The Valens Company (TSX:VLNS, OTCQX:VLNCF) has updated its shareholders on the rationale behind its recent US$28.75 million bought deal financing and on its “integration initiatives”.
In a letter to shareholders, the manufacturer of cannabis products, which announced the first wave of integration initiatives in early February, unveiled a second wave of initiatives which are aimed at delivering additional operational and organizational efficiencies in the coming quarters as Valens “continues on its path to profitability”.
In the letter, Valens chief executive officer Tyler Robson and president Jeff Fallows said proceeds from the recent financing will enable it to manage working capital and cash cycles and give it financial flexibility as the company pursues its growth initiatives.
They said the company has made great progress with approximately 80% of the $10 million in cost efficiencies announced in early February now actioned.
READ: The Valens Company closes previously announced bought deal public offering of units for total gross proceeds of approximately C$32.3M
Valens is in the process of realizing the initial benefits in its Q2 financial results, with the majority expected to be realized in the back half of the fiscal year, said Robson and Fallows.
The company has started to execute plans on a further $10 million in targeted annualized costs efficiencies, which are also expected to add a positive contribution to margins in the second half of 2022.
As part of its integration initiatives, Valens has shut down Citizen Stash's facility in Mission, British Columbia and moved production to its highly automated Kelowna facilities to centralize manufacturing and optimize margins. This restructuring will result in a one-time charge which will lead to decreased operating expenses in future quarters, the company noted.
Additionally, it is in the process of monetizing the Citizen Stash's facility and other non-core assets, which is expected to add $5 million to $10 million in cash to the $20 million in annual cost efficiencies expected through 2022.
The company does not own cultivation assets as it does not believe this is an efficient strategy in an oversupplied environment. It explained that this “asset light strategy” has required a higher working capital investment over the last few quarters to cover the cash cycles needed to purchase targeted strains on the spot market.
Specifically, Valens has had to purchase biomass for cash upfront and has experienced a minimum 90-day cash conversion cycle to provincial revenue.
In addition, the company has increased its investment in inventory to reduce stockouts for its core brands, which continue to experience rapid growth.
However, it expects investment in inventory to stabilize by Q4 2022 as consumer demand and purchase orders of its products achieve a more normalized level of sell-through and lead to tighter inventory management.
Although the integration initiatives are expected to positively impact the company’s cost structure in the second half of the year, ongoing inflationary cost pressures, a volatile supply chain, and heightened geopolitical risk are not expected to ease in the near term.
“Faced with this reality, we took steps necessary to strengthen our balance sheet and provide additional financial support to our business until the benefits of our 'Integration Initiatives' are realized, and our operating environment normalizes,” the letter said.
Valens told shareholders it is evaluating two strategic areas for potential investment in 2022:
- Internalizing manufacturing at Green Roads: “While Green Roads maintains a strong portfolio of cGMP manufacturing capabilities, there are nevertheless opportunities to bring additional expertise in-house,” Valens said.
- Discounted Assets: The company said it “will become increasingly opportunistic to take advantage of the growing number of attractive assets in both the US and Canada which are hitting the market at significantly discounted prices”.
Valens reiterated its key performance indicators for 2022, including its target to achieve positive adjusted EBITDA by the fourth quarter and to grow its share of the adult recreational market by becoming a Top 5 Player in vapes, edibles and beverages and a Top 10 Player in flower products.
The Valens Company (TSX:VLNS, OTCQX:VLNCF) is a manufacturer of cannabis products. It provides proprietary cannabis processing services, in addition to product development, manufacturing, and commercialization of cannabis consumer packaged goods.
The company's products are formulated for the medical, health and wellness, and recreational consumer segments, and are offered across all cannabis product categories with a focus on quality and innovation. It also manufactures, distributes, and sells a wide range of CBD products in the US through its subsidiary Green Roads, and distributes medicinal cannabis products to Australia through its subsidiary Valens Australia.
Contact the author at jon.hopkins@proactiveinvestors.com