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HEXO Wins a New Pair of Licenses

By Eric Volkman - Oct 29, 2019 at 10:37AM

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The licenses will allow the company to sell "Cannabis 2.0" products from its home in Quebec and conduct R&D activities in an Ontario facility.

Marijuana company HEXO (HEXO -2.82%) is reporting two closely related pieces of good news. The company announced on Monday that it had received a pair of licenses from cannabis industry regulator Health Canada for facilities in different parts of the sprawling country.

The first is a sales license for its campus located in its home city of Gatineau, Quebec (which incidentally is located close to the nation's capital of Ottawa, Ontario). This permit will allow HEXO to sell derivative products such as cannabis-infused drinks and extracts from the facility. The second is a research-and-development license granted to the company's Centre of Excellence facility in the small Ontario municipality of Belleville.

Gloved hand holding marijuana leaf in front of Canadian flag.

Image source: Getty Images.

Both licenses will bolster HEXO's activities under the so-called Cannabis 2.0 legalization in Canada. This initiative, enacted in mid-October, sanctions the licensed sale of derivative products in the country. It came into force one year after Canada legalized recreational cannabis.

In the press release announcing the obtaining of the licenses, HEXO seemed more enthusiastic about the R&D one for the Belleville facility. It wrote that this permit "will allow us to take our innovation work to the next level, with testing on derivative products, including taste testing. Consumers have high expectations for their packaged goods experiences, and cannabis will be no different."

The two licenses represent HEXO's first initial step toward official sales of derivative products. Investors have been eager for Canadian companies to enter this space, as derivative products are generally higher margin than traditional cannabis flower offerings. They are also popular with consumers who, for a variety of reasons, don't wish to consume cannabis by smoking.

Profitability remains a subject of great concern for marijuana stock investors. Due partially to a host of challenging external factors such as supply issues and licensing delays, Canadian operators, in particular, have frequently posted bottom-line losses. The rollout of derivative products in the country promises to give those companies a better shot at landing in the black.

Although HEXO's licensing news is positive, it comes on the heels of several troubling developments for the company. Last week, it announced a set of job cuts and delayed the release of its Q4 and full-year fiscal 2019 results. It also withdrew its previously issued guidance for fiscal 2020.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends HEXO. The Motley Fool has a disclosure policy.

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