Stockwatch article on LABS AND HEXO
Cannabis Summary for March 30, 2020
2020-03-30 16:39 PT - Market Summary
by Stockwatch Business Reporter
The S&P/TSX Cannabis Index dropped 8.36 points to 134.12 Monday, while the Canadian Securities Exchange Composite Index fell 2.18 points to 280.08. Sebastien St-Louis's Quebec-based cannabis producer Hexo Corp. (HEXO) sank 43 cents to $1.10 on 11.79 million shares after releasing its fiscal second quarter results, which were prepared "on a going concern basis." The company lost an eye-popping $298-million in the second quarter, $250-million of which was from impairment charges.
A little over half of the impairment charges relate to the company's decision to list its Niagara facility, which was acquired in Hexo's acquisition of Newstrike Brands Ltd., for sale. (Hexo paid $263-million for its acquisition of Newstrike.) The company ran "impairment testing" and concluded that an impairment charge of $138-million was required. The rest was a $111-million impairment charge to goodwill that Hexo says was caused by slow store openings and regulatory delays for cannabis 2.0 products in Canada.
If we disregard the impairment charges, Hexo still would have lost $48-million in Q2, a modest improvement on its Q1 loss of $66-million. For shareholders, the news has been far from good: The company is down from a 52-week high of $11.29 in April, 2019, to today's closing price of $1.10. (That said, the stock is well above its mid-March low of 50 cents.)
One positive from the results was the increase in Hexo's net revenue to $17-million in Q2, up from $14.4-million in Q1. The increase was primarily the result of Hexo's mid-October (just before Q1 ended) launch of Original Stash, a marijuana line priced to compete with the normally much-more-affordable black market. Hexo first launched Original Stash in Quebec at $125.70 per ounce of marijuana, about $4.49 a gram (compared with the average Q4 black market price of $5.73 a gram). In Q2, Hexo started selling Original Stash in Ontario, British Columbia and Alberta. Pricing marijuana to be competitive with the black market has its downsides too: the company's net revenue per gram for recreational marijuana decreased to $2.47 in Q2 from $3.24 in Q1.
While Hexo remains far from profitable, it appears to have enough money to survive into the next quarter. The company had working capital of $189-million, including cash and cash equivalents of $80.4-million, as of Jan. 31, 2020. Hexo still has money from a series of financings that raised over $100-million in the second quarter. Hexo's shrinking pile of cash is a concern, though. In releasing its results, Hexo acknowledged the obvious -- that it will likely need to raise more money to meet its obligations and planned expenditures through the year.
As for any concerns related to COVID-19 and any potential halt in Hexo's operations, the company offered the typical remarks: its priority is the safety of its employees, it continues to operate but is taking more precautions (including having more of its employees work from home), and it has instilled "additional sanitation measures."
Pat McCutcheon's Medipharm Labs Corp. (LABS) offered similar platitudes, saying the company would continue operating but is taking precautions with "enhanced safety protocols."
Medipharm lost 35 cents to $1.63 on 3.4 million shares after reporting fourth quarter revenue of $32.4-million, down from $43.4-million in the third quarter. The decline ends a streak of continuous revenue growth for the company. It had gone from $22-million in Q1 to $31.5-million in Q2 to $43.4-million in Q3. The company attributed the drop in revenue to a reduction in bulk extract sold (cannabis oil sold in bulk, for example) and a decrease in the average selling price. As there is more supply in the market, the price has gone down.
The company's earnings/loss declined along with its revenue. After a $3.2-million profit in Q3, Medipharm lost $3.5-million in the fourth quarter. That reduced the extractor's 2019 profit to $1.1-million on revenue of $129-million. The fourth quarter loss and declining revenue may raise concerns about what is to come in 2020.
Much of the company's growth plans for 2020 rely on expansion into international markets. In the first quarter, Medipharm's Australian subsidiary began selling cannabis oil to Compass Clinics Australia Pty. Ltd. Medipharm is hoping to receive a European Union good manufacturing practice certification, which would allow it to ship cannabis products to Europe.
To pursue these plans, and to develop its own brands (the first of which, CBD oil, was announced last week), Medipharm is trying to tighten its spending. The company slashed its work force by 10 per cent in Q1 and vowed to focus on "cost-savings initiatives" and "operational efficiencies." At year-end, Medipharm had working capital of $90-million with cash and cash-equivalents of $38.6-million.