HEXO Corp Could Be a Big Cannabis 2.0 Winner

HEXO Corp. (TSX:HEXO), one of the Canadian marijuana stocks, is set to the quench the thirst of investors with its partnership with Molson Coors

SmallCapPower | August 29, 2019: HEXO Corp. (TSX:HEXO) (NYSE:HEXO), one of the Canadian cannabis stocks, is a consumer-packaged goods cannabis company that creates and distributes innovative products to the international cannabis market. The Company utilizes a hub and spoke business strategy that involves partnerships with Fortune 500 companies. Through this strategy, HEXO brings its brand value, cannabinoid isolation technology, licensed infrastructure and regulatory capability to established companies, leveraging their distribution networks and capacity. As of March 2019, the Company had 37 product offerings for recreation use that included dried flower, milled, pre roll, powder and spray formats. HEXO is one of the largest licensed cannabis companies in Canada, with a total of 2.4M sq. ft of facilities in Ontario and Quebec.

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Figure 1: Overview of HEXO’s Operations

Source: MD&A

Through a joint partnership formed in September 2018 with QNBS, a medical cannabis company based in Greece, HEXO will gain cultivation and licensed infrastructure to process and distribute medical cannabis in Europe. The agreement between the two companies plans for the development of a 350,000 sq.ft facility. The construction of the facility is expected to commence in 2019. Currently, the initial contribution of €50,000 of the total €250,000 has been received for a 33.34% share in HEXOMed. There is an additional option to add €500,000 to the contribution to increase its interest to 50%. This partnership provides the Company with a presence in Europe, which will allow it to supply its brands in France, the United Kingdom and other European markets after regulations permit.

In January 2019, the Company closed a $57.5M public offering of common shares. The shares were offered at a price of $6.50 each. The total proceeds are expected to be used to fund global growth initiatives and research and development.

Foothold in Quebec – HEXO has agreements to supply nine provincial governments, which includes a five-year contract with Quebec’s Société Québécoise du Cannabis (“SQDC”), which the Company expects to be worth $1 billion in potential revenue. The agreement with SQDC represents about 30% or more of the province’s recreational use sales in the first year of legalization based upon disclosed supply agreements. According to HEXO, the Company’s current agreements allow it to have the potential to reach 95% of the Canadian population (MD&A, 2019).

Figure 2: HEXO’s Anticipated Distribution by Province

Source: Investor Presentation

The Company has strong expansion plans to capitalize on the global cannabis market, estimated to be worth US$130B by 2029 (Jefferies, 2019). Specifically, HEXO is considering entering eight states in the U.S. in 2020 and expects to utilize a variety of distribution channels in order to provide a diverse offering of products. Jefferies’ estimation for the size of the U.S. cannabis market is US$21.7B, 26.7% higher than its estimation for Canada. In addition to its current foothold in Greece, the Company is planning to leverage its operations there to enter the UK by 2021 and the France soon after.

HEXO currently has a Joint Venture (JV) with Molson Coors Canada that has resulted in the formation of Truss. Truss focuses on developing non-alcoholic, cannabis-infused beverages. The JV announced on August 1, 2018, is structured as a standalone startup company, with Molson Coors processing 57.5% controlling interest and HEXO having the remaining ownership stake. Molson Coors beverage experience combined with HEXO’s capabilities in the cannabis sector should provide a strong advantage in creating cannabis beverages for Cannabis 2.0.

Figure x: Highlight of Benefits from HEXO and Molson Coors Partnership

Source: Investor Presentation

Recent Press Releases

August 14, 2019 – The Company announced it has increased its Ontario foothold through the addition of 18 new product listings at the Ontario Cannabis Store.

June 12, 2019 – HEXO reported its Q3/19 financial results, highlighted by revenue of $15.9M, a QoQ decrease of 1.5%. As well, HEXO increased its cannabis produced by 98% to 9,804 kg of dried cannabis when compared to the previous quarter. HEXO reported holding cash and cash equivalents and short-term investments of $17.6M and capital of $219.1M.

May 28, 2019 – The Company announced it had completed its acquisition of Newstrike Brands Ltd. The transaction was valued at about $263M. Under terms of the agreement, Newstrike shareholders will be given 0.06332 of a HEXO common share in return for each Newstrike common share. The transaction increases HEXO’s capacity by about 150,000kg annually and provides the Company with access to four production campuses totaling about 1.8M sq.ft.

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