HEXO Receives Several Downgrades After Reporting A Serious Miss On Revenue

Yesterday, HEXO Corp. (HEXO.TO) (HEXO) published third quarter financial results and we were less than impressed with the numbers that were reported.

So far this year, the Canadian Licensed Producer (LP) has announced several bolt-on acquisitions of smaller scale companies that are levered to attractive verticals of the cannabis value chain.

After HEXO released quarterly financial results, a few broker-dealers responded by lowering price targets. Below, we have highlighted the changes and consider this to be an important trend:

• Alliance Global Partners lowered its price target to C$12 from C$14
• ATB Capital went from Hold to Sell and lowered its price target to C$6 from C$9.75
• CIBC lowered its price target to C$10 from C$13.50
• Stifel lowered its price target to C$7.50 from C$10

From having leverage to strategic international cannabis markets to enhancing the number of brands that fall under HEXO’s umbrella, the management team considers the acquisitions to be strategic. Going forward, we will monitor how the transactions support the growth of entire operation and will keep an eye on how the story advances from here.

Reports a $10 Million Drop in Revenue

When compared to the prior quarter, HEXO reported a $10 million decline in revenue (generated less than $25 million of revenue) and we found the drop-off to be worth highlighting. The company attributed the revenue decline to lower recreational non-beverage cannabis sales in Quebec. The $5 million decline in revenue is related to strain cultivation decisions that were made by the company as well as hash-related production issues.

In Alberta, HEXO reported a more than $2.5 million decline in revenue when compared to the prior quarter. The management team attributed the 32% decrease in revenue from the sale of its UP brand to temporary stock limitations as the company continues to roll out the re-launched brand.

During the quarter, HEXO reported no revenue from international medical cannabis markets due to a decision by the Israeli government which caused a delay in the company’s ability to export. HEXO reported to have satisfied the requests from the Israeli government and is allowed to start selling medical cannabis markets in this burgeoning international market.

Management Team Expects the Business to Bounce Back

Going forward, HEXO expects the business to get back on track and is forecasting strong growth in Quebec in the coming quarters. The combination of an improved domestic and international cannabis landscape could prove to be a major catalyst for growth in future quarters and we will monitor how the management team is able to execute on a going forward basis.

As of today, HEXO reported to have approx. $194 million of cash on hand and $182 million of working capital. We believe the company has the resources that are required to capitalize on burgeoning cannabis markets and will monitor how the recent acquisitions support the growth of the entire business.

If you are interested in learning more about HEXO’s financial results, please send an email to support@technical420.com with the subject “HEXO’s Financial Results” to be added to our distribution list.

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Michael Berger is Managing Partner of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

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