Update: Shares in Gatineau’s Hexo drop as earnings fall short of expectations


Gatineau-based cannabis company Hexo Corp. outlined its plans to enter eight U.S. states with CBD products in 2020 as it reported third-quarter earnings that fell short of expectations, sending its stock lower.

Hexo chief executive Sebastien St.-Louis would not say which states the pot producer was prioritizing, but the company expects to enter the U.S. market through a joint venture with Molson Coors Brewing Co.

He added that it plans to launch a suite of products, and is in varying levels of discussions with roughly 60 Fortune 500 companies for potential partnerships.

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“We think we can enter with our Fortune 500 partners … We think we can lever their existing distribution and go through non-marijuana channels,” he said on a conference call on Thursday.

Cannabis is legal for medical and recreational use in several U.S. states, but remains illegal at the federal level south of the border. However, the passage of a U.S. law late last year has allowed for the growing of hemp for the purposes of extracting CBD.

Hexo already has a Canadian joint venture with Molson Coors for a portfolio of cannabis-infused beverages, called Truss. St. Louis said it plans to enter the U.S. beverage market with a similar type of partnership with Molson.

Hexo’s U.S. plans came as it reported financial results for the three months ended April 30.

Hexo saw net revenues of $13 million, up from $1.24 million during the same period a year earlier before the legalization of recreational pot in Canada last October.

However, its latest quarterly revenues fell short of the $14 million expected by analysts, according to Thomson Reuters Eikon.

Hexo’s quarterly net loss deepened to $7.75 million, from a $1.97-million loss a year earlier, as operating expenses jumped to $24.1 million from $5.3 million during the same period in 2018.

The company’s stock on the Toronto Stock Exchange closed down 8.4 per cent to $7.81 on Thursday.

RBC Capital Markets analyst Douglas Miehm said Hexo’s results were “a little light” relative to estimates.

“Though, we note that the variance (at least compared to RBCCM) was driven by the company’s medical business, with the more important adult-use segment tracking in line with expectations,” he said in a note to clients.

Hexo said Thursday that it still expects to ramp its net revenue to $400 million by its 2020 financial year.

However, there are two factors that could put that target at risk, St. Louis said. Hexo’s Belleville facility must be operational by the fall, but the company expects it will be ready in time, he told analysts.

Eyeing legalized edibles

As well, the legalization of edibles and other next-generation cannabis products are expected to be legalized in the coming months, but long delays would push the timing back, St. Louis said.

Health Canada has completed its consultation on the draft version of the regulations, but has yet to release the final rules.

“It would be prudent to expect a delay, potentially into December,” St.-Louis said on the conference call. “But if it’s further delayed, that could put upwards of $100 million of that $400 million at risk … As we’re planning advanced products to be about 25 per cent.”

Hexo’s $400 million revenue guidance does not include its U.S. plans, he noted.

The cannabis company says it has secured a supply of 60,000 kilograms of hemp for extraction of CBD, the compound that can be derived from both cannabis and hemp, in preparation for the upcoming edibles market and its U.S. launch in 2020. It has also entered into a supply agreement for 200,000 kilograms of hemp to be supplied during its 2020 financial year.

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