HEXO's Revenue Soars, but Capacity Limits Its Growth

It's been a great year for HEXO Corp. (NYSEMKT: HEXO) so far. The company reported tremendous revenue growth in its first full quarter of sales in the Canadian adult-use recreational marijuana market. It announced the acquisition of Newstrike Brands. And HEXO even received some love from Wall Street, with Bank of America Merrill Lynch analyst Christopher Carey naming HEXO as his favorite pot stock.

With the wind at its back, HEXO hoped to deliver even more good news to investors with its fiscal 2019 third-quarter results. The company announced those results Wednesday evening. Here are the highlights from HEXO's update.

Marijuana buds and a cannabis oil bottle on top of a red Canadian maple leaf cutout.

Image source: Getty Images.

HEXO results: The raw numbers

Metric Q3 2019 Q3 2018 Year-Over-Year Change
Gross revenue CA$15.9 million CA$1.24 million 1,184.7%
Net income (loss) (CA$7.75 million) (CA$1.97 million) N/A
Diluted earnings (loss) per share  (CA$0.12) (CA$0.01) N/A

Data Source: HEXO. All amounts in Canadian dollars. N/A = Not Applicable.

What happened with HEXO this quarter?

As expected, HEXO's massive year-over-year revenue growth came from the Canadian adult-use recreational marijuana market. The company posted adult-use gross revenue of CA$14.6 million compared to no revenue from this market in the prior-year period. Dried flower and milled products made up 84% of gram equivalents sold during the quarter.

HEXO's adult-use gross revenue slipped 1.3% from the previous quarter due to a lower price per gram sold. The company sold 2,759 kilograms or equivalents of adult-use cannabis in the third quarter compared to 2,537 kilograms in the previous quarter.

Medical cannabis revenue increased 6.7% year over year to CA$1.3 million. This total reflected a decline of 4.6% from the fiscal second quarter, though.

The primary constraint for HEXO's top line continues to be its limited production capacity. The company's new 1-million-square-foot greenhouse didn't have its first harvest until April. The fiscal third quarter ended on April 30.

HEXO reported a wider net loss in the quarter as the result of a significant increase in spending. Operating expenses soared 3,523% year over year to CA$24.1 million as the company ramped up operations and marketing.

What management had to say

HEXO CEO Sebastien St-Louis stated:

The past five years have seen the cannabis industry landscape, and our company, evolve significantly. This evolution continues at a staggering pace, as HEXO ramps up production effort and significantly increases its inventory, further contributing to our capacity to meet the demand and to reach our sales and revenue targets. Our Innovation, Development and Engineering team has grown significantly ahead of the legalization of edibles and now includes 25 professionals with PhDs and extensive experience in major consumer packaged goods companies.

He added, "This quarter saw HEXO remain on track as it continues ramping up to $400 million in revenue in fiscal 2020, including completing the first harvest in our 1 million sq. ft. expansion and preparing to fund our ongoing expansion projects and innovation initiatives by entering a $65 million syndicated credit facility."

Looking forward

HEXO's net revenue should roughly double in the next quarter thanks to its increased production capacity. However, expenses are also expected to increase significantly as the company completes its expansion projects and boosts investments in research and development.

Probably the biggest thing to look forward to is HEXO's integration of Newstrike Brands. This acquisition should increase the company's annual production capacity to 150,000 kilograms once Newstrike's facilities are fully operational. The deal catapults HEXO into the upper echelon of Canadian cannabis producers based on capacity.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends HEXO. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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