HEXO Corp Reports First Quarter Fiscal 2021 Financial Results

Published: December 15, 2020

HEXO Corp Reports First Quarter Fiscal 2021 Financial Results

HEXO Corp. reported first quarter fiscal 2021 financial results. All amounts are expressed in Canadian dollars unless otherwise noted.

“I would like to thank the entire HEXO team for the remarkable progress made in the first quarter,” said HEXO CEO and co-founder Sebastien St-Louis. “Today’s record revenue performance reflects our commitment to providing consumers with high-quality products, at reasonable prices, for all occasions. We continue to hold the number one market share position in Quebec, while continuing to aggressively expand into other markets. HEXO is now top four in adult-use market share by net sales dollars in Canada. We have also moved into the top beverage spot through Truss, our joint venture with Molson Coors, and have reached the number one market share position for hash, which we believe will continue to be an important category for the industry.”

Key Financial & Operating Highlights from 1Q21

  • Gross revenue of $41.3M, the highest in the Company’s history, increased 14% from 4Q20 and 114% from the comparative prior year period.
  • Net revenue of $29.5M, up 9% from 4Q20 and 103% from the year ago period.
  • Sales momentum increased across Canada, with 18% of the periods gross sales coming from Alberta, 15% from Ontario and 6% from British Columbia.
  • Maintained number one market share in Quebec.
  • Number one in beverages with net revenue increasing 54% versus 4Q20.
  • Six straight quarters of Adjusted EBITDA loss improvement, 87% reduction from ($3.25M) in 4Q20 to ($0.42M).
  • Adjusted Gross Margin of 39% on sales excluding adult-use beverages, while beverage related revenue was gross margin positive in just its second full quarter of being in market.
  • At the close of Q1, the Company’s working capital was $250.3M, including $149.8M of cash.
  • Operational cash use of ($6.1M) for the quarter, not including financing and investing activities.

“We made extraordinary gains toward profitability this quarter, as we continue to optimize production, persist in our war on COGS, and focus on reducing our SG&A. This was the sixth sequential quarter of Adjusted EBITDA improvement, as we march towards being Adjusted EBITDA positive. We believe the strength of our balance sheet, along with our low depreciable capital base, have put us on a path where we are looking beyond positive Adjusted EBITDA and striving towards positive EPS,” continued St-Louis. “As discussed on our fiscal year-end earnings call, we purposely took time this quarter to focus on better matching supply to forecasted demand, leading to tough decisions, such as delaying the relaunch of our UP brand until Q2. Despite this, we were able to achieve record sales and I am delighted at the progress we have made to date. UP has been successful thus far, which gives us confidence in our approach moving forward.”

For the three months ended
Income Statement Snapshot October 31, 2020 July 31, 2020 October 31, 2019
  $ $ $
Revenue from sale of goods 41,300 36,140 19,297
Excise taxes (11,887) (9,082) (4,839)
Net revenue from sale of goods 29,413 27,058 14,458
Ancillary revenue 55 87 41
Total revenue 29,468 27,145 14,499
 
Cost of sales (17,544) (63,157) (35,826)
Fair value adjustments 6,290 1,322 388
Gross profit/(loss) 18,214 (34,690) (20,939)
 
Operating expenses (20,776) (71,509) (39,524)
Loss from operations (2,562) (106,199) (60,463)
Other expenses and losses (1,635) (63,333) (5,576)
Net loss before tax (4,197) (169,532) (66,039)
Income tax recovery 6,023
Total Net loss (4,197) (169,532) (66,016)

First Quarter 2021 Financial Results

Total net revenue in 1Q21 increased $2.3M to $29.4M from $27.1M in 4Q20 due primarily to 8% growth in adult-use cannabis sales and 54% growth in adult-use beverage. Total net revenue increased 103% from the comparative period of fiscal 2020. The Company strengthened its positions in several key Canadian markets outside of Quebec, while maintaining its top competitive position within Quebec.

For the three months ended Adult-Use
(excluding beverages)
Medical International Wholesale Total
non-beverage
Adult-use
beverages
Company total
October 31, 2020 $ $ $ $ $ $ $
Net revenue 24,344 486 1,125 401 26,356 3,057 29,413
Cost of sales 15,497 123 317 113 16,050 3,037 19,087
Gross profit before adjustments ($) 8,847 363 808 288 10,306 20 10,346
Gross margin before adjustments (%) 36% 75% 72% 72% 39% 1% 35%
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 19,041
Gross profit before adjustments ($) 8,912 429 649 433 10,423 (2,406) 8,017
Gross margin before adjustments (%) 39% 78% 50% 66% 42% (121%) 30%

The Company’s consolidated gross margin for 1Q21 improved to 35% from 30% in 4Q20. This increase is directly attributable to an improved gross profit in adult-use beverage during the period, where Truss Beverage achieved positive gross profit in only its second quarter of being in market.

Operating expenses were $20.8M in the quarter, an improvement of $50.7M from 4Q20, as the Company continued to streamline costs across the organization, primarily in SG&A, offset by marketing costs related to product launches. Loss from operations improved to $2.6M in 1Q21 from a loss of $60.5M in 4Q20, driven by a clean balance sheet and absence of material, non-recurring charges.

The Company’s total Adjusted EBITDA improved by 87% or more than $2.8M from ($3.3M) in 4Q20 to ($0.4M) in 1Q21. Net loss improved to $4.2M from a loss of $66.0M in 4Q20, when the Company took significant write downs.

Adjusted EBITDA

Q1’21 Q4’20
$ $
Total net loss (4,197) (169,532)
Income taxes (recovery)
Finance expense (income), net 1,895 2,069
Depreciation, included in cost of sales 2,406 1,254
Depreciation, included in operating expenses 1,078 1,179
Amortization, included in operating expenses 331 249
Investment (gains) losses
Revaluation of financial instruments loss/(gain) (733) 1,433
Share of loss from investment in joint venture 1,073 1,863
Loss/(gain) on convertible debentures 86
Unrealized loss on investments 587 4,345
Realized loss/(gain) on investments
Foreign exchange loss/(gain) 461 1,623
Loss on inducement of convertible debentures 54,283
Non-cash fair value adjustments
Realized fair value amounts on inventory sold 4,806 6,656
Unrealized gain on changes in fair value of biological assets (11,096) (7,978)
Restructuring costs 525 (79)
Other non-cash items
Share-based compensation, included in operating expenses 2,930 4,373
Share-based compensation, included in cost of sales 596 511
Write-off biological assets and destruction costs
Write-off of inventory 2,217
Write (up)/down of inventory to net realizable value (1,543) 41,899
Impairment loss on right-use-assets 761 2,000
Gain on exit of lease (419)
Impairment loss on property, plant and equipment 42 46,414
Impairment of intangible assets
Impairment of goodwill
Recognition of onerous contract 1,763
Disposal of long-lived assets 78 122
Adjusted EBITDA (419) (3,250)

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.

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