Hexo 3Q Earnings & Dropping Off the S&P/TSX Index

Hexo Corp announced its 3rd quarter earnings ended on April 30th on June 11th,  after an initial pop the stock has sold off over the following trading days.

One of the contributing reasons for the subsequent sell off is due to Hexo losing its spot on the S&P/TSX Composite Index, the change will take effect end of day June 22nd, 2020.

Source: YCharts

Hexo reported revenue worth of $22.1M, which rose by 70% year over year, beating analyst estimates of $20.3M (9% beat).

However, its gross margin shrank by 74% year over year to $5.7M, and its total net loss worsened by 152% decline year over year to -$19.5M.

The following table breaks down Hexo’s revenue based on its three primary market segments.

Recreational
Net Revenue ($K)21,045
Dried Grams Sold (kg)9,338
Medical
Net Revenue ($K)693
Dried Grams Sold (kg)104
Wholesale
Net Revenue ($K)340
Dried Grams Sold (kg)156
Ancillary Revenue ($K)54
Total Net Revenue ($K)22,132

 

Financial Health

According to its latest filings in comparison to other major licence producers in Canada, Hexo ranks as the lowest in terms of cash liquidity, which is less than a quarter.

Source: Company Reports

In addition to the closing of a $46M public offering on April 13th, 2020, Hexo followed up with another offering worth $57.5M after the 3rd quarter on May 21st to ease its cash woes.

Perhaps this additional offering could provide the necessary cash runway it needs to survive until a sustainable improvement is achieved, such as more retail stores openings in Ontario.

To further ensure its ability to survive, Hexo undertook several cost cutting measures which included the elimination of approximately 200 staff company wide, and halting the construction of its 200 thousand square foot Gatineau Facility.

The company also put its Niagara facility up for sale and expect it to be sold by the end of the current fiscal year.

According to the management, these efforts would eventually yield the company a positive adjusted EBITDA in the first half of fiscal 2021.

These actions would also help the company comply with the NYSE’s US $1.00 share price listing threshold as it currently struggles to maintain its compliance.

But the management reported that it would exercise several options including share consolidation, if the company’s shares fail to trade above a dollar by December 16th later this year.

Yet, even with its financial shortcomings the company still trades at a fairly high sales multiple in comparison to its peers, except against sector leaders such as Canopy Growth and Aurora.

Source: YCharts

Product & Partnership Strategy Overview

The slow roll-out of Ontario retail stores and an emboldened black market following the legalization has not favoured most licence producers’ bottom lines.

As a result, Hexo was the first licence producer to introduce a value brand to the market named Original Stash. Hexo stated that this brand has helped the company combat the black market and sustain its revenue in a backdrop of decreasing prices.

Hexo was also announced that its preparations are moving according to plan to meet the Canadian Cannabis beverage demand through its Truss Limited Partnership or Truss Beverage Co., which is their joint venture with Molson Coors Canada.

This joint venture has already launched a water soluble cannabis extract drop product under the brand Veryvell on May, and its acceptance by the public will be first reflected in its upcoming fourth quarter financials.

The company will be expecting to launch its line of cannabis drinks produced at its Belleville facility into the second half of this year as well.

Furthermore, it looks to enter the United States by delivering a non-alcoholic hemp derived CBD drink in the state of Colorado, under a second joint venture with Molson Coors called Truss CBD USA LLC.

Bottom Line

While the strong revenue growth and beating analyst estimates were positives,  fundamental issues still remain such as a low cash runway, and a risk of being delisted by the NYSE if it fails to trade above a dollar by the given dead line.

Regardless the Price to Sales multiple indicates that its shares still trade at a fairly high premium.

Perhaps, the company could grow into that multiple if it achieves success in its value brand by stealing market share from its competitors or if its joint ventures with Molson Coors are successful.

From our vantage point the stock remains a poor risk/reward relative to other cheaper peers with more cash runway.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.