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 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: Flushed with a C$70 million capital runway, the company in June gained a major foothold in the US CBD market with its acquisition of Green Roads, a leading manufacturer of cannabis products. Valens will pay US$40 million for Green Roads, plus up to an additional US$20 million in contingent consideration payable upon the purchased business achieving certain profit milestones. If all the milestones are met, the transaction represents around 4.5x 2022 earnings before interest, tax, depreciation, and amortization (EBITDA).  The company also 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.  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 seven provinces, with its business already sending products to Alberta, British Columbia, Manitoba, New Brunswick, Ontario, Saskatchewan and the Yukon. 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 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, 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.  In May, Valens announced a slew of management team and board of directors moves, including the appointments of Sunil Gandhi as CFO and Adam Shea as chief commercial officer.   On the financial front, Valens in April 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 that 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 has submitted an initial application to list its common shares on the Nasdaq. Inflection points: Strike more deals, contracts Grow provincial sales through FY21 Expand edibles and topicals segments What the broker says: On June 22, Stifel GMP resumed a “Buy” rating and raised its target price on Valens a day after the company closed its acquisition of Green Roads. The broker's analysts also noted that Valens' C$70 million capital runway. It also cited the launch of Valens’ first flower products that are aggressively priced in Canada.  “In short, VLNS has executed on what management has promised, proving its suitable comps are with Tier 1 LPs, in our view,” the Stifel analysts said, raising their price target to C$5.75 a share from C$3.75. Overall, they noted, buying Green Roads gives Valens direct entry into the US market with a trusted and leading CBD health and wellness brand, an established manufacturing and distribution platform with a global reach, highly experienced leadership team with a strong knowledge of the US consumer landscape. and a proven track record in cannabis consumer packaged goods manufacturing. “We see a slew of revenue and cost synergies to drive growth in both cannabis and CBD verticals, with the latter likely to have significant growth in 2021/2022,” the analysts wrote. They noted that Green Roads could help Valens’ cannabis operations in Canada by expanding the product portfolio with its sophisticated online marketing engine that boasts a double-digit return on customer acquisition costs upon first purchase. On the CBD side, the analysts pointed to Valens’ ability to leverage its deep industry network to secure lower-cost hemp biomass, which would help expand Green Roads' gross margin.  “At the same time, VLNS could open new retail doors to GR with US cannabis operators, existing international customers (11 countries collectively incl. late-stage discussions in Latin America, Asia-Pacific & Europe) and potentially break into a new revenue stream through third-party manufacturing, in our view,” they said. In addition, the analysts noted that Valens is expanding its Canadian product offerings and geographical distribution. “VLNS introduced one of the industry's first baked goods and the company's first flower product targeting the large format, value segment,” they pointed out. “As we had expected, the LP leveraged the immense oversupply in the market to secure ultra-low cost product and has priced its flower offering at ~$2.70/gram retail, representing the lowest price point in the industry and 25-35% below most peers. We believe this could drive significant market share capture and showcases the company's differentiated and attractive operating profile.”  Valens’ stock recently traded at around C$3.16 a share in Toronto and around US$2.56 in New York. What the boss says: "We expect to realize strong synergies and to aggressively pursue various strategic opportunities that are now available to our combined business through this transaction, including expanding the distribution of our ever-growing product offerings overseas and further disrupting the North American market with innovative cannabis products," said CEO Tyler Robson said in a statement.  "The combination of Valens and Green Roads makes for an unbeatable team, diversified distribution network, and unparalleled product development and manufacturing platform, which we expect will provide us the footprint to become one of the biggest players in the global cannabis health and wellness market." Contact the author: patrick@proactiveinvestors.com Follow him on Twitter @PatrickMGraham