Valens Q2 Revenue Increases 4% Sequentially to C$24 Million

Operational Cost Efficiencies

Five months into our Integration Initiatives, we have actioned $15 million in annual cost savings and have identified over $5 million of additional annual cost savings to be actioned in the next few quarters. With the annual cost savings actioned and identified to date, Valens is on track to exceed management’s original $20 million target by fiscal year end 2022. The Company expects to realize the majority of these benefits in Q3 2022 and Q4 2022.

Of the $15 million actioned, approximately 79%, or $11.9 million, of the cost savings are coming through SG&A with the remaining 21%, or $3.1 million, coming through COGS. Of the additional cost savings identified in excess of $5 million, management anticipates approximately 40% to come through SG&A and approximately 60% to come through COGS as we further streamline the organization to drive process-related efficiencies. Management expects these cost savings to positively impact operating expenses and drive margin expansion in the coming quarters.

Financial Summary

• Net revenue of $24.0 million in Q2 2022, representing an increase of 3.5% over Q1 2022
• Adjusted gross profit⁽¹⁾ was $3.4 million, or 14.0% of net revenue in Q2 2022, compared to $3.4 million, or 14.6% of net revenue, in Q1 2022.
  • Despite flat adjusted gross profit⁽¹⁾ in the quarter, we implemented numerous initiatives during Q2 2022 which position Valens for improvement in adjusted gross margin⁽¹⁾ in coming quarters. These initiatives include optimizing biomass and input sourcing, commissioning new automation such as flower packing, among others.
• SG&A decreased 6.2% to $20.9 million, or 87% of net revenue in Q2 2022, compared to $22.3 million, or 96% of net revenue in Q1 2022.
  • The reduction in SG&A was primarily due to lower wages and salaries related to headcount realignment across the organization.
  • Valens had a $1.4 million non-cash charge related to risk on B2B receivables in the quarter. Without this non-cash charge SG&A would have declined to $19.5 million, or 81% of net revenue in Q2 2022
• Adjusted EBITDA⁽²⁾ was $(15.9) million, in Q2 2022 compared to $(17.6) million in Q1 2022.
  • The improvement in adjusted EBITDA was attributable to lower SG&A with adjusted gross profit⁽¹⁾ flat quarter over quarter.
  • Without the $1.4 million non-cash charge related to risk on B2B receivables in the quarter, EBITDA would have been $(14.4) million in Q2 2022 compared to $(17.6) million in Q1 2022.
• Cash flow from operations and cash flow from investing showed a combined large improvement of $4.8 million quarter over quarter.
• Valens had cash and marketable securities of $26.1 million at the end of Q2 2022. The Q2 2022 cash and marketable securities position does not include the expected monetization of assets that is valued at ~$5 million on the balance sheet.
  • Valens expects Q3 2022 cash flow from operations between $(9) million to $(12.5) million.

During the three months ended May 31, 2022, indicators of impairment were identified as a result of market conditions surrounding the Company, cannabis industry, and growth companies as a whole. This included an excess in the carrying value of the Company’s net assets compared to its market capitalization, as well as an increase in market interest rates. These indicators resulted in management re-assessing the current valuation of certain intangible assets and goodwill. As a result of the analysis, the Company recognized an impairment loss on goodwill and intangible assets of $52.9 million and $67.9 million, respectively, for the three months ended May 31, 2022. In the same period, unrelated to the goodwill and intangible impairment charges, the Company recognized impairment losses of $4.1 million on prepaid deposits, $2.8 million on assets held for sale and an inventory write-down of $13.9 million for the three months ended May 31, 2022. The Company does not expect the impairment charges to have any impact on future operations, nor affect its liquidity, cash flow from operating activities, or compliance with the financial covenants set forth in the loan agreement.

The following table of financial highlights is presented in thousands of Canadian dollars, except for percentages, per share figures and Canadian recreational market share.

1. Management utilizes this measure to provide a representation of performance in the period by excluding the inventory impairment measurement adjustments and impacts of biological asset changes as required by IFRS. Adjusted gross profit is a non-GAAP ratio, which management believes provides useful information as it represents gross profit for management purposes based on costs to manufacture, package and ship inventory sold, exclusive of any impairments due to changes in internal or external influences impacting the net realizable value of inventory and non-cash items. See reconciliation of “Adjusted Gross Profit (non-GAAP measure)” in the Company’s Management’s Discussion and Analysis for the quarter ended May 31, 2022.
2. The Company has identified adjusted EBITDA as a relevant industry performance indicator.  Adjusted EBITDA is a non-GAAP financial measure used by management that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. Management defines adjusted EBITDA as loss for the period, as reported, adjusted for financing costs (net), recovery of income taxes, depreciation and amortization, share-based payments, fair value and realized biological assets changes, foreign exchange gains, inventory valuation allowance, remeasurement of contingent consideration, restructuring charges, gains and losses on disposal of capital assets, gains and losses on marketable securities and derivatives, and non-recurring and transaction costs. Management believes this measure provides useful information as it is a commonly used measure in the capital markets to approximate operating earnings. See reconciliation of “Adjusted EBITDA (non-GAAP measure)” in the Company’s Management’s Discussion and Analysis for the three months ended May 31, 2022.

Second Quarter Fiscal 2022 Corporate and Operational Highlights:

• Entered into an agreement with Signifi Solutions, to place cloud-managed Green Roads smart kiosks in various premium mall locations in bustling retail markets in the U.S. The agreement includes 12 premium mall locations with the potential for an additional 60 mall location in 2022. Kiosks will include a full assortment of Green Roads products customized at helping consumers with various wellness needs.
• Subsequent to quarter-end, Valens secured an exclusive cannabis partnership with ColdHaus Distribution (“ColdHaus”), providing integrated logistics solutions for Valens-branded cannabis products across Ontario, Alberta, and British Columbia. Pursuant to the two-year partnership, ColdHaus in conjunction with Valens will be responsible for store level representation, brand advocacy, distribution route coverage and retail staff education to drive brand visibility and commercial retail presence.
• Subsequent to quarter-end, Valens enhanced its adult recreational market portfolio with the launch of Bon Jak, an exclusive cannabis brand in Quebec, designed to deliver unique user experience to target consumers.

“While the recent market volatility and rising interest rates have disproportionately impacted growth companies, we have made significant progress on several objectives over the last six months,” said Jeff Fallows, President of The Valens Company. “We have revitalized Valens’ brand portfolio, partnered with ColdHaus to increase product distribution, and completed a series of targeted Integration Initiatives aimed at driving efficiencies throughout the organization.”

Fallows continued, “In Q2 2022, we saw sequential improvement in our adjusted EBITDA, as we began to realize the initial benefits of our Integration Initiatives. Most importantly, we expect to see the bulk of the savings from these initiatives in the coming quarters, as we continue down the path to becoming adjusted EBITDA positive by Q4 2022.”

Outlook

Key Performance Indicators and Revenue Guidance:

Key Objectives for 2022:

1. Grow adult recreational market share in Canada by seeking to become a top 5 Player in vapes, edibles and beverages and a top 10 player in flower products.
2. Unlock our potential in the U.S. and international markets through the Green Roads platform acquired in April 2021.
3. Seek to achieve positive adjusted EBITDA by Q4 by improving the gross margin and SG&A profile of the business through our Integration Initiatives which are based on a combination of cost efficiencies, realization of M&A synergies and greater levels of automation and process standardization.
4. Reduce cash burn through improvements in adjusted EBITDA, working capital management and monetization of non-core assets.
5. Development of the Company’s U.S. THC strategy as permissible under federal regulations.

Revenue & EBITDA Guidance 2023:

1. Minimum revenue of CAD$225 million
2. Adjusted EBITDA margins greater than 10%

This press release is intended to be read in conjunction with the Management’s Discussion and Analysis (“MD&A”) for the period and the accompanying Financial Statements and notes, available under the Company’s profile on SEDAR at www.sedar.com and the Company’s Form 6-K, which will be furnished on EDGAR (www.sec.gov/edgar.shtml).

Q 2 2022 Conference Call Details

The Company will host a conference call tomorrow, Thursday, July 14, 2022, at 11:00 AM Eastern Time / 8:00 AM Pacific Time to discuss the financial results and business outlook.

Participant Dial-in Numbers:

Toll-Free: 1-877-407-0792
Toll / International: 1-201-689-8263
*Participants should request The Valens Company Earnings Call or provide conference ID: 13731030.

The call will be available via webcast on the Valens investor page of the Company website at https://thevalenscompany.com/investors or at this link. Please visit the website at least 15 minutes prior to the call to register, download, and install any necessary audio software. A replay of the call will be available on the Valens investor page approximately two hours after the conference call has ended.

Tyler Robson, Chief Executive Officer, Sunil Gandhi, Chief Financial Officer, Jeff Fallows, President, Adam Shea, Chief Commercial Officer, and Everett Knight, Executive Vice President of Corporate Development and Capital Markets, will be conducting a question-and-answer session following the prepared remarks.

At Valens, it’s Personal.

Sources:
³ Based on Hifyre data for Alberta, Ontario, British Columbia, and Saskatchewan

About The Valens Company

The Valens Company is a leading cannabis consumer products company, with significant expertise in manufacturing cannabinoid-based products and a mission to bring the benefits of cannabis to the world. Valens provides proprietary cannabis processing services and best-in-class product development, manufacturing, and commercialization of cannabis consumer packaged goods. Valens’ high-quality products are formulated for the recreational, health and wellness, and medical consumer segments and are offered across all cannabis product categories, with a focus on quality and product innovation. Valens also manufactures, distributes, and sells a wide range of CBD products in the United States through its subsidiary Green Roads, and distributes medicinal cannabis products to international markets through its subsidiary Valens Australia. In partnership with brand houses, consumer packaged goods companies and licensed cannabis producers around the globe, Valens continues to grow its diverse product portfolio in alignment with evolving cannabis consumer preferences. Through Valens Labs, Valens is setting the standard in cannabis testing and research and development with Canada’s only ISO17025 accredited analytical services lab, named The Centre of Excellence in Plant-Based Science by partner and scientific world leader Thermo Fisher Scientific. Discover more on The Valens Company at http://www.thevalenscompany.com.

Original Press Release