HEXO Corp’s Results Should Leave Investors Hopeful

Despite missing expectations, HEXO Corporation (TSX:HEXO) shareholders should be happy with the Company’s increasing production capabilities and strong cash position

John Brooker | June 14, 2019 | SmallCapPower: HEXO Corporation (TSX:HEXO), a Canadian cultivator & distributor of cannabis and cannabis products, released its Q3/19 financial results Wednesday after the market close. Net revenue and EBITDA came in at $13.0M and -$9.2M, respectively, which missed consensus analyst estimates, which were $14.1M and -$7.8M. Shares of HEXO ended Thursday’s trading session $0.60 lower at $7.93, and down 7.0%. HEXO stock trades at a market cap of C$2.0 billion.

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The loss was driven primarily by a decrease in medical cannabis sales and higher operating expenses.  

Third-quarter results featured total revenues of $13M and gross profits of $21.8M. The difference between gross profit and revenues is primarily a result of the Company recording a fair value adjustment on biological assets of -$20M. During Q3, recreational sales accounted for 91% of total revenue. Revenues in this segment decreased only slightly. However, in the medical segment, net revenues declined 7% to $1.1M. Not only did the volume of medical cannabis sold decrease for HEXO, but the average selling price the Company was able to sell both its recreational and medical cannabis products did as well.

One positive takeaway from HEXO’s results is that the Company stated that it produced 9,804 kg of dried cannabis during Q3, an increase of 98% from the previous quarter. HEXO also realized the first harvests of its newly-completed and licensed B9 1M square foot greenhouse at the Gatineau campus. This achievement is an important step for the Company as it continues to ramp up its annual production capacity of dried cannabis and prepares for the legalization of edibles and concentrate cannabis derivatives expected in the fall of 2019.

A strong move HEXO made during Q3 was the acquisition of Newstrike Brands. In May 2019, HEXO completed the $260M all-stock deal to acquire the Oakville-based, mid-sized cannabis company Newstrike Brands Ltd. The deal boosted HEXO’s production capacity to ~150,000kg of cannabis annually, to a total cultivation space of 1.8M square feet.

Importantly, on June 13, 2019, HEXO announced that HEXO MED S.A. received a medical cannabis license from the Greek government. HEXO Med has an EU GMP facility that is 30,000 m2    and construction is expected to begin in Q4/19.

Looking at HEXO’s financial position, the Company holds cash and short-term investments of $173.6M and working capital of $219.1M. The Company’s strong cash position should help them grow in an industry that is expected to consolidate in time.

Overall, much of the disappointment regarding HEXO’s earnings is derived from lower-than-expected revenue and EBITDA despite their production growing. There are high expectations for companies that are able to produce at such a high level, and HEXO was unable to meet those expectations. HEXO’s investors, though, should be happy with the Company’s increasing production capabilities along with having a strong cash position. HEXO stock currently trades at a market cap of C$2.0 billion.

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