Earlier last week, HEXO Corp. (TSX: HEXO; NYSE: HEXO) released weaker-than-expected third quarter financial results and several broker-dealers slashed price targets on the Canadian Licensed Producer (LP) after the sub-optimal report.
Revenue from the sale of cannabis 2.0 products in Canada is one of the metrics from HEXO’s earnings report that surprised us. On numerous occasions, we have highlighted the company’s cannabis beverage focused joint venture partnership with Molson Coors Canada under the Truss Beverages brand name.
Although HEXO kept its number one position in the beverage category and reported more than 150% growth (outside of Quebec) on a year-over-year basis, it reported a $5.2 million sequential decline in non-beverage recreational cannabis revenue in Quebec. The reason for the drop is related to the specific timing of strain cultivation decisions as well as certain production decisions in hash.
Going forward, HEXO does not expect to see a sales decline of this magnitude and reported to have fixed the problem. The company reported to remain committed to rebuilding its strain strategy and brand mix in Quebec to ensure that it satisfies consumer demands and maintains a leading position in the province.
A few months ago, Truss announced six new products to its existing brand offering for the summer and we expect the increase to serve as a catalyst for growth. We remain bullish on the Canadian cannabis 2.0 market and consider it to be an attractive vertical for LPs.
Following HEXO’s quarterly earnings miss, we want to highlight a few Canadian cannabis companies that are highly focused on the Canadian cannabis 2.0 opportunity. We will be following these operators ahead of earnings and believe that our readers should be aware of these companies.
- Indiva Limited (TSXV: NDVA) (OTC: NDVAF) is a mid-tier Canadian LP that has been highly focused on the cannabis 2.0 market. By forming relationship with leading US cannabis brands, the company has become a formidable opponent to larger-scale LPs. We believe Indiva’s leverage to the cannabis 2.0 market makes them an acquisition target and will continue to closely follow the story.
- Auxly Inc. (TSXV: XLY) (OTC: CBWTF) is another mid-tier Canadian LP that has benefited from forming strategic relationships with leading cannabis brands like dosist. We believe these relationships have made it easier for the company to raise capital and will monitor how the management team is able to advance the operation from here.
- Aleafia Health Inc. (TSX: AH) (OTC: ALEAF) is a Canadian LP that is flying under the radar and is levered to several burgeoning verticals of the cannabis industry. The company has been one of the few LPs to execute on the outdoor cultivation market in Canada and this aspect of the story has fueled its entrance into Canada’s cannabis 2.0 market. We expect Aleafia Health to report ramping revenue from the cannabis 2.0 vertical and this is an opportunity to be aware of.