HEXO Corp. reported its financial results for the fourth quarter and fiscal year ended July 31, 2021 (“F’21”). All amounts are expressed in Canadian dollars unless otherwise noted.
“I am honoured and humbled to join the team as HEXO’s President & CEO,” said Scott Cooper. “I look forward to continuing to build on HEXO’s strong foundation with an immediate priority of continuing to integrate our recent acquisitions and reviewing our financial position, with the ultimate goal of driving growth and profitability through the commercialization of cannabis consumer packaged goods products.”
“As we review our last fiscal year, I would like to highlight some key achievements. Last fiscal, HEXO achieved its highest net revenue in the Company’s history, leads the Canadian cannabis market in four categories and completed three acquisitions, including the transformative Redecan acquisition, propelling the Company to the number one market share position in Canadian adult-use recreational cannabis sales,” commented Cooper.
Business Update
M&A
Key Highlights to July 31, 2021
- Closed the Zenabis acquisition on June 1, 2021, offering diversified cultivation facilities, including a state-of-the-art indoor grow facility in Atholville, NB.
- Zenabis contributed $6.8 million in net revenue for the two months ended July 31, 2021.
Subsequent Events
- The Company completed the acquisitions of Redecan and 48North Cannabis Corp. (“48North”). Through the integration progress, HEXO is focused on ensuring that it implements the strengths of each acquired company across the organization, identifies and resolves any weaknesses, and obtains synergistic value for the overall organization.
- HEXO believes these acquisitions will increase its market share, accelerate its path to profitability, and create accretive synergies.
Operations
Key Highlights to July 31, 2021
- Committed to ESG leadership, by offsetting 100% of its 2020 operational carbon emissions and personal emissions for all employees1. The Company also committed to offsetting the plastic used in its pouch packaging.
Subsequent Events
- The Company undertook a strategic reorganization, announcing the departure of its Co-Founder and CEO, Sebastien St-Louis and the appointment of Scott Cooper as HEXO’s new President & CEO.
- Scott joins HEXO from Truss Beverage Co., a joint venture between Molson-Coors Canada and HEXO which holds the number one market share in cannabis infused beverages in Canada, where he held the position of President & CEO. For a period of not more than six months, Scott will simultaneously remain in this role.
- HEXO also announced the appointment of Valerie Malone as Chief Commercial Officer and Guillaume Jouet as Chief People & Culture Officer. Both executives bring significant consumer-packaged good experience to the organization.
Canadian cannabis market
Key Highlights to July 31, 2021
- Net revenue increased 71% quarter-over-quarter and 43% from Q4’20, marking HEXO’s highest quarter of revenue to date.
- Total Q4’21 net revenue increased to $38.7 million from $22.6 million in Q3’21
- Total net revenue for FY21 grew to $123.5 million from $80.6 million in FY20.
- Increased market share in several Canadian provinces, including Ontario, Alberta and British Colombia, and maintained a top two market share in Quebec.
- Adult-use net revenues, exclusive of beverages, increased 28% quarter-over-quarter.
- Cannabis beverage net revenues increased 70% quarter-over-quarter and 161% from fiscal 2020.
Maintained leading market position relative to peers as market share continues to diversify.
HEXO USA
Key Highlights to July 31, 2021
- On June 28, 2021, HEXO announced the closing of the acquisition of a 50,000 sq. ft. facility in Colorado providing the Company with the necessary infrastructure to execute on its U.S. expansion plans. The facility is zoned for producing a full range of cannabis products and offers a variety of operational capabilities.
Subsequent Events
- Truss CBD USA announced the expansion of Veryvell, a line of hemp-derived CBD and adaptogen beverages, to 17 states following a successful Colorado launch in 2020. Truss CBD USA is a joint venture by Molson Coors Beverage Company and HEXO USA Inc, a subsidiary of HEXO poised to capture the US cannabis infused beverage market.
Financial Update
| In 000’s | For the three months ended | For the twelve months ended |
||||||||
| Income Statement Snapshot | July 31, 2021 |
April 30, 2021 |
July 31, 2020 |
July 31, 2021 |
July 31, 2020 |
|||||
| $ | $ | $ | $ | $ | ||||||
| Revenue from sale of goods | 53,022 | 33,082 | 36,140 | 173,081 | 110,149 | |||||
| Excise taxes | (14,365 | ) | (10,482 | ) | (9,082 | ) | (49,583 | ) | (29,598 | ) |
| Net revenue from sale of goods | 38,657 | 22,600 | 27,058 | 123,498 | 80,551 | |||||
| Ancillary revenue | 103 | 60 | 87 | 271 | 233 | |||||
| Total revenue | 38,760 | 22,660 | 27,145 | 123,769 | 80,784 | |||||
| Gross profit before adjustments2 | 7,988 | 5,006 | 8,104 | 34,175 | 26,953 | |||||
| Gross profit/(loss) before fair value adjustments | 1,499 | 4,379 | (36,012 | ) | 29,066 | (46,421 | ) | |||
| Gross profit/(loss)2 | 3,234 | 8,816 | (34,690 | ) | 48,798 | (57,975 | ) | |||
| Operating expenses | (63,116 | ) | (24,906 | ) | (71,509 | ) | (134,293 | ) | (418,576 | ) |
| Loss from operations | (59,882 | ) | (16,090 | ) | (106,199 | ) | (85,495 | ) | (476,551 | ) |
| Other expenses and losses | (9,630 | ) | (4,621 | ) | (63,333 | ) | (29,664 | ) | (75,961 | ) |
| Loss and comprehensive loss before tax | (69,512 | ) | (20,711 | ) | (169,532 | ) | (115,159 | ) | (552,512 | ) |
| Current and deferred tax recovery | 397 | – | – | 397 | 6,023 | |||||
| Other comprehensive income | 1,156 | 3 | – | 1,152 | – | |||||
| Total Net loss and comprehensive loss | (67,959 | ) | (20,708 | ) | (169,532 | ) | (113,610 | ) | (546,489 | ) |
| 1 | The Company has adjusted the presentation of gross profit before fair value adjustments by removing inventory and biological asset write offs and impairment losses. |
| 2 | See section ‘Cost of Sales, Excise Taxes and Fair Value Adjustments’ for reconciliation of gross profits |
Operating Expenses
| In 000’s | For the three months ended |
For the years ended |
|||||
| July 31, 2021 |
April 30, 2021 |
July 31, 2020 |
July 31, 2021 |
July 31, 2020 |
|||
| $ | $ | $ | $ | $ | |||
| Selling, general and administration1 | 19,160 | 11,178 | 12,436 | 54,543 | 52,793 | ||
| Marketing and promotion | 3,665 | 2,452 | 2,375 | 10,348 | 12,474 | ||
| Share-based compensation | 827 | 2,715 | 4,373 | 11,731 | 25,790 | ||
| Research and development | 934 | 730 | 677 | 3,835 | 4,639 | ||
| Depreciation of property, plant and equipment | 1,728 | 1,612 | 1,179 | 6,097 | 6,072 | ||
| Amortization of intangible assets | 1,002 | 371 | 249 | 2,050 | 3,939 | ||
| Restructuring costs | 1,562 | 336 | (79 | ) | 3,283 | 4,767 | |
| Impairment of property, plant and equipment | 19,350 | 16 | 46,414 | 20,230 | 79,418 | ||
| Impairment of intangible assets | – | – | 2,000 | – | 108,189 | ||
| Impairment of goodwill | – | – | – | – | 111,877 | ||
| Realization of onerous contract | – | – | 1,763 | – | 4,763 | ||
| Disposal of long-lived assets | – | – | 122 | 1,294 | 3,855 | ||
| Loss/(gain) on disposal of property, plant and equipment | 19 | (19 | ) | – | 64 | – | |
| Acquisition transaction costs | 14,869 | 1,871 | – | 17,174 | – | ||
| Health Canada Recovery Fee’s1 | – | 3,644 | – | 3,644 | – | ||
| Total | 63,116 | 24,906 | 71,509 | 134,293 | 418,576 | ||
| 1 | The Company has adjusted the presentation of the Selling, General and Administrative expenses to breakdown the Health Canada Recovery Fee’s for ease of user review and identification. This presentation differs from that of the Company’s interim financial statement for the year ended July 31, 2021. |
Other Matters
Gross margins
Quarter-over-quarter, the Company’s total gross margin declined to 20% from 22% in Q3’21. Net adult-use revenue (exclusive of beverages) gross margin declined to 12% from 28% due to; increases to sales in higher excise tax burdened markets, decreases to average selling prices, and the crystallization of fair value adjustments upon the business acquisition of Zenabis.
Normalizing for the impact of the crystallization, the Company’s total gross margin would improve to 26% in Q4’21. Strong margined international sales grew significantly in period to net revenues of $6.8 million and a gross margin contribution of 65%. Wholesales were also impacted by the crystallization of fair value adjustments on the purchase price accounting of Zenabis, normalized for this, margins would otherwise have been 35% versus reported gross margin of (65%).
Going Concern & the Senior Secured Convertible Note
The Company acknowledges the ongoing concern with its senior secured convertible notes issued on May 27, 2021. The Company has maintained a positive relationship with the holder, with the holder having negotiated and agreed to two amendments favorable to the Company. While there exists a risk that significant cash outflows may be required over the next twelve months under the terms of the Senior Secured Convertible Note, the Company has been working with the Holder to renegotiate the terms of the Senior Secured Convertible Note.
The Company has sufficient funding for ongoing working capital requirements, however, current funds on hand, combined with operational cash flows, are not sufficient to also support funding potential cash requirements under the Senior Secured Convertible Note, investments required to continue to develop cultivation and distribution infrastructure, and the future growth plans of the Company. Management is exploring several options to secure the necessary financing, which could include the issuance of new public or private equity or debt instruments, supplemented with operating cash inflows from operations.
Nevertheless, there is risk that certain sources of additional future funding will not be available to the Company or will be available on terms which are acceptable to management. In the meantime, Management continues to monitor and manage its cash flow in relation to its strategic growth objectives and working capital requirements.
About HEXO Corp
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 www.HEXOcorp.com.
