The Valens Company Inc., an innovative manufacturer of cannabis derivative products, provided an update on its corporate initiatives to drive further growth in 2021.
After analyzing Canadian cannabis market trends, including: (1) the anticipated increase in outdoor cannabis volumes and continued overall decline in dried cannabis pricing, (2) the strong success of its value-priced product offerings with partners, and (3) the near-term launch of several new product formats which leverage both strain and terpene specific profiles, The Valens Company made the strategic decision to liquidate the majority of its cannabis oil inventories at market clearing prices in the fourth quarter of 2020. This decision led to a related one-time financial statement impact in the fourth quarter of 2020 between $9.0 million and $10.0 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.
The Valens Company has achieved two core objectives with the completion of this strategic initiative. First, the Company 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 are anticipated to grow product gross margins in 2021. Second, Valens can now better 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, including large consumer packaged goods companies.
Tyler Robson, Chief Executive Officer and Chair of the Board, 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. While this decision resulted in a one-time financial statement impact in the quarter, we now enjoy the increased opportunity to capture market share, drive future product margin expansion 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 Fourth Quarter 2020 Revenue and First Quarter 2021 Guidance
For the fourth quarter of 2020, preliminary gross revenue will be between approximately $17 million and $18.5 million, with preliminary net revenue 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. Various reintroduced provincial COVID-19 restrictions to cannabis storefronts also negatively impacted revenue in the quarter and led to a delay in achieving purchase orders originally planned for the fourth quarter, resulting in these purchase orders being shifted 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, enter into new innovative product verticals, and increase output volumes. The Company expects the K2 Facility to continue to unlock revenue growth throughout the remainder of fiscal 2021.
The Valens Company expects to report its fiscal 2020 fourth quarter results in late February.
Term Loan Repayment and Covenant Realignment
In addition to the above strategic initiative, the Company made a voluntary prepayment of $9,500,000 borrowed under the Term Loan on November 30, 2020, reducing the secured revolving loan to $9,500,000 as of the date hereof, and the credit facility was amended: (i) to remove an accordion feature that previously allowed the Company to increase the aggregate commitments under the credit facility by up to an additional $10,000,000, (ii) to amend certain financial covenants including the senior leverage ratio and the fixed charge coverage ratio and the basis of EBITDA calculations for these financial covenants to be determined on an annualized forward looking basis commencing in the first quarter of 2021, (iii) to add a minimum liquidity covenant of $5,000,000 until June 30, 2021, (iv) to add a fourth tier of pricing resulting in interest on the term loan of prime plus 2.00% to prime plus 2.75% depending on certain financial covenants, and (v) a waiver was proactively requested by the company and received from the Lender relating to the fourth quarter of 2020 financial covenants due to the previously mentioned inventory write-down.
Jeff Fallows, President, commented, “Our strategic decision to reposition our inventory also led us to proactively renegotiate our credit facility to better align with the needs of the business as it grows. Although it resulted in a reduction of our surplus cash balance, the repayment of the Term Loan relieved constraining covenants and increased both our operational and financial flexibility to aggressively pursue emerging market opportunities and support our future international expansion, including our anticipated U.S. market entry. Our cash balance remains healthy and we remain financially well-positioned to execute on our global business strategy.”
The Valens Company is a leading manufacturer of cannabis derivative products with a mission to bring the benefits of cannabis to the world. The Company provides proprietary cannabis processing services across five core technologies, in addition to best-in-class product development, formulation and manufacturing of cannabis consumer packaged goods. Discover more on The Valens Company and its subsidiaries at http://www.thevalenscompany.com.