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The One-Two Punch for Cannabis Success

Jeff Nielson Jeff Nielson, Stockhouse
1 Comment| December 22, 2017


Click to enlargeWhat do cannabis companies do? Pretty much any investor can supply a partial answer to that question: they grow cannabis. However, at best, that only represents half of the equation.

Cannabis companies are also very active in testing. They test their cannabis strains to determine potency levels, not only with respect to THC (the psychoactive component in cannabis) but also with respect to other cannabinoids – particularly cannabidiol (CBD).

These companies also test their cannabis strains to seek to identify different medicinal properties. More notably, cannabis companies engage in testing to target specific medical conditions. What cannabis strain is effective in treating multiple sclerosis? What cannabis strain is effective with respect to epilepsy? If no particular strain meets these needs, what genetic hybrid can be created to treat a particular condition?

In short, cannabis companies do a lot of laboratory testing. Such testing can get very expensive, eating up a third or more of total operating costs all by itself. Valens GroWorks Corp. (CSE: VGW, OTCQB: MYMSF, Forum) recognized this reality, and management quickly came to a decision: the Company should acquire its own laboratory facility.

However, VGW wasn’t content in acquiring merely any lab. It set its sights high: Supra THC Services. As the name implies, Supra’s facilities were already dedicated to cannabis testing operations. But the Company’s attraction in making this acquisition goes beyond the laboratory itself. Management was equally interested in the personnel behind Supra.


We welcome the opportunity to work with Dr. Rob O'Brien [CEO and CSO of Supra] and the Supra THC Services team, an organization that conducts testing activities in plant based medicine. Dr. O'Brien has an extensive background in analytical chemistry and is a recognized authority in scientific circles.
 

  • Luc Dionne, Canadian Sales Manager, Thermo Fisher Scientific (Mississauga) Inc.
 
On March 1, 2017; Valens finalized the acquisition of Supra THC Services. With this one deal, what is a major expense for most cannabis companies will become a strong revenue stream for VGW. How strong? In a conference call with Stockhouse Editorial, management noted that just since the acquisition they had already received inquiries from 40 to 50 different entities regarding Supra’s services.

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One of those entities was Thermo Fisher Scientific. Billing itself as “the world leader in serving science”, Thermo Fisher has annual revenues of more than $20 billion, with approximately 65,000 employees world-wide.

What was the interest of this multinational corporation in a B.C.-based junior cannabis company? On September 22, 2017; Valens announced a collaboration between Supra and Thermo Fisher to develop a “Centre of Excellence in Plant Based Medicine Analytics”, to be based in Kelowna, B.C.

Also impressed with the caliber of Supra’s operations is the Canadian government. On October 3, 2017; VGW announced being awarded a three-year $330,000 MITACS Research Grant. MITACS is a non-profit entity that operates a high-level internship/mentoring program in cooperation with the federal government, provincial governments, and Canadian universities.

MITACS facilitates internship opportunities for some of the finest minds emerging from Canadian universities. Valens gets access to these newly-minted PhD’s, the students gain valuable experience working for a world-class laboratory facility – win/win.

Adding additional luster to Supra, the lab is currently awaiting its (pending) ISO 17025 accreditation. This represents the highest standard of quality for laboratory facilities, and once received, Supra will be the only cannabis lab in Canada to have earned such accreditation.

For many cannabis companies, Supra is an asset that would be the centerpoint of operations. However, well before Valens acquired Supra, this was a company with a strong cultivation pedigree. In March 2014; Valens Agritech (VAL) was born.

The Company was founded by experienced British Columbia growers. Their goal was to develop low-THC CBD oil to help meet the large and growing need for legally-sourced medicinal cannabis products. Their focus was on devising treatments for children and adults with diverse neurological conditions.

Operations are based in B.C.’s Okanagan Valley. The decision to locate in the Okanagan was largely due to the favorable climate. More generally, British Columbia offers low-cost power, and (in the eyes of many) the province represents a more friendly “cannabis culture” than other Canadian jurisdictions.

With the addition of Supra, VAL became the cultivation division of Valen’s operations. Current grow operations are on a 17,000 square foot cultivation & research facility, situated on a two-acre property. Its present cultivation capacity is 625 kilograms. At wholesale prices, that translates into revenues of approximately $6.125 million.

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The facility produces proprietary medicinal cannabis strains, with emphasis on cannabinoid/terpene optimization. VAL received its Health Canada Dealer’s License on May 18, 2017. The Company is already active in the customized production of cannabis oils. VGW has been approved to both produce and sell cannabis oils.

Separate from Supra, Valens Agritech engages in its own contract R&D operations. Focused on genetic research rather than laboratory testing, VAL assists its R&D clients in the selection of the best cannabis strains for the cultivation needs of these clients.

However, as cannabis investors already know, this is a rapidly evolving sector, with huge growth potential. Not only does medicinal cannabis use continue to surge, in Canada a national, legal recreation market is also imminent.

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In preparation for this expected explosion in demand, VGW is already well advanced in its expansion planning. Phase 2 expansion will raise the total area under cultivation to 40,000 square feet: 28,000 square feet of indoor cultivation, and 12,000 square feet of greenhouse cultivation.

Design work is already underway. Completion of Phase 2 is targeted for the latter half of 2018. Once built out, total cultivation capacity will increase to 6,500 kilograms, more than a 1,000% increase from current cultivation levels. Beyond that, planning is already underway for the Company’s Phase 3 expansion.

Valens has secured access to a larger acreage for this expansion. Completion is targeted for 2020. Once online, Phase 3 will provide a total of 140,000 square feet of cultivation space, with 80% of that cultivation in greenhouses.

Total annual production capacity will increase to 23,500 kilograms. The estimated revenue potential is $300+ million, however that is a conservative figure as it is based upon a 100% wholesale revenue base. The Company is currently awaiting its (retail) sales license from Health Canada, with management firmly believing that awarding of this license is “imminent”.

While this is a robust expansion strategy, Valens stressed that increased production capacity would not come at the expense of reduced quality. In their conference call with Stockhouse, VGW’s management team pointed to what they called “two races” that are emerging in this sector.

There is the race-to-the-bottom: cannabis companies with a focus that is almost entirely upon maximizing quantity.

Then there is the race-to-the-top: cannabis companies that are devoted to distinguishing themselves from their peers at the high end of the cannabis market. Valens has firmly adopted the latter approach.

This is more than mere talk. How do cannabis companies produce the highest quality product? Along with the best cannabis strains, it requires smaller grow rooms. To illustrate this, current industry leaders operate huge grow rooms, requiring up to 200 lights per chamber. In contrast, VGW hives its production into much smaller cultivation units – using roughly 20 lights per room.

From an elementary standpoint, it is simply much easier to maintain consistent, optimal growing conditions over a smaller area. Equally important, opting for more and smaller grow rooms means being able to quickly and easily isolate any infection/contamination problems that are always a potential issue.

However, the Company’s commitment to quality goes well beyond this. Tyler Robson, VGW’s CEO articulates how Valens has perfected its organic cultivation of cannabis.

Our mantra is “from plants to premium products.” We pride ourselves on our ability to work with this amazing cannabis plant and unlock its health-enhancing attributes. We truly believe that we have a best-practices methodology and an array of premium products that are superior to our competition. The Valens team is excited to be moving forward to supply the Canadian marketplace with the absolute best products that we are proud to stand behind.

Premium products? Actions speak louder than words. On October 5, 2017; VGW proudly announced a supply and sales agreement with industry leader, Canopy Growth Corporation. Specifically, Valens’ premium cannabis products will be retailed through Canopy’s Craft Grow division, dedicated to offering WEED’s large consumer base access to industry-leading brand lines at the high end of the cannabis market.

This deal is more than just an endorsement of the Company’s growing expertise and high-quality products.

  • A 4-year deal with guaranteed revenues of $22 million
  • Sharing VGW’s best growing practices and know-how; accessing WEED’s distribution channels and marketing expertise
  • Retaining Valens’ branding with all Craft Grow sales

Win/win.

An industry-leading laboratory facility. Premium cannabis production, with a guaranteed revenue stream, and a robust expansion plan. What else would cannabis investors like to see in their cannabis investments? A well thought-out marketing strategy.

Recreational sales are coming to Canada. The market potential is huge. The key in separating the winners and losers when recreational cannabis comes to Canada will be who has the most effective strategy for market penetration. VGW is taking a two-pronged approach, with two distinct recreational brand lines, targeting two well-defined demographics.

The 19 – 35 demographic

Management sees this segment of the recreational cannabis market as being comprised of consumers who see recreational consumption of cannabis as a social activity. These would be cannabis products with relatively higher THC-content. The Company plans to produce smokeable cannabis products for this demographic, seeing this as a market that (in colloquial terms) is interested in “passing around a joint”.

Valens RX

For the more mature consumers in the recreational cannabis market, VGW is taking a radically different (and unique) approach to its cannabis marketing. Management reasons that this segment of recreational consumers will be less interested in “getting high”, and much more interested in the health-and-wellness benefits of cannabinoid consumption. Reflecting the focus on consumer health, this brand line would be comprised of non-smokeable products.

Knowledgeable cannabis investors already know that cannabinoids are good for us. Produced naturally within the human body, medical science is now acknowledging that these compounds are essential in regulating human health. Valens RX will provide the Company’s cannabis consumers with an entirely different way to “feel good” from consuming cannabis.

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  • Strong assets
  • Strong partners
  • A strong team
  • A detailed strategy

A world-class cannabis laboratory and premium cultivation operations are a one-two punch for success in the cannabis industry. Deploying these assets in an optimal manner is what VGW’s management believes will separate the Company from its peers.

Readers should note that this is a very tightly-held company with more than 85% of issued and outstanding shares held by management and insiders. For any investors wanting to acquire a significant position in VGW, they may be well-advised to seek to participate in Valens’ current private placement, hosted on the Stockhouse DealRoom.

valensgroworks.com
 
Appendix 1: the Valens Team

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FULL DISCLOSURE: Valens GroWorks Corp. is a paid client of Stockhouse Publishing.


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