HEXO Corp. (TSX:HEXO; NYSE:HEXO) (“HEXO” or the "Company") today
reported its financial results for the first quarter fiscal 2020
ended October 31, 2019. All amounts are expressed in Canadian
dollars.
“We have done some pretty heavy lifting on our operations, as we
work towards profitability in 2020. The choices that we have made
and implemented have already led to a 25% reduction in our
operating expenses,” said Sebastien St-Louis, CEO and co-founder of
HEXO Corp. “Cost control combined with our multi-brand approach, an
updated strain mix, as well as the introduction of new products,
will help us increase our market share and total revenue, leading
us towards great results in 2020. I am more confident than ever in
our ability to continue down this path and to pivot with more speed
and assertiveness should market conditions evolve again.”
Operational and Financial Highlights
|
|
|
For the three months ended |
|
Income
Statement Snapshot (in millions) |
|
|
October 31, 2019 |
|
October 31, 2018 |
|
|
|
|
$ |
|
$ |
|
Gross cannabis revenue |
|
|
19.3 |
|
6.6 |
|
Excise taxes |
|
|
(4.8 |
) |
(1.0 |
) |
Net revenue from sale of goods |
|
|
14.5 |
|
5.7 |
|
Ancillary revenue |
|
|
0.0 |
|
0.0 |
|
Gross margin before fair value adjustments |
|
|
4.6 |
|
2.8 |
|
Gross margin |
|
|
(23.4 |
) |
7.2 |
|
Operating expenses |
|
|
35.1 |
|
22.0 |
|
Loss from operations |
|
|
(58.5 |
) |
(14.8 |
) |
Restructuring costs |
|
|
(3.8 |
) |
– |
|
Other income/(expenses and losses) |
|
|
(6.3 |
) |
2.0 |
|
Net loss before tax |
|
|
(68.5 |
) |
(12.8 |
) |
Tax recovery1 |
|
|
6.0 |
|
- |
|
Net loss |
|
|
(62.4 |
) |
(12.8 |
) |
1 The income tax recovery figure represents the correct amount of
recovery in the period and will not be subject to change upon the
restatement of the July 31, 2019 and October 31, 2019 MDA’s. See
Notice to Reader within the interim condensed consolidated
financial statements for the three months ended October 31, 2019
dated December 15, 2019. |
First Quarter 2020 Highlights
Shipped revenue in Q1’20 decreased slightly to $20.2M, compared
with $22.8M in Q4’19. Shipped revenue was reduced by price
concessions of $1.2M in Q1’20, compared with $2.8M in Q4’19 and
return provisions of $0.7M in Q1’20 compared with $1.0M in Q4’19,
which yielded gross adult-use sales of $18.3M in Q1’20 and $19.0M
in Q4’19. Additionally, the company realized sales returns of $0.6M
in Q1’20 and $Nil in Q4’19 was reversed from the provision for
returns made during the previous quarter. Overall during the period
gross adult use sales decreased moderately by 4%. The provisions
are reflective of a general best estimate provision for returns and
price adjustments based on the Company’s assessment of sell-through
and slow-moving inventory.
Net revenue in Q1’20 decreased slightly to $14.5M, compared to
$15.4M, in Q4’19, and increased from $5.7M in Q1’19.
Adult use sales volume in Q1’20 increased 5% to 4,196 kg from
4,009 kg equivalents sold in the prior quarter. The SQDC
contributed 3,080 kg, ALGC contributed 474 kg, OCS contributed 518
kg, other provinces and private retailers contributed 124 kg.
Gross adult-use revenue per gram equivalent decreased to $4.35
in Q1’20 from $4.74 in Q4’19, reflective of the provision for sales
returns and price adjustments recorded in the quarter. The
provision is reflective of a general best estimate provision for
returns and price adjustments based on the Company’s assessment of
sell-through and slow-moving inventory. This was partially
countered by the addition of the premium brand Up cannabis, which
commands revenue of $7.03 per gram on dried flower during the
quarter. The adult-use net revenue per gram equivalent decreased to
$3.24 in Q1’20 from $3.51 in Q4’19, reflecting the impact of the
provision above.
|
Q1’20 |
|
Q4’ 19 |
|
Q1 ’19 |
Shipped Revenue (in millions) |
$ |
20.2 |
|
$ |
22.8 |
|
$ |
5.2 |
Total gram and gram equivalents sold |
|
4,196 |
|
|
4,009 |
|
|
952 |
Shipped revenue per gram and gram equivalent
sold |
$ |
4.82 |
|
$ |
5.69 |
|
$ |
5.45 |
Less: price concessions (1) |
|
(0.30 |
) |
|
(0.71 |
) |
|
– |
Less: provision for
sales returns (1) |
|
(0.17 |
) |
|
(0.24 |
) |
|
– |
Adult-use
gross revenue per gram and gram equivalent sold |
$ |
4.35 |
|
$ |
4.74 |
|
$ |
5.45 |
(1) Computed as the price concession or provision for returns per
gram and gram equivalent sold in the period. |
Gross margin before fair value adjustments for Q1’20 was $4.6M
or 31% of net revenue from sale of goods, compared to $5.1M and 33%
in the prior quarter.
The Company incurred an impairment loss on inventory of $25.5M
during Q1’20 compared with $16.9M in Q4’19. The impairment loss was
realized on the Company’s inventory in comprised of the
following;
- Impairment of a surplus of cannabis trim (trim is the
accumulation of the cannabis’ sugar leaves during the dry trimming
process and is primarily used for extraction purposes) and milled
products the amount of $16.4M due to an excess of stock relative to
the Company’s short-term demand for cannabis distillate
production;
- Impairment of bulk purchased product of $4.4M due, in part, to
an oversupply in the market of bulk products with lower potencies
as well as a relatively low value when compared to competing bulk
goods with a higher potency in the current adult-use market;
- Impairment of oil based finished goods of $3.4M due a surplus
of finished goods as oil-based products haven’t captured the market
share as originally estimated. Also contributing to the impairment
is the decision made by certain provinces to return oil products
with packaged dates greater than 3 to 4 months old; and
- Impairment of finished goods of $1.2M which are required to be
archived as at October 31, 2019 due to Health Canada requirements
with a net realizable value of $nil.
Operating expenses decreased 25% quarter over quarter to $35.1M
in Q1’20, compared with $46.9M in Q4’19 as a result of a decrease
in G&A expenses of 30%, marketing expenses of 35% and
stock-based compensation expense of 20%, as the Company continues
to reduce previous spending levels to refocus operations on
becoming adjusted EBITDA positive.
Operating expenses increased from $22.0M in Q1’19, reflecting
the significant increase to the scale of our operations over the
last year.
Loss from operations for the quarter was ($58.5M), compared with
($60.7M) in the prior period and ($14.7M) for the comparable
quarter year over year. Excluding non-cash impairment charges in
Q1’20, adjusted net loss was ($33.0M) compared with ($43.7M) in
Q4’19. The increase in loss year over year is attributable to the
larger magnitude of the Company’s operations, the expanding scale
production and sales in the period, and an impairment loss.
Adjusted EBITDA (in millions)
|
Q1’20 |
|
Q4’ 19 |
|
Q3 ’19 |
|
Q2 ’19 |
|
Q1 ’19 |
|
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
Total net loss |
(62.4 |
) |
(56.7 |
) |
(7.8 |
) |
(4.3 |
) |
(12.8 |
) |
|
|
|
|
|
|
Interest income |
(0.6 |
) |
(1.6 |
) |
(1.2 |
) |
(1.3 |
) |
(1.1 |
) |
Income tax |
(6.0 |
) |
(3.8 |
) |
– |
|
– |
|
– |
|
Depreciation of property, plant and equipment |
1.3 |
|
0.6 |
|
0.1 |
|
0.5 |
|
0.6 |
|
Amortization of intangible assets |
1.7 |
|
1.4 |
|
0.1 |
|
0.1 |
|
0.2 |
|
Standard
EBITDA |
(66.0 |
) |
(60.1 |
) |
(8.7 |
) |
(5.1 |
) |
(13.1 |
) |
|
|
|
|
|
|
Adjustments: |
|
|
|
|
|
Share-based compensation |
8.2 |
|
10.2 |
|
8.2 |
|
5.0 |
|
4.7 |
|
Share of losses from joint ventures and associates |
1.7 |
|
1.3 |
|
1.1 |
|
0.8 |
|
2.3 |
|
Restructuring costs |
3.7 |
|
|
|
|
|
Realized fair value amounts on inventory sold |
6.7 |
|
7.3 |
|
4.7 |
|
3.7 |
|
0.7 |
|
Unrealized gain on changes in fair value of biological assets |
(7.1 |
) |
(5.3 |
) |
(20.1 |
) |
(8.4 |
) |
(5.1 |
) |
Write off of Inventory, biological assets and destruction
costs |
28.3 |
|
16.9 |
|
– |
|
– |
|
– |
|
Adjusted
EBITDA |
(24.6 |
) |
(29.8 |
) |
(14.8 |
) |
(4.0 |
) |
(10.5 |
) |
Adjusted EBITDA as a %
of net loss |
39 |
% |
53 |
% |
191 |
% |
92 |
% |
82 |
% |
|
|
|
|
|
|
Net revenue from
cannabis sales |
14.5 |
|
15.4 |
|
13.0 |
|
13.4 |
|
5.6 |
|
Adjusted EBITDA margin
(%) |
(59 |
%) |
(52 |
%) |
(87 |
%) |
(335 |
%) |
(53 |
%) |
During Q1’20, the Company’s calculated adjusted EBITDA results
were ($24.6) or 39% of the net loss in the period. This represents
a 43% decrease as compared to the same period in fiscal 2019, most
influenced by the increased share-based compensation and fair value
adjustments on inventory sold and biological assets. Adjusted
EBITDA decreased by 14% from Q4’19.
The adjusted EBITDA’s gross margin remained decreased to (59%),
a decrease of 6% from the same comparative period from fiscal 2019
and 7% with the previous quarter.
Restructuring Costs
Unique to the period were restructuring costs incurred. These
expenses are the result of the restructuring efforts as discussed
in the section – Corporate Restructuring. These costs amounted to
$3.7M, primarily comprised of severance and other payroll related
termination costs. These expenses are deemed non-operating related
as they are not result of the Company normal operating activities
and therefore, have not been included in the net operating
loss.
Block B
As previously disclosed on November 15, 2019, upon discovery of
the licensing issue in Block B of the Company’s Niagara facility,
inventory from Block B was quarantined and held back from
sales. The inventory was kept on the books and although
destruction was a possible outcome, the Company has reassessed any
risks related to such inventory and concluded that it is cleared
for sale and will not be subject to destruction. Note that Block B
is now fully Licensed by Health Canada.
Financial Position
As at October 31, 2019, the Company held cash, cash equivalents
and short-term investments of $73.5M. The Company has a $65M credit
facility with a syndicate of Canadian chartered banks. This
consists of $50M term credit and a $15M revolving line of credit
which will be used in part to finance the continuing expansion of
the Gatineau campus as well as the leasehold improvements at the
Belleville facility without diluting the shareholders of HEXO.
Subsequent to the end of the quarter, the Company closed a $70M
private placement of 8% unsecured convertible debentures, maturing
on December 5, 2022.
Operational Update
As previously announced, during the first quarter fiscal 2020,
the Company is improving its cost structure and operational
efficiencies. HEXO continues to drive improvements in yields
and processing facilities. Operations in the suspended areas can be
recommenced when required. Current annualized production run rate
is approximately 90,000 kgs of dried cannabis equivalents,
comprised of approx. 50% dried flower, with the balance comprised
of trim, which can be used for a variety of value-added
products. The Company continues to ramp up production towards
over 100,000 kg per year.
In order to achieve its cost and operational efficiency goals,
management is focusing on the following priorities:
- Driving sales through new product offerings and leveraging
increased analytics for decision making
- Achieving operational excellence
- Right-sizing our operational expenses to drive towards
profitability
- Commissioning our state of the art, manufacturing facility in
Belleville
- Continuing to invest in R&D and Intellectual Property
- Future partnerships through our “Powered by HEXO” strategy
- Dedication to corporate social responsibility initiatives
Reservation of Opinion
The Company’s auditors have reviewed the condensed interim
consolidated financial statements of the Company for the quarter
ended October 31, 2019. In such review, they have expressed a
reservation of opinion as it relates to an identified error related
to the deferred tax liability in the Company’s audited financial
statements for the fiscal year ended July 31, 2019. As
described in Note 32 of the interim statements, the Company
identified an error related to the deferred tax liability as at
July 31, 2019 which resulted from the Company not netting a tax
loss generated in one subsidiary against a deferred tax liability
generated by a different subsidiary. Because these two tax
positions existed in two separate entities, the Company’s original
position was that they could not be offset or reduce one another.
However, the two subsidiaries were amalgamated and consolidated on
August 1, 2019, and on that basis the Company should have
anticipated the amalgamation would result in the two tax balances
reducing themselves and recognized a reduction of the deferred tax
by $14.4M, leaving a deferred tax balance at July 31, 2019 of
$6.0M.
This error remains in the deferred tax liability in both the
interim financial statements for the quarter ended October 31, 2019
and the audited financial statements for the fiscal year ended July
31, 2019. The Company will restate and refile both sets of
financial statements correcting for this error.
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, December 16th, 2019 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: December 16, 2019 Time: 8:30 a.m. EDT Webcast:
https://event.on24.com/wcc/r/2145409/A436DA4482DF5575CFB986B3CD309BB2
Replay information:
A replay of the call will be accessible by telephone until 11:59
a.m. EDT on December 23, 2019. Toll Free Dial-In Number:
1-888-390-0541. Replay Password: 157917# 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. Through its hub and spoke business
strategy, HEXO Corp is partnering with Fortune 500 companies,
bringing its brand value, cannabinoid isolation technology,
licenced infrastructure and regulatory expertise to established
companies, leveraging their distribution networks and capacity. As
one of the largest licenced cannabis companies in Canada, HEXO Corp
operates in Ontario and Quebec. The Company is also expanding
internationally and has a foothold in Greece to establish a
Eurozone processing, production and distribution centre. 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. 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.com
www.hexocorp.com
Media Relations: (819) 317-0526
media@hexo.com
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