customers and provides the capacity for us to drive significant volumes of previously launched and trusted products that have continued to gain acclaim from consumers across the country." Contact the author: patrick@proactiveinvestors.com Follow him on Twitter @PatrickMGraham