The Valens Company Inc. (VLNS)

[FUNMAN]

Disappointing...Short of my own hopes by $3M--->>>THE VALENS COMPANY REPORTS FINANCIAL RESULTS FOR THE SECOND QUARTER OF FISCAL 2021
Valens entered the US market with the acquisition of Green Roads, securing a global leadership position in the health and wellness market

* Country-wide SKU listings increased 76.0% to 132 as of the end of Q2 2021, compared to 75 in Q1 2021

* Nine additional SKU listings were achieved since the end of Q2 2021, and another 40 SKU listings have been accepted by provincial distributors with first shipments expected in Q3 or Q4 2021 bringing total to 181

* Estimated share of the growing extract-based market remained stable at ~5% in Alberta, British Columbia, and Ontario in Q2 2021, based on Hifyre data and not including B2B LP manufacturing

* Entered into four new product categories, including flower, pre-rolls, topicals, and edibles, significantly increasing Valens’ total addressable market in Canada and beyond

Kelowna, B.C., July 14, 2021 – The Valens Company Inc. (TSX: VLNS) (OTCQX: VLNCF) (the “Company,” “The Valens Company” or “Valens”), a leading manufacturer of cannabis products, is pleased to report its second quarter financial results for the period ended May 31, 2021.

Tyler Robson, Chief Executive Officer, Co-Founder and Chair of The Valens Company, said: “We believe that our business model remained resilient despite ongoing challenges presented by the pandemic, and our strategy continued to demonstrate its effectiveness as we gained significant market penetration across the country. We are proud to share that in the second quarter alone, Valens had 132 SKUs listed in Canada – a 76% increase in comparison to 75 SKUs listed in the first quarter of 2021. This material growth in SKU listings stands in stark contrast to many of our competitors in the sector and is a testament to the innovation and quality we are bringing consumers and retailers.”

Robson continued, “Importantly, we are seeing this momentum continue into the third quarter with an additional 40 SKUs accepted by the provincial boards with shipments during the third and fourth quarters. These new listings include products from four newly entered categories during the second quarter, such as flower, pre-rolls, topicals, and edibles, with many of them already receiving high consumer acclaim. Additionally, we have enhanced our platform with increased technical capabilities and greater efficiency to develop and commercialize winning products, which we expect will drive revenue growth in the second half of fiscal 2021. We look forward to continuing to drive new product innovation in the sector, specifically in the flower, pre-roll, beverage, concentrates, and edibles categories. With our recent distribution wins into New Brunswick, Manitoba, and Yukon, we are positioned well to capitalize on these investments.”

Key Highlights

Gross revenue increased 16.1% in Q2 2021 to $20.5 million compared to $17.6 million in Q2 2020

Net revenue increased 6.5% in Q2 2021 to $18.8 million compared to $17.6 million in Q2 2020

Product sales increased 70.5% in Q2 2021 to $16.9 million compared to $9.9 million in Q2 2020

The year-over-year increase in product sales was driven by successful new product launches across multiple cannabis categories as partners expanded their portfolios in parallel with Valens’ scaled-up manufacturing capabilities

Product sales as a percentage of net revenue remained at ~90.0% in Q2 2021

SKU listings increased by 76.0% to 132 in Q2 2021 compared to 75 in Q1 2021

Of these 132 SKU listings, 24.2% had their first shipments towards the end of Q2 2021, meaning Q3 2021 will be the first full quarter of contribution from these SKU listings

Subsequent to the end of Q2 2021, Valens obtained an additional 9 SKU listings, and another 40 SKU listings have been accepted by provincial distributors with first shipments expected in Q3 2021 or early Q4 2021

Estimated share of the growing extract-based market remained stable at ~5% in Alberta, British Columbia, and Ontario in Q2 2021, based on Hifyre data and not including B2B LP manufacturing

Estimated share of the cannabis-infused beverage category grew to 8.0% in Q2 2021 from 5.5% in Q1 2021 in Alberta, British Columbia, and Ontario, based on Hifyre data with only one customer in this category to date

Valens expects to bring on more partners in this category with the launch of the GTA Facility expected in the second half of fiscal 2021
Launched the number one selling baked good, the Verse Double Chocolate Brownie, in addition to the number one selling bath product, the nuance Soothing Eucalyptus CBD Bath Bomb, at the Ontario Cannabis Store (“OCS”) in June 2021, according to OCS sales data

Manufactured 57 SKUs in Q2 2021 within a carefully curated portfolio across all cannabis categories, compared to 53 SKUs in Q1 2021, with a focus on driving higher efficiencies through increased listings across provinces

Ended the quarter with a strong cash position of ~$23.9 million, prior to the closing of a $46 million bought deal financing on June 1, 2021
*The term “SKU listings” refers to the total number of provincial and territorial listings of products manufactured and distributed by The Valens Company

Corporate and Operational Highlights:

In the second quarter, The Valens Company continued to execute on its corporate strategy and advance its global manufacturing platform, as illustrated by the following milestones and initiatives:

Entered the US market with the acquisition of Green Roads for US$40 million, which closed in June. In combination with Green Roads, Valens more than triples its total addressable market and secures a global leadership position in the cannabis health and wellness vertical with one of the largest CBD brands by market share. Additionally, the acquisition strengthens Valens’ capabilities to supply global markets with an expanded product offering and increased speed to market with a US-based manufacturing and cGMP certified co-manufacturing platform.
Expanded Canadian distribution network to supply Manitoba, New Brunswick, and Yukon Territory with Valens-manufactured products. The Company now distributes its products in six provinces and one territory, including Alberta, British Columbia, Ontario, and Saskatchewan.

Expansion of Valens’ distribution platform continues to be a top priority and the Company intends to bring its innovative product portfolio to consumers in all regions of Canada including the remaining Eastern provinces in the second half of fiscal 2021, with entry into Quebec being a top priority.

Launched a range of innovative products in four new categories, including edibles, topicals, flower, and pre-rolls.

Edibles: Since closing the acquisition of LYF during the second quarter, The Valens Company has formulated, manufactured, and distributed over 15 new edibles products with various partners in a wide variety of formats, including chocolate, soft chews, and baked goods. Available at select provincial retailers, chocolate offerings include milk chocolate coffee quinoa with no added sugar, toffee crunch, ice cream sandwich cookies & cream milk chocolate bites, acai berry dark chocolate, cherry milk chocolate fruit chews, chocolate truffles, and the newly-launched double chocolate brownie from Verse Cannabis – one of the first confectionery products of its kind to hit the Canadian recreational market. Additionally, soft chews are offered in a wide variety of fruit flavours, including pineapple coconut, lemonade, cherry, watermelon, blackberry acai, blue raspberry, and green apple.

Topicals: Crafted with all-natural plant-derived essential oils and infused with 100mg of premium CBD, the nuance CBD Bath Bomb is the first Valens-manufactured topical product and currently the largest bath bomb available in the Canadian market. The bath bomb joins nuance’s brand lineup of premium wellness products and is offered in two formats, Soothing Eucalyptus and Revitalizing Grapefruit, at select provincial retailers.

Flower & Pre-Rolls: In partnership with Verse Cannabis, The Valens Company introduced a variety of flower and pre-roll products under the Verse Originals line, including BC God Bud Flower, Dreamweaver Pre-Rolls, and the Amp Pre-Roll – the first flower products sourced and manufactured by Valens to enter the Canadian market. Since they have launched, Valens has experienced strong sell-through for this line of products across its Canada-wide distribution network.

Strengthened Licensed Producer partnership network with the addition of two leading Canadian producers. Valens will provide extraction and custom manufacturing services for Rubicon Organics, and pre-roll manufacturing and distribution services for Citizen Stash Cannabis Corp. with the potential to expand these agreements to include additional product development and manufacturing services as the relationship strengthens.

Bolstered Management team and Board of Directors. Sunil Gandhi has been appointed Chief Financial Officer, bringing 25 years of corporate and operational finance experience largely in the consumer packaged goods and alcohol beverage industries, most recently at Trophy Foods as CFO and prior, at one of North America’s largest beverage companies. Adam Shea has been appointed Chief Commercial Officer, bringing over 16 years of experience in commercial strategy, sales, and marketing, with various consumer-focused organizations in the food, beverage, tobacco, and cosmetics industries, including Weston Foods, Coty Beauty, and British American Tobacco. Dr. Guy Beaudin, executive leadership advisor, and Drew Wolff, former Starbucks executive, were elected to the Company’s Board of Directors at its Annual and Special Meeting of Shareholders on May 25, 2021.

Financial Summary

Net revenue increased 6.5% to $18.8 million in Q2 2021 compared to $17.6 million in Q2 2020 and decreased by 6.2% compared to $20.0 million in Q1 2021

Net Revenue Breakdown (in thousands of Canadian dollars) Three months ended May 31, 2021
$

Three months ended May 31, 2020
$

Product Sales 16,884 9,905

Toll Processing and Co-Packing 1,489 7,328

Analytical Testing 391 394

Total Net Revenue 18,764 17,627

Product sales revenue, including both provincial sales and B2B sales of finished goods, distillate, isolate, and other ingredients:

Increased 70.5% to $16.9 million in Q2 2021 over the same time last year, comprising ~90% of total net revenue, as a result of increased volume through the execution of white label product offerings and additional manufacturing agreements with branded partners

Administrative delays with provincial board sourcing and listing Cannabis 2.0 and 3.0 products, in addition to store limitations and closures brought on by the pandemic, led to a decrease in provincial sales quarter-over-quarter

The retail store environment has since improved as a result of pandemic restrictions being eased in many regions in Canada, demonstrated by the number of listings Valens achieved toward the end of the second quarter and to date in the third quarter

Gross profit was $4.1 million, or 22.0% of revenue, in Q2 2021 compared to $6.3 million, or 35.8% of revenue, in Q2 2020

Gross margin percentage was impacted due to various factors related to pandemic restrictions across the country including provincial inventory rationalization and retail store limitations. In addition, the opportunistic launch of a larger than forecasted number of products burdened our cost structure with revenue and operating efficiencies expected to drive margin improvement in future quarters.

Adjusted EBITDA(1) was $(5.0) million in Q2 2021, compared to $2.7 million, or 15.3% of revenue in Q2 2020

The decrease in adjusted EBITDA can be attributed to the integration of LYF and increased costs related to the launch of a number of new and innovative products with predictable start-up costs and lower short-term capacity utilization. However, as the Company continues to focus on volumes, capturing market share, and increasing targeted SKU listings across the country, Valens expects to achieve revenue growth, margin expansion, and higher utilization as these products take hold in the coming quarters.

Jeff Fallows, President of The Valens Company, said: “Over the second quarter, we made significant strides building and launching our newly enhanced manufacturing and distribution platform in addition to expanding our partnership network and broadening our product offerings. These accomplishments allowed us to win a significant number of provincial SKU listings which are expected to materialize into market share gains throughout Canada over the next several quarters.

Predictably, our accelerated launch of a targeted portfolio of high-volume SKUs resulted in an increase in costs which impacted our adjusted EBITDA in the quarter. However, we expect these costs to produce accelerated revenue and margin growth in the coming quarters particularly as we achieve greater utilization of our largely completed manufacturing platform.”

Fallows continued, “Our team’s successful execution of the Green Roads acquisition in June marks our entry into the rapidly accelerating US market and represents a pivotal accomplishment in our mission to lead the global cannabis health and wellness market. We continue to dedicate efforts and remain keenly focused on completing our listing on the Nasdaq which we expect to be completed in the third quarter of the 2021 calendar year, and which has been fortified by our US entry. These initiatives will be instrumental in advancing global market opportunities and will lead to Valens accomplishing its strategic and operational growth objectives which we believe will be transformational for the company, generate additional sources of sustainable revenue, and drive shareholder value. We continue to maintain a strong balance sheet as we successfully raised additional capital from our bought deal financing which closed after the quarter. This equity raise provides Valens with the capital to pursue its strategic initiatives, specifically by taking an opportunistic approach to additional accretive acquisitions and to further secure our entrance into additional Cannabis 2.0 and 3.0 product verticals. With a global platform taking shape, we believe Valens is best positioned to capitalize on large CPG players who continue to look for large-scale entry into the cannabis sector through various strategic avenues.”

The following table of financial highlights is presented in thousands of Canadian dollars, except per share, biomass extracted amounts, and number of SKUs manufactured.

See the financials at this link:

https://thevalenscompany.com/press-releases/the-valens-company-reports-financial-results-for-the-second-quarter-of-fiscal-2021/