Marijuana Grower Hexo Spends to Grow

March 14, 2019 by Paul Ausick

When Canada-based marijuana grower and distributor Hexo Corp. (NYSEAMERICAN: HEXO) reported second fiscal-quarter 2019 results before markets opened Thursday morning, it said revenue jumped 144% sequentially to C$16.2 million ($12.15). That was primarily due to a 200% increase in sales of recreational marijuana. The company’s second quarter was the first full quarter reflecting legal recreational sales in Canada.

On Wednesday, Hexo announced that it will acquire Newstrike Brands in an all-stock transaction valued at about C$263 million. Newstrike is a licensed cannabis grower and distributor that has been working on developing “high-quality cannabis brands.”

In the acquisition announcement, Hexo said it expects fiscal year 2020 revenues from the combined company to total more than C$400 million. That’s quite a jump considering that the first half of fiscal 2019 has generated C$22.8 million in gross cannabis revenue and just under C$19 million in net revenue (gross revenue less excise taxes). The company’s operating loss for the first half of the year totals C$21.68 million.

Sebastien St-Louis, CEO and co-founder, said:

This quarter not only saw an exponential increase in gross revenue and production, but also saw us continue to execute on our promises including reaching a construction and licensing milestone on our 1,000,000 sq. ft. greenhouse expansion and listing on the NYSE-A. Just yesterday, we announced an agreement to acquire Newstrike Brands Limited. HEXO’s future is very promising, I am looking forward to continually driving shareholder value and achieving milestones with our team.

Newstrike’s position in Ontario and “English Canada” complements Hexo’s position in Quebec, commented Newstrike CEO Jay Wilgar. When the acquisition is completed, Hexo shareholders will own about 86% of the combined company while Newstrike shareholders will own the remaining 14%.

Hexo made our list of the 2018 list of the 10 largest marijuana companies and, since the end of 2018, the company’s market cap has grown by C$782 million (84%), from C$933 million to C$1.72 million. The addition of Newstrike revs up the company’s production capacity by nearly 50% to 150,000 kilograms annually of high-quality cannabis.

After jumping about 6% in Thursday’s premarket session, shares traded up about 2.2% in New York and up about 3.2% in Toronto at C$8.08, in a 52-week range of C$3.91 to C$9.29. The 12-month consensus price target on the stock is C$9.43.