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Marijuana Producer

Expansion through bigger growing facilities, competitor acquisitions, e-commerce and both local and international partnerships mean this marijuana company is working hard to grow its business

HEXO CORP., $8.87, symbol HEXO on Toronto (Shares outstanding: 207.7 million; Market cap: $1.9 billion; TSI Cannabis Quality Rating (CQR): ; www.hexocorp.com) is a Canadian-based producer and distributor of medical cannabis with production facilities in Quebec. In addition, the company plans to branch into the recreational and consumables markets when it becomes legal.

Hydropothecary listed on the TSX Venture Exchange in March 2017 and moved to the main Toronto Stock Exchange on June 22, 2018. The stock is also listed on the New York exchange under the symbol HEXO.

The company changed its corporate name from Hydropothecary Corp. on August 29, 2018. It will continue to use the Hydropothecary name for its medical products; any of its products directed at the recreational market will carry the new Hexo brand.

Under license from Health Canada, Hexo started production of medical cannabis in 2014 and subsequently gained approval to transport and sell marijuana in various formats. That includes oils.

The company’s 1.3 million-square-foot Gatineau facility includes 1.3 million square feet of greenhouse space and a 10,000-square-foot advanced automated manufacturing facility for dewaxing, distillation, milling and extraction. Of the 1.3 million square feet of greenhouse space, 1.0 million square feet was recently added through an expansion as part of the company’s plans to increase its production capacity. It’s now in the process of preparing its Gatineau facility to produce cannabis-infused edibles and beverage products in anticipation of legalization of these products in Canada in October 2019.

Hexo has entered into arrangements to further expand its facilities to include additional advanced processing and manufacturing space of up to 2.0 million square feet. in Belleville, Ontario, strategically located along Canada’s major shipping highway. The Belleville facility is anticipated to become operational this year and be the company’s main production facility for processing, extraction and packaging, research and development and the manufacture of ancillary cannabis products.

The company has also formed a partnership with Greek company Qannabos with the aim of establishing a eurozone processing, production, and distribution center in Greece.

Hexo’s operations also include a 58,000-square-foot distribution centre located in Montreal, Quebec and a corporate office location in Gatineau, Quebec.

The company is just completing the acquisition of Newstrike Brands (symbol HIP on the Toronto Venture Exchange) for approximately $263 million in Hexo shares.  Newstrike is backed by the Canadian band The Tragically Hip. The purchase expands Hexo’s distribution range from three to nine provinces. Newstrike also has two cannabis facilities in Ontario—an indoor grow room in Brantford, and a greenhouse in Niagara.

The company currently offers 30 HEXO products for the adult-use market in Canada. These products are currently available for online shipping and in stores across Canada and include dried flower, milled, pre roll, powder, spray and capsule formats. Selected products include Bayou Flower, Sierra Pre Roll, Horizon Flower, Elixir THC Oil, Nebula Flower, Fleur de Lune Intimate Spray and Atlantis Flower. In the future, Hexo intends to extend its offerings to include soft gel capsules, vapes, topicals, edibles and beverages.

In March 2018, the company announced an agreement with Shopify, symbol SHOP on Toronto, to use that firm’s e-commerce platform for cannabis products. The company believes this is an important component of its Canadian distribution strategy.

Hexo has already secured supply agreements with the Quebec provincial government. It is also among the producers selected by the B.C. government to supply recreational cannabis to the province. It has also entered into a supply agreement with the Ontario Cannabis Store—run by the provincial government. It has also aligned itself with Fire & Flower Inc., a private cannabis retailer operating in certain Canadian provinces where private retailers are permitted including B.C., Alberta and Saskatchewan.

Apart from the medical and recreational markets, Hexo has a joint venture agreement with Molson Coors, Toronto symbols TPX.A and TPX.B. Under the terms of that deal, Molson will own 57.5% of a new joint venture focused on developing cannabis-infused non-alcoholic beverages. Edible cannabis products, from drinks to brownies, should become legal as early as mid-2019.

For the three months ended January 31, 2019, overall revenue jumped sharply, to $13.4 million, from $1.2 million a year earlier. Losses fell to $4.3 million, or $0.02 a share, from $9.0 million, or $0.10.

Hexo’s balance sheet is strong: on January 31, 2019, it held cash of $165.6 million and had no debt.

The company should benefit substantially from its large supply contract for the Quebec Government as well as its agreements in B.C. and Ontario. This will soon be supplement by the addition of Newstrike Brands. However, it faces aggressive rivals in the Canadian market. That fierce competition could eventually result in an oversupplied market and put downward pressure on cannabis prices.

The agreement with Molson Coors also raises the possibility that Hexo may eventually be acquired by that much larger alcoholic beverage maker. Alone, that’s not reason enough to buy the stock, but it adds appeal.

Note that like most marijuana producers, the company needs huge revenue growth to justify its current market cap. If its revenue growth stalls, Hexo could drop sharply as momentum traders unload the stock.

Hexo Corp. has a 3-Leaf Cannabis Quality Rating (CQR). The stock is a speculative buy for aggressive investors who want exposure to the marijuana industry.