SmallCapPower ArticleHave been watching this one for awhile and jumped in yesterday on sector weakness. GLTA
Valens GroWorks Corp. (TSXV:VGW), one of the Canadian cannabis extraction stocks, announced its third-quarter financial results late Tuesday
SmallCapPower | October 17, 2019: Valens GroWorks Corp. (TSXV:VGW) (OTC:VGWCF), one of the Canadian cannabis extraction stocks, reported Q3/19 financial results on October 15, 2019, after markets closed. Financial results were highlighted by revenue of $16.5M, representing 87.1% growth QoQ, which was a slight beat of the consensus estimate of $16.0M. EBITDA came in at $9.7M, which surpassed the consensus forecast of $5.9M. In terms of production, the Company processed 26,625 kg of cannabis and hemp biomass in Q3/19, a 211.5% increase over 8,547 kg processed in Q2/19. Valens GroWorks has about $60.4M in cash on hand.
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Figure 1: Financial Highlights
Source: Company Reports, Ubika
Significant revenue growth led by a ramp-up in processing services leading up to Cannabis 2.0.Revenue rose to $16.5M, an 87.1% increase over Q2/19, and a 641.4% gain from Q1/19. Cannabis and hemp biomass processed increased by 211.5% to 26,625 kg and the Company reported that in the first 45 days of Q4/19 it had already processed 13,423 kg of biomass with processing volumes expected to accelerate into the second half of Q4/19, as Valens GroWorks begins to process larger, white-label lots for sale in 2020.
Highest gross margins in the industry. Gross profit increased by 151.2% to $12.8M in Q3/19 (was $5.0M in Q2/19). Gross margins were 77.8% during the third quarter, compared with 57.9% in Q2/19. Management commented that the significant expansion in its Q3/19 gross margin was due primarily to a contract opportunity, which they do not anticipate will reoccur in subsequent quarters. However, management mentioned that they are expecting gross margins to see an upward trend from Q2/19, and we believe that Valens could achieve gross of 65% to 70% as the Company continues to scale up operations. Valens GroWorks currently has one of the most robust margin profiles in the industry, in-line with industry leaders, such as Supreme Cannabis (59% Q4/19), Aurora Cannabis (56% Q4/19), and Organigram (50% Q2/19).
Second cannabis company to report positive net income from operations. Valens reported positive net income of $5.9M, which is the highest reported net income derived from cannabis operations in the industry to date, followed by MediPharm Labs, which reported $2.0M in net income during Q2/19. Of note, Aphria reported positive net income during the past two quarters, but this was a result of fair-value adjustments and non-operating income.
Positive net income shows the importance of a focused business strategy. A focused business strategy is one of Michael Porter’s 3 Generic Business strategies (Differentiation, Cost Leadership, and Focus) typically taught in business schools. By adopting a narrow focus, companies can become more efficient, learn from their mistakes faster, and can better meet the needs of its customers and target markets, thus generating superior profitability. Many cannabis companies have tried to become vertically integrated and are trying to do too much (cultivation, extraction, and retail), which is leading to a lack of focus and operating inefficiencies. This can be seen with Canopy Growth Corporation, which had a measly gross margin of 15% during Q1/20. One of the reasons for this could be that Canopy is having difficulty integrating cultivation, extraction, retail, and all the business they acquired over the past 2-3 years, thus lacking focus.
Key Takeaways. Overall, it was another blockbuster quarter for Valens GroWorks, taking the reigns of most profitable cannabis company. Management has guided that in the first 45 days of Q3/19, the Company processed 13,423 kg of cannabis and hemp biomass and indicated that processing volumes are expecting to accelerate towards the back half of the quarter, thus we could see ~$30.0M in revenue for Q4. Additionally, it is no secret that cannabis companies have seen downward pressure on their share prices recently, with the Horizons Marijuana Life Sciences ETF (TSX:HMMJ) down ~55% since its 2019 high. As such, there is a liquidity crisis looming and it will be difficult for cultivators to raise capital in the coming quarter. Because of this, we expect that cultivators will likely delay high capital expenditures, such as extraction equipment (which costs ~1.0M per unit). As a result, cultivators may have no choice but to turn to extraction companies, such as Valens GroWorks, MediPharm Labs, and Nextleaf Solutions, for tolling services to create concentrates and edible products for Cannabis 2.0.
Shares of Valens GroWorks ended Wednesday’s trading session 1% lower at C$3.26. Valens stock has a market cap of C$399.2M.
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