- Achieved positive net income for the first
time in Company history
- Adjusted gross margins increased from 40% to
45% while maintaining pricing
- SG&A and operating expenses continued to
decrease
- Generated $5.3M in cash from operations
- $40.7M convertible debenture paid off during
the period
This news release constitutes a “designated
news release” for the purposes of the Company’s prospectus
supplement dated May 2, 2022 to its short form base shelf
prospectus dated May 7, 2021 and amended and restated on May 25,
2021.
HEXO Corp. (TSX: HEXO; NASDAQ: HEXO) ("HEXO" or the “Company"),
a leading producer of high-quality cannabis products, today
reported its financial results for the second quarter of the 2023
fiscal year (“Q2’23”). All currency amounts are stated in Canadian
dollars unless otherwise noted.
“HEXO held firm to our long-term strategy this quarter and
remained focused on our most profitable brands and maintaining fair
prices,” said Charlie Bowman, President and Chief Executive Officer
of HEXO. “While cannabis prices have dropped sharply across the
market, it is our view that slashing prices is not a sustainable
strategy. We’re confident our products will continue to deliver
excellent value to customers and shareholders alike.”
“Our continued focus on profitability is yielding solid results,
including positive net income before tax for the first time in our
history,” noted Julius Ivancsits, Chief Financial Officer of HEXO.
“SG&A spending is down 11 per cent or $1.5 million compared to
the previous quarter. We also made significant progress in our
trade accounts receivable with a $21 million reduction compared to
the first quarter and have paid off $40.7 million in debt. Our
adjusted gross margin lift to 45 per cent from 40 per cent last
quarter, shows that we continue to align operations towards the
path to profitability.”
“We launched several new products late in the quarter that flew
off the shelves, validating our commitment to producing a range of
high-quality products that customers want,” added Mr. Bowman.
“Customer response to our revitalized portfolio of brands, which
includes proven favourites and new proprietary strains, has been
very positive. This feedback allowed us to further enhance our
highest-performing lines and significantly increase production of
our popular Redecan straight edge pre-roll products."
Significant Financial Results
- Improved total net income to $0.7 million, compared to a net
loss of ($56.3) million from the first quarter of FY23
(Q1’23).
- Generated $5.3 million of cash from operations in Q2’23, an
improvement of $34.1 million compared to ($28.8) million of cash
used in Q1’23 and an improvement of $40.6 million compared to
($35.2) million of cash used in Q2’22.
- Recorded an Adjusted EBITDA loss of $(2.4) million, an
increased loss of $1.8 million from Q1’23, however, when compared
to Q2’22, Adjusted EBITDA has improved by $3.2 million.
- Net revenues decreased 26% to $24.2 million, compared to $35.8
million in Q1’23 and decreased 57% compared to $52.8 million of net
revenue in Q2’22.
- Reported flat G&A expenses compared to Q1’23 and
significant improvement compared to Q2’22 with cost-savings of $12
million.
- Improved selling, marketing and promotional costs by $1.4
million from Q1’23 with realized cost savings of $3.7 million when
compared to Q2’22.
- On December 5, 2022, the Company’s 8% convertible debenture
matured and a total of $40.7 million was paid upon the debt’s
settlement.
Key Financial Results
(in thousands of Canadian dollars)
For the three months ended
For the six months ended
January 31,
October 31,
January 31,
January 31,
January 31,
2023
2022
2022
2023
2022
$
$
$
$
$
Revenue from sale of goods
35,268
52,884
72,014
88,152
141,511
Excise taxes
(11,809)
(17,340)
(19,251)
(29,149)
(38,786)
Net revenue from sale of goods
23,459
35,544
52,763
59,003
102,725
Service revenues1
702
227
-
929
225
Net revenue
24,161
35,771
52,763
59,932
102,950
Cost of goods sold
(26,337)
(35,563)
(61,302)
(61,899)
(144,285)
Gross loss before fair value
adjustments
(2,176)
208
(8,539)
(1,967)
(41,335)
Realized fair value amounts on inventory
sold
(5,194)
(19,966)
(9,966)
(25,160)
(22,726)
Unrealized gain on changes in fair value
of biological assets
1,394
2,403
15,945
3,797
29,526
Gross (loss)/profit
(5,976)
(17,355)
(2,560)
(23,330)
(34,535)
Operating expenses
(23,771)
(23,164)
(667,296)
(46,937)
(790,431)
Loss from operations
(29,747)
(40,519)
(669,856)
(70,267)
(824,966)
Finance income (expense), net
(752)
(1,917)
(5,058)
(2,669)
(9,588)
Non-operating income (expense), net
34,169
(14,632)
(61,190)
19,537
(18,977)
Net income/(loss) before tax
3,670
(57,068)
(736,104)
(53,399)
(853,531)
Current and deferred tax recovery
(2,948)
813
25,218
(2,136)
25,373
Net income/(loss)
722
(56,255)
(710,886)
(55,535)
(828,158)
Other comprehensive income
(11,784)
4,201
20,632
(7,584)
20,996
Total net loss and comprehensive loss
(11,062)
(52,054)
(690,254)
(63,119)
(807,162)
1The Company notes that $1,069 of
previously classified Service revenue has been reclassified to
Revenue from sale of goods in the three months ended October 31,
2022.
Net Revenue
For the three months ended
Q2’23
Q1’23
Variance
Variance
Q2’22
Variance
Variance
$
$
$
%
$
$
%
Adult-use cannabis net revenue
21,333
29,997
(8,664)
(29%)
36,114
(14,781)
(41%)
Beverage based adult-use sales
–
1,551
(1,551)
(100%)
3,867
(3,867)
(100%)
International sales
(265)
1,207
(1,472)
(122%)
8,231
(8,496)
(103%)
Domestic medical sales
550
581
(31)
(5%)
811
(261)
(32%)
Wholesales
1,841
2,208
(367)
(17%)
3,740
(1,899)
(51%)
Net revenue from the sale of
goods
23,459
35,544
(12,085)
(34%)
52,763
(29,304)
(56%)
Service revenues1
702
227
475
(209%)
–
702
n/a
Total net revenues
24,161
35,771
(11,610)
(32%)
52,763
(28,602)
(54%)
Dried grams and gram equivalents sold
(kg)
16,449
19,360
(2,911)
(15%)
29,578
(13,129)
(44%)
- Q2’23 total net revenue was $24.1 million, a 32% decline when
compared to Q1’23 net revenues of $35.8 million. The decline can be
attributed to lower sales in Québec due to competitors dropping
prices and taking market share, returns of certain seasonal holiday
products due to low velocity, unavailable supply for certain
demanded products and certain products being placed on hold due to
pricing reductions in the key market of Ontario. The Company also
ceased the recognition of cannabis infused beverage revenue during
Q2’23 as the result of Truss Beverage Co. operationalizing their
cannabis selling license. Price concessions of $0.26 million
attributable to the international sales of Q1’23 were recognized in
the period.
- Due to increased competition, net sales declined 54% relative
to Q2’22 as the result of the HEXO brand’s decreased market share
and performance in the key provincial markets of Ontario, Alberta
and Québec. Conversely, the Company’s Redecan brand sales increased
9% from Q2’22, as the result of an increased emphasis on the
Alberta market. The Zenabis subsidiary (which was deconsolidated in
Q4’22 upon loss of control), contributed $3,551 of net sales in
Q2’22, which are no longer applicable to the Company.
Cost of Goods Sold & Adjusted Gross Margin
The following table summarizes and reconciles the Company’s
gross profit line items per IFRS to the Company’s selected non-IFRS
financial measures adjusted cost of sales, gross profit/margin
before adjustments and gross profit before fair value adjustments.
Refer to the ‘Non-IFRS Measures’ section below for definitions.
For the three months ended
For the six months ended
January 31,
October 31,
January 31,
January 31,
January 31,
2023
2022
2022
2023
2022
$
$
$
$
$
Net revenue from the sale of goods
23,459
35,544
52,763
59,003
102,725
Adjusted cost of sales
(12,818)
(21,475)
(27,964)
(34,292)
(60,265)
Gross profit before adjustments
10,641
14,069
24,799
24,711
42,460
Gross margin before adjustments
45%
40%
47%
42%
41%
Depreciation included in COGS2
(4,675)
(4,773)
(5,973)
(9,448)
(10,942)
Write off of biological assets and
destruction costs
-
-
(1,360)
-
(2,340)
Write off of inventory
(817)
(4,400)
(4,941)
(5,217)
(5,556)
Write (down)/up of inventory to net
realizable value
(7,600)
(4,915)
(13,937)
(12,515)
(50,134)
Crystallization of fair value
-
-
(7,127)
-
(15,050)
Gross (loss)/profit before fair value
adjustments
(2,451)
(19)
(8,539)
(2,469)
(41,562)
Realized fair value amounts on inventory
sold
(5,194)
(19,966)
(9,966)
(25,160)
(22,726)
Unrealized gain on changes in fair value
of biological assets
1,394
2,403
15,945
3,797
29,526
Gross (loss)/profit
(6,251)
(17,582)
(2,560)
(23,832)
(34,762)
1 This is a supplementary financial
measure. See section "Key Operating Performance Indicators" of the
MD&A for additional details.
2 The Company has modified the definition
of the Non-IFRS metric gross profit/margin before adjustments to be
net of depreciation included COGS in order to align with
managements definition of the key metric, used in the evaluation
and monitoring of the business, as well as to better align with the
Company’s competitors defined measure.
- Total gross margin before adjustments improved to 45% in Q2’23
from 40% in Q1’23, in part as a result of a more favourable sales
mix of higher margined product sales. Additionally, the reduced
composition of $nil margin adult-use beverage and international
sales contributed to gross margin improvement in Q2’23 compared to
Q1’23, which contributed adjusted gross margins of $nil.
- Reductions to inventory write offs, impairments and net
realizable value adjustments were recognized relative to Q2’22, as
management continues to focus on aligning cultivation to demand and
mitigate the risk of aged out and unsellable stock. Additionally,
the crystallization of fair value from business combinations was
fully realized in Q4’22 and therefore did not factor into Q1’23 or
Q2’23.
- Unrealized gains on changes in fair value of biological assets
declined due to a lower average percentage of completion state of
crops on hand relative to Q1’23 as well as lower volume as the
Cayuga site’s outdoor harvest was completed in the previous
quarter. Compared to Q2’22 the Company reduced its total grow
facilities through the deconsolidation and reorganization of its
operational footprint, resulting in lower plants on hand. The
decrease to weighted average selling prices and lower sales in the
period led to the reduction in realized fair value amounts in
inventory sold.
Operating Expenses
For the three months ended
For the six months ended
January 31,
October 31,
January 31,
January 31,
January 31,
2023
2022
2022
2023
2022
$
$
$
$
$
General and administration (“G&A”)
10,484
10,466
22,550
20,953
45,036
Selling, Marketing and promotion
(“S,M&P”)
2,678
4,106
6,369
6,784
12,592
Share-based compensation
301
959
4,017
1,260
7,841
Research and development (“R&D”)
166
322
1,478
488
2,445
Depreciation of property, plant and
equipment
839
784
1,140
1,623
3,196
Amortization of intangible assets
3,262
2,871
6,895
6,132
15,053
Restructuring costs
481
1,062
4,524
1,543
8,513
Impairment of property, plant and
equipment
408
(611)
100,130
(203)
123,933
Impairment of intangible assets
-
-
140,839
-
140,839
Impairment of goodwill
-
-
375,039
-
375,039
Impairment of investment in associates
643
-
-
643
26,925
Derecognition of Onerous contract
(269)
-
-
(269)
-
Loss/(gain) on disposal of property, plant
and equipment
133
(510)
(254)
(377)
74
Acquisition transaction and integration
costs
4,645
3,715
4,569
8,360
28,945
Total
23,771
23,164
667,296
46,937
790,431
General and Administration Expenses by
Nature
For the three months ended
For the six months ended
January 31,
January 31,
January 31,
January 31,
2023
2022
2022
2022
$
$
$
$
Salaries and benefits
2,595
9,487
5,491
19,633
General and administrative
5,089
4,754
8,835
10,389
Professional fees
2,565
6,379
5,939
12,540
Consulting
235
1,930
688
2,474
Total
10,484
22,550
20,953
45,036
- Total operating expenses in Q2’23 remained relatively flat from
Q1’23. The moderate increase is attributed to a write down of the
Company’s investment in associate, Truss CBD USA, as a result of
management mutually ending the venture during the period.
- Operating expenses in Q2’23 decreased by $645.5 million, or
96%, compared to Q2’22. This was due to significant impairment
charges related to the Company’s property, plant and equipment
($100.1 million), intangible assets ($140.8 million), and goodwill
($375.0 million) in Q2’22 as management rightsized the business and
balance sheet.
- During the six months ended January 21, 2023 and excluding
impairment charges, operating expenses in Q2’23 decreased by $77.2
million when compared to the same period of FY22, as a result of
the general cost saving measures, realized efficiencies,
reorganization of the business structure and the departmental
restructuring of the consolidated operations.
Other Income and Losses
For the three months ended
For the six months ended
January 31,
October 31,
January 31,
January 31,
January 31,
2023
2022
2022
2023
2022
$
$
$
$
$
Interest and financing expenses
(1,263)
(2,467)
(5,251)
(3,730)
(10,555)
Interest income
511
550
193
1,061
967
Finance income (expense), net
(752)
(1,917)
(5,058)
(2,669)
(9,588)
Revaluation of financial instruments
(loss)/gain
273
2
11,866
275
39,334
Share of loss from investment in associate
and joint ventures
43
(2,398)
(2,669)
(2,355)
(4,818)
Loss on convertible debt fair value
adjustments
31,777
(6,270)
(76,666)
25,506
(64,995)
Gain on sale of interest in BCI
-
-
9,127
-
9,127
Gain/(Loss) on investments
-
140
(297)
140
(576)
Foreign exchange (loss)/gain
3,709
(9,023)
(4,582)
(5,313)
920
Other income and losses
(1,633)
2,917
2,031
1,284
2,031
Non-operating income (expense), net
34,169
(14,632)
(61,190)
19,537
(18,977)
- Finance income (expense), net improved by $1.2 million quarter
over quarter, driven by the repayment of the $40.1 million
convertible debentures on December 5, 2022, resulting in lower
quarterly interest expenses. Year over year, the improvement of
$4.0 million is driven by the principal repayment of the $40.1
million convertible debentures on December 5, 2022, and the
deconsolidation of the Zenabis subsidiary’s interest-bearing note
in Q4'22.
- Total non-operating income of $34.2 million was generated
during Q2’23, compared to the non-operating loss of ($14.6 million)
in Q1’23. The improvement is the result of the fair value gain on
the senior secured convertible note due to the quarterly payments
of advisory fees and the impact on valuation due to the lower share
price as compared to October 31, 2022. Favourable foreign exchange
gains of $3.7 million were recorded in Q2’23 compared to
unfavourable losses of ($9 million) in Q1’23.
- Total net non-operating expenses of $61.2 million in Q2’22 was
the result of the ($76.7 million) unfavourable fair valuation gain
under the original senior secured convertible note, and
unfavourable CAD/USD foreign exchange losses. Offsetting the
previous losses was the $11.9 million gain on revaluation of
warrant liabilities due to favourable movement in the Company’s
share price as well as the one-time $9.1 million gain on the sale
of the joint venture Belleville Complex Inc. (“BCI”) in Q2’22.
Reconciliation of Adjusted Earnings
before interests, taxes, depreciation and amortization to Total Net
Loss Before Tax
(in thousands of Canadian dollars)
Q2’23
Q1’23
Q2’22
$
$
$
Total net loss before tax
3,670
(57,068)
(736,104)
Finance expense (income), net
752
1,917
5,058
Depreciation (cost of sales)
4,675
4,773
5,973
Depreciation (operating expenses)
839
784
1,140
Amortization (operating expenses)
3,262
2,871
6,895
Standard EBITDA
13,198
(46,723)
(717,038)
Investment (gains) losses
(35,802)
17,549
63,221
Non-cash fair value adjustments
3,800
17,563
1,148
Non-recurring expenses
5,126
4,777
9,093
Other non-cash items
11,266
6,236
637,978
Adjusted EBITDA
(2,412)
(598)
(5,598)
Select Balance Sheet Metrics
(in thousands of Canadian dollars)
As at
January 31,
2023
July 31,
2022
$
$
Cash & cash equivalents
34,233
83,238
Restricted funds
2,253
32,224
Trade receivables
23,939
42,999
Biological assets & inventory
50,590
82,315
Other current assets2
21,052
30,871
Accounts payable & accrued
liabilities
32,129
72,581
Senior secured convertible note &
convertible debenture
189,659
248,680
Adjusted working capital1
54,431
123,730
Property, plant & equipment
274,724
285,866
Assets held for sale
3,264
5,121
Total Assets
527,788
680,949
Total Liabilities
272,676
367,257
Shareholders' equity
255,112
313,692
1 Defined as the Company’s current assets
less current liabilities net of the senior secured convertible
note. The note is classified as a current liability as the lender
possess the ability to unilaterally convert the note to equity and
therefore does not represent a cash-based liability to the Company
within one-year of January 31, 2023. Working capital is utilized as
a key metric for management in assessing the Company’s ability to
meet its future obligations.
2 Total current assets less cash and cash
equivalents, restricted funds, trade receivables, biological assets
and inventory.
Liquidity Risk
During the three and six months ended January 31, 2023, the
Company reported operating losses of $29.7 million and $70.3
million, respectively; cash outflows from operating activities of
$23.4 million in the six months ended January 31, 2023 (positive
operating cashflows of $5.36 million generated in three months
ended January 31, 2023) and an accumulated deficit of $1.8 billion
and has yet to generate positive cashflows or earnings. The Company
had a working capital deficiency of $111.0 million and held cash
and cash equivalents of $34.2 million as at January 31, 2023 ($83.2
million at July 31, 2022).
The Company remains subject to, amongst other covenants, a
minimum liquidity covenant of US$20 million under the Senior
secured convertible note as well as a requirement to achieve
Adjusted EBITDA of not less than US$1.00 for each quarter beginning
in the three months ended April 30, 2023.
These circumstances lend substantial doubt as to the ability of
the Company to meet its obligations as they come due and,
accordingly, the appropriateness of the use of accounting
principles applicable to a going concern.
Management will continue to evaluate potential private and
public financing opportunities through the issuance of equity.
Notably, the Company’s at-the-market program as initiated in May
2022, remains available to the Company (following certain legal and
administrative filings) and authorizes the Company to issued equity
up to US$40 million from treasury to the public, although the
Company’s ability to access this entire amount may be affected by
market conditions and the performance of the Company’s share price.
Management may look to utilize this program to bridge cashflows
during certain periods of volatility in order to manage its working
capital obligations and remain compliant with the minimum liquidity
covenant.
The Company has also commenced discussions with its lender
regarding potential amendments to and/or covenant relief under the
Senior Secured Convertible Note. No agreement has been reached to
date and there can be no assurance that such agreement will be
reached.
There can be no assurances however that financing alternatives
will be available or available on terms that are acceptable to the
Company, that the Company will be able to obtain favourable waivers
and/or covenant relief from its lender under the Senior Convertible
Note or that the Company’s savings initiatives alone will yield
sufficient liquidity to meet the minimum liquidity or generate
positive Adjusted EBITDA, in order for the Company to meet its
covenant requirements and execute on its business plan. Should
these efforts prove unsuccessful, there is uncertainty as to the
Company’s ability to remain in compliance with the covenants of the
Senior Secured Convertible Note over the next 12-month period.
These circumstances create material uncertainties that lend
substantial doubt as to the ability of the Company to meet its
obligations as they come due and, accordingly, the appropriateness
of the use of accounting principles applicable to a going
concern.
About HEXO Corp.
HEXO is an award-winning licensed producer of premium products
for the global cannabis market. HEXO delivers a thoughtfully
curated portfolio of both recreational and therapeutic cannabis
products that inspire customer loyalty. HEXO’s brands include HEXO,
Redecan, Original Stash, Bake Sale and T 2.0, as well as medical
cannabis products.
HEXO’s world-class Canadian grow sites are unmatched in size,
technological advantage and yield of high-quality cannabis, driving
innovation through every step of the process. HEXO operates three
major grow sites in Ontario and Québec, including one of the
largest facilities in North America. HEXO Corp. is a publicly
traded company under the tickers (TSX: HEXO) and (NASDAQ:HEXO).
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. 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.
The preceding press release should be read in conjunction with
the management’s discussion and analysis (“MD&A”) and condensed
interim consolidated financial statements and notes thereto as at
and for the quarter ended January 31, 2023. Readers should also
refer to the section regarding “Non-IFRS Measures” in the
immediately following section of this press release. Additional
information about HEXO is available on the Company’s profile on
SEDAR at www.sedar.com and EDGAR at www.sec.gov, including the
Company’s Annual Information Form for the year ended July 31, 2022
dated October 31, 2022.
Non-IFRS Measures
In this press release, reference is made to adjusted cost of
sales, gross profit before adjustment, profit/margin before fair
value adjustments, adjusted gross profit/margin, adjusted EBITDA,
crystallization and adjusted working capital which are not measures
of financial performance under International Financial Reporting
Standards (IFRS). These metrics and measures are not recognized
measures under IFRS, do not have meanings prescribed under IFRS,
and are unlikely to be comparable to similar measures presented by
other companies. These measures are provided as information
complementary to those IFRS measures by providing a further
understanding of our operating results from the perspective of
management. As such, these measures should not be considered in
isolation or in lieu of a review of our financial information
reported under IFRS. Definitions and reconciliations for all terms
above can be found in the Company's Management's Discussion and
Analysis for the quarter ended January 31, 2023, filed under the
Company's profile on SEDAR at www.sedar.com and EDGAR at
www.sec.gov respectively.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20230316005738/en/
For media or investor inquiries please contact: Hayley
Suchanek, Kaiser & Partners
hayley.suchanek@kaiserpartners.com
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