Our last structure on Valens’ year end ($VLNS) looked at a few of their deals in detail, crapped all over their SBC share printing machine, and noted credit concentration in accounts receivable.

The first quarter of their brand spanking new fiscal year is now out, let’s see how they fared in comparison with $LABS. The periods covered overlap by a month (Dec), and here we’ll see 2.0 operations from January and February of this year.

To the financials!

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• Sales of $32MM in the quarter, net income of $2.5MM.
• Margin of ‘cannabis operations’ to 56%. This excludes $2.5MM of inventory write-downs, which was attributed to “cannabis purchased and processed in which the cost exceeds its net realizable value”. Looks like they got stuck with some poor yielding biomass (trim perhaps) on in-house purchases. Not a good look on them either.
• Perhaps an occupational hazard of being an extractor, but I suspect someone got their ass-kicked hard for that.
• $28MM total in inventory, $7MM in extracts – this is up from a total inventory amount of $7MM last quarter. One can view this as getting ready to bespoke unique production lines and feed into their beverages and in-house product – or – they are ending up with product they can’t move.
• Way too early to say the latter I think, although packing that much growth in inventory is notable. We’ll see what’s going on with that next fins.
• Receivables up to $50MM from $35MM. Hella. Given $32MM in sales on the quarter, this is a big amount. $VLNS tucks a ‘subsequent events’ note into the ‘Credit Risk’ section of Note 18, assuring the reader that 55% of o/s amounts had been collected (and/or impaired) subsequent to date of financials.
• They’d had $13MM over 60 days (!), and that remark about impairment on receivables is ominous. The amount is what matters. 70% of the total is with 5 customers, so less concentration risk present than say, a $LABS.
• Still a curiosity to me how many days extractors are financing LP’s for, and the amounts they’re doing it at.
• We also find out in Note 18 that 70% of their total sales come from 5 customers. This is a far better presence in-market than $LABS, who reported 2.
• $1MM/month going out to related parties and key personnel. $2.7MM in SBC this quarter in total. Which, eclipsed wages by $400k in the period. Thank God Management is here for staff.
• Warrants and options largely out of the money, although there’s still a honey pot of some 1.5MM options around $0.80. Not massive. As mentioned last time, they’ve gone to straight share issuance as comp, with 900k shares this year being gifted at market. It’s definitely a clearer way to price and assess.
• The ‘Pommies’ buy has been fully articulated, and on-boarded $7.6MM in goodwill and intangibles, out of a total $7.6MM purchase price. Yep. All in Note 15.
• $45MM in accounts payable and taxes owed, so not all sunshine and rainbows. With levels like this in A/R & A/P, there will likely be much scrutiny and planning around timing of payments. Cash at $35MM is a good buffer, yet the levels of them highlight credit risk to core operations

Ok, not really much more to say. This shop – at this point in time – looks to be trimming the engine and beginning to plane.

The rate of return (net income v sales) is somewhat low, given margins. The analytical/testing lab they’ve built out over the past year is in operation, and generated north of $500k in revenue, runs at a crisp 70%+ margin.

Biomass throughput at $VLNS has now declined for the 2nd straight quarter. The MD&A attributes this as a….”result of smaller lots being received from our partners, as we work with them to roll out a number of product SKUs into the cannabis 2.0 market.”

A relatively even revenue mix, split between tolling revenue and pure sales though:

Biomass inventory has exploded/ballooned/blown out – from $500k to some $21MM QoQ, with another $6MM held in pre-paid raw biomass. Loading the cannon in full daylight. It looks as if their throughput is being almost fully absorbed through product sales, indicative of formalized scheduling and production planning:

An interesting line comes in from Note 17, where $VLNS states flatly that they have no internal KPI’s on rates of return on capital. I like the disclosure in these financials overall, and this is one of those things one doesn’t hear often – this type of information is usually ‘outside the ropes’ as it were:

If anything, an ROC does provide a relative measure of asset performance. It might be this industry/business model is so fledgling, the Board is just going to roll with it until some sort of operational benchmarks are established. I’d expect at some point that the CEO saying ‘trust me….I got this’ simply won’t be enough. Apparently we aren’t there yet. At any rate, if KPI’s are put in place around it, we’ll probably never know.

In some housekeeping news, as of tomorrow (April 16th), they’re being up-listed to the TSX from the venture. And $VLNS has applied to purchase up to 6MM shares for cancellation. Curious, given their float has expanded from 93MM to 129MM shares over last year.

They will need some cash to build out their dreams of beverage market entry, and it won’t be cheap.

Sales did come off 18% QoQ. Given their rationale, the reasons they provide may be a better indication of future run rates in-industry. That is to say, smaller bespoke turns of spec product is now emergent as the norm – rather than bulk pulls. Any extractor that’s nimble, has solid scheduling and logistics established, capability within IP, and presence of terpenes/cannabinoids for supplementation…..would be in good position to exploit under this assumption.

One would want to see sales stabilizing though – at whatever level. The ramp to 2.0 and competitive land grabs during so has occluded core sale rates for now. 56% gross margin on cannabis operations is decent.

All in all, a relatively good quarter that shows more depth in their business model than $LABS.

To me, the jury on long-term extraction run rates is still out. The $200MM in revenues booked last year between $LABS and $VLNS though – aside from the Dosecann’s and $PUMP and $NEPT and $RTI’s and in-house capabilities being aspired and built by biomass producers – reveals there’s revenue and value-add in the segment.

Given the share price action today, many people appear to be using the financials as a cash piñata, and crystallizing what could be had from the sub $2 levels seen in March. As a trader, I *heart* vol, as an investor….not so much.

Relative to every other extractor Ive looked at, $VLNS looks to be the best in the space with earnings relatively diversified and product channels being established. AR/AP though is high in concentration risk, and the length of payment terms is a concern. Matching the timing of payments/cash flows and ensuring collectability is as mission critical as operations in extraction.

he preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $VLNS.