HEXO Q4 Financial Results Show Major Operational Loss But Express Optimism Regarding Future

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In spite of the negative results in the latest financial report, HEXO's (NYSE:HEXO) CEO is confident that its multi-brand approach, focus on customer demand, re-evaluation of its strain mix, and introduction of new products to counter the black market, will help the company increase its future market share and total revenue.

Fourth Quarter Financial Highlights (All amounts are expressed in thousands of Canadian dollars, unless otherwise noted and except for per gram, kilogram amounts and their equivalents.)

• Gross adult-use revenue per gram equivalent decreased by 10.4% based on provision for sales returns and price adjustments recorded in the period
• Net adult-use revenue per gram equivalent decreased by 18.4% reflecting the impact of the provision above as well as new sales in Alberta, which imposes on average a 16% higher excise tax rate than Ontario and Quebec.
• Net revenue increased by 18.5%
  • Adult-use sales increased 30% accounting for 91% of total revenue.
  • Medical-use sales declined by 12.2%
• Sales volume increased 45% 
  • Dried flower and milled products increased by 4% accounting for 89% of gram equivalents sold.
  • Oil product sales comprising the balance of the quantity sold.  
• Gross margin before fair value adjustments was 45% of net revenue from sale of goods compared to 49% in the prior quarter. 
• Operating expenses increased by 338% reflecting the increase to the scale of operations. 
• Loss from operations for the quarter of ($60,650) was primarily due to:
  • the significant increase in scale of operations and increased stock-based compensation expense due to higher cannabis market value,
  • increased R&D expenditures
  • and an impairment loss on inventory..

Fourth Quarter Operations Highlights

​During the fourth quarter, HEXO:

• closed the Newstrike acquisition (May 24) thereby:
  • increasing its production,
  • diversifying total market penetration,
  • and incorporating the UP brand to its brand portfolio,
• entered into a supply agreement with the Alberta Gaming, Liquor and Cannabis Commission,
• listed 18 additional products with the Ontario Cannabis Store,
• transferred its U.S. stock exchange listing from the NYSE American to the New York Stock Exchange
• secured an European medical cannabis license through Greek affiliate, HEXO MED S.A.
• launched Original Stash, the industry’s first value brand to compete directly with the illicit market and to contribute to a significant increase in sell-through,
• reduced its cost structure by:
  • eliminating 200 positions across its departments and locations,
  • suspending cultivation at its Niagara facility, and in 200,000 sq. ft. of its Gatineau facility determining that additional cultivation space was not required at this time given the current market conditions in Canada.  

Sebastien St-Louis, CEO and co-founder of HEXO Corp., stated in the Q4 report that he was:

"confident that our multi-brand 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”.

Subsequent to quarter end:

• announced that its JV with Molson Coors Canada, Truss Beverages Co., in partnership with Flow Glow Beverages Inc., was ready for Cannabis 2.0  with its first beverage brand of CBD-infused water
• announced a $70M private placement of 8% unsecured convertible debentures.
• obtained research and Phase 1 license for Belleville, and sale of cannabis topicals, extracts, edibles and beverages for Gatineau facility

Outlook

The company:

• estimates Q1’20 net revenue to be in the range of approximately $14,000 to $18,000
• is targeting to achieve positive adjusted EBITDA in calendar 2020 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.

As can be seen in the chart below investors reacted negatively to HEXO's Q4 Financial Report yesterday with its stock dropping 3% by mid-day (and down 16% in the past week in anticipation of this report) but it has regained some ground in early trading today..