Hexo Corp (TSE:HEXO) Gives Preliminary Glimpse of Post-Legalization Revenue Potential
Hexo Corp (TSE:HEXO) (OTCMKTS:HYYDF) became the first major Canadian licensed producer to report partial post-legalization sales on its income statement. The results give investors a sneak peak into individual and competitor adult-use cannabis revenues going forward.
On its own, the headline number was impressive. Hexo recorded aggregate gross revenue of $6.7 million* during its Q1 2019—with $5.2 million of that registered in the last two weeks of the quarter (post-legalization period between October 17-31). This represents a ↑346.66% bump in quarterly revenue in the last two weeks versus the remaining quarter—a testament to strong and continuous consumer demand in the province of Quebec. It doesn’t take much imagination to extrapolate the kind of large gross revenue generation Hexo will deliver with a full quarter of adult-use sales behind them. The final two weeks accounted for 78% of total revenues reported for the quarter.
Overall, Hexo’s revenue growth increased ↑400% from the prior quarter, indicating that the company’s ‘hockey stick’ growth is well underway. The market knew these dynamics were coming, but investors have official proof with 2 weeks of adult-use sales in the books.
Some of the company’s other drill-down details included gross margin before fair value adjustments of 50%—which is lower than many LPs have reported. However, excise taxes associated with preliminary adult-use revenues reduced total gross margin by approximately thirteen percent. We expect GM numbers for other Canadian LPs will similarly decline once they begin reporting individual post-legalization numbers.
As a rough comparison, PwC found that of the 57 consumer packaged goods (CPGs) analyzed in 2016, gross margin range fluctuated between 34.9-52.3% for the top and bottom performers. These companies were all generating revenues of at least $4 billion annually. Obviously, we can’t extrapolate PwC’s results with that of early-stage growth companies like Hexo, but the cannabis sector will naturally migrate to lower gross margin realities over time.
Medical sales increased a modest two percent over last quarter, despite the adult-use market going live. The sequential revenue increase reflected a lower revenue per gram on the dried flower sales, which decreased $0.22/gram due to the current period’s sales mix of products. It will be interesting to see how much other LPs medical sales growth rates slow in the coming quarter. Hexo, at least, was able to hold serve and eek out menial growth on this front.
Perhaps most importantly, Hexo affirmed its 1 million sq. ft. facility in Gatineau, Quebec, will be fully functional shortly. Hexo expects to achieve 108,000 kg of annual dried flower production upon completion.
Despite the large and confirmational ‘hockey stick’ revenue increase, Hexo stock has decreased in-line with the sector today (↓3.30%). In these bearish times, investors are focusing more on actual profitability than potential, and Hexo’s $14.79 million quarterly loss isn’t exactly playing well in this environment. Of course, the loss is transient—a by-product of higher expenses associated a stock option compensation associated with scaling operations—but the market cares not at the moment.
Regardless, the main takeaway from this report is that for select Canadian LPs, better times are coming. Hexo’s revenue ‘hockey stick’ curve is the first manifestation of this, eventually followed by net income once expenditures associated with the company’s ongoing build-out come under heel.
* Q1 2019 revenue—net of excise tax—came in at $5.663 million dollars. This is a departure from the reported $6.7 million headline number.
Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.
Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.
Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.