HEXO Corp. (TSX: HEXO; NYSE: HEXO) stock was dropping over 6% in early trading after the company gave guidance, despite beating earnings estimates. Net revenue in Canadian dollars for the fourth quarter ending July 31, 2019, increased to $15.4 million versus last year’s $13 million for the same time period. This beat revenue estimates by $.38 million according to Seeking Alpha.

The company delivered a net loss increase of over 400% coming in at $56 million for the quarter versus last year’s net loss of $10 million for the same time period. The company said the increase in net loss was” primarily due to the significant scale of operations and increased stock-based compensation expense due to higher cannabis market value, increased R&D expenditures and an impairment loss on inventory.”

“We are at the end of the first year of adult-use legalization in Canada, which was an incredible year full of successes and challenges across the industry.  We’ve gone from $4.9M to $59.3M in gross revenue in just one year. This type of revenue growth is a testament to the Company’s resilience and capacity to pivot in the face of uncertainty,” said Sebastien St-Louis, CEO, and co-founder of HEXO Corp. “I am confident that our multi-brand approach, focusing on customer demand, re-evaluating our strain mix, as well as the introduction of new products to counter the black market, will help us increase our market share and total revenue”.

Guidance Less Than Stellar

HEXO  gave the following outlook for 2020:

Q1 2020 guidance: Revenue will range between $14M – 18M and attributed the lack of growth on “a provision for returns and retroactive adjustments on inventory held by provinces, which is subject to price adjustments as a result of a re-evaluation of the Company’s pricing strategy.”

2020 guidance: Positive EBITDA. HEXO said its original revenue guidance for fiscal 2020 was lowered “due to slower than expected store roll out across Canada, consumer demand-based product mix shifts and lower than expected sell-through.”

Sales Mix

Adult-use sales in the quarter accounted for 91% of total revenue. The company noted that adult-use gross sales jumped  30% to $18 million in the quarter versus $14 million in the third quarter and zero for the same time period last year. The acquisition of Newstrike contributed $2 million in sales. Sales to the AGLC, which was new business in the quarter, added another $4 million.

Sales volume in the fourth quarter grew by 45% to 4,009 kg from 2,759 kg equivalents sold in the prior quarter. The acquisition of Newstrike contributed 396 kg, sales to the AGLC contributed 971 kg. Dried flower and milled products represented 89% of gram equivalents sold during the quarter, a 4% increase from the prior quarter, with oil product sales comprising the balance of the quantity sold.

Expenses

Operating expenses increased to $46 million in the quarter versus last year’s $10 million for the comparable quarter as the company said it reflected a significant increase to the scale of our operations. Loss from operations for the quarter was $60 million compared to $10 million for the comparable quarter year over year.

Rough Times

HEXO had been signaling the quarter was going to be a difficult one to deliver. The CFO resigned earlier in the month and the company laid off 200 employees. The company also had to delay  its original planned earnings announcement. The company blamed the new financing for the reason it had to reschedule the release of its fourth-quarter and full-year financial results to October 28, 2019. Hexo had entered into subscription agreements with a group of investors for a C$70 million private placement basis, for an 8.0% unsecured convertible debentures of Hexo.

Positives

The company launched the Original Stash brand that competes with black market prices. HEXO’s JV with Molson Coors Canada, Truss Beverages Co., announced the first beverage brand for 2.0, Flow Glow, a partnership with Flow Glow Beverages Inc. water for CBD infused beverages. It also obtained a research and Phase 1 license for Belleville, and sale of cannabis topicals, extracts, edibles and beverages for Gatineau facility.

“Above and beyond significantly increasing our retail reach to nine provinces, we’ve also launched Original Stash, the industry’s first true value brand, which we believe will not only compete directly with the illicit market but also contribute to a significant increase in sell-through,” added St-Louis.