While other cannabis companies are restructuring, saddled with mountains of debt and lower than expected revenues, Valens GroWorks (TSXV: VLNS) (OTCQX: VLNCF) delivered a solid fourth quarter and fiscal year earnings report. Valens reported after the market closed on Monday that its revenue increased to $58.1 million for the fiscal year 2019. For the fourth quarter of 2019 revenue increased to $30.6 million, an 86.0% increase over the third quarter and above the high-end of the guidance range announced on December 16, 2019.

Net income for the quarter increased 14% to $4.4 million and earnings per share were $0.04. The company delivered adjusted EBITDA of $27.4 million for the fiscal year 2019. For the fourth quarter of 2019, adjusted EBITDA was $17.7 million, or 57.7% of revenue, compared to adjusted EBITDA of $9.8 million, or 59.4% of revenue, in the third quarter. The company ended the year with a strong balance sheet with $58.7 million in cash and short-term investments and a net working capital position of $88.2 million as of November 30, 2019.

“In Fiscal 2019 we added significant scale to our operations and became the largest white label product development, manufacturing and third-party extraction company in Canada,” said Tyler Robson, CEO of Valens. “Our multi-year extraction contracts with industry leading players positioned us as the partner of choice in the industry and drove significant revenue, gross profit, and adjusted EBITDA growth.”

White Label Business

During the second half of 2019, Valens worked with a number of its clients to process white label products in preparation for the launch of edibles and concentrates for Cannabis 2.0. Valens signed a multi-year white label agreement with BRNT Ltd, a leading, premium, cannabis ancillary company, to launch a line of unique cannabis vape pens in Canada. The company also announced receipt of its first international purchase orders of white label products to customers in Australia. Based on the purchase orders received, the initial shipments will consist of three SKUs of tinctures, totaling over 3,000 units, and are expected to be shipped in Q2, pending receipt of necessary import and export permits.

“In the second half of 2019, we broadened our offering to include white-label product development and we now produce a broad portfolio of safe, consistent and innovative products to help our partners build brands and differentiate themselves in the market,” added Robson. “These white-label product development initiatives contributed to record revenues in the fourth quarter of 2019 as new and existing customers pushed to roll out Cannabis 2.0 oil-based products into the market.”

Biomass Details

The company processed 61,394 kilograms of dried cannabis and hemp biomass in fiscal 2019, of which 24,426 kilograms of dried cannabis and hemp biomass was processed in the fourth quarter of 2019. During the second half of 2019, The revenue-per-gram of input increased to $1.25/gram in the fourth quarter of 2019, compared to $0.61/gram in the third quarter of 2019. The company said that revenue-per-gram is expected to increase throughout 2020 as product development contracts continue to grow in number, and revenue from extraction contracts contributes to a lesser proportion of total revenue.

Robson added, “Our margins in the fourth quarter also remained strong and were only slightly lower than our Q3 results.  However, we do expect this type of margin contraction to continue in the coming quarters as we build out our infrastructure and execute on our strategic shift towards becoming a next-generation product company that offers increased opportunity and greater EBITDA per input gram but a more conservative margin profile.  This strategic shift is now well underway and our white label contracts now outnumber our extraction contracts, and include top-tier names such as BRNT, Shoppers Drug Mart and Iconic Brewing.”

Jeff Fallows, President of Valens, said, “As expected, our shift to smaller processing lots to facilitate a broad entry of Cannabis 2.0 products by our customers resulted in stable processing volumes in the quarter and a corresponding increase in our revenue per gram of input.  The rapid growth we experienced in the fourth quarter resulted in an increase in our receivables and as of November 30, 2019, we had $34.4 million of trade receivables outstanding.  However, despite operating with an elevated working capital position for a brief period of time, the Company has subsequently collected or has trade payables outstanding with the same customers representing 81% of the trade receivables balance. In short, we continue to enjoy a strong working relationship with our customers and the strength of our balance sheet continues to provide us with the flexibility to drive growth both organically and through acquisitions in domestic and international markets. In February 2020, we achieved a milestone when we announced purchase orders for our first international shipments of white label products to customers in Australia. We are now at an inflection point and expect our operations to gain momentum as we execute on existing contracts and secure new ones at this pivotal time in the market’s evolution.”