NICI update on VALENS:
Everything You Need to Know About This Extraction Powerhouse By Greg Miller Dear Curtis Allen, Today, I want to dive into one of the companies we've added to the Cannabis Investor's Report model portfolio recently. To understand Valens Groworks Corp. (OTC: VGWCF), you first have to understand the big trends occurring in the cannabis market across the globe. So before I provide you with more in-depth coverage of how Valens operates, I want to give a little more background on what is going on in the cannabis oil market. That will help you see why I'm so excited about Valens! The first thing to know is that consumers purchasing traditional cannabis - the kind with THC - are starting to buy more and more oil-based products instead of smokeable cannabis. The biggest oil-based product is vape concentrate for recreational use, but medical patients prefer oil-based products in caplets or as a tincture. Both medical and recreational users are also switching to edibles and, eventually, will consume their cannabis through beverages. The CBD market was never a smoking-based market. Smokeable CBD exists, but it's a tiny part of the cannabis sector. In CBD, tinctures, lotions, edibles, and similar oil-based products make up almost the entire market. And as we've discussed, CBD is growing even faster than the THC cannabis market in the United States. To make all of that oil, THC-cannabis and hemp must be processed to remove the oils. There are several ways to perform the processing, including using chemical solvents, super-cooled carbon dioxide, and even simply the application of heat and pressure. It's a precision process and difficult to get just right, especially with products for which the producer intends to keep the flavor profile of the original cannabis plant. The oil from any of these processes, which the industry calls crude oil, is then further refined before finally either being packaged as a product or shipped to another facility to be a part of other products. The final thing you need to know is that Canada has a much less robust cannabis oil market than the U.S. That's because some of the most popular oil-based cannabis products, vape concentrate, and edibles are currently illegal in Canada. That changes in October, when the country will start to allow those products. With that background, let's look at Valens Groworks. Valens is a cannabis and CBD extraction company. How Valens Groworks Operates Rather than do their own extraction, many cannabis companies outsource it to a specialist like Valens. That allows cannabis firms to focus their attention on building great brands. And in Valens' case, the customer list is impressive: Canopy Growth Corp. (NYSE: CGC), Tilray Inc. (Nasdaq: TLRY), OrganiGram Holdings Inc. (TSXV: OGI, OTC: OGRMF), and Hexo Corp. (NYSE: HEXO), just to name a few. In fact, most of Canada's largest producers have chosen to use Valens for at least some of their extraction needs. And extraction is just part of the value Valens can bring to its customers. It has a robust testing business, which is particularly important in concentrates because what may be just a trace chemical in the cannabis plant can become a too-large part of the concentrate. Valens also does product formulation. It can restore flavors lost during the processing, it can add new flavors, and it can also customize the balance among THC, CBD, other cannabinoids, and terpenes. Other formulations can make the products have a longer shelf life, increase bioavailability, make the cannabis oils water-soluble, and much more. Finally, Valens can create custom products for branding companies. This service is mostly directed at smaller companies, but some larger ones will use it too, for products outside their areas of expertise. The Competitive Edge In Canada, Valens is the leader, and it's not even close. Valens has a current annual extraction capacity of 240,000 kilograms of cannabis material; the next largest extractor, MediPharm Labs Corp. (TSXV: LABS, OTC: MEDIF), has only 150,000 kg of capacity. The next two closest are just a fraction of that. Moreover, Valens has the most different ways of doing the oil extraction, the most contracts with growers, and the only organic certification. All of that - mostly extraction - adds up to a very profitable business. Right now the business is not profitable - first quarter revenues were only C$2.2 million, with gross margins at 38% and adjusted EBITDA negative. But by the end of the year, the company will have grown to C$54 million in revenues and C$23 million of adjusted EBITDA - an EBITDA margin of 43%. That's a pretty impressive growth rate, but the company is demonstrating its ability to hit that kind of growth number, so it's realistic to expect those projections. In the first two months of the company's second fiscal quarter, Valens processed 177% more hemp and cannabis than it did during the entire first quarter - as the producers deliver cannabis, Valens has the capacity to process it. And once vapes and edibles are legal, Valens will have trucks lined up outside its plant filled with cannabis and hemp to be turned into concentrate. The really good news comes as the company gains scale in 2020. Revenues should be nearly C$150 million, and EBITDA margins should approach or exceed 50%. At its full capacity, the company is capable of generating revenues of C$300 million or more. At a 50% EBITDA margin at the company's current stock price, it would be trading at 1.1 times revenues and only 2.2 times EBITDA. That's an absurdly low level, which gives a sense of just how much potential is in this company's stock if it continues to grow. Valens is done raising capital for the time being. It completed an equity financing round in April that raised C$43 million, giving the company over C$60 million of cash to complete its buildout. Because extraction hasn't taken off in Canada the way it has in the U.S. (because of the regulatory reason discussed above), concentrate extraction is one of the few areas where Canadian companies trade at a discount to where a comparable American company would (there is no current pure-play concentrate extraction company in the U.S. public markets). Until next time, Greg Miller Executive Director, National Institute for Cannabis Investors
