The Valens Company Inc (CVE:VLNS) (OTCQX:VLNCF) reported fiscal second-quarter results after the bell on Wednesday revealing growing profits and revenue that had doubled driven by its custom manufacturing, co-packing and white label cannabis operations.
For the period ended May 31, 2020, the Kelowna, British Columbia-based manufacturer of cannabinoid-based products, reported revenue of $17.6 million, a 100.3% jump, compared to revenue of $8.8 million in the fiscal second quarter of 2019.
Gross profit increased to $6.3 million, good for 35.8% of revenue, up from $5.1 million a year ago.
Unlike a lot of companies in the cannabis space, Valens has a strong balance sheet with $45.1 million in cash and short-term investments and a net working capital position of $90.5 million as of May 31, 2020.
"Although the slowdown across the cannabis industry during the second quarter led to a decrease in toll extraction revenue and bulk winterized and distillate product oil sales, we are pleased to see revenue from our custom manufacturing, white-label, and co-packing agreements grow quarter over quarter,” Valens CEO Tyler Robson said in the results statement.
“Our increasing number of agreements in these segments is expected to drive revenue in the second half of fiscal 2020 as we bring on more partners who recognize the value in our bespoke manufacturing capabilities," he added.
The Valens Company boss said that during the quarter, the company saw “increased demand” from provincial suppliers with the expansion of the company’s customers' cannabis 2.0 product lines.
“We continue to create, manufacture, and distribute new and innovative product formats. This includes our recent internal record of launching a new product in only 44 days,” Robson added.
During the quarter, the company shifted its focus to extracting Valens-owned cannabis and hemp biomass, processing over 30,000 kilograms to prepare for anticipated inventory requirements for 2.0 white label edible and concentrate products.
“We plan to continue to leverage attractive biomass pricing to increase margins in our custom manufacturing and white label segments going into 2021,” Robson said.
He added that Valens was focused on demonstrating the value of its platform as it integrates into the supply chain of companies bringing customized products to Canadian consumers.
To that end, Valens launched a line of cannabis-infused beverages, produced under a white label agreement with A1 Cannabis Company (a subsidiary of Iconic Brewing) in Canada.
The company has also struck a partnership with TREC Brands Inc to manufacture vape pens across three existing TREC brands - Thumbs Up Brand, WINK, and Blissed - with the potential to later produce other innovative products. The TREC agreement follows a royalty-based payment structure.
During the coronavirus pandemic, the company also stepped up to the plate, bottling 30,000 bottles, or nearly 1,300 litres of hand sanitizer liquid at its Kelowna facility.
Mackie has a ‘Buy’ rating
Analysts at Mackie Research maintained a ‘Buy’ rating on Valens with a C$5.50 target price.
“Revenue for the quarter was $17.6 million which was in-line with our estimate. EBITDA was $2.7 million (15.3% margin) which came in ahead of our $1 million forecast (6% margin). Net loss for the quarter was $3.5 million ($0.03/share) compared to our net loss forecast of $1.9 million ($0.02/share),” wrote Mackie Research analysts Greg McLeish and Jack Keating.
“The higher net loss was primarily attributable to a $1.5 million inventory write-down and higher share-based compensation expense.”
The reserach firm noted that white label manufacturing partnerships would drive revenue generation.
“In 4Q 2019 Valens began to shift its focus from custom extraction processing of cannabis and hemp biomass to more product development and white label services with both licensed and non-licensed partners. The company has been very successful with the move towards more product development and white label services,” added the analysts.
-- Updated with analyst commentary --
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