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HEXO Corp. HEXO (TSX), HEXO (NYSE)

Should You Invest in HEXO Corp?

Recommendation: See Below

Should You Invest in HEXO Corp?

HEXO Corp

HEXO Corp. engages in the manufacture, production, and distribution of medical cannabis. It offers products through the brands: Time of Day, H2, Decarb, and Exlixir No. 1 brands. Should you invest in HEXO?

Fundamentals
Profile:
HQ: Gatineau, Canada
Founded: 2013
Facilities: Ontario, Quebec, Greece
Symbol: HEXO (TSX), HEXO (NYSE)

Focus: Neutral
HEXO is a vertically integrated cannabis company in Canada. Incorporated as Hydropothecary Corp in 2013, they have built both medical and adult-use brands HEXO, UP, and Original Stash. HEXO uses a hub and spoke model to attempt to partner with larger companies and expand revenue. One such example of this is their partnership with Molson Coors Canada.

Size: Neutral
Market Cap: US $520 mil
Enterprise value: US $519 mil
# of employees: 1100

Markets: Strong
Primary: Canada
Secondary: Greece, USA
Major Subsidiaries: Newstrike Brands Ltd, 167151 Canada Inc.

Operations: Strong
Cultivation:
Current production: Currently 1.77 million sq. ft. of grow and operating space. They have 150,000 kg capacity annually of cannabis in Canada.
Future production: Another 1 million-plus sq. ft. are leased.

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Distribution:
Direct sales: They have brick and mortar presences in all 10 of the Canadian territories.
Store networks: All licensed with 112 retail locations throughout Canada.
Supply agreements: Valens GroWorks Corp, Molson Coors

Integration/Diversification:
Vertically integrated: Yes
Horizontally diversified: Yes

Financials:  Neutral
Outstanding shares (diluted): 212.7 mil
2019 Revenue: $47.5 mil
EPS (diluted): -0.38

Management: Weak
CEO: Sebastien St. Louis
CFO: Stephen Burwash
COO: Donald J. Courtney
Recent turnover of the old CFO Michael Monahan has brought on SEC investigations of upper management on whether securities fraud has taken place. This has hit the stock price hard, with its tanking lately.

Branding: Strong
HEXO hits all levels of branding. They have a premium brand, UP, a mid-market brand, HEXO, and a mass-market brand, Original Stash. Each is present at many partner retail locations.

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Valuation: Weak
Current share price: US $2.00
Price to Sales: 24.9
Price to Book: 1.85
52 week low/high: US $1.56 to $8.40
EV / Revenue: 9.85

Financings: Neutral
HEXO just announced the closing of a $70 million private placement of unsecured convertible debentures for cash. This cash is to be used for working capital and corporate expenses. Many of the company executives were included in the financing.

Risks: High
The risks of investing in this company may be higher than many cannabis companies in that they are undergoing SEC investigations, firing staff, and bleeding cash.

HEXO Corp. HEXO (TSX), HEXO (NYSE) – Should You Invest in HEXO Corp?

Recommendation: Weak
HEXO is a vertically integrated, licensed cannabis company in Canada and the USA. They have more than enough production space and retail sites to be profitable. They sell cannabis topicals, extracts, edibles, and beverages.

First the good news. They have strong branding with their UP, HEXO, and Original Stash brands. Smaller product lines include Time of Day, Decarb and Elixir. Their product SKU’s are also impressive.

They recently raised $70 million in a private placement so they have plenty of operating capital. They are also listed on the TSX and NYSE so there is plenty of access to capital. Partnerships with huge companies like Molson Coors of Canada prove that there could be value at HEXO.

Now the bad news, and unfortunately for them, there is no shortage. Recent revenue was almost 3x higher than the same time last year, BUT, the company reported CA$58.5 million in losses. The total net losses are up by almost 500%. This means that although they just raised some capital to work with, the company is bleeding cash at an extremely high rate.

The company is under investigation for fraud, has recently fired over 200 employees and, and the stock price is trending strongly down. At a P/S of 25 (less than 6 is recommended), the stock is one to stay away from. There are good signs in this company, as noted above, but they need to right the ship in 2020 before we’ll believe they can stage a financial comeback.


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