Speculating on HEXO's Q4 with simulationIn my opinion analysts have not considered HEXO's reasons for flat revenues in Q3 despite guidance. In particular CIBC has chosen to focus on flat revenues and declining margins. From a market maker perspective, CIBC controls over 60% of HEXO trades and I believe has the ability to move a market up or down. I think it has done so to defend John Zamparo's downgrade of HEXO.
If you remember, HEXO did report in Q2 that Q3 revenues would be flat because of processing bottle necks despite a growing inventory. Below is a recent quote from HEXO's IR regarding the issue -
"As Sebastien mentioned in both Q2 and Q3 the reason that inventory is growing and sales are not is due to a bottle neck in our processing. We have solved that issue, and are expecting Q4 to be double that of Q3, and to continue to improve once the Belleville facility is online."
If I look to simulation to determine what is in store for Q4 and I apply HEXO's guidance, I don't see any evidence for the stock to have declined the way it has.
Below is a table of simulation inputs and outputs calculated with a 90% confidence interval. In a nutshell, if results from financing activities stay similar to Q3 and operating costs increase according those shown as a result of doubling production and absorbing HIP, Net Income is expected to be almost break even.
Lastly, the SAQ take or pay contract calls for 20,000kg. This alone translates into a signifcant boost to Q12020 revenues.
In an effort to improve on the simulation, I welcome user comment and justification on input parameters.
| Name | Cell Reference | Sim# | Minimum | Mean | Maximum | x1 | p1 | x2 | p2 | x2-x1 | p2-p1 | Errors |
| Input 1 | Headcount / Q4 | 1 | 1052.29 | 1100.003 | 1147.299 | 1065.617 | 5% | 1134.104 | 95% | 68.48645 | 90% | 0 |
| Input 2 | Dried gram equivalents sold Adult (kg) / Q4 | 1 | 2813.103 | 4520.072 | 5752.4 | 3337.452 | 5% | 5444.851 | 95% | 2107.399 | 90% | 0 |
| Input 3 | Gross revenue per gram equivalent / Q4 | 1 | 5.012522 | 5.233361 | 5.393878 | 5.077284 | 5% | 5.35486 | 95% | 0.277576 | 90% | 0 |
| Input 4 | Dried gram equivalents sold Med (kg) / Q4 | 1 | 140.5143 | 150 | 159.8329 | 143.1239 | 5% | 156.8059 | 95% | 13.68207 | 90% | 0 |
| Input 5 | Gross revenue per gram equivalent / Q4 | 1 | 8.905026 | 9.049999 | 9.146905 | 8.949601 | 5% | 9.124505 | 95% | 0.174904 | 90% | 0 |
| Input 6 | Ancillary Revenue / Q4 | 1 | 60.16159 | 65.00002 | 69.8364 | 61.55109 | 5% | 68.38992 | 95% | 6.838833 | 90% | 0 |
| Input 7 | Consulting / Q4 | 1 | 1838.627 | 2238.01 | 2581.57 | 1950.511 | 5% | 2490.382 | 95% | 539.8712 | 90% | 0 |
| Input 8 | Professional fees / Q4 | 1 | 1583.959 | 1651.993 | 1721.174 | 1603.023 | 5% | 1701.306 | 95% | 98.28369 | 90% | 0 |
| | | | | | | | | | | | | |
| Output 1 | Cost of Goods Sold / Q4 | 1 | 6883.51 | 10598.41 | 13274.42 | 8014.397 | 5% | 12618.36 | 95% | 4603.963 | 90% | 0 |
| Output 2 | gross margin % / Q4 | 1 | 0.46358 | 0.487108 | 0.502319 | 0.472288 | 5% | 0.498328 | 95% | 0.02604 | 90% | 0 |
| Output 3 | Gross Margin / Q4 | 1 | 30354.41 | 31619.1 | 32861.3 | 30770.19 | 5% | 32451.91 | 95% | 1681.719 | 90% | 0 |
| Output 4 | Stock based compensation / Q4 | 1 | 9665.668 | 9983.822 | 10299.19 | 9754.537 | 5% | 10211.2 | 95% | 456.667 | 90% | 0 |
| Output 5 | Marketing and promotion / Q4 | 1 | 3172.087 | 4944.088 | 6267.229 | 3723.739 | 5% | 5894.854 | 95% | 2171.115 | 90% | 0 |
| Output 6 | Salaries, Benefits & Wages / Q4 | 1 | 6819.793 | 7024.915 | 7228.239 | 6877.089 | 5% | 7171.512 | 95% | 294.4229 | 90% | 0 |
| Output 7 | Consulting / Q4 | 1 | 1838.627 | 2238.01 | 2581.57 | 1950.511 | 5% | 2490.382 | 95% | 539.8712 | 90% | 0 |
| Output 8 | Facilites / Q4 | 1 | 2039.5 | 2039.5 | 2039.5 | 2039.5 | 5% | 2039.5 | 95% | 0 | 90% | 0 |
| Output 9 | Operating Expenses / Q4 | 1 | 28769.26 | 30872.33 | 32551.15 | 29626.04 | 5% | 31952.61 | 95% | 2326.566 | 90% | 0 |
| Output 10 | Net Earnings / Q4 | 1 | -2978.17 | -495.225 | 2622.685 | -2112.2 | 5% | 1417.35 | 95% | 3529.549 | 90% | 0 |