Mr. Sebastien St-Louis reports
HEXO CORP REPORTS FINANCIAL RESULTS FOR THE FOURTH QUARTER AND 2019 FISCAL YEAR
Hexo Corp. has released its financial results for the fourth quarter and fiscal year ended July 31, 2019. All amounts are expressed in thousands of dollars, unless otherwise noted and except for per-gram and kilogram amounts and their equivalents.
"We are at the end of the first year of adult-use legalization in Canada, which was an incredible year full of successes and challenges across the industry. We've gone from $4.9-million to $59.3-million in gross revenue in just one year. This type of revenue growth is a testament to the company's resilience and capacity to pivot in the face of uncertainty," said Sebastien St-Louis, chief executive officer and co-founder of Hexo. "I am confident that our multibrand approach, focusing on customer demand, re-evaluating our strain mix, as well as the introduction of new products to counter the black market, will help us increase our market share and total revenue."
During the fourth quarter, Hexo closed the Newstrike acquisition on May 24, 2019, increasing its production, diversifying total market penetration and incorporating the Up brand to its brand portfolio. Shortly after, the company entered into a supply agreement with the Alberta Gaming, Liquor and Cannabis Commission (AGLC) and listed 18 additional products with the Ontario Cannabis Store.
"Above and beyond significantly increasing our retail reach to nine provinces, we've also launched Original Stash, the industry's first true value brand, which we believe will not only compete directly with the illicit market but also contribute to a significant increase in sell-through," added Mr. St-Louis.
As at July 31, 2019, the company held cash, cash equivalents and short-term investments of $139,505. The company has a $65,000 credit facility with a syndicate of Canadian chartered banks. This consists of $50,000 available term credit and a $15,000 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 year, the company made the decision to scale back operations in certain facilities. The company reduced its cost structure with the elimination of approximately 200 positions across its departments and locations. Cultivation has been suspended at the Niagara facility and in 200,000 square feet of the company's Gatineau facility. The company determined that given the current market conditions in Canada, additional cultivation space is not required at this time. 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 80,000 kilograms of dried cannabis equivalents, composed of 45 to 55 per cent dried flower, with the balance composed of trim, which can be used for a variety of value-added products.
The company continues to realign its strategy to address changes in the market. With near-term focus on the following priorities:
- Driving sales through new product offerings and leveraging increased analytics for decision making;
- Achieving operational excellence;
Rightsizing the company's operational expenses to drive toward profitability;
Commissioning the company's state-of-the-art manufacturing facility in Belleville;
Continuing to invest in research and development and intellectual property;
Future partnerships through the company's powered-by-Hexo strategy;
- Dedication to corporate social responsibility initiatives.
OPERATIONAL AND FINANCIAL HIGHLIGHTS
For the three months ended For the 12 months ended
Income statement snapshot July 31, 2019 July 31, 2018 July 31, 2019 July 31, 2018
Gross cannabis revenue $20,517 $1,410 $59,256 $4,934
Excise taxes (5,122) - (11,914) -
Net revenue from sale of goods 15,395 1,410 47,342 4,934
Ancillary revenue 29 - 199 -
Gross margin before fair value adjustments 5,133 711 21,344 2,841
Gross margin (13,748) 519 26,925 6,400
Operating expenses 46,902 10,713 111,482 24,367
(Loss) from operations (60,650) (10,194) (84,557) (17,967)
Other income/(expenses) 125 (315) (847) (5,383)
Net (loss) before tax recovery (60,525) (10,509) (85,404) (23,350)
Tax recovery 3,840 - 3,840 -
Total net (loss) (56,685) (10,509) (81,564) (23,350)
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Fourth quarter 2019 highlights
Net revenue in fourth quarter 2019 increased to $15,424, compared with $13,017 in the prior quarter and $1,410 in fourth quarter 2018. Adult-use sales in the quarter accounted for 91 per cent of total revenue. Adult-use gross sales increased 30 per cent to $18,997 in fourth quarter 2019, compared with $14,607 in the prior quarter and nil in fourth quarter 2018. The acquisition of Newstrike contributed $2,770, and sales to the AGLC, new in fourth quarter 2019, contributed $4,828.
Sales volume in fourth quarter 2019 increased 45 per cent to 4,009 kilograms from 2,759 kilograms equivalents sold in the prior quarter. The acquisition of Newstrike contributed 396 kg, and sales to the AGLC contributed 971 kg. Dried flower and milled products represented 89 per cent of gram equivalents sold during the quarter, a 4-per-cent increase from the prior quarter, with oil product sales comprising the balance of the quantity sold.
Gross adult-use revenue per gram equivalent decreased to $4.74 in fourth quarter 2019 from $5.29 in the prior quarter, reflective of the provision for sales returns and price adjustments recorded in the period. 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. Based on the assessment, the company has estimated the possible returns on inventory held by provinces to be in the amount of $6.7-million, which includes price adjustments as a result of a re-evaluation of Hexo's pricing strategy. This was partially countered by the addition of the premium brand Up cannabis, which commands revenue of $6.80 per gram on dried flower during the quarter. The adult-use net revenue per gram equivalent decreased to $3.51 in fourth quarter 2019 from $4.30 in the prior quarter, reflecting the impact of the provision above, as well as new sales in Alberta, which imposes on average a 16-per-cent-higher excise tax rate than Ontario and Quebec.
Gross margin before fair value adjustments for fourth quarter 2019 was $5,133, or 33 per cent of net revenue from sale of goods, compared with $6,440 and 49 per cent in the prior quarter. Adjusted gross margin before fair value adjustments for fourth quarter 2019 adjusting for sales provisions made to gross revenue for management estimates of price concessions and estimated returns based on return provisions within provincial sales contracts was $8,561, or 45 per cent of adjusted net revenue from sale of goods adjusting for the same sales provisions made to gross revenue.
Operating expenses increased to $46,902 in the quarter, compared with $10,713 for the comparable quarter year over year, reflecting the significant increase to the scale of the company's operations.
Loss from operations for the quarter was ($60,650) compared with ($10,194) for the comparable quarter year over year. Excluding non-cash impairment charges in fourth quarter 2019, adjusted net loss was ($43,732). The increase in net loss was primarily due to the significant scale of operations and increased stock-based compensation expense due to higher cannabis market value, increased research and development expenditures, and an impairment loss on inventory.
Fiscal 2019 year highlights
Gross revenue from sale of goods for fiscal 2019 totalled $59,256, an increase of $54,332 as compared with $4,934 in fiscal 2018. The increase is due to the legalization of adult-use products in fiscal 2019.
Net revenue from sale of goods for fiscal 2019 increased to $47,541, compared with $4,934 in the prior year. Adult-use sales in the year accounted for 89 per cent of total net revenue from sale of goods.
Adult-use gross sales increased to $42,355 in fiscal 2019, compared with nil in the prior year.
Operating expenses increased to $111,482 in fiscal 2019, compared with $24,367 in the prior year. This increase reflects the significant increase to the scale of the company's operations.
Loss from operations for the fiscal year was ($85,404), compared with net loss of ($17,966) for the prior year. Excluding non-cash impairment charges in fourth quarter 2019, adjusted net loss was ($67,639). The increase in net loss was primarily due to the significant increase to the scale of operations, which happened during the fiscal year.
The company currently estimates first quarter 2020 net revenue to be in the range of approximately $14,000 to $18,000. This range is reflective of a provision for returns and retroactive adjustments required on inventory held by provinces, which are subject to price adjustments as a result of a re-evaluation of the company's pricing strategy. Furthermore, the company is targeting to achieve positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in calendar 2020. This is based on certain assumptions made by management regarding store counts in the various provinces, as well as operational improvements and cost-saving initiatives the company is seeking to implement.
The company's original revenue guidance for fiscal 2020 was retracted due to slower-then-expected store rollout across Canada, consumer demand-based product mix shifts and lower-than-expected sell-through.
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 and on the company's website.
The company will hold a conference call on Oct. 29, 2019, to discuss these results. Mr. St-Louis, and Stephen Burwash, chief financial officer, will host the call starting at 8:30 a.m. Eastern Time. A question-and-answer period will follow management's presentation.
Date: Oct. 29, 2019
Time: 8:30 a.m. EDT
Replay information: A replay of the call will be accessible by telephone until 11:59 a.m. EDT on Nov. 12, 2019.
Toll-free dial-in number: 1-888-390-0541
Replay passcode: 531469 followed by the number sign
For previous quarterly results and recent press releases, see
the company's website.
About Hexo Corp.
Hexo is an award-winning consumer packaged good cannabis company that creates and distributes innovative products to serve the global cannabis market. Through its hub and spoke business strategy, Hexo is partnering with Fortune 500 companies, bringing its brand value, cannabinoid isolation technology, licensed infrastructure and regulatory expertise to established companies, leveraging their distribution networks and capacity. As one of the largest licensed cannabis companies in Canada, Hexo operates facilities in Ontario and Quebec. The company is also expanding internationally and has a foothold in Greece to establish a euro-zone processing, production and distribution centre.
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