HEXO: Why did Shares of Hexo Corp. Surge This Morning?

Today, before the market opened, Hexo Corp. (HEXO - Get Rating) reported third-quarter fiscal 2020 financial results. The company grew net revenue by 30% to $22.1 million and improved its operational performance.

Some of the key operating highlights were their gross revenues increased by 30% to $30.9M from $23.8M in Q2. Adult-use grams and gram equivalents sold increased by 42% to 9,338 kg compared to Q2. Their gross margins increased to 40% from last quarter. Operating expenses decreased to $26.8M which is exactly what investors were looking for.

As cannabis companies struggle to adjust to the current market conditions due to the COVID-19 global pandemic, operating expenses have become an increasing concern. During these times it’s extremely important that companies operate much more efficiently in order to ensure the longevity of their business.

HEXO also closed a $46 million dollar public offering which was initiated to enhance liquidity.

Their adjusted EBITDA figure improved to a loss of $4.3M from a loss of $8.5 in Q2. The company is hoping for a positive adjusted EBITDA in the first half of fiscal 2021.

HEXO also announced that they have expanded their partnership with Molson Coors to explore the US CBD market in Colorado. This is an exciting announcement, as investors were hoping to hear that the company would expand internationally.

When it comes to the adult-use recreational market, which is HEXO’s main source of revenue, the figures improved this quarter. Adult-use cannabis gross revenue in Q3’20 increased 30% to $29.8M from $23.0M in Q2’20, and from $14.6M in Q3’19. The main reason for the increase in revenue this quarter was due to the sales from Original Stash. This product was launched recently to combat the illegal black market and seems to be showing some promising results.

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Some of HEXO’s new products such as hash and oil extract drops also contributed to overall adult-use sales growth. Adult-use sales volume in Q3’20 increased by 42% to 9,338 kg from 6,579 kg sold in Q2’20.

Regarding this quarter’s release, the CEO and co-founder of HEXO, Sebastien St-Louis said, “I’d like to take this opportunity to thank the HEXO team who has worked tirelessly during the COVID 19 pandemic to keep the doors open and ensure the safety of our employees and our customers. We could not do this without you, we recognize and appreciate your efforts. It’s thanks to your hard work that we closed the third quarter delivering on our financial goals, even in the face of adversity.”

This morning, shares were trading up more than 10% from yesterday’s close. However, as the stock market plummeted, shares slid and closed down 6%.

(Disclosure: The author is long HEXO)

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HEXO shares rose $0.05 (+5.55%) in after-hours trading Thursday. Year-to-date, HEXO has declined -40.25%, versus a -6.05% rise in the benchmark S&P 500 index during the same period.

About the Author: Aaron Missere

Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...