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June 11, 2020, 7:19 a.m. EDT

HEXO Corp. reports third quarter fiscal 2020 financial results; Net Revenue Up 30% to $22.1 Million, Improved Operational Performance

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OTTAWA, June 11, Jun 11, 2020 (GLOBE NEWSWIRE via COMTEX) -- Key Operating Highlights

-- Gross Revenue increased 30% to $30.9M from $23.8M in Q2

-- Net Revenue increased 30% to $22.1M from $17.0M in Q2

-- Adult-use grams and gram equivalents sold increased 42% to 9,338 kg compared to Q2

-- Gross Margins increased to 40%

-- Operating expenses decreased to $26.8M

-- Closed $46M public offering to enhance liquidity

-- Adjusted EBITDA improved to ($4.3M) from ($8.5) in Q2; tracking towards positive adjusted EBITDA in the first half of fiscal 2021

-- Announced expanded partnership with Molson Coors to explore US CBD market in Colorado

HEXO Corp. /zigman2/quotes/200008967/delayed CA:HEXO -2.11% /zigman2/quotes/206508254/composite HEXO +0.96% ("HEXO" or the "Company") today reported its financial results for the third quarter fiscal 2020 ended April 30, 2020. All amounts are expressed in Canadian dollars unless otherwise noted.

"I'd like to take this opportunity to thank the HEXO team who has worked tirelessly during the COVID 19 pandemic to keep the doors open and ensure the safety of our employees and our customers. We could not do this without you, we recognize and appreciate your efforts. It's thanks to your hard work that we closed the third quarter delivering on our financial goals, even in the face of adversity," said Sebastien St-Louis, CEO and co-founder of HEXO.

Operational and Financial Highlights







                                                    For the three months ended                                    For the nine months ended
        Income Statement Snapshot (in millions)     April 30, 2020      January 31, 2020      April 30, 2019      April 30, 2020   April 30, 2019
                                                    $                   $                     $                   $                $
        Revenue from sale of goods                  30.9                23.8                  15.9                74.0             38.7
        Excise taxes                                (8.8           )    (6.9             )    (3.0           )    (20.5          ) (6.8           )
        Net revenue from sale of goods              22.1                17.0                  13.0                53.5             32.0
        Ancillary revenue                           0.1                 0.1                   0.1                 0.1              0.2
        Gross margin before fair value adjustments  8.8                 5.7                   6.4                 18.9             16.2
        Gross margin                                5.7                 (7.9             )    21.8                (23.3          ) 40.7
        Operating expenses                          (26.8          )    (281.5           )    (24.1          )    (347.9         ) (64.6          )
        Loss from operations                        (21.1          )    (289.4           )    (2.2           )    (371.1         ) (23.9          )
        Other income/(expenses and losses)          1.5                 (8.8             )    (5.5           )    (12.8          ) (1.0           )
        Net loss before tax                         (19.5          )    (298.2           )    (7.8           )    (384.0         ) (24.9          )
        Tax recovery                                -                   -                     -                   6.0              -
        Total Net loss                              (19.5          )    (298.2           )    (7.8           )    (377.9         ) (24.9          )
        


Third Quarter 2020 Highlights

Gross revenue increased 30% to $30.9M from $23.8M in Q2'20, and from $15.9M in Q3'19. Net revenue increased 30% to $22.1M from $17.0M in Q2'20, and from $13.0M in Q3'19.

Adult-use cannabis gross revenue in Q3'20 increased 30% to $29.8M from $23.0M in Q2'20, and from $14.6M in Q3'19. The primary driver of the increase in sales during the quarter was the increase in sales from Original Stash. Newly launched products such as hash and oil extract drops also contributed to overall adult-use sales growth. Adult use sales volume in Q3'20 increased 42% to 9,338 kg from 6,579 kg sold in Q2'20.







                                                    Q3'20     Q2'20     Q1'20     Q4'19     Q3'19
        Shipped Revenue (in millions)               $  31.7   $  24.4   $  20.2   $  22.8   $  14.6
        Less: price concessions                        (1.1 )    (0.2 )    (1.2 )    (2.8 )    -
        Less: provision for sales returns              (0.9 )    (1.2 )    (0.7 )    (1.0 )    -
        Revenue from sale of adult-use cannabis        29.8      23.0      18.3      19.0      14.6
        Excise taxes                                   (8.7 )    (6.7 )    (4.7 )    (4.9 )    (2.7 )
        Net revenue from sale of adult-use cannabis $  21.0   $  16.3   $  13.6   $  14.1   $  11.9
        


Gross margin before fair value adjustments for Q3'20 increased 7% to $8.8M or 40% of net revenue from sale of goods, compared with $5.7M or 33% in the prior quarter. Increase in gross margin was driven by a decreased production costs through increased efficiencies, automation of packaging activities, and selection of strains which resulted in decreased labour costs. While the Company expect to see fluctuations in gross margins over the next few quarters as new products are introduced and the Belleville facility ramps up, this success demonstrates that HEXO is tracking towards its goal of a 40% gross margin across their product portfolio.

The Company incurred a write down on inventory of $0.2M compared with $16.1M during Q2'20. HEXO has shifted their strains to those in demand by consumers and focused on creating 2.0 products to utilize trim. These internal production gains mean that we have not had to access inferior 3 party product.

Operating expenses decreased to $26.8M compared with $281.5M in Q2'20, and from $46.9M in Q4'19. Included in operating expenses, are certain expenses which management believes are expenses that are non-recurring or non-cash and related to significant changes in market conditions. Included in these expenses are:

-- Restructuring costs - During the quarter the Company incurred restructuring costs in the amount of $0.9M, compared with $0.3M in Q2'20, associated to the rightsizing of operations. These costs are not expected to continue.

-- Impairments of property, plant and equipment and intangible assets - In the prior quarter after completing a strategic review of its cultivation capacity, the Company made the decision to list the Niagara facility for sale. As a result of the decision to sell, the Company undertook impairment testing of the facility, its property, plant and equipment, and the intangible assets acquired from Newstrike Brands Ltd. The Company determined that an impairment loss of $138.3M was required in Q2'20, nil in Q3'20.

-- Impairment of goodwill - In the prior quarter, the Company recorded an impairment in goodwill of $111.9M, nil in Q3'20.

-- Realization of onerous contract - The Company recorded a $3.0M realization as the result of an onerous contract which is currently the subject of litigation in Q2'20, nil in Q3'20.

When normalized for these non-recurring or non-cash expenses related to significant changes in market conditions, the company reports normalized operating expenses of $25.7M compared to $28.1M in Q2'20, and at its highest point of $46.9M in Q4'19. The 9% decrease quarter over quarter is the result of a decrease in legal and professional fees, travel and share based compensation, as the Company continues to reduce previous spending levels to refocus operations on becoming adjusted EBITDA positive. The significant reduction since its peak in Q4'19 is also due to a reduction and refocusing of marketing related expenditures. When normalized for other non-cash expenses the company reports normalized operating expenses of $14.4M compared with $16.1M in Q2'20.







        Adjusted EBITDA (in millions)                                 Q3'20   Q2'20    Q1'20   Q4'19   Q3'19
                                                                      $       $        $       $       $
        Total net loss                                                (19.5 ) (298.2 ) (60.0 ) (44.7 ) (7.8  )
        Income taxes (recovery)                                       -       -        (6.0  ) (18.2 ) -
        Finance expense (income), net                                 2.9     3.3      (0.1  ) (1.3  ) (1.1  )
        Depreciation, included in cost of sales                       1.0     0.9      0.4     0.4     0.3
        Depreciation, included in operating expenses                  1.6     2.0      1.3     0.6     0.1
        Amortization, included in operating expenses                  0.3     1.7      1.7     1.4     0.1
        Investment (gains) losses
        Revaluation of financial instruments loss/(gain)              (5.0  ) (2.7   ) (0.3  ) (0.5  ) 1.1
        Share of loss from investment in joint venture                1.2     1.6      1.7     1.3     1.1
        Unrealized loss/(gain) on convertible debentures              0.2     0.4      2.6     0.1     4.1
        Unrealized loss on investments                                0.3     6.6      1.7     -       0.3
        Realized loss/(gain) on investments                           1.2     0.2      -       0.2     -
        Foreign exchange loss/(gain)                                  (2.4  ) (0.6   ) -       0.1     -
        Non-cash fair value adjustments
        Realized fair value amounts on inventory sold                 9.3     5.4      6.7     7.3     4.7
        Unrealized gain on changes in fair value of biological assets (6.4  ) (7.9   ) (7.1  ) (5.3  ) (20.1 )
        Non-recurring expenses
        Restructuring costs                                           0.9     0.3      3.7     -       -
        Other non-cash items
        Share-based compensation, included in operating expenses      6.2     7.9      8.2     10.2    8.2
        Share-based compensation, included in cost of sales           0.4     1.0      0.2     0.9     0.4
        Write-off biological assets and destruction costs             -       -        0.7     -       -
        Write-off of inventory                                        -       -        2.2     -       -
        Write down of inventory to net realizable value               0.2     16.1     23.0    19.3    -
        Impairment loss on right-use-assets                           -       0.5      0.7     -       -
        Impairment loss on property, plant and equipment              0.2     31.6     -       -       -
        Impairment of intangible assets                               -       106.2    -       -       -
        Impairment of goodwill                                        -       111.9    -       -       -
        Recognition of onerous contract                               -       3.0      -       -       -
        Disposal of long-lived assets                                 3.2     0.5      -       -       -
        Adjusted EBITDA                                               (4.3  ) (8.5   ) (18.7 ) (28.2 ) (8.5  )
        


During Q3'20, the Company's calculated adjusted EBITDA increased to ($4.3M), compared with ($8.5M). This represents a 50% increase. The Company remains focused on achieving positive adjusted EBITDA in the first half of fiscal 2021, dependent on the implication of COVID 19 on operations, store roll outs and customer demand.

Other Developments

Entry Into US Market

On April 15, 2020 Molson Coors and HEXO announced the formation of joint venture to explore opportunities for non-alcohol hemp derived CBD beverages in Colorado.

/zigman2/quotes/200008967/delayed
CA : Canada: Toronto
$ 0.93
-0.02 -2.11%
Volume: 859,564
Aug. 12, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$388.18 million
Rev. per Employee
N/A
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/zigman2/quotes/206508254/composite
US : U.S.: NYSE
$ 0.71
+0.0068 +0.96%
Volume: 7.79M
Aug. 12, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$291.86 million
Rev. per Employee
N/A
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