HEXO: Why Did Shares of HEXO Plunge 28% Yesterday?

On Monday, HEXO Corp. (HEXO) reported second-quarter fiscal 2020 financial results before the market opened. Despite its tremendous rally last week, the stock plummeted 28%.

The main reason the stock plunged was due to the $266 million impairment charges that were recorded this past quarter. Impairment charges, or goodwill as some call it, has plagued the cannabis sector as a whole for some time.

In terms of HEXO’s overall results, net revenue increased 17% to $17.0M from $14.5M in Q1. Adult-use grams and gram equivalents increased by 57% to 6,579 kg compared to the quarter before. Cannabis production increased to 22,305 kg from 16,107 kg in the previous quarter which indicates that demand should have increased.

HEXO also obtained Phase 1 license for Belleville facility along with a second license for the sale of cannabis topicals, extracts, edibles and beverages for their Gatineau facility. HEXO closed a $70M private placement of 8% unsecured convertible debentures which included management and board participation of over 10%. This signals that management still has confidence in the company long term.

Finally, HEXO closed two registered direct offerings totaling $45 million due to the need for constant financing, and this did have a negative impact on the stock over the past quarter.

Sebastien St-Louis, who is CEO and co-founder of HEXO, had some remarks regarding their most recent quarter, “We have continued our focus on improving our operations and expanding distribution across Canada. Our strategy with Original Stash has demonstrated that we can directly compete with the black market. The industry continues to see challenges ahead, and following a strategic review of the Company’s core and non-core assets we believe we have positioned HEXO to meet these challenges head-on.”

As investors, we can only hope that the worst of it, in terms of writedowns, is over for HEXO. The company’s share price took a dramatic hit after the report but we are optimistic the company has what it takes to weather the storm.

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There is a huge opportunity in combating the black market to generate recreational sales revenue. One way they are doing this is by catering to the consumer by launching new products, in regards to their expansion of Original Stash in Ontario, British Columbia, and Alberta.

Another way is that HEXO should see online sales increase during the COVID-19 crisis. The black market should get hit hard due to social distancing, and if HEXO can provide a safer alternative at the same price we feel that Original Stash will be a big hit.

(Disclosure: The author is long HEXO)

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HEXO shares were trading at $0.82 per share on Tuesday afternoon, up $0.03 (+3.87%). Year-to-date, HEXO has declined -48.43%, versus a -18.98% 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...