Can HEXO save itself from collapse?

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An exceptional pot stock that increased when Canada legalized cannabis for the first time appears to be collapsing this year. HEXO (NYSE: HEXO) saw a lot of the bad news in 2019.

It repeatedly missed its revenue and revenue forecasts last year, which put the company in a cash crunch. The resignation of CFO Michael Monahan worried investors, which dampened the performance of HEXO stocks. The company lost 70% of its market value in 2019 and has been down 36% since the start of the year. It looks like his bad times are not yet over, as he announced a new CDN $ 4.3 million EBITDA loss in his third quarter results released this morning.

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Wrestling time

Concerns continued for HEXO in 2020 when its shares fell and traded below $ 1 on the New York Stock Exchange (NYSE). NYSE commercial compliance requires warning notifications to companies trading below $ 1 in stock prices for 30 trading days. HEXO received a listing notification in April warning that its share price is expected to exceed $ 1 in the next six months. If it does not, NYSE will begin its suspension and cancellation procedures. NYSE has extended the deadline for HEXO until December 16 due to the COVID-19 pandemic.

Aurora Cannabis (NYSE: ACB) had a similar case, but chose to execute a 1 for 12 reverse share split on May 11 before he could receive a warning from the NYSE. Aurora’s shares are recovering after the stock split and have since gained 112.4%. Aurora also increased revenue 20.4% year-over-year in its last third quarter, but has yet to make a profit.

What are the options?

To avoid being delisted, HEXO is exploring options such as diluting stocks to raise more capital. Diluting stocks usually doesn’t go well with investors. To regain investor confidence, the company must post better quarterly figures. In the second quarter, it posted year-over-year revenue growth of 26.9% to C $ 17.01 million ($ 12.57 million) and an increase of 17.3% from the first quarter.

The decline in revenues for Canadian cannabis companies last year is the result of a slowdown in the deployment of legal stores, increased sales in illicit markets and other regulatory delays. Demand was undoubtedly strong – but the lack of legal stores caused an imbalance between supply and demand.

In its recent call for results, HEXO management suggested that the delay in licensing and launching “Cannabis 2.0” products are some of the many challenges the company has faced in the past two years. first quarters of fiscal 2020. Cannabis 2.0 refers to the legalization of cannabis derivatives in Canada, including beverages, edibles and vapes. In “Cannabis 1.0”, Canada only legalized cannabis flowers, oils, plants and seeds, so the next iteration will bring new products to the recreational market.

HEXO had to experience C $ 16.1 million in inventory depreciation due to excess inventory. Meanwhile, operating expenses reached C $ 281.5 million compared to C $ 39.5 million in the first quarter. This resulted in a loss of profit before interest, taxes, depreciation and amortization (EBITDA) of C $ 10.3 million compared to C $ 6 million a year ago. However, losses have decreased from the first quarter of 2020.

The shares of HEXO and Aurora Cannabis have increased by 72.4% and 11.6% respectively so far in June, while SPDR S&P 500 ETF gained 5.7%.

Could Cannabis 2.0 products be a glimmer of hope?

Even with the pandemic wreaking havoc, investors can still hope for the potential of Cannabis 2.0 products. The demand is huge for cannabis derivatives, which include edibles, beverages, chocolates, vapors and concentrates.

HEXO entered the American cannabidiol (CBD) market via a joint venture called Truss CBD USA with Molson Coors Drink (NYSE: TAP). The joint venture will explore the possibilities of bringing hemp-based CBD soft drinks to Colorado.

Cannabis drinks are an exciting new product concept that could capture a large consumer base – the reason why Canopy growth has announced the launch of its cannabis infused drinks.

The new HEXO tsunami flower format also impressed investors and helped boost its stock this month. On June 3, the company announced a new 30-gram medical flower format for its high THC Tsunami strain for medical cannabis patients. The company previously had to sell smaller product sizes to comply with regulations on medical cannabis packaging. The new product format will now allow it to receive large volume orders, which could be a positive for revenue growth.

As the revenues of American cannabis companies have tripled, the numbers of Canadian peers are grim. Overall, marijuana stocks are finally seeing better days. Hexo released its third quarter results for fiscal year 2020 today before the market opens. Its net income less excise taxes increased 70% over the same period last year to reach CA $ 22.1 million and 30% more than in the second quarter. It also recorded an adjusted EBITDA loss of C $ 4.3 million, which is much better than the loss of C $ 8.5 million for the same period last year and the loss of C $ 8.5 million. in the second quarter. The headline was up 4.9% this afternoon. If demand for cannabis continues its post-pandemic rate, Cannabis 2.0 products can finally conquer the market.

HEXO is undoubtedly a risky investment – but looking at the turnaround in Aurora Cannabis, there might be some hope. For now, HEXO must develop a cautious strategy while looking for options to raise capital, regain investor confidence and prevent its shares from collapsing.



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