HEXO Corp. (TSX: HEXO; NYSE: HEXO) (“HEXO” or the "Company") today
reported its financial results for the second quarter fiscal 2020
ended January 31, 2020. All amounts are expressed in Canadian
dollars unless otherwise noted.
“We have continued our focus on improving our operations and
expanding distribution across Canada. Our strategy with
Original Stash has demonstrated that we can directly compete with
the black market,” said Sebastien St-Louis, CEO and co-founder of
HEXO Corp. “The industry continues to see challenges ahead, and
following a strategic review of the Company’s core and non-core
assets we believe we have positioned HEXO to meet these challenges
head on.”
Operational and Financial Highlights
|
For the three months ended |
|
For the six months ended |
|
Income Statement Snapshot (in millions) |
January 31, 2020 |
|
January 31, 2019 |
|
January 31, 2020 |
|
January 31, 2019 |
|
|
$ |
|
$ |
|
$ |
|
$ |
|
Revenue from sale of goods |
23.8 |
|
16.2 |
|
43.1 |
|
22.8 |
|
Excise taxes |
(6.9 |
) |
(2.8 |
) |
(11.7 |
) |
(3.8 |
) |
Net revenue from sale of goods |
17.0 |
|
13.4 |
|
31.4 |
|
19.0 |
|
Ancillary revenue |
0.1 |
|
0.1 |
|
0.1 |
|
0.1 |
|
Gross margin before fair value adjustments |
5.7 |
|
6.9 |
|
10.2 |
|
9.8 |
|
Gross margin |
(7.9 |
) |
11.6 |
|
(29.0 |
) |
18.8 |
|
Operating expenses |
(281.5 |
) |
(18.5 |
) |
(321.0 |
) |
(40.5 |
) |
Loss from operations |
(289.4 |
) |
(6.9 |
) |
(350.0 |
) |
(21.7 |
) |
Other income/(expenses and losses) |
(8.8 |
) |
2.6 |
|
(14.3 |
) |
4.5 |
|
Net loss before tax |
(298.2 |
) |
(4.3 |
) |
(364.3 |
) |
(17.1 |
) |
Tax recovery |
– |
|
– |
|
6.0 |
|
– |
|
Total net loss |
(298.2 |
) |
(4.3 |
) |
(358.3 |
) |
(17.1 |
) |
Second Quarter 2020 Highlights
Gross revenue increased 23% to $23.8M from $19.3M in
Q1’20. Net revenue increased 17% to $17.0M from $14.5M in
Q1’20.
Adult-use cannabis shipped revenue in Q2’20 increased 21% to
$24.4M from $20.2M in Q1’20. Net adult use revenue increased
20% to $16.3M from $13.6M in Q1’20. The primary driver of the
increase in sales during the quarter was the launch of Original
Stash in Ontario, British Columbia and Alberta during the quarter,
and the increase volume sold in Quebec. Adult use sales
volume in Q2’20 increased 57% to 6,579 kg from 4,196 kg sold in the
prior quarter.
Gross adult-use revenue per gram equivalent decreased to $3.49
in Q2’20 from $4.35 in Q1’20, reflecting the impact of the
increasing portfolio share of Original Stash, the Company’s value
brand. The adult-use net revenue per gram equivalent
decreased to $2.47 in Q2’20 from $3.24 in Q1’20.
|
Q2’20 |
|
Q1’20 |
|
Q4’ 19 |
|
Q3’19 |
|
Q2 ’19 |
|
Shipped Revenue (in millions) |
$ |
24.4 |
|
$ |
20.2 |
|
$ |
22.8 |
|
$ |
14.6 |
|
$ |
14.8 |
|
Less: price concessions |
|
(0.2 |
) |
|
(1.2 |
) |
|
(2.8 |
) |
|
– |
|
|
– |
|
Less: provision for
sales returns |
|
(1.2 |
) |
|
(0.7 |
) |
|
(1.0 |
) |
|
– |
|
|
– |
|
Revenue from sale of adult-use cannabis |
|
23.0 |
|
|
18.3 |
|
|
19.0 |
|
|
14.6 |
|
|
14.8 |
|
Excise taxes |
|
(6.7 |
) |
|
(4.7 |
) |
|
(4.9 |
) |
|
(2.7 |
) |
|
(2.6 |
) |
Net revenue from sale of adult-use cannabis |
$ |
16.3 |
|
$ |
13.6 |
|
$ |
14.1 |
|
$ |
11.9 |
|
$ |
12.2 |
|
Gross margin before fair value adjustments for Q2’20 was $5.7M
or 33% of net revenue from sale of goods, compared to $4.6M and 31%
in the prior quarter.
The Company incurred an write down on inventory of $16.1M during
Q2’20 compared with $23.0M during Q1’20. The write down was
realized on the Company’s inventory in comprised of the
following;
- Write down of surplus cannabis trim (trim is primarily used for
extraction purposes) and milled products in the amount of $3.1M due
to an excess of stock relative to the Company’s short-term demand
for cannabis distillate production; and
- Write down of concentrated bulk purchase of $11.8M, in part to
an oversupply in the bulk product market, of which lowered the
value when compared to the contracted price. The bulk product
was acquired through a supply agreement, which is currently the
subject of litigation and is alleged to be void as it was
negotiated in bad faith at prices well in excess of market.
- Write down in the amount of $1.2M was recognized due to sunk
costs related to packaging reconfiguration.
Operating expenses increased to $281.5M compared with $39.5M in
Q1’20. Included in operating expenses, are certain expenses
which management believes are expenses that are non-recurring or
non-cash and related to significant changes in market conditions.
Included in these expenses are:
- Restructuring costs – During the quarter the Company incurred
restructuring costs in the amount of $0.3M associated to the
rightsizing of operations that took place in Q1’20.
- Impairments of property, plant and equipment and intangible
assets - Subsequent to the end of the quarter, after completing a
strategic review of its cultivation capacity, the Company made the
decision to list the Niagara facility for sale. As a result
of the decision to sell, the Company undertook impairment testing
of the facility, its property, plant and equipment, and the
intangible assets acquired from Newstrike Brands Ltd. The
Company determined that an impairment loss of $138.3M was
required.
- Impairment of goodwill – As at January 31, 2020, the carrying
amount of the Company’s total net assets significantly exceeded the
Company’s market capitalization. In addition, slower than expected
retail store roll outs in Canada and delays in government approval
for cannabis derivative products resulted in a constrained
distribution channels which have adversely affected overall market
sales and profitability. As a result of these factors, management
performed an indicator-based impairment test of goodwill as at
January 31, 2020. As a result of this assessment, the Company
recorded an impairment in goodwill of $111.9M.
- Realization of onerous contract – The Company recorded a $3.0M
realization as the result of an onerous contract which is currently
the subject of litigation.
When normalized for these non-recurring or non-cash expenses
related to significant changes in market conditions, the company
reports normalized operating expenses of $28.1M, compared with
$35.1M in Q1’20. A 21% decrease as the result of a decrease in
marketing expenditures and headcount, as the Company continues to
reduce previous spending levels to refocus operations on becoming
adjusted EBITDA positive. When normalized for other non-cash
expenses the company reports normalized operating expenses of
$16.1M, compared to $23.9M in Q1’20.
Loss from operations for the quarter was ($289.4M), compared
with ($60.6M) in the prior period. Excluding non-cash write downs
and impairment charges in Q2’20, adjusted net loss was ($23.2M)
compared with ($34.0M) in Q1’20.
Adjusted EBITDA (in millions) |
Q2’20 |
|
Q1’20 |
|
Q4 ’19 |
|
Q3 ’19 |
|
Q2 ’19 |
|
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
Total net loss |
(298.2 |
) |
(60.0 |
) |
(44.7 |
) |
(7.8 |
) |
(4.3 |
) |
Adjustments: |
|
|
|
|
|
Income taxes (recovery) |
- |
|
(6.0 |
) |
(18.2 |
) |
- |
|
- |
|
Finance expense (income), net |
3.3 |
|
(0.1 |
) |
(1.3 |
) |
(1.1 |
) |
(1.3 |
) |
Depreciation of property, plant and equipment |
2.0 |
|
1.3 |
|
0.6 |
|
0.1 |
|
0.5 |
|
Amortization of intangible assets |
1.7 |
|
1.7 |
|
1.4 |
|
0.1 |
|
0.1 |
|
|
|
|
|
|
|
Investment (gains) losses |
|
|
|
|
|
Revaluation of financial instruments loss/(gain) |
(2.7 |
) |
(0.3 |
) |
(0.5 |
) |
1.1 |
|
0.8 |
|
Share of loss from investment in joint venture |
1.6 |
|
1.7 |
|
1.3 |
|
1.1 |
|
0.5 |
|
Unrealized loss/(gain) on convertible debentures |
0.4 |
|
2.6 |
|
0.1 |
|
4.1 |
|
(2.5 |
) |
Unrealized loss on investments |
6.6 |
|
1.7 |
|
- |
|
0.3 |
|
- |
|
Realized loss/(gain) on investments |
0.2 |
|
- |
|
0.2 |
|
- |
|
- |
|
Foreign exchange loss/(gain) |
(0.6 |
) |
- |
|
0.1 |
|
- |
|
- |
|
|
|
|
|
|
|
Non-cash fair value adjustments |
|
|
|
|
|
Realized fair value amounts on inventory sold |
5.4 |
|
6.7 |
|
7.3 |
|
4.7 |
|
3.7 |
|
Unrealized gain on changes in fair value of biological assets |
(7.9 |
) |
(7.1 |
) |
(5.3 |
) |
(20.1 |
) |
(8.4 |
) |
|
|
|
|
|
|
Non-recurring expenses |
|
|
|
|
|
Restructuring costs |
0.2 |
|
3.7 |
|
- |
|
- |
|
- |
|
|
|
|
|
|
|
Other non-cash items |
|
|
|
|
|
Share-based compensation |
7.9 |
|
8.2 |
|
10.2 |
|
8.2 |
|
5.0 |
|
Write-off biological assets and destruction costs |
- |
|
0.7 |
|
- |
|
- |
|
- |
|
Write-off of inventory |
- |
|
2.2 |
|
- |
|
- |
|
- |
|
Impairment loss on inventory |
16.1 |
|
23.0 |
|
19.3 |
|
- |
|
- |
|
Impairment loss on right-use-assets |
0.5 |
|
0.7 |
|
|
- |
|
- |
|
Impairment loss on property, plant and equipment |
31.6 |
|
- |
|
- |
|
- |
|
- |
|
Impairment loss on intangible assets |
106.2 |
|
- |
|
- |
|
- |
|
- |
|
Impairment loss on goodwill |
111.9 |
|
- |
|
- |
|
- |
|
- |
|
Realization of onerous contract |
3.0 |
|
- |
|
- |
|
- |
|
- |
|
Disposal of long-lived assets |
0.5 |
|
- |
|
- |
|
- |
|
- |
|
Adjusted
EBITDA |
(10.3 |
) |
(19.4 |
) |
(29.6 |
) |
(9.2 |
) |
(6.0 |
) |
During Q2’20, the Company’s calculated adjusted EBITDA results
were ($10.3M), compared with ($19.4M). This represents a 47%
decrease.
Financial Position
As at January 31, 2020, the Company held cash, cash equivalents
and short-term investments of $81.4M.
Management estimates that the working capital as at January 31,
2020 and forecasted cash flows will require additional
capitalization in order to meet the Company’s obligations,
commitments and budgeted expenditures through January 31,
2021. Please see the financial statements for more
detail.
COVID-19 UPDATE
HEXO is also carefully monitoring and assessing the
evolving situation related to COVID-19 and the potential
impact to its business, employees and
customers. HEXO is working diligently
to protect the health and safety of its employees and
to ensure that there is no disruption to its supply of
medical and adult-use cannabis. As of today, manufacturing
facilities remain open, with additional measures in place to
allow the Company to maintain the capacity needed
to fulfil orders. Additional measures
include: temporary restriction of visitors to facilities; work
from home policy and support for employees who can do
so; employees who feel unwell or have travelled are asked to
stay home; hosting all meetings via digital tools; significant
investment into additional sanitation measures; consistent
communication to employees with reminders and instructions on
practicing good personal hygiene, including proper handwashing; and
operational measures to support social distancing, such as
staggered break schedules and workstations.
“Our priority is the safety and wellness of our employees,
and that is what our emergency response team is focused on,”
added St-Louis. “We are proud to be taking decisive and appropriate
measures to protect our teams, our sites, and our ability to
respond to our customers and medical clients’
needs.”
At the current time, the Company remains operational, as the
cannabis sector has been included as an essential workplace in
Ontario and Quebec.
The management’s discussion and analysis for the period and the
accompanying financial statements and notes are available under the
Company's profile on SEDAR at www.sedar.com and on its website at
www.hexocorp.com.
Conference Call
The Company will hold a conference call, March 30th, 2020 to
discuss these results. Sebastien St-Louis, CEO, and Stephen
Burwash, CFO, will host the call starting at 8:30 a.m. Eastern
time. A question and answer period will follow management’s
presentation
Date: March 30th, 2020 Time: 8:30 a.m. EDT Webcast:
https://event.on24.com/wcc/r/2225306/FB7095540E2F2B9E49E6E4CD363A66B4
Replay information:
A replay of the call will be accessible by telephone until 11:59
a.m. EDT April 13, 2020. Toll Free Dial-In Number:
1-888-390-0541 Replay Password: 632688 # For previous
quarterly results and recent press releases, see
hexocorp.com.
About HEXO Corp
HEXO Corp is an award-winning consumer packaged goods cannabis
company that creates and distributes innovative products to serve
the global cannabis market. The Company serves the Canadian
adult-use markets under its HEXO Cannabis and Up Cannabis brands,
and the medical market under HEXO medical cannabis. For more
information please visit
hexocorp.com.
Forward-Looking Statements
This press release contains forward-looking information and
forward-looking statements within the meaning of applicable
securities laws (“forward-looking statements”). Forward-looking
statements are based on certain expectations and assumptions and
are subject to known and unknown risks and uncertainties and other
factors that could cause actual events, results, performance and
achievements to differ materially from those anticipated in these
forward-looking statements. Forward-looking statements should not
be read as guarantees of future performance or results.
Forward-looking statements in this press release include but are
not limited to the Company’s statements with respect to
management’s belief that certain expenses included in operating
expenses are non-recurring and related to significant changes
in market conditions and the refocus of its operations on becoming
adjusted EBITDA positive.
A more complete discussion of the risks and uncertainties facing
the Company appears in the Company’s Annual Information Form and
other continuous disclosure filings, which are available on SEDAR
at www.sedar.com and EDGAR at
www.sec.gov. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak
only as of the date of this press release. The Company disclaims
any intention or obligation, except to the extent required by law,
to update or revise any forward-looking statements as a result of
new information or future events, or for any other reason.
Investor Relations: Jennifer Smith
1-866-438-8429
invest@HEXO.comwww.hexocorp.com
Media Relations: (819) 317-0526
media@hexo.com
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