HEXO Corp. (TSX:HEXO)(OTC:HYYDF) closed down 0.09 percent to CAD$5.80 Friday following its positive earnings report for the three and twelve months ended July 31, 2018. The company continues to beat the overall marijuana market in performance, yielding 40.80 percent year-to-date returns. Horizons Marijuana Life Sciences ETF (TSX:HMMJ), which is a good representation of how the overall North America Marijuana Index is doing, is down 18.61 percent YTD.
HEXO’s price escalation is backed by their strong financials. As reported Friday, the company’s revenue increased 64 percent year-over-year from CAD$862,000 to CAD$1.410 million, or from CAD$9.00 per gram to CAD$9.26 per gram. Revenue increased each quarter of fiscal year 2018 because of increased sales volume of 59 percent in the past year, and their balance sheet is debt-free.
“The past quarter has signified many milestones for HEXO Corp as we moved towards final preparations for the adult-use cannabis market,” said Sebastien St-Louis, HEXO’s CEO and co-founder in a statement. “With two additional supply deals, this time in Ontario and in British Columbia, the establishment of a joint venture with Molson Coors Canada to develop cannabis-infused non-alcoholic beverages, a first step towards going global, and more, I’m extremely proud of the speed at which we continue to execute on our strategic priorities.”
Legalization produces operational losses
Unfortunately, they experienced an operational loss from the increased cost of operations which were mainly caused by higher expenses in line with expanding the scale of operations to prepare for Canadian marijuana legalization. Additionally, they increased their expenses associated with marketing and promotion to build brand recognition. They expect that these expenditures are investments that will pay off long-term through resulting growth.
The sales volume was expanded through various corporate actions which were outlined in their earnings release. They formed a joint venture with Molson Coors Canada to develop non-alcoholic, cannabis-infused beverages, increase supply agreements with Ontario Cannabis Store and the British Columbia Liquor Distribution Board and increased production facility space through various acquisitions and construction of new facilities throughout the year.
Additionally, they are expanding their market into Europe through a partnership with Greek company Qannabos.
HEXO Corp. serves the Canadian cannabis market as one of the country’s lowest-cost producers. They’re working on increasing production capacity through construction in additional production facilities due to complete construction by the end of 2018. Now that recreational marijuana is legal in Canada, HEXO plans to serve the adult-use market under their HEXO brand while continuing to serve its medical cannabis clients through their Hydropothecary brand.
Meeting demanding post-legalization
The overwhelming demand for newly legal marijuana in Canada resulted in a rough first week for the cannabis industry, challenging many producers to go into production overdrive. Despite the challenge, the fact that demand exceeded expectations benefited companies like HEXO greatly because they were more reliable than other companies when it came to providing product during the shortages.
According to HEXO representatives, the company was able to meet initial demand and send resupply shipments ahead of schedule. Jean-François Bergeron, Vice-President of Supply Chain, Société des alcools du Québec, commented on the shortages, saying that “thanks to HEXO’s preparedness, we have been able to provide and maintain customer service to the SQDC’s clients, even with this higher demand.”
According to analyst estimates, HEXO revenue is expected to grow monumentally into 2019. The average analyst estimate for expected 2019 revenue is CAD$101.82 million compared to the CAD$4.1 million in revenue reported for fiscal year 2018. These estimates suggest huge gains potential for traders investing in HEXO stock in the next year.