Valens Groworks Corp (CNSX:VGW) Delivers Q1 2019 Earnings; Q2 Processing Run Rate Sizzles

Amidst rising expectations in the red-hot cannabis extraction sub-sector, Valens Groworks Corp (CNSX:VGW) (OTCMKTS:VGWCF) (FRA:7LV) released its fiscal Q1 2019 earnings yesterday evening. While the reported quarter’s topline results were modest in comparison to arch-competitor MediPharm Labs Q4 2018 results—including an additional 2 months of post-legalization operating leeway—VGW’s explosive processing run rate could steal the show.

[stock_chart symbol=”VGW:CNX” width=”60%”]

If one focuses strictly on the myopic view of Valens Groworks current reporting quarter, there’s not much cause for celebration.

While revenue did increase infinity year-over-year to $2.22 million dollars from zero in fiscal Q1 2018, that won’t place it on any cannabis revenue tracker Top 50. The modest booked revenues lead to a soaring quarterly net loss of $6.36 million, as much higher operating costs couldn’t possibly be offset. The caveat, however, is that Q1 2019 marked the 1st quarter where cannabis was received, extracted and returned to the VGW’s industry partners. Thus, the relatively tame topline is a reflection of company operations that are literally in the 1st inning of commercialization.

Looking beyond the now, VGW’s financials look to get a whole lot better next quarter. That’s due to a scintillating processing run rate that is expanding at an exponential clip.

According to the company, 4,976,000 grams of input cannabis and hemp biomass have been processed in the second quarter to date (by April 24, 2019), in comparison to 1,796,000 grams processed (and sold) in all of Q1 2019 combined. That works out to a volume increase of 177.1% quarter-over-quarter.

If we extrapolate these figures to the end of the May 31st reporting period, Valens Groworks should process in excess of 8 million grams in Q2 2019—over 4-times the processing run rate for Q1. Assuming gross profit % and sales volumes hold up, the company could be looking at $9-10 million in booked revenues next quarter. Even if that’s slightly optimistic, VGW’s earnings picture about to get much better—and soon.

VGW’s upcoming outlook is reminiscent to that of Medipharm Labs, which reported Q4 2018 revenue of $10.2 million—with all of that commencing mid-quarter after receipt of sales license from Health Canada. Both companies have seen large revenue ramp-ups but for different reasons, and Valens Groworks looks to be about 1.5 quarters behind MediPharm Labs in terms of similar operating results. On a comparative basis, VGW’s gross profit increased to $850,525—or 38.3% of revenue—which is similar to the 39% LABS reports as gross margin percentage. Both companies appear to be mirroring each other in many respects.

Overall, agreements have been executed with several partners to provide proprietary extraction expertise. They include both big and small licensed producers, including: The Green Organic Dutchman Holdings, Tilray Canada, OrganiGram Holdings, Sundial Growers, Canopy Growth, Harvest One and GTEC Holdings. The company continues to be engaged in active discussions with additional partners to provide extraction services, value-added product development and white label services.

Midas Letter will have further coverage and updates as events warrant.

Update 7:30 AM EDT April 25, 2019

Valens GroWorks has entered into an arm’s length binding multi-year extraction services agreement to provide cannabis and hemp extraction services to HEXO Corp. The Agreement has an initial 2-year term from the date of the first shipment, with HEXO supplying Valens with an annual minimum of 30,000kg in the first year and 50,000kg in the second year of cannabis and hemp biomass. Valens will process this material on a fee for service basis into premium quality resins and distillates using the company’s proprietary extraction processing methods.

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