Miami, FL – May 16, 2018 (EmergingGrowth.com NewsWire) — EmergingGrowth.com, a leading independent small cap media portal with an extensive history of providing unparalleled content for the Emerging Growth markets and companies, reports on HempAmericana, Inc.
Earlier this month, HempAmericana (OTC: HMPQ) issued a press release saying it had acquired 4,000 pounds of hemp flower for processing at its recently launched CBD oil extraction facility in Maine, Portland. It went on to say that, after processing the 4000 pounds, it expects initial revenue to exceed $1 million.
On the surface, this is good news in light of the fact that HempAmericana is a development stage company that is still pre-revenue. However, the market is yet to react in a bullish manner. This latest piece of news has done little to rouse the stock out of stagnation; it is still hovering between $0.015 and $0.02 a share, where it has stagnatedsince February this year.
Likewise, the volume of shares traded also remains significantly depressed at around 11-12 million, which is below the 65-day average volume of 20.1 million. This investor apathy, even in the face of seemingly good news, strongly suggests that there are active undercurrents negatively shaping investors’ perceptions about the company.
The first sticking point is trust. There is a continued loss of trust in HMPQ owing to the string of broken promises it has left behind. For instance, in the beginning of the year—on January 4thto be precise—the company announcedthat it would commence CBD oil production the same month, in line with previous indications. Several months have gone by and this is yet to happen. There are other broken promises, but this example suffices to demonstrate the point.
The company has tried to ameliorate the situation through an aggressive investor outreach and public relations campaign over the past few months, including securing a prominently placed feature in CannaInvestor magazineand partnering with cannabis media outlet, High Times.
These tactics have, however, not positively influenced investor sentiment. Investors are treading cautiously—not only because of the broken promises, but also because the OTC Markets Group has put the company under caveat emptor status, a move that was made after volumes spiked abnormally in late January to more than 400 million.
In light of these issues, it is not difficult to understand why the latest sales projection of $1 million has failed to spur investor interest. Most investors don’t believe in the company’s promises.
But even if they did, it wouldn’t make a difference for the stock. At the current market cap of around $32 million, a sales projection of $1 million would value the company at x32 on a price/sales ratio basis. This puts its valuation at par with some of its peers, which have actual sales.
A glance at the P/S ratio of other companies within the space—early stage companies in the nascent cannabis and CBD space with limited to no profits—shows that, at x32, HMPQ is overvalued and/or within the same range as competitors that already have sales and a track record.
HempAmericana’s peers that are within the same valuation range are more competitive and commercially successful
Despite the similarity in valuation, these peers are better positioned than HempAmericana in terms of business competiveness and commercial success.
At x32 sales—which is the valuation HempAmericana has given itself on the basis of its sales projection—investors would be paying the same for HMPQ as they would for a fundamentally better company.
GrowLife, Inc. (OTCQB:PHOT), an indoor cultivation product and service provider, has positioned itself competitively by, among other things, adopting an e-commerce sales platform in both the U.S. and Canada. It grossed $2.45 million in the past financial year and is valued at a lower P/S multiple compared with HMPQ.
Whereas GrowLife has a strong sales strategy, HempAmericana has not divulged much about its sales and marketing plan, making it anyone’s guess as to whether it has a strong e-commerce component in its sales strategy. Any sales strategy that does not have an e-commerce component in a market as fragmented and competitive as cannabis is bound to run into significant headwinds.
Similarly, Medical Marijuana Inc. (OTC: MJNA), which was the first publicly traded cannabis company in the U.S., is leveraging on already proven business models by, for instance, getting into the anti-ageing and skin care spaces, which have existing consumer interest. It recently announced that its subsidiary, Kannaway, had introduced “Cannabis Beauty,” a new line of anti-aging skincare products for its European customers. The collection is available to all citizens of European Union (EU) member nations as well as other countries outside of the EU.
Medical Marijuana’s targeting and precision as far as marketing strategy is concerned, is yet to be seen with HempAmericana, which has to this point been vague about who it is targeting and how it is going about it. Though this is understandable—considering the company has focused most of its energy in recent months on getting the 17,000 square foot extraction facility in Maine, Portland operational—it is not excusable.
From an investment standpoint, it is always a red flag when a company issues a lofty sales estimate without a compelling sales and marketing strategy to back it up. This is yet another reason why the $1 million sales projection has failed to arouse positive investor interest.
Understanding the industry
Overall, the cannabis space has attracted heightened investor interest over the past few years due to the wave of legalization as well as cultural shifts in the U.S. A growing segment of the population are in support of continued legalization of marijuana, both for recreational and medicinal purposes. Those who hold contrary views are also steadily declining.
There is increased support for legalization of marijuana in the U.S.; source: Bloomberg
Marijuana is now legal for medicinal purposes in 29 states across the U.S. and for recreational use in 8 states, according to recent data from Bloomberg. In Canada, legislation is even more favorable and recreational use is anticipated to be legalized nationwide by early Augustthis year.
Despite soaring demand and hype, the cannabis market is still highly segmented. Investors should not just back a company simply because it is in a high growth sector or the latest research indicates that favorable legislation is on the horizon. There is an entire value chain from farm to finished product—be it CBD oil or recreational weed. Understanding the dynamics of each part of the value chain is important as far as making an informed investment decision and understanding different business models is concerned.
For instance, CBD has been touted as one of the fastest growing segments in the entire cannabis space, attracting more interest in recent months than sectors such as cultivation. The CBD consumer market is expected to reach $2.1 billion by 2020, according to a report by the hemp business journal.
Based on these projections, companies in CBD extraction like HempAmericana, but also larger peers such as Hemp Inc. (OTC: HEMP), are casting themselves as the next big thing in the pot industry. However, as investors are beginning to understand the nuances of the CBD space and juxtaposing it with other segments in the cannabis value chain, they are also coming to the realization that it is safer to back players who are lower down the value chain in areas like hemp cultivation.
This is simply because areas like cultivation have already taken definitive shape. In contrast, hemp and cannabis processing is still in the formative stages as the regulatory landscape for the finished product is still evolving. Distribution channels are also not yet well defined as the product is mainly going to the end user and not another company in the cannabis value chain.
Moreover, operational and capital expenditure in the processing stage is far higher due to the technology and human capital needed. Tellingly, most of the companies in the hemp and cannabis processing spaces end up raising capital through dilutive instruments—due to the capital intensive nature of the business. In case they are successful in the production stage, they sometimes end up with a glut of inventory that they can’t offload—due to the lack of structured distribution networks to reach end consumers or regulatory headwinds.
As an example, Hemp Inc., despite being among the largest hemp CBD processors in the U.S. and having a rock star CEO in the person of reformed drug smuggler Bruce Perlowin, has repeatedly had to raise capital through dilutive instruments.
Owing to an increase in outstanding shares brought about by these instruments, a good example being convertible notes, it has resorted to reverse splits in the recent past in order to stabilize its share price. In 2015, for instance, it had 4.35 billion shares outstanding, but effected a 10:1 reverse split, merging shares and reducing the count to 435 million outstanding shares in order to shore up the share price.
Investors are increasingly wary of these antics. More importantly, they are beginning to understand the reasons why some pot companies are getting in these situations in the first place. Companies like Hemp Inc., as well as HempAmericana, have made a foray into highly capital intensive segments of the cannabis value chain but lack the wherewithal to execute their business plans.
As a segment in the cannabis space, CBD oil extraction—because of its orientation towards medicinal use—is better suited for players that have the financial muscle to conduct research and development, leverage on innovation and even go through the grueling FDA drug approval process before bringing their products to market.
Players like NASDAQ listed GW Pharma (NASDAQ: GWPH) have been successful on this front. The biopharmaceutical company, which has previously been touted as a favored picky by analysts at investment bankssuch as Goldman Sachs, is likely to receive FDA approval for CBD based Epidiolex by June, according tomultiple news reports. An FDA advisory group has unanimously recommended that Epidiolex, a CBD-based oral medication for treating two serious types of childhood epilepsy, be approved by the agency.
FDA approval will give the brand full acceptance in the market, especially among distributors who deal with end users and therefore keep away from other CBD-based products that lack FDA approval for fear of legal of public relations ramifications. Patents, which is something GWPH has, will also keep away competition at bay, at least until it recoups its investment and makes a return.
These are the dynamics in the CBD oil extraction space. Players like HempAmericana are ambitious, but lack the capital and human capital to compete in this space. HMPQ doesn’t even have a single patent under its belt. Raking in $1 million in sales will be an uphill task.
The fact that investors are yet to positively respond to the $1 million sales projection already speaks volumes about what the market thinks about HMPQ. The outstanding caveat emptor designation by the OTC Markets Group and the string of broken promises that characterize the company’s history also inspire little trust. Moreover, its peers within the same valuation range (based on its sales projection) have measurable competitive advantages in terms of strategy and execution. They have also registered some level of commercial success that HMPQ has not. To cap it off, HMPQ has positioned itself in a segment of the cannabis value chain that is very capital intensive and requires a certain level of human capital that it sorely lacking in HMPQ. In light of all these factors, the $1 million revenue projection will possibly morph into yet another broken promise. When this happens, there is no telling how big the downside could be. However, one thing is certain: this stock is headed south.
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