Today, Rich is discussing the latest news about HEXO Corp. (TSX:HEXO) (NYSE:HEXO). This is an award-winning consumer packaged goods cannabis company, but unfortunately, no awards are inbound for the company today.
While there’s a lot to celebrate about this company, today’s news recalls one of the boogeyman of cannabis, CannTrust Holdings Inc. (TSX:TRST) (NYSE:CTST). Specifically, the revelation about CannTurst employees growing cannabis in unlicensed rooms.
It’s never a good thing when your company gets compared to the most infamously scandalous company in the sector. So without further ado, let’s break down HEXO’s news.
HEXO Provides Additional Transparency on Licensing
In the company’s latest press release, HEXO disclosed that it has grown cannabis in a room that was not adequately licensed.
Back in March, the Quebec-based company spent $260 million acquiring Newstrike Brands. At the time, this was the the biggest M&A activity between major cannabis companies since legalization.
Unfortunately for HEXO, prior to the acquisition, Health Canada had requested additional information about Newstrike’s UP Cannabis cultivation facility, specifically about Block B. While the facility, including Block B, was ultimately licensed for cannabis cultivation, the regulatory body never received this additional information.
This led to the discovery on June 30 that cannabis was being grown in Block B, which was not adequately licensed. Upon learning this, the company swiftly halted cultivation and contacted Health Canada, which was “satisfied with HEXO management’s corrective actions.”
Nevertheless, the company has scheduled the inventory produced at the UP cultivation facility for destruction. In addition, the facility is no longer operational, though HEXO retains the ability the reinstate it should demand increase.
CEO and co-founder, Sebastien St-Louis, had this to say about the matter:
“HEXO is keenly focused on producing high-quality products that Canadians can trust … While we are disappointed with what we uncovered, we assume responsibility for any issues with UP products prior to the acquisition.”
“CannTrust got caught, whereas HEXO voluntarily let Health Canada know,” explains Rich. “But this news is still brutal.”
Stock and Forecast from Here
Fortunately for HEXO holders, the stock didn’t take too much of a hit. It’s currently down 3.1% but is already back on an upswing on the NYSE.
Unfortunately, as Rich notes, the stock has already fallen considerably since its peak in late April. Shares have lost 80% of their value since the 52-week high and 56.6% from the beginning of the year.
When HEXO first acquired Newstrike, it expected its revenue to hit $400 million in 2020. Last month, however, the company cut its Q4 revenue estimates to around $16 million. That’s down from around $26 million.
For Q1 2020, the company expects to generate revenue between $14 million and $18 million. This means it will no doubt miss the initial $400 million target for the year.
HEXO remains the biggest cannabis cultivator in Quebec, but it hasn’t had much success extending its reach beyond that province.
“I don’t know what to think anymore about this sector,” says Rich, exasperated. “As investors, we need to get better and we need to diversify. We have to hunt the bottoms and we have to realize we’re in a dangerous sector. You can lose a lot of money, or you can make a lot of money.”
What do you think? Is this just a minor blip or a major bump in the road? Let us know what you think.
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