As the cannabis sector is evolving, some companies from the North American cannabis market like Hexo (NYSE: HEXO) failed to meet the financial expectations, due to overly optimistic valuations. Meanwhile, smaller companies like Veritas Farms Inc (OTC:VFRM) are catching up and demonstrate that the North-American cannabis market can bounce back.
Cannabis producer Hexo decided to scrap its financial forecasts for the year 2020, an announcement that has reduced the value of its stock by 23% and comes six days after the departure of its CFO. On the stock market, the entire sector has paid the price.
The Gatineau-based company, which is one of the main suppliers to the Quebec Cannabis Society (SQDC), initially forecast net income of $400 million next year. For the current year, Hexo expects net income to be between $46.5 million and $48.5 million.
“Revenues for the fourth quarter are below our expectations and guidelines, mainly due to the lower than expected rate of product sales,” said Sébastien St-Louis, the company’s CEO and co-founder, in a press release.
Among the factors that play against Hexo, according to his management, are “the slower than expected opening of stores, the delay in the government approval date for cannabis products and early signs of price pressures”.
While the SQDC currently has 21 branches and 22 other sites, not all business models are the same in Canada. In addition, Statistics Canada reported on Wednesday that the average price per gram in the third quarter fell for the first time since recreational legalization, from $10.65 per gram to $10.23.
On the stock market, all the major Canadian producers paid the price for Hexo’s announcement. The share price of Canopy Growth dropped by 10%, compared to 14% for Aphria, 9% for Aurora and 7% for Cronos.
“While we are disappointed with these results, we are implementing significant changes to our sales and operations strategy to generate future results. During the last quarter, we began redefining our operations to focus on the best-selling strains,” continued Mr. St-Louis.
Stock market crash
The investors’ reaction had the effect of reducing the share price by 23% to $3.76. The stock has lost about two-thirds of its value since peaking at over $11, in April 2019.
With a market capitalization of nearly $1 billion, just under $200 million in cash and revenues of less than $50 million expected this year, Hexo’s share price “is very expensive to pay,” said Pierre-Olivier Langevin, portfolio manager at GPS Medici, a firm based in Saint-Bruno. The company has no shares in the sector. Last year’s cannabis frenzy “deflated a little”, he added, but estimates “are still high”.
Last week, the company announced the resignation of Michael Monahan, who had only been CFO since May. Mr. Monahan motivated his departure by stating that it had become “obvious that this position requires that he spends the majority of his time in Gatineau and Ottawa,” a situation incompatible with his family’s needs. He was based in the United States.
While the majority of the Canadian cannabis companies are slogging their way through this difficult period of losses, in the neighboring US some smaller caps seem to have found the key to conquer the North-American cannabis market.
Veritas Farms demonstrates that the North-American cannabis market still has huge potential
One of the companies that takes full advantage of the bountiful opportunities of the North American cannabis market is Veritas Farms Inc (OTC:VFRM). By building its brand around transparency, Veritas demonstrated the extraordinary potential of the CBD market. Since 2015, the company experienced impressive growth. In Q2, 2019 Veritas generated more than $2.9 million in total revenue. That is a 500% increase since Q2 2018. Veritas’ gross profits reached $1,523,413 and thanks to great results, the company managed to reduce the liabilities by over $1.3 million.
Moreover, Veritas just announced its quarterly results and they are looking very good. In Q3 2019, the company experienced impressive revenue growth, to $1,215,810 compared to $459,329 in Q3 2018, a 165% rise. Also, the company’s gross profits increased with 468% compared to the same period of 2018.
This growth has been driven by an aggressive plan to rapidly expand the company’s distribution network, which now includes over 5,000 retailers and partners. Veritas Farms just closed some groundbreaking partnerships with Winn-Dixie and BI-LO supermarkets to supply CBD to 152 South Eastern stores. Moreover, the company announced that its pet products will be sold in the Bi-Mart network of stores as a result of another astounding partnership.
The North- American cannabis sector in expected to bounce back, and Hexo will probably gain success again. Currently, Veritas Farms is demonstrating that a clear business plan and building the brand around transparency can transform the company in one of the dominant players on the North American cannabis market.