Stockwatch article on VLNS
Cannabis Summary for July 16, 2020
2020-07-16 16:41 PT - Market Summary
by Stockwatch Business Reporter
The S&P/TSX Cannabis Index slipped 1.47 points to 154.16 Thursday, while the Canadian Securities Exchange Composite Index dropped 4.44 points to 432.92. Tyler Robson's cannabis extractor The Valens Company Inc. (VLNS) gained three cents to $2.20 on 762,200 shares after releasing its fiscal second quarter results for the period ended May 31, 2020. The company lost $3.5-million in fiscal Q2 2020, its first quarter losing money since fiscal Q2 2019. Its revenue also dropped off steeply to $17.6-million in fiscal Q2 compared with $31.9-million in fiscal Q1. With the stock holding steady today, the market obviously did not have high expectations.
(The market may have been expecting the loss after one of Valens's top extraction competitors, Medipharm Labs Corp. (LABS: $1.19), suffered an even larger decline in revenue recently. It went from $32.4-million in Q4 2019 to $11-million in Q1 2020. For shareholders of extraction companies, 2019 was a much rosier year. Despite the cannabis industry overall seeing wide-ranging declines in valuation throughout 2019, Medipharm and Valens had terrific years, each more than doubling in value. Medipharm rose from $1.68 to $3.86 last year, while Valens rose from $1.53 to $3.43. So far, 2020 has been a decidedly different story. Medipharm has sunk from $3.86 to $1.19; Valens has fared somewhat better, but has still dropped 35 per cent to $2.20.)
Valens chief executive officer Tyler Robson noted "the slowdown across the cannabis industry" as the explanation for the company's falling revenue. The "slowdown" does not seem to really be "across" the industry, but rather more concentrated to specific parts of cannabis.
For Valens, one of the aspects of its business that is slowing down is toll extraction revenue. (In a toll extraction deal, a third party company would supply Valens with marijuana to be processed into some sort of oil, concentrate or even beverage for a fee.) The company says that its white label, custom manufacturing and co-packing deals are increasing, deals that Mr. Robson says are based around Valens extracting its own cannabis and hemp biomass. The products that Valens makes under these deals range from vapes to beverages to tinctures to cannabis oils. But, at least for now, those deals are clearly not making up for declines in the remainder of the business.
Some of the decline is also related to the COVID-19 pandemic, according to president Jeff Fallows. Mr. Fallows expects the effects of the pandemic to continue weighing on the company in fiscal Q3, but still he says business has improved somewhat since the end of Q2.
Ken Villazor's Nevada-based Flower One Holdings Inc. (FONE) lost 2.5 cents to 47.5 cents on 202,200 shares after releasing its official first quarter results for 2020. The company had already offered a preliminary review of its results so, again, the market knew to expect Q1 2020 revenue of $8.8-million (U.S.). That was up nicely from revenue of $5.8-million (U.S.) in Q4 2019.
Flower One's bottom line is obscured by all sorts of accounting adjustments, so the best way to look at its profitability or lack thereof is cash flow from operations. Flower One burned through $9-million (U.S.) in cash from operating activities in Q1 2020. For the most part, it has been poor margins and high general and administrative expenses that have weighed on the company's results. The company had $6.2-million (U.S.) in G&A expenses in Q1 2020, an improvement over $6.8-million (U.S.) in Q4 2019. The company has said that it expects its operating expenses to really start coming down by Q3 this year.
One of the accounting adjustments was a $10.6-million writedown to the company's inventory. COVID-19 has caused Flower One's Q2 2020 sales to fall sharply, meaning Flower One is left with more inventory than it had expected. Thus, much of the marijuana sitting in inventory that was set to expire by the end of Q2 was not sold as expected. Although it apparently is not okay to sell the "expired" marijuana as marijuana, the company intends to process the marijuana into distillate and other similar products for sale. It still had to take the writedown because, presumably, the processed product will not sell for as much.
Shareholders are also already aware of the fact that Flower One's sales fell sharply in Q2 2020. The company had revenue of $3.8-million (U.S.) in Q2 2020, down from the above-mentioned $8.8-million (U.S.) in Q1 2020. (Flower One is in the habit of giving very early revenue figures.) The Nevada market was badly affected by COVID-19, but the company says sales have picked up considerably since casinos reopened at the start of June. Flower One has not really benefited from the rally that many U.S.-based cannabis companies have made since the start of COVID-19. Today's closing price of 47.5 cents is up from a 52-week low of 34.5 cents, but many of its U.S. peers have more than doubled since their lows.
One Nevada-based competitor, Planet 13 Holdings Inc. (PLTH), has fared much better throughout the pandemic. Planet 13 only has one operating dispensary but also sells its branded cannabis products at third party dispensaries in Nevada. Today, the Las Vegas retailer gained 16 cents to $2.80 on 1.33 million shares, touching a new 52-week high in intraday trading of $2.98.
It is a remarkable turnaround from when the pandemic began. When investors realized the effect that COVID-19 would have on tourism, which Planet 13 relies on for its business, the cannabis retailer plunged from $2.60 to 98 cents. There has not been an obvious catalyst, but Planet 13 has steadily climbed to $2.80 since that March low. The company has yet to give any indication of what it expects for revenue in Q2. With Planet 13 having historically generated 85 per cent of its sales from tourists, shareholders will surely be expecting a considerable decline from the $16.7-million (U.S.) in sales that the company had in Q1.
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