$VLNS has been active in becoming all things ‘CPG’: in late January, they bought a kitchen in LYF. announced the purchase of a CBD company, and is looking to uplist to the NASDAQ.

Our last look at $VLNS saw a company aspiring to become everything, including mentioning some form of future operations south of the 49th parallel. Financial reality is a little different than the narrative though, as sales have sequentially declined YoY. This has been a familiar tale around all who initially began as extractors and have been seeking ways to generate margin without having production as a foundation.

A reflection of this is seen in Heritage Cannabis ($CANN) (a long running laugh-track), who announced a licensing agreement with 2 dispos in Missouri (pop: 6MM), seeking traction some anywhere, and likely driven by Merida Capital’s influence (who I mentioned yesterday). Economically, it’s a yawn. And that’s what the entire landscape of extractors seems to be at the moment.

There appears to be commercial interest remaining in extractors though – as Sundial ($SNDL) (of all outfits) has been accumulating $VLNS, and sporting an average cost of $2.67 (!). I’d been wondering what was driving $VLNS share price….and I have little doubt that the 16MM shares $SNDL’s been buying has been a huge part of it:

Overbrimming with cash, $SNDL has been signalling for awhile that it’s on the hunt for game to take back home, even if its’ roadkill. For an outfit that’s definitely proven it’s not an operator – moving into an unproven and tenuous CPG platform seems a long-ball indeed. I mean, if a company as well positioned (relatively speaking) as Supreme ($FIRE) decided to tap out, I see that as a dark cloud on the CPG horizon. It indicates that a standalone is facing headwinds…..absent capital. $SNDL has quite a bit, but it can’t be said that adding $VLNS is anywhere near accretive at this point, pointedly so if buying for cash.

Let’s have a look at $VLNS latest quarter, and see if there’s been activity in their sales or bottom line.

To the financials!

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• Cash up to $49MM after raises. Sales are up on the core business ($20MM), margin at 21%.
• Given OPEX of $7.3MM, that’s an issue. They charged some $350k against inventory for “repositioning of vape hardware utilized with certain industry partners“. I’d heard rumours about their vapes leaking, and it appears to be true. No direct mention of it though.
• Inventory flat at $14MM.
• A/R seems stubbornly high at $29MM (up $2MM QoQ). No aging schedule either. They did write-off $62k this quarter, which would be considered ‘normal’ for this level of A/R
• 5 customers make up more than half of their total sales, but I can’t find a split on in-house versus 3rd party sales.
• $7MM in capital expenditures (K2 Facility $3MM, Pommies $4MM) to be spent, forecast to be spent in their 2nd quarter.
• They’re still spending on PP&E, another $7MM added. Full steam ahead.
• The bought deal ($39.6MM) in January saw 19MM shares issued, total outstanding now at ~=170MM fully diluted. Share price accretion has brought many of the 18MM in long dated warrants back into the money. I’m curious to see how hard the SBC piñata gets whacked next Q. More on SBC below.
• They’ve got a deal down under (Australia) as well as a subsidiary there. I don’t know the potential. All that’s mentioned is that they’re working on ‘monetizing’ the agreement. When a company demurs on setting operational expectations, it’s not a sign that its’ going to surprise.

Ok. I’ve been on these for awhile, but despite the sales increase, I can’t say much about the quarter.

$VLNS did a couple of deals with counter-parties for vape manufacturing (Rubicon) and pre-roll manufacturing (Experion). No dollar values provided, both look to be fee for service. A white label deal with TREC Brands – done just 6 months ago – has been terminated. Notably, the initial deal with BRNT – announced with great fanfare in late 2019 – and expanded in June of 2020….is gonzo too. Boy, something really went off the rails with BRNT, perhaps around credit or margin potential or whatever. $VLNS chalks it up to the results of examining SKUs and sales velocities – and put the whole thing into rearview, dumping 9 SKUs QoQ.

The SoRSE agreement has come with a steep cost – now sitting on the balance sheet as an ‘obligation’ (read liability) at $10.7MM, although it’s taken $38MM in equity to get. $VLNS issued yet another $5MM of equity this quarter for an expansion of the initial deal. Seems awfully steep to me given their run rate. Perhaps its’ key to their formulations, it still represents a pretty hard drag on per unit margins. I have a hard time valuing a deal like this, as its’ difficult to divine direct sales uplift without comparatives.

SBC for management ran at $400k/month, driven by RSU’s and a rather generous compensation plan. I’ve noted the richness of this before, and given they’ve been operating for as long as they have (and yet unable run at positive EBITDA consistently), I believe its’ inordinate. I’ll add that management is getting good deal off of shareholders on amounts paid by $VLNS for their taxes as well, and I believe this is not a good look on leadership in totality:

And that’s on top of an outright grant of 1.7MM shares over three years to one individual:

Well, I’d write more, but this quarter is relatively ‘boring’. Much like their past several – there isn’t much of a business emerging yet, despite their early mover status. We see some SKU rationalization, and an overall increase in biomass pulled, but as mentioned, that rather anemic margin (and high OPEX) offsets a relatively ‘good’ sales rate of $21MM. Their analytical testing in a cash cow, but immaterial.

I think the value of this company (~=$600MM) to be extremely high for $80MM a year in sales. If I was holding them, I’d sell and send $SNDL a ‘thank you’ card. Unless there’s a hard catalyst (Pommies actualizing, LYF products starting strong, or continued expansion of sales or inroads on market share), I’m not terribly interested in $VLNS. It’s not very analytical to say ‘it seems’, but it seems to me that for every step forward for $VLNS, there’s one taken back.

$SNDL’s accumulation shouldn’t be seen as a ‘good’ thing – at least in the mid-term. Their CEO comes from a fund background, and doesn’t seem particularly interested in operating. I can’t help but think having $VLNS front office preoccupied with a potential hostile – albeit running up share price – will only add volatility and distraction when these guys seriously need to prove out an operational vision. Watch SBC next time for a bulge – a spike will increase my criticism of executive compensation – which is low hanging fruit as it is.

There’s a whack of existing and potential revenue in legal cannabis, but only Auxly ($XLY) seems to be able to realize strong gains (and yet they ‘seem’ to have their own issues). $VLNS sales being up as strong as they were this quarter is good, but (at the risk of repeating myself, because there really isn’t much to see here that we haven’t covered), that’s countered by a persistent OPEX and what ‘seems’ to be an operational model that hasn’t quite found a lane. They’ve got edibles incoming, but dosages and cost remain a challenge. Beverages too – but heading into a price compressing (and competitive) landscape.

$VLNS can’t seem to shake the ankle biters off just yet (in $CANN/$NEPT/$LABS), but do have the most depth around outside of $XLY.

Much potential currently exists in the share price, and $VLNS has yet to fully demonstrate they can fulfill it. With these financials, that storyline is simply continued. The longer that takes, the more risk they’ll attract.

The 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