Hexo Corp. shares jumped late-morning Thursday, after the company’s fiscal second-quarter loss narrowed from the year earlier, as revenue surged in the first full quarter since Canada legalized cannabis for recreational use in October.
Quebec-based Hexo HEXO, +2.94% said it had a net loss of C$4.33 million ($3.25 million) in its quarter ended Jan. 31, narrower than the C$8.95 million loss posted in the year-earlier period.
Revenue rose to C$13.4 million from C$1.2 million. The company sold 2,537 kilogram of adult-use cannabis, up from 952 kg in the previous quarter, at an average price of C$5.83 a gram, up from C$5.45 in the previous quarter. Medical cannabis revenue came to C$1.171 million, down from C$1.182 million a year ago and C$1.391 million in the prior quarter. The price per gram of medical cannabis rose slightly to C$9.15 from C$9.12.
Hexo produced about 4,938 kg of dried cannabis in the quarter, up from 3,550 kg in the October quarter. The company increased staff by 32% to 374 employees, as it ramped up production and new facilities came online.
“While the company continues to prepare for the initial harvests from its new 1,000,000 sq. ft. greenhouse which should be realized throughout the third quarter of fiscal 2019 and the activation of its product transformation center in Belleville which is expected in the fourth quarter of fiscal 2019, net revenues for the third quarter are estimated to increase minimally from those of the second quarter,” the company said in a statement. It expects revenue to roughly double in the fourth quarter from the second quarter.
The company is expanding production capacity at its licensed 250,000 square feet facility and additional 1 million square feet facility as it ramps up to a run goal rate of 108,000 kgs of annual dried flower production.
The company said the fair value changes on the growth of its biological assets came to a negative C$8.35 million. The fair value adjusted on the sale of inventory came to C$3.69 million.
Under Canadian accounting standards, the company has to report the value of a biological asset at different stages of its development as a way to smooth earnings over time. For cannabis companies, it means they must book the theoretical value of the crop before they have sold it and then make an adjustment in the following quarter if that calculation wasn’t accurate.
Cost of sales rose to C$6.499 million from C$451 million in the year-earlier quarter, mostly due to higher sales volumes and an increase to transformation costs as the company made more oils and other value-added products. Oils sales accounted for 23% of adult-use revenue.
Adding cost of sales to the fair-value adjustment produces a number just above C$10 million, below the C$13.4 million revenue number, suggesting the company took a conservative approach to its fair-value estimate.
The deal will give Hexo an extra capacity of roughly 150,000 kg of cannabis annually and diversify its domestic market distribution. The combined companies will have agreement in eight Canadian provinces, including Quebec, British Columbia, Alberta, Saskatchewan, Manitoba, Nova Scotia, and Prince Edward Island. The companies expect to generate annual synergies of $10 million. Hexo is expecting to achieve net revenues from Canadian cannabis sales of $400 million for fiscal 2020.
Shares rose 4% to $6.19 and had hit an intraday high Thursday of $6.31. Over the past 12 months, the company’s stock is up 103%, while the S&P 500
HEXO Corp. shares were trading at $6.14 per share on Thursday morning, up $0.19 (+3.19%). Year-to-date, HEXO has gained 79.01%, versus a 12.57% rise in the benchmark S&P 500 index during the same period.
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