Following yesterdays news of Hexo Corp (TSX: HEXO; NYSE: HEXO) acquiring Newstrike Brands (TSXV: HIP) in an all stock deal worth $263 million, the company quietly posted its Q2 2019 financials to Sedar without much fanfare. Whether this was by design is yet to be seen.
Overall, the company reported gross revenues of $16.1mm for the quarter, which drops to $13.3mm in net revenues once excise taxes are accounted for. With this being the first full set of financials with recreational markets, Hexo saw revenues figures increase 144% from that of its Q1 revenues of $6.63mm. In terms of analyst expectations, these revenues can be regarded as a beat on gross revenues, with high-end estimates coming in at $16mm for the quarter, on an average of $14.06mm. The company reported an overall loss of $4.3mm for the quarter.
These increased sales came at a cost however, as G&A costs doubled from $4.9mm to that of $8.1mm. This coincides with a decrease on marketing and promotion spend from $11.7mm to that of $4.8mm. The increase in revenue QoQ may be seen as a result of this large marketing spend last quarter, with the increased revenues being a result of last quarters marketing push.
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Of note, is inventory which rose from $16.2mm in Q1 to that of $21mm in Q2, while biological assets rose from $2.6mm to $4.2mm. Dried cannabis products rose by $4.0mm in inventory, with oils increasing $0.6mm. While Hexo does not indicate how many grams are currently in inventory, it notes that it expects to yield 12,871KG of product based on current growth, which compares to 4,938KG harvested during Q2.
During the quarter Hexo also saw an improvement in the average sell price per gram. In the recreational market, gross revenue per gram rose from $5.45 in Q1 2019, to $5.83, and accounted for $14.7mm in revenues for the quarter. Sales in this category increased from 952KG, to 2,537KG. Meanwhile, medical gross revenue per gram increased from $9.12 to $9.15. However, the company saw a net decrease in sales in this category, dropping from 158KG to 152KG.
Although positive overall, the worrisome trend of inventory growth needs to be addressed. This concern may not be specific to Hexo Corp, with the company selling a total of 2,689KG of cannabis during the second quarter of 2019. In this same time frame it produced 4,983KG. With the next quarters harvest expecting to yield 12,871KG of product, it is evident that we will quickly see a buildup of inventory, especially as additional grow space comes online. The other trend of decreasing high margin sales in the medical market is also worrisome, and likely to continue sector wide as more production comes online, further driving down the price of recreational product.
Hexo Corp closed at CA$7.83, up $0.43, or 5.81% on the news of the all stock acquisition of Newstrike Brands.
Information for this briefing was found via Sedar and Hexo Corp. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
