The Valens Company Inc (TSE:VLNS) (OTCQX:VLNCF) (FRA:7LV) provided a corporate update on Tuesday showing that it has become one of the lowest-cost cannabis platforms following realignment of its inventory to drive growth in 2021.
In the update, the Kelowna, British Columbia-based manufacturer of cannabis derivative products, said that after analyzing Canadian cannabis market trends, it made the strategic decision to liquidate the majority of its cannabis oil inventories at market-clearing prices in the fourth quarter of 2020.
The company said this decision led to a related one-time financial statement impact in the fourth quarter of 2020 between $9 million to $10 million, including a $2.9 million to $3.2 million loss from the sale of bulk cannabis oil, an inventory write-down of $4.7 million to $4.9 million, and a provision on previously entered biomass commitments of $1.4 million to $1.9 million.
READ: Valens joins Food, Health & Consumer Products of Canada to expand its product footprint and educate members about cannabis
Significantly, Valens said it has achieved two “core objectives” with the completion of this strategic initiative. Firstly, the company said it has reduced the average price of its oil inventory by over 50% and can now rebuild its inventory with targeted strains of dried cannabis sourced at opportunistic, lower price points that will expand product gross margins in 2021.
Secondly, Valens can now align its catalogue of strains in inventory with its innovative product portfolio, as well as offer a broader range of products at consumer-friendly prices – an attractive advantage to existing and potential new partners.
In a statement, Valens CEO Tyler Robson said: "Looking into 2021, we wanted to clear the deck and increase our flexibility to make a much more aggressive push into the market with new, innovative products, including several exciting opportunities in the Health & Wellness category, at highly competitive prices."
“Adding low-cost inputs to our already low-cost manufacturing infrastructure makes us tough to beat and will help us secure a cost leadership position in the market,” he added.
Robson explained that while this decision resulted in “a one-time financial statement impact in the quarter,” Valens now enjoys the opportunity to capture market share and generate shareholder value as “one of the most flexible, lowest-cost cannabis platforms in the Canadian market focused on 2.0 and 3.0 cannabis derivative products.”
Preview of 4Q 2020 revenue
For its fiscal fourth quarter, Valens estimates reporting preliminary gross revenue of between $17 million and $18.5 million, with preliminary net revenue at between $15 million and $16.5 million.
“An approximate quarter-over-quarter increase of 250% in provincial product sales in the fourth quarter worked to offset some of the loss attributed to lower bulk oil revenues as a result of market-clearing pricing for the inventory liquidation,” the company said.
Valens noted that COVID-19 restrictions also “negatively impacted” revenue in the quarter and led to a delay in achieving purchase orders originally planned for the fourth quarter, resulting in the orders being pushed into the first quarter of 2021.
“Revenue for the first quarter of 2021 is expected to be between $19 million to $23 million, driven by the company's newly launched and operational K2 Facility which is expected to give Valens the ability to increase product and provincial sales,” said the company. The K2 Facility is tipped to unlock revenue growth through fiscal 2021 for the company.
Valens expects to report its fiscal 2020 fourth-quarter results in late February.
Contact the author Uttara Choudhury at uttara@proactiveinvestors.com
Follow her on Twitter: @UttaraProactive