Third Quarter 2026 Results Conference Call - VALENS COMPANY INC

Explicit Guidance:

• No formal quantitative financial guidance (e.g., specific FY2027 revenue, earnings, or margin targets) is provided for future periods.
• Management expects the $8 million final cash inflow from the unwinding of the captive insurance arrangement to occur in Q4 2026 (following the $10.6 million initial benefit in Q3).
• Management indicates that P&L benefits from workforce reductions (30% cut at Kelowna facility) and cost reductions in cannabis operations will begin contributing in Q4 2026.
• The proposed "substantial issuer bid" outlines a potential capital return of up to $50 million at a price not to exceed $1.35 USD per share, pending approvals.

Business-Segment Outlook:

• Cannabis Operations: A strategic review is underway to evaluate alternatives including potential asset divestitures and productivity initiatives to address underperformance; the segment is expected to remain below prior expectations in the near term.
• Cannabis Operations (Kelowna): Following a 30% workforce reduction and manufacturing cost cuts, the facility is pivoting to focus on higher-value product categories and improved realized pricing for international markets; management expects P&L improvements to commence in Q4 2026.
• Cannabis Operations (Canada): Management anticipates the exit from the unprofitable domestic dried flower category will not negatively impact sales in other categories (e.g., edibles, beverages) where the company holds a dominant position.
• Cannabis Retail: Expects continued reliance on new store openings and value-backed conversions to offset same-store sales declines driven by market contraction in Alberta and Ontario.
• Liquor Retail: Forecasts continued "persistent softness" in market demand affecting same-store sales; growth is expected to rely on new store openings (e.g., "Wine & Beyond") and private label momentum outperforming national brands.
• Ontario Franchise: Anticipates a resolution to regulatory matters with the Alcohol and Gaming Commission of Ontario (AGCO) upon completion of documentation and payment of a $200,000 penalty; this will transition operations to a modified franchise structure, leading to the deconsolidation of Ontario franchise operations from S&DL financials (impacting reported revenue by ~$105M but operating income by only ~$2M).
• Cannabis Operations (International): EUGMP certification is expected imminently; management anticipates cost savings of $0.20–$0.45 per gram by eliminating reliance on third-party processors and expects facility upgrades (HVAC, lighting) to yield better quality and yields for international markets.

Market and Competitive Outlook:

• U.S. Medical Cannabis: Management is evaluating paths to achieve direct ownership and financial consolidation of Parallels' medical cannabis business, citing the need for scale, attractive margins, and a growth platform.
• U.S. Recreational Cannabis: Plans to keep recreational assets "ring-fenced" and owned indirectly to facilitate uplisting, pending potential Schedule III changes; the company will not wait for federal action to advance strategic goals.
• Domestic Dried Flower: The company does not intend to compete in the low-cost, high-volume dried flower domestic market due to infrastructure disadvantages (lack of massive glasshouse capabilities) held by peers, opting instead to focus on higher-margin edibles and beverages.
• Capital Allocation: Intent to prioritize capital return via share repurchases (accelerated in 2026) and selective investments in U.S. assets (Parallels, SunStream/Gainesville) while maintaining balance sheet flexibility.

Macro / Industry Outlook:

• Regulatory (Canada): Anticipates normalization of franchise operations in Ontario contingent on resolving AGCO regulatory matters and restructuring debt via a $30 million third-party secured financing facility.
• Regulatory (US): Acknowledges uncertainty regarding federal Schedule III classification; strategy focuses on "controllables" and indirect equity exposure until consolidation clarity emerges.
• Economy/Demand: Notes "persistent softness" in liquor retail demand and market contraction in key Canadian cannabis provinces (Alberta, Ontario).
• Competition: Anticipates the need for continuous strengthening of commercial capabilities and distribution for market leader products (edibles, beverages) to maintain competitive advantage against peers with lower-cost cultivation infrastructure.

Strategic Initiatives:

• Cannabis Operations Restructuring: Decisive actions include exiting the unprofitable domestic dried flower category, a 30% workforce reduction at the Kelowna site, and a comprehensive strategic review for potential asset sales or divestitures.
• U.S. Consolidation: Funding investments to increase indirect equity ownership in Parallels to ~92% (from 67%); evaluating the financial consolidation of Parallels' medical cannabis business.
• U.S. Capacity Expansion: Funding new cultivation facility build-out in Gainesville, Florida via SunStream.
• Debt Acquisition: SunStream has acquired additional Parallels "take-back" debt at 75% of face value, increasing ownership of that debt from 39.4% to 69.4%.
• Capital Returns: Completed repurchase of 5.4M shares in Q3 (total 23M shares in 2026); announced intention for a $50M substantial issuer bid.
• Ontario Debt Restructuring: Contemplated structure involves $30M of third-party secured financing to repay existing S&DL debt, with proceeds restricted as collateral.

Risks and Headwinds to Outlook:

• Cannabis Operations Underperformance: Continued losses and below-expectation performance in the cannabis operations segment pose a significant drag on consolidated results; the strategic review outcome is uncertain.
• Macro/Market Demand: Persistent softness in liquor retail demand and contraction in Canadian cannabis markets (Alberta, Ontario) threaten same-store sales growth.
• Regulatory Delays: Resolution of AGCO matters is subject to "definitive documentation" and potential delays; U.S. federal regulatory clarity (Schedule III) remains undefined.
• Operational Execution: Risks associated with labor efficiencies, self and operating planning processes, and facility upgrades at the Kelowna site.
• Working Capital Timing: Variability in working capital movements could impact cash flow, as seen in the reduced benefit compared to the prior year quarter.
• Capital Return Execution: The $50M substantial issuer bid is "subject to required approvals and documentation."

Management Tone on the Future:

• Cautiously Optimistic on Core Retail: Expresses encouragement regarding "disciplined pricing, mix management, and cost control" in liquor and cannabis retail segments, which have achieved record gross margins.
• Action-Oriented on Cannabis Ops: Acknowledges the segment is "below expectations" but emphasizes "decisive action" and a focus on "higher conviction strategic priorities."
• Confidence in Financial Discipline: Highlights confidence in the ability to generate free cash flow and adjust the balance sheet, noting the "path towards normalized franchise operations" in Ontario.
• Strategic Flexibility: Tone reflects a willingness to pivot quickly (e.g., exiting flower, strategic review) without hesitation, prioritizing long-term value creation over short-term segment performance.

Miscellaneous:

• Parallels Ownership: Indirect equity ownership increased to ~92% via a rights offering post-Parallels restructuring.
• Share Count: 23 million shares repurchased in 2026 (~9% of beginning share count); 34 million shares repurchased since Q4 2024.
• Financial Reporting: Net revenue for Q3 2026 was $238 million; Free Cash Flow was a record $20 million; Adjusted Operating Income turned positive at $5.2 million.