HEXO Corporation (HEXO.TO) (HEXO) has been nothing short of a turnaround story in June and the shares have surged over 50% during this time.
*At time of publishing the stock is up 14% premarket.
The rally was supported by the granting of necessary cannabis licenses from Health Canada as well as stronger-than-expected third quarter financial results. We also believe that the relationship with Molson Coors (TAP.CN) played a role in the recent move higher and are favorable on this aspect of the story.
Prior to the rally, HEXO was trading well below the $1 level on the New York Stock Exchange and a forced reverse split seemed imminent. Due to the rally higher, HEXO will no longer be forced to conduct a reverse stock split and we find this to be significant. Although we have been cautiously optimistic with the Canadian cannabis producer, the recent trend is hard to ignore and we want to provide an update on the business.
During the quarter, HEXO generated more than $30 million of revenue, which represents a 30% increase over the prior period and almost a 100% increase when compared to the same period last year. The revenue growth was primarily the result of a substantial increase in the amount of recreational cannabis that was sold during the quarter.
Canada’s cannabis 2.0 market also served as a growth driver for HEXO and we are favorable on this trend. The company’s growth was also supported by the launch and sale of new products (hash and oil extract drops) and this is a revenue stream that we expect to become more significant on a going forward basis.
One of the quarterly developments that we find to be significant for HEXO was the 7% increase in gross margins. The increase was the result of decreased production costs through increased efficiencies, automation of packaging activities, and selection of strains which resulted in lower labor costs.
In April, HEXO reported a major milestone as it relates to its relationship with Molson Coors and announced the formation of joint venture to explore opportunities for non-alcohol hemp derived CBD beverages in Colorado. This comes after the company was pretty quiet about the relationship with the alcohol conglomerate and we find this opportunity to be significant.
Earlier this month, HEXO was granted a license amendment for the sale of dried and fresh cannabis, cannabis extracts, cannabis topicals and edible cannabis products. The amendment included the beverage production area that is dedicated to the Molson Coors relationship and are bullish on the leverage to the cannabis beverage vertical in Canada. The license will allow HEXO to achieve greater economies of scale, expand the roll out of 2.0 products, and continue on its national expansion strategy.
Going forward, HEXO is well positioned to capitalize on the North American cannabis industry and will monitor how the story continues to evolve. The company recently completed a private placement and we are favorable on the move to strengthen the balance sheet. With a strong balance sheet, HEXO is better positioned to execute on previously announced growth initiatives and we will keep an eye on the opportunity.