Valens GroWorks Q2 Financial Results Deserve Greater Appreciation

Valens GroWorks Corp. (TSXV:VGW), one of the Canadian cannabis extraction stocks, announced its second-quarter financial results on Monday

SmallCapPower | July 17, 2019: Valens GroWorks Corp. (TSXV:VGW) (OTC:VGWCF), one of the Canadian cannabis extraction stocks, reported Q2/19 financial results on July 15, 2019, after markets close. The financial results were highlighted by revenue of $8.8M, representing 296% growth QoQ, which beat the consensus estimate of $6.9M. EBITDA came in at $2.0M, which surpassed the consensus forecast of $1.2M. In terms of production, the Company processed 8,547 kg of cannabis and hemp biomass in Q2/19, a 376% increase over 1,796 kg processed in Q1/19. VGW’s cash sits at $57.0M.

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Revenue growth was driven primarily by a ramp up in extraction services provided to Valens’ partners, such as Canopy Growth Corporation (TSX:WEED), Organigram Holdings (TSXV:OGI), HEXO Corp. (TSX:HEXO), and Tilray (NASDAQ:TLRY). Gross margins increased to 57.9% in Q2/19 from 38.3% in Q1/19, due to efficiencies gained from higher extraction volumes in the second quarter. Its net loss increase was due to an analytical testing license that was an asset held of sale and was subsequently determined that the sale was unlikely. As a result, the fair value less cost to sell was recorded as a $3.2M impairment loss. Additionally, the Company recorded a $5.9M non-cash loss due to fees and legal services related to the termination of a consulting agreement with a former president.

Positive adjusted EBITDA after two quarters of operations. Adjusted EBITDA came in at $2.0M, compared with a $2.0M adjusted EBITDA loss in Q1/19. This is quite impressive, as most cultivators except for Organigram Holdings (TSXV:OGI) could be a few quarters away from reporting positive EBITDA. Investors should expect significant EBITDA growth in the following quarters as Valens GroWorks is expecting to be processing full contract volumes by the end of Q3/19, as the Company’s extraction partners prepare for the legalization of edibles and derivative products on October 17, 2019.

Key takeaways and outlook. Overall, it was a positive quarter and Valens is showing robust margins compared with many $1B market cap Canadian cannabis cultivators. Management has guided that in the first 45 days of Q3/19, the Company processed 7,358 kg of cannabis and hemp biomass and indicated that processing volumes are increasing MoM. As a result, we are expecting Valens GroWorks to process a minimum of ~15,000 kg of biomass in Q3, which could lead to revenues of ~$15.5M for the next quarter. Investors should expect a gradual ramp-up of extraction services through to Q4/19, with a significant ramp-up expected in Q1/20 when edibles and derivatives are fully legalized in Canada. Valens is also building an additional extraction facility that is expected to be completed by the first half of 2020, bringing the total annual capacity to 1,000,000 kg. Additionally, the Company is working on its white-label product formulation with a wide variety of tinctures, vapes, topicals, beverages, and capsules. White-label revenues are expected to surpass tolling revenues by the second half of 2020. Valens GroWorks currently has 10 contracts for tolling services with cultivators, and investors should expect additional white-label contracts within the next six months. The Company is also looking at several international opportunities and is expected to provide more colour on this in the coming months.

Shares of Valens GroWorks ended Tuesday’s trading session 6% lower at C$4.08. Valens stock has a market cap of C$403.9 million. Valens trades at a 3.3x EV/Revenue multiple, a discount to Canadian mid-cap and large-cap cultivators, which trade at average multiples of 7.3x and 10.7x, respectively.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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