Mr. Sebastien St-Louis reports

HEXO CORP REPORTS FINANCIAL RESULTS FOR THE FOURTH QUARTER AND FISCAL YEAR 2020

Hexo Corp. has released its financial results for the fourth quarter and fiscal year ended July 31, 2020. All amounts are expressed in Canadian dollars unless otherwise noted.

"Hexo's top-line growth this quarter reflects the ongoing performance and success of our 2.0 products and the high quality of our offering which repeatedly resonates with consumers. We are commanding significant market share in Quebec, and this year we made major strides by launching Truss cannabis-infused beverages in Canada in addition to our initial foray into the U.S. with Molson Coors, a world-class partner," said Sebastien St-Louis, chief executive officer and co-founder of Hexo.

Mr. St-Louis continued: "Our business is improving quarter over quarter as we continue to focus on achieving positive adjusted [earnings before interest, taxes, depreciation and amortization]. In the fourth quarter we also strengthened our balance sheet as we look beyond positive adjusted EBITDA to positive EPS."

Key financial and operating highlights from fourth quarter 2020:

• Revenue per gram equivalent for non-beverage adult-use sales increased to $4.07 or 29 per cent from the previous quarter;
• Continued market expansion and first quarter of contribution from cannabis beverage products powered by Hexo in the fourth quarter, contributing $2-million of net revenue;
• Net revenue of $27.1-million, up 23 per cent from the previous quarter and 76 per cent from the same quarter in the prior year;
• Gross revenue of $36.1-million, the highest in the company's history, increasing 17 per cent from the previous quarter and 76 per cent from the same quarter in the prior year;
• Adjusted EBITDA of ($3.25-million), representing a 21-per-cent improvement from the previous quarter, tracking toward positive adjusted EBITDA in the first half of fiscal 2021;
• The company maintained gross margin before adjustments of 42 per cent, on sales excluding adult-use beverages, as the company continued its strategy of providing consumers with high-quality, lower-priced alternatives;
• Increased cash and cash equivalents by 95 per cent from the prior quarter. This was accomplished primarily through the company's financing activity in the period where net funds of $54-million and $33-million were raised through the May, 2020, public offering and the June, 2020, at-the-market offering, respectively;
• The company's working capital was $223-million, including $184-million of cash;
• Operational cash use of ($3.8-million) (1) for the quarter, not including financing and investing activities;
• The company recorded writedowns to inventory of $43-million to align the company with future demand and near-term production plan. The company recorded impairments to property, plant and equipment of $46.4-million, right-sizing the balance sheet to align with future performance and support a pathway to positive earnings per share.

(1) Operational cash use was calculated as the change between the cash used in operating actives for the year ended July 31, 2020, as compared with the cash used in operating activities for the nine months ended April 30, 2020.

                                        FINANCIAL HIGHLIGHTS
 
                                                                          For the three months ended
Income statement snapshot                                July 31, 2020  April 30, 2020 July 31, 2019

Revenue from sale of goods                                    $ 36,140        $ 30,895      $ 20,517
Excise taxes                                                    (9,082)         (8,817)       (5,122)
Net revenue from sale of goods                                  27,058          22,078        15,395
Ancillary revenue                                                   87              54            29
Gross (loss)/profit before adjustments (1)                       8,104           8,783         5,133
Gross (loss)/profit before fair value (1) adjustments (2)      (36,012)          7,452       (14,202)
Gross (loss)/profit                                            (34,690)          5,730       (16,165)
Operating expenses                                             (71,509)        (26,485)      (46,902)
(Loss) from operations                                        (106,199)        (20,755)      (63,067)
Other income/(expenses and losses)                             (63,333)          1,699           125
Net (loss) before tax                                         (169,532)        (19,056)      (62,942)
Tax recovery                                                         -               -        18,213
Total net (loss)                                              (169,532)        (19,056)      (44,729)

                                                               For the 12 months ended
                                                          July 31, 2020  July 31, 2019

Revenue from sale of goods                                    $ 110,149       $ 59,256
Excise taxes                                                    (29,598)       (11,914)
Net revenue from sale of goods                                   80,551         47,342 
Ancillary revenue                                                   233            199 
Gross (loss)/profit before adjustments (1)                       26,953         21,344 
Gross (loss)/profit before fair value (1) adjustments (2)       (46,421)         2,009 
Gross (loss)/profit                                             (57,975)        24,508 
Operating expenses                                             (418,576)      (111,482)
(Loss) from operations                                         (476,551)       (86,974)
Other income/(expenses and losses)                              (75,961)          (847)
Net (loss) before tax                                          (552,512)       (87,821)
Tax recovery                                                      6,023         18,213 
Total net (loss)                                               (546,489)       (69,608)

(1) Refer to the company's non-international financial reporting standards measures section as
    disclosed in the fiscal 2020 management's discussion and analysis.

Fourth quarter 2020 highlights

Gross revenue in Q4 2020 increased 17 per cent to $36.1-million from $30.9-million in Q3 2020 and 76 per cent from $20.5-million in Q4 2019. The primary drivers of the increase were the company's cannabis 2.0 products, launching cannabis vapes into the market, which is a new sales stream and contributed $1.3-million to gross sales, as well as $2.4-million of beverage-based adult-use sales, another new revenue stream that began mid-fiscal year, and from international sales of $1.3-million reflecting the company's purchase agreement established with an Israel-based medical cannabis company.

Gross margin before fair value adjustments in Q4 2020 was 30 per cent, compared with 40 per cent in the prior sequential quarter. While the company's gross margin has been trending upward in the year driven by production efficiencies, automation of packaging activities and choice of strain cultivation, the company's adult-use beverage launch caused an impact to margins in Q4 2020 as operating and overhead costs were recognized in cost of sales without the benefit of fully scaled production and sales. As previously noted, the company had expected to see fluctuations in gross margins related to new product introductions.

                                          Adult use  Medical  International  Wholesale     Total      Adult-  Company
                                         (excluding                                         non-         use    total
                                          beverages)                                    beverage   beverages

For the three months ended July 31, 2020 

Net revenue                                  22,575      548          1,291        655    25,069       1,989   27,058
Cost of sales                                13,663      119            642        222    14,646       4,395   19,558
Gross profit before adjustments ($)           8,912      429            649        433    10,423      (2,406)   7,500
Gross margin before adjustments (%)             39%      78%            50%        66%       42%       (121%)     28%
                                                                                                       
For the three months ended April 30, 2020     

Net revenue                                  20,614      693              -        340    21,647         431   22,078
Cost of sales                                11,826      163              -        198    12,187       1,162   13,349
Gross profit before adjustments ($)           8,788      530              -        142     9,460        (731)   8,729
Gross margin before adjustments (%)             43%      76%              -        42%       44%       (170%)     40%

Operating expenses were $71.5-million in the quarter, and loss from operations for Q4 2020 was $106.2-million. Included in Q4 2020 operating expenses were the following items:

• Impairments of property, plant and equipment of $46.4-million;
• Loss on onerous contract of $1.8-million;
• Restructuring costs of ($100,000).

During the three months ended July 31, 2020, the company's adjusted EBITDA improved 21 per cent from the previous quarter, coming in at ($3.25-million) compared with ($4.1-million) for the three months ended April 30, 2020. Increased sales of cannabis 2.0 products, while managing selling, general and administrative levels, were primary contributors to an improvement in adjusted EBITDA. The company's wholesale activity and international sales also contributed, due to having higher margins, as these streams are exempt from excise taxes.

Fiscal 2020 year highlights

Revenue from sale of goods increased 86 per cent for fiscal 2020, totalling $110.1-million compared with $59.3-million in fiscal 2019. The company's net revenue from sale of goods for fiscal 2020 increased 70 per cent to $80.6-million, compared with $47.3-million in the prior year.

The company strengthened its financial position by raising net cash of $186.7-million during the year ended July 31, 2020, through various public and private offerings.

Operating expenses increased to $418.6-million in fiscal 2020, compared with $111.5-million in the prior year. Included in fiscal 2020 are several non-cash expenses, namely $111.9-million impairment of goodwill, $108.2-million impairment of intangible assets, $79.4-million impairment of property, plant and equipment, $4.8-million of restructuring costs, and $4.8-million loss on an onerous contract. Not including these items, operating expenses are $110.5-million, down $1.6-million from the prior year, even as there was a significant increase to the scale of the company's operations, including a number of product launches.

Loss from operations for the fiscal year was $476.6-million, compared with an operating loss of $87-million for the prior year.

The net loss for fiscal 2020 year was $546.5-million compared with $69.6-million in the prior year. Included in net loss in fiscal 2020 are the items noted above, in addition to a $54.3-million loss on the inducement of convertible debentures.

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 its website.

Non-IFRS (international financial reporting standards) 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 and revenue per gram equivalent, which are not measures of financial performance under international financial reporting standards. 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 with similar measures presented by other companies. These measures are provided as information complimentary to those IFRS measures by providing a further understanding of the company's operating results from the perspective of management. As such, these measures should not be considered in isolation or in lieu of a review of the 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 three months ended July 31, 2020, filed on SEDAR and EDGAR.

Conference call

The company will hold a conference call, Friday, Oct. 30, 2020, to discuss these results. Sebastien St-Louis, chief executive officer, and Trent MacDonald, chief financial officer, will host the call starting at 8:30 a.m. EST. A question-and-answer period will follow management's presentation.

Date:  Oct. 30, 2020

Time:  8:30 a.m. EST

For previous quarterly results and recent press releases, see the company's website.

About Hexo Corp.

Hexo 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, Up Cannabis and Original Stash brands, and the medical market under Hexo medical cannabis.

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