Sales are skyrocketing at HEXO Corp. (HEXO) but so are its expenses

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hexo – Seven facts about HEXO’s fiscal second-quarter financial performance worth knowing.


A national, recreational, adult-use marijuana market opened for business nationwide in Canada last October, and surging demand from consumers eager to move their purchases out of the shadows is causing revenue to shoot up at Canada’s cannabis companies. Investors have already gotten a look at how the recreational market is playing out at Canopy Growth and Aurora Cannabis, and on Thursday they also found out how their smaller competitor HEXO (NYSEMKT:HEXO) is doing. Here are seven facts about HEXO’s fiscal second-quarter financial performance worth knowing.

1: Sales growth is jaw-dropping

HEXO’s gross revenue last quarter was 16.2 million Canadian dollars, up a remarkable 1,269% from one year ago and an impressive 144% from the previous quarter. Excluding excise taxes, net sales were CA$13.4 million, up from CA$1.2 million in the same quarter last year.

2: Quebec is king

The recreational market is the biggest reason for HEXO’s increasing revenue. It sold cannabis in three provinces last quarter, including Quebec, where it has a five-year agreement that enables it to sell 20,000 kilos during the adult-use market’s first year. Quebec accounted for 84% of the CA$12.2 million in revenue HEXO reported from the adult-use market last quarter.

Quebec’s likely to continue accounting for a large proportion of HEXO’s sales. HEXO expects to supply 35,000 kilograms in the second year and 45,000 kilos of marijuana in the third year of adult-use sales. The amount it supplies in the last two years of its preferred supplier agreement will be determined later, but HEXO estimates it could supply over 203,950 kilos to Quebec over the five-year period.

3: Production is increasing

To meet its obligations, HEXO’s boosting production. It has 250,000 square feet of production now, but it’s undergoing a 1,000,000-square-foot expansion program that it expects will boost annual dried flower capacity to 108,000 kilos per year. The strategy is already panning out. Last quarter, HEXO’s marijuana production grew 39% to 4,938 kilos.

4: Prices are stable

Dried flower prices are typically lower than prices for extracts, like oils, so companies have focused a lot of attention on shifting their product mix to extracts — especially since dried flower prices are lower in the recreational market than they are in the medical marijuana market.

Last quarter, HEXO was able to sell more cannabis oil, and as a result its average price per gram improved. Oils accounted for 23% of its adult-use revenue, up from 19% previously. This resulted in revenue per gram equivalent, including excise taxes, increasing to $5.83 from $5.45 in the prior quarter.

5: Losses are mounting

The worldwide marijuana market is worth $150 billion, according to the United Nations, so HEXO and its peers can’t be blamed too much for spending aggressively to establish leadership early on. Nevertheless, losses are mounting, and spending won’t be slowing anytime soon.

Management spent CA$18.5 million on operating expenses last quarter, up from CA$5.5 million one year ago. Spending on marketing and promotion increased to $4.8 million from $1.4 million. General administrative expenses increased to $8.2 million from $1.8 million. And stock-based compensation expenses increased to $5 million from $2 million. The increases caused HEXO to report an operating loss of CA$6.9 million for the quarter.

Management expects general and administrative expenses to “significantly escalate” in fiscal 2020, so investors should brace for additional profit headwinds.

6: HEXO’s embracing deals

HEXO’s been flexing some financial muscle recently to bolster its shot at meaningful market share. Last quarter it acquired a 33% stake in HEXOMed, a Greece-based company that will attempt to tap into growing legalization efforts in Europe. This week, it announced it’s handing over about $263 million in shares to acquire Newstrike Brands. Newstrike gives HEXO licenses to supply eight of Canada’s 10 provinces and infrastructure that increases its future marijuana production capacity forecast to 150,000 kilos annually.

Management’s also taken steps to give it access to more money it can use to fuel its growth plans. It raised CA$54.2 million through a public offering last quarter, after fees. It also entered into a $65 million credit facility that can be increased by $135 million.

7: There’s a strong outlook

The company expects its revenue this quarter will be about in line with last quarter, but it expects a big boost in sales later in 2019 because of expanding production capacity coming online. In its fiscal fourth quarter, net revenue is forecast to “approximately double” the CA$13.4 million reported last quarter, and in fiscal 2020, management is targeting $400 million in revenue, excluding excise taxes.

With a forecast like that, investors should take notice. That kind of top-line growth could make HEXO one of Canada’s best marijuana stocks to buy.

Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool recommends HEXO. The Motley Fool has a disclosure policy.

 

 


HEXO Corp. shares were trading at $6.15 per share on Friday afternoon, up $0.05 (+0.82%). Year-to-date, HEXO has gained 79.30%, versus a 12.74% rise in the benchmark S&P 500 index during the same period.


This article is brought to you courtesy of The Motley Fool.

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