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 fiscal quarter ended January 31, 2022
(Q2’22). The quarter was focused on realigning its balance sheet to
position HEXO for growth and consequently included significant
impairments. All amounts are expressed in Canadian dollars unless
otherwise noted.
Q2 2022 Key Financial
Highlights
- Total net
revenues of $52.8 million hit second consecutive quarterly high, a
61% increase compared to Q2’21
- Adjusted gross
margin improvement quarter over quarter from 25% to 36%
- Adjusted EBITDA
increased by $5.6 million from $(11.2) million to $(5.6)
million
- Completes write-down of $616
million in impairments, eliminating past issues and enabling a
clean slate for future growth:
- $100 million of impairment losses
on property, plant and equipment as management performed an
assessment of its new and existing consolidated production
capability and asset base
- $141 million of impairment of
intangible assets and $375 million of impairment on goodwill as
management underwent a revision of forecasts and budgets to align
to the Path Forward and the Company’s consolidated capabilities
across all subsidiaries
- As of the end of its second
quarter, the Company was not in compliance with the positive
Adjusted EBITDA covenant set forth in the Senior Convertible Note
(“Secured Note”) which has a fair value of 115% of the outstanding
principal amount under the Secured Note, resulting in a net fair
value loss of $56 million. Subsequent to quarter end, the
Noteholder irrevocably waived, on a temporary basis, any rights in
relation to the breach of that covenant of the
Company.
- HEXO’s financial condition is
positioned to be significantly strengthened by the proposed
restructuring of the debt, allowing for access to up to
approximately $282M in cash:
- $102M in unrestricted cash
- $180M through an equity backstop
commitment from KAOS Capital and partners
- Achieved
international sales growth of 36% from Q1’22 and 312% from Q2’21,
including the international sales from Zenabis – comprising 54% of
the quarter’s net sales – which grew 91% quarter-over-quarter.
“Since joining HEXO in November, my top priority
has been to clean up a very challenged balance sheet as a result of
the Secured Note that was previously put in place,” said Scott
Cooper, President & CEO of HEXO. “We’re now on the path to
establishing a strong foundation that we expect will, once
finalized, enable us to become a cash flow positive business within
the next four quarters, along with continuing to grow our
significant market share.”
“This has been a transformational quarter for
the Company and we’re very pleased with the progress we’ve made on
a number of fronts,” said Mark Attanasio, Chair of the Board and
Executive Chair of HEXO. “We’ve finalized terms of a number of
proposed agreements, including the recently announced strategic
investment from Tilray, that will, once finalized, restructure the
more onerous repayment and liquidity terms of the Secured Note. We
expect this much improved structure will allow us to accelerate our
growth path and unlock the full potential of the organization.”
Update on The Path Forward The
“Path Forward” is a strategic plan that utilizes HEXO’s current
assets and capabilities to drive accelerated organic growth, build
market share and become operationally cash flow positive within the
next four quarters1.
The Path Forward includes five priorities:
- Continue to reduce manufacturing
and production costs
- Streamline and simplify the
organizational structure
- Realize cost synergies from
acquisitions and recent plant closures
- Focus on revenue management,
including more disciplined pricing
- Accelerate growth through organic
market share gains and capture missed revenue opportunities
This plan is underpinned by specific actions to
fortify the balance sheet, strengthen the leadership team and
enhance corporate governance, which are on track for execution.
The plan is expected to generate incremental
run-rate cash flow of $37.5 million in fiscal 2022 and an
additional $135 million of cash flow in fiscal 2023, for a total of
$172.5 million over the two years, through a combination of cost
reductions and anticipated revenue growth.
Reduce Manufacturing and Production
Costs
The Company expects to reduce manufacturing and
production costs by leveraging existing capabilities across
facilities. The Company is actively applying best practices and
learnings from its highest-margin categories and top facilities
across its entire operations, to improve and optimize
productivity.
The Company has identified approximately $30
million in annual savings through optimization of HEXO’s production
network and leveraging the capacities of its recent acquisitions.
This includes transitioning from co-packaging agreement towards
in-house production capabilities, leveraging HEXO’s scale to
deliver on procurement savings and reconfiguring the Company’s
production network to achieve greater efficiencies; for example,
moving vape production and distillate production to the Redecan
facility.
Streamline and Simplify the
Organizational Structure
The Company expects to streamline and simplify
its organizational structure and more closely align operating costs
with its size. These cost reductions will be achieved through a
combination of reduced reliance on outside consultants,
streamlining the organization as a new IT platform is implemented,
right-sizing the organization, and realizing the synergistic
benefits of the recent acquisitions. These initiatives are expected
to represent a 30% reduction in the Company’s SG&A by fiscal
year end 2023.
Part of these initiatives is the reduction of
180 positions subsequent to second quarter end, resulting in
savings of approximately $15 million on an annualized basis. Half
of these positions were related to the previously announced closure
of the Stellarton facility. The remaining reductions were related
to reducing back-office positions where there is significant
overlap as a result of recent acquisitions, simplifying HEXO’s
operating model to drive clearer accountability and de-layering
management.
Cost Synergies
The Company expects to continue to deliver on
synergies as a result of its recent acquisitions.
Revenue Management
HEXO will focus on revenue management, including
more disciplined pricing across our entire range. By leveraging its
brand continuum, HEXO is able to differentiate itself across
features and price, balancing its approach to both volume and
profit.
Accelerate Organic Growth
To increase revenue, the Company plans to
accelerate growth through organic market share gains and capture
revenue opportunities through enhanced demand planning. For
example, in the past, the Company was able to satisfy only 65% to
70% of customer demand. Going forward, the Company will connect its
demand forecast to its harvest plan. The Company will apply
learnings from its acquisition of Redecan across the organization.
The Company will also re-focus on medical and consolidate this
product under Redecan’s leadership, given its strength in this
category.
Proposed Sale of Amended Senior Secured
Convertible Notes to Tilray Brands and $180 million Equity Backstop
Financing with KAOS
On March 3, 2022, the Company announced a
proposed strategic partnership agreement with Tilray Brands, in
which Tilray would acquire the outstanding principal amount of
senior secured convertible notes (the “Senior Notes”) that were
originally issued by HEXO (the “Transaction”) to HT Investments MA
LLC (“HTI”).
This proposed strategic alliance between HEXO
and Tilray Brands, if successfully completed, would provide several
financial and strategic benefits to HEXO, including the
following:
- De-leveraging: Tilray is proposing to purchase
the Notes at a 5% discount to par and a 15% discount to the level
that the Notes have been redeemed to date.
- More Favourable Debt Terms: The Notes would be
amended on terms more favourable to HEXO, including a three-year
maturity extension, adjustments to the financial covenants, and
elimination of the monthly redemption feature and associated
shareholder dilution.
- Financial Flexibility: Project expected to
result in substantial increase in HEXO’s liquidity by implementing
two critical measures:
- Unlocking US$80 million of restricted cash and
- Establishing a three-year C$180 million equity backstop
commitment, both of which may be used to fund operations and other
strategic growth initiatives.
- Substantial Synergies: Tilray Brands and
HEXO also plan to enter into an agreement to form a strategic
partnership that is expected to deliver up to $50 million of cost
synergies within two years of the completion of the transaction,
which will be shared equally between HEXO and Tilray Brands. The
companies have been working together to evaluate cost saving
synergies as well as other production efficiencies, including
cultivation and processing services and certain Cannabis 2.0
products, including pre-rolls, beverages and edibles and shared
services and procurement.
- Product Breadth and Commitment to
Innovation: Leveraging both companies’ commitment to
innovation, brand building and operational efficiencies, both
companies expect to share expertise in order to strengthen market
positioning and capitalize on opportunities for growth, through a
broadened product offering and new innovation.
In addition to the restructured debt, HEXO has
entered into an agreement with KAOS and its partners (collectively,
the “Standby Parties”) and are expected to negotiate a standby
equity purchase agreement (the “Standby Agreement”). It is expected
that the Standby Agreement will permit HEXO to demand the Standby
Parties to subscribe for an aggregate of $5 million of Common
Shares per month over a period of 36 months. The maximum standby
commitment is expected to be $180 million over the term of the
Standby Agreement (the “Standby Commitment”). The proceeds from the
Standby Commitment provide for additional operational flexibility
and are expected to be used to fund interest payments under the
Senior Notes and general corporate purposes.
Second Quarter 2022 Financial
Highlights
KEY FINANCIAL PERFORMANCE
INDICATORS
Condensed summary of results for the three and six months ended
January 31, 2022, October 31, 2021 and January 31, 2021.
|
|
|
|
|
|
|
For the three months ended |
For the six months ended |
|
|
January 31, 2022 |
|
October 31, 2021 |
|
January 31, 2021 |
|
January 31, 2022 |
|
January 31, 2021 |
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|
Revenue from sale of goods |
72,014 |
|
69,497 |
|
45,678 |
|
141,511 |
|
86,977 |
|
|
Excise taxes |
(19,251 |
) |
(19,535 |
) |
(12,851 |
) |
(38,786 |
) |
(24,738 |
) |
|
Net revenue from sale of goods |
52,763 |
|
49,962 |
|
32,827 |
|
102,725 |
|
62,239 |
|
|
Ancillary revenue |
– |
|
226 |
|
53 |
|
225 |
|
108 |
|
|
Total revenue |
52,763 |
|
50,188 |
|
32,880 |
|
102,950 |
|
62,347 |
|
|
|
|
|
|
|
|
|
Cost of goods sold |
(61,302 |
) |
(82,985 |
) |
(21,566 |
) |
(144,285 |
) |
(39,111 |
) |
|
Gross loss before fair value
adjustments |
(8,539 |
) |
(32,797 |
) |
11,314 |
|
(41,335 |
) |
23,236 |
|
|
|
|
|
|
|
|
|
Fair value adjustments1 |
5,979 |
|
821 |
|
7,270 |
|
6,800 |
|
13,560 |
|
|
Gross profit/(loss) |
(2,560 |
) |
(31,976 |
) |
18,584 |
|
(34,535 |
) |
36,796 |
|
|
|
|
|
|
|
|
|
Operating expenses |
(667,296 |
) |
(123,133 |
) |
(25,501 |
) |
(790,431 |
) |
(46,280 |
) |
|
Loss from operations |
(669,856 |
) |
(155,109 |
) |
(6,917 |
) |
(824,966 |
) |
(9,484 |
) |
|
|
|
|
|
|
|
|
Other expenses and
losses |
(66,248 |
) |
37,682 |
|
(13,922 |
) |
(28,565 |
) |
(15,553 |
) |
|
Loss before tax |
(736,104 |
) |
(117,427 |
) |
(20,839 |
) |
(853,531 |
) |
(25,037 |
) |
|
|
|
|
|
|
|
|
Current and deferred tax |
25,218 |
|
155 |
|
– |
|
25,373 |
|
– |
|
|
Other comprehensive income |
20,632 |
|
364 |
|
– |
|
20,996 |
|
– |
|
|
Total Net loss and comprehensive loss |
(690,254 |
) |
(116,908 |
) |
(20,839 |
) |
(807,162 |
) |
(25,037 |
) |
|
1 Realized fair value amounts on inventory sold and unrealized
gain on changes in fair value of biological assets.
COST OF SALES & GROSS MARGIN BEFORE
ADJUSTMENTS
The following table illustrates the breakout of gross profit
before adjustments (non-IFRS measure) by sales stream for the
current the previous fiscal quarters.
For the three months ended |
Adult-Use(excluding beverages) |
Medical |
International |
Wholesale |
Total non-beverage |
Adult-usebeverages |
Company total |
January 31, 2022 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
Net revenue from the sale of goods |
36,114 |
|
811 |
|
8,231 |
|
3,740 |
|
48,896 |
|
3,867 |
|
52,763 |
|
Adjusted cost of sales |
(22,682 |
) |
(136 |
) |
(3,808 |
) |
(3,444 |
) |
(30,070 |
) |
(3,867 |
) |
(33,937 |
) |
Gross profit before adjustments ($) |
13,432 |
|
675 |
|
4,423 |
|
296 |
|
18,826 |
|
– |
|
18,826 |
|
Gross margin before adjustments (%) |
37 |
% |
83 |
% |
54 |
% |
8 |
% |
39 |
% |
– |
|
36 |
% |
|
|
|
|
|
|
|
|
October 31,
2021 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
Net revenue from the sale of goods |
35,983 |
|
668 |
|
6,041 |
|
4,111 |
|
46,803 |
|
3,159 |
|
49,962 |
|
Adjusted cost of sales |
(27,938 |
) |
(276 |
) |
(2,148 |
) |
(3,128 |
) |
(33,490 |
) |
(3,780 |
) |
(37,270 |
) |
Gross profit before adjustments ($) |
8,045 |
|
392 |
|
3,893 |
|
983 |
|
13,313 |
|
(621 |
) |
12,692 |
|
Gross margin before adjustments (%) |
22 |
% |
59 |
% |
64 |
% |
24 |
% |
28 |
% |
(20 |
%) |
25 |
% |
January 31, 2021 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
Net revenue from the sale of goods |
26,904 |
|
422 |
|
2,000 |
|
109 |
|
29,435 |
|
3,392 |
|
32,827 |
|
Adjusted cost of sales |
(17,010 |
) |
(143 |
) |
(577 |
) |
(44 |
) |
(17,774 |
) |
(3,418 |
) |
(21,192 |
) |
Gross profit before adjustments ($) |
9,894 |
|
279 |
|
1,423 |
|
65 |
|
11,661 |
|
(26 |
) |
11,635 |
|
Gross margin before adjustments (%) |
37 |
% |
66 |
% |
71 |
% |
60 |
% |
40 |
% |
(1 |
%) |
35 |
% |
- The Company’s total adult-use, non-beverage gross margin before
adjustments increased 15% from the previous quarter. This growth is
due to a more favorable sales mix of higher margin products.
- Total gross profit before adjustments increase of 48% from
Q1’22 and 62% from Q2’21.
Operating Expenses
|
For the three months ended |
For the six months ended |
|
|
January 31, 2022 |
|
October 31, 2021 |
January 31, 2021 |
|
January 31, 2022 |
January 31, 2021 |
|
|
$ |
|
$ |
$ |
|
$ |
$ |
|
General and administration |
22,550 |
|
22,484 |
12,299 |
|
45,036 |
24,215 |
|
Marketing and promotion |
6,369 |
|
6,223 |
2,149 |
|
12,592 |
4,231 |
|
Share-based compensation |
4,017 |
|
3,824 |
5,259 |
|
7,841 |
8,189 |
|
Research and development |
1,478 |
|
967 |
1,136 |
|
2,445 |
2,172 |
|
Depreciation of property, plant and equipment (“PPE”) |
1,140 |
|
2,057 |
1,679 |
|
3,196 |
2,757 |
|
Amortization of intangible assets |
6,895 |
|
8,158 |
342 |
|
15,053 |
672 |
|
Restructuring costs |
4,524 |
|
3,989 |
860 |
|
8,513 |
1,385 |
|
Impairment of property, plant and equipment |
100,130 |
|
23,803 |
61 |
|
123,933 |
865 |
|
Impairment of investment in joint venture and associates |
– |
|
26,925 |
– |
|
26,925 |
– |
|
Impairment of intangible assets |
140,839 |
|
– |
– |
|
140,839 |
– |
|
Impairment of goodwill |
375,039 |
|
– |
– |
|
375,039 |
– |
|
Disposal of long-lived assets |
– |
|
– |
1,294 |
|
– |
1,294 |
|
Loss/(gain) on disposal of property, plant and equipment |
(254 |
) |
329 |
(14 |
) |
74 |
64 |
|
Acquisition, integration and transaction costs |
4,569 |
|
24,374 |
436 |
|
28,945 |
436 |
|
Total |
667,296 |
|
123,133 |
25,501 |
|
790,431 |
46,280 |
|
- General and administrative expenses
flat from Q1’22, and have decreased on a prorated basis of expenses
realized after acquisition dates of Redecan and 48North in
Q1’22.
- Impairments to PPE, intangible
assets and goodwill of $616 million in Q2’22 after the Canadian
Cannabis market experienced adverse changes, which were reflected
in significant revisions to management’s forecasts of future net
cash inflows and earnings from previous budgets and forecasts.
|
|
Q2’22 |
|
|
|
Q1’22 |
|
Total net loss |
|
$ (736,104 |
) |
|
|
$(117,427 |
) |
Finance expense (income), net |
|
5,058 |
|
|
|
4,531 |
|
Depreciation, included in cost of sales |
|
5,973 |
|
|
|
4,969 |
|
Depreciation, included in operating expenses |
|
1,140 |
|
|
|
2,057 |
|
Amortization, included in operating expenses |
|
6,895 |
|
|
|
8,158 |
|
Standard
EBITDA |
|
(717,038 |
) |
|
|
(97,712 |
) |
|
|
|
|
Investment (gains) losses |
|
63,221 |
|
|
|
(42,213 |
) |
Non-cash fair value
adjustments |
|
1,148 |
|
|
|
(7,102 |
) |
Non-recurring
expenses |
|
9,093 |
|
|
|
28,363 |
|
Other non-cash
items |
|
637,978 |
|
|
|
92,884 |
|
Adjusted EBITDA |
|
(5,598 |
) |
|
|
(11,576 |
) |
- Adjusted EBITDA increase of 52% driven by increased adjusted
gross margins and flat selling, general and administrative
expenses.
Other Significant Development and Subsequent
Events
Default under senior secured convertible notes
On March 11, 2022, HEXO provided notice on March
11, 2022 to HT Investments MA LLC (“HTI”) of the occurrence of an
event of default under the Company’s senior secured convertible
note due May 2023 (the “Secured Note”) as it was not in compliance
with the covenant of the Company in the Secured Note to have
positive Adjusted EBITDA as defined and calculated in the Secured
Note for the three-month period ending on January 31, 2022 (the
“Event of Default”).
Following provision of the notice by the
Company, the Holder irrevocably waived its rights due to the Event
of Default until the earlier of May 17, 2022 or the date the
proposed transaction announced on March 3, 2022 among the Company,
the Noteholder and Tilray Brands, Inc. (“Tilray”) under which
Tilray is expected to purchase the Secured Note from the Holder is
terminated (the “End of Forbearance Date”), provided further that
the Company, HTI and Tilray have agreed to extend the End of
Forbearance Date in the event that they remain engaged in good
faith negotiations to consummate the proposed transaction.
As a result of the Event of Default, the Holder
would have had the right to declare the Secured Note or any portion
of it to become due and payable immediately for cash in an amount
equal to 115% of the outstanding principal amount of the Secured
Note. The current outstanding principal amount of the Secured Note,
which was issued with an initial principal amount of US$360,000,000
but which has been reduced through redemptions by HTI, is
US$208,665,185.
Conference Call
The company will host a conference call for analysts and
investors on March 18, 2022. Analysts' question and answer period
will follow management's presentation.
Date: March 18, 2022Time: 8:30 a.m.
ETWebcast: https://events.q4inc.com/attendee/563274977
Forward-Looking Statements
This press release contains forward-looking
information and forward-looking statements within the meaning of
applicable securities laws (“Forward-Looking Statements”) including
and not limited to: the proposed acquisition by Tilray of the
Secured Note, including the conditions thereto; the strategic
commercial agreement and efficiencies to be created between HEXO
and Tilray and the and synergies generated as result of the
Transaction; the Company’s cash flow projections; the entering into
of the Standby Agreement on the terms described herein, if at all;
the amount of the Standby Commitment and the use of the proceeds
from the Standby Commitment. 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 following press release should be read in
conjunction with the management’s discussion and analysis
(“MD&A”) and unaudited condensed consolidated interim financial
statements and notes thereto as at and for the three and six months
ended January 31, 2022. 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, 2021 dated October 29, 2021.
Non-IFRS Measures
In this press release, reference is made to
gross profit before adjustment, profit/margin before fair value
adjustments, adjusted gross profit/margin, adjusted EBITDA 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 as a result 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 MD&A for the three and
six months ended January 31, 2022, filed under the Company’s
profile on SEDAR at www.sedar.com and EDGAR at www.sec.gov
respectively.
About HEXO
HEXO is an award-winning licensed producer of
innovative products for the global cannabis market. HEXO serves the
Canadian recreational market with a brand portfolio including HEXO,
Redecan, UP Cannabis, Namaste Original Stash, 48North, Trail Mix,
Bake Sale, REUP and Latitude brands, and the medical market in
Canada, Israel and Malta. The Company also serves the Colorado
market through its Powered by HEXO® strategy and Truss CBD USA, a
joint venture with Molson-Coors. With the completion of HEXO's
recent acquisitions of Redecan and 48North, HEXO is a leading
cannabis products company in Canada by recreational market share.
For more information, please visit hexocorp.com.
For further information, please
contact:Investor
Relations:invest@hexo.comwww.hexocorp.com
Media Relations:(819)
317-0526media@hexo.com
__________________________________________________________________1
Period begins post Q2’22 and includes the five quarters thereafter,
up to and including Q3’23
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