Key highlights of second quarter of 2019 fiscal year
HEXO Corp (TSX:HEXO; NYSE-A:HEXO) is reporting its financial results for the second quarter of the 2019 fiscal year, the Company’s first full quarter following the legalization of adult-use cannabis in Canada. Total gross revenue for the quarter reached $16.2 million, an increase of 144% from the previous quarter.
“This is an exciting time for HEXO as we continue to achieve milestones on the way to becoming a top two cannabis company,” said HEXO Corp CEO and co-founder, Sebastien St-Louis.
“This quarter not only saw an exponential increase in gross revenue and production, but also saw us continue to execute on our promises including reaching a construction and licensing milestone on our 1,000,000 sq. ft. greenhouse expansion and listing on the NYSE-A. Just yesterday, we announced an agreement to acquire Newstrike Brands Limited. HEXO’s future is very promising, I am looking forward to continually driving shareholder value and achieving milestones with our team.”
Other financial highlights from the quarter include:
During the quarter ended January 31, 2019, the Company announced that its 1,000,000 sq. ft. greenhouse expansion reached construction and licensing milestones. The first harvest from the facility is expected later this month and will allow HEXO to continue ramping up to an annual production capacity of 108,000 kg of dried cannabis annually.
Subsequent to quarter end, HEXO announced that it entered into a syndicated credit facility for up to $65 million available credit through a $50 million credit facility with an option to increase by an additional $135 million and a $15 million revolving loan with CIBC. The proceeds of the total available credit of $200 million will be used in part to fund the Company’s ongoing expansion projects and innovation initiatives.
HEXO most recently announced an agreement to acquire Newstrike Brands Ltd. This transaction was unanimously approved by the board of directors of both HEXO Corp and Newstrike Brands Limited. The acquisition will provide HEXO Corp capacity to produce approximately 150,000 kg of high-quality cannabis annually with access to four cutting-edge production campuses. It also provides the Company diversified domestic market penetration with combined distribution agreements in eight provinces. The combined entity is estimated to realize annual synergies of $10 million, allowing HEXO to operate more efficiently with a continued commitment to excellence. The acquisition requires Newstrike shareholder approval before being finalized.
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.
Second Quarter 2019 Financial Results
Summary of results for the three and six months period ended January 31, 2019 and 2018 (in thousands of Canadian dollars, except share and per share amounts, and where otherwise noted)
Q2 PERIOD HIGHLIGHTS
Summary of Results
Total net revenue in the second quarter of fiscal 2019 increased to $13,438 from $1,182 in the same period of fiscal 2018. The main contributor is the addition of adult-use sales in which the Company realized its first full quarter of legalization in Canada. Adult-use sales in the quarter accounted for 91% of total revenue. Non-cannabis ancillary sales which began in the previous quarter increased to $62 from $47. This revenue is derived from a management agreement held by the Company with arms-length partners.
The Company realized its first complete quarter of adult-use sales during the second quarter of fiscal 2019. Adult-use gross sales totaled $14,792 in the three months ended January 31, 2019, which is a 1,151% increase over the $1,182 of total sales in the second quarter of 2018 (which included medical sales only during that period), and a 185% increase over the $5,194 of adult-use sales in the first quarter of the current fiscal year. This is a direct result of the Company’s strong supply agreements and introductory brand awareness campaign.
The Company’s adult-use gross sales for the six months period ended January 31, 2019 totaled $19,986, an increase of $17,703 as compared to the six months period ended January 31, 2018 total sales of $2,283 (which include medical sales only during that period). The increase is due to there existing no adult-use sales in the comparative period.
Sales volume in the second quarter of 2019 was 2,537 kg for a 166% increase over the 952 kg equivalents sold in the first quarter of fiscal 2019. Dried flower products represented 85% of gram equivalents sold during the period, a 5% decrease from the first quarter of fiscal 2019 and oil product sales comprising the balance.
Gross adult-use revenue per gram equivalent increased to $5.83 from $5.45. This is reflective of the increased oil sales during the quarter which command higher market sales prices per gram equivalent. The adult-use net revenue per gram equivalent increased to $4.81 from $4.44 in the previous quarter reflecting a consistent approximate ($1.00) impact to revenue per gram due to excise taxes. In future periods as the sales mix shifts towards oil and other value-added products from lower valued dry flower products the impact of these excise taxes on revenue per gram is expected to decrease.
During the period, 84% of all adult-use sales were realized through the SQDC with the remaining 16% derived in Ontario and British Columbia via the OCS and BCLDB.
While the Company continues to prepare for the initial harvests from its new 1,000,000 sq. ft. greenhouse which should be realized throughout the third quarter of fiscal 2019 and the activation of its product transformation centre in Belleville which is expected in the fourth quarter of fiscal 2019, net revenues for the third quarter are estimated to increase minimally from those of the second quarter.
Net revenues for the fourth quarter are expected to approximately double those of the second quarter for the reasons detailed above.
Gross medical revenue in the three months ended January 31, 2019 increased 17% to $1,387 compared to $1,182 in the same period in fiscal 2018. Higher revenue was driven by increased sales volume as well as higher Elixir oil sales which command a higher revenue per gram when compared to dried gram sales. Compared to the prior quarter, the sequential revenue decreased by 3% from $1,436, reflecting a lower total gram equivalents sold due to lower dried flower sales in the period. Medical oil sales remained consistent quarter over quarter.
The Company realized $2,823 of gross medical sales during the six months period ended January 31, 2019 which is an increase of 24% from the $2,283 of gross medical sales during the comparative six months ended January 31, 2018. This increase is due to the reasons as stated above.
Net medical revenues decreased during the quarter by 16% to $1,171 due to the impact of excise taxes applied to the full periods medical sales versus those applied to only those medical sales realized post legalization on October 17, 2018 in the prior quarter.
Sales volume increased 15% to 151,521 gram equivalents, compared to 131,501 in the same prior year period. Revenue per gram equivalent increased to $9.15 as compared $8.99 the same prior year period and $9.12 from the prior quarter. This is a direct result of the increase in our oil-based products sales as the product mix purchased by customers continues to shift towards smoke-free alternatives.
Cost of Sales and Excise Taxes
Cost of goods sold includes the direct and indirect costs of materials and labour related to inventory sold, and includes harvesting, processing, packaging, shipping costs, depreciation and applicable stock based compensation and overhead.
Fair value adjustment on sale of inventory includes the fair value of biological assets included in the value of inventory transferred to cost of sales.
Fair value of biological assets represents the increase or decrease in fair value of plants during the growing process less expected cost to complete and selling costs and includes certain management estimates.
Cost of sales for the quarter ended January 31, 2019 were $6,499, compared to $451 for the same quarter ended in fiscal 2018. The increase in cost of sales is the result of increased sales volumes and increases to transformation costs as the oil and other value-added product production mix has increased from the second quarter of fiscal 2018.
For the six months period ended January 31, 2019, cost of sales increased to $9,329 from $914 from the comparable period of fiscal 2018 for the reasons as noted above.
Fair value adjustment on the sale of inventory for the second quarter ended January 31, 2019 was $3,690 compared to $1,032 for the same quarter ended January 31, 2018. This variance is due to increased sales volume of inventory sold when compared to the same quarter in fiscal year 2018. This is offset by the introduction of the adult-use market which commands a lower fair value per gram when compared to the exclusively medical market-based sales in the three months ended January 31, 2018.
Fair value adjustment on biological assets for the current quarter was ($8,354) compared to ($1,053) for the same quarter ended in fiscal 2018. This variance is due to the increase in the total number of plants on hand as well as increased yields in the quarter, primarily due to the fully licensed 250,000 sq. ft. greenhouse which began harvests in Q1 of fiscal 2019. This results in significantly increased expected gram yields in the quarter and increased production costs of operating a newly in-use facility. The increase in scale and total plants on hand is the result of meeting the demand of the adult-use market.
The fair value adjustments on the sale of inventory and biological assets increased to $4,407 and ($13,477) respectively from $1,846 and ($3,692) respectively in the comparative period of fiscal 2018 for those reasons as noted above.
New in fiscal 2019 are excise taxes associated with the new adult-use revenues and medical sales incurred after October 17, 2018. These taxes totaled $2,803 an increase of 176% from the prior quarter due which is consistent with increase in underlying sales. This reduced gross margin before fair value adjustments by approximately 9% during the quarter which is an increase of 2% from the sequential quarter. The increase is due to the total current periods medical sales being excise tax burdensome as opposed to the first fiscal quarter of 2019 in which only those medical sales post October 17, 2018 were burdened. Excise taxes are a function of fixed provincial and territorial rates based upon the gram equivalents sold as well as a variable ad valorem component which is dependent upon the selling price of the products.
Operating expenses include general and administrative expenses, inclusive of research and development, marketing and promotion, stock-based compensation, and amortization expenses. Marketing and promotion expenses include customer acquisition costs, customer experience costs, salaries for marketing and promotion staff, general corporate communications expenses, and research and development costs. General and administrative expenses include salaries for administrative staff and executive salaries as well as general corporate expenditures including legal, insurance and professional fees.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $8,161 in the second quarter of fiscal 2019, compared to $1,770 for the same period in fiscal 2018. This increase reflects the general growing scale of our operations, including an increase in general, finance and administrative staff for an increase of $2,775. New rental space in our Belleville location resulted in an increase of $613 which was obtained to house product processing and transformation as well as the administration department of the Belleville location. Total general and administrative payroll increased $1,950 due to the growth in operations. Total professional, listing and legal expenses increased by $1,024, as a result of additional corporate development initiatives and the increased financial reporting and control-based regulatory requirements accompanying public status on the TSX and NYSE-A. Increased insurances pertaining to commercial property and directors and officers increased $1,342 due to increased property, plant and equipment balances and the listing on the NYSE-A.
Total general and administrative expenses for six months ended January 31, 2019 increased to $13,076 from $3,046 in the same period of fiscal 2018 due to the general growth of the operational scale of the corporation for the same reasons as outlined above.
The Company is anticipating general and administrative expenses to increase as the Company completes and operationalizes its current expansion projects over the remaining two quarters of the fiscal year. Research and development expenses are expected to rise on trend with general and administrative expenses for the final two quarters of fiscal 2019 and subsequently, significantly escalate in fiscal 2020 as the Company executes its innovation initiatives.
MARKETING AND PROMOTION
Marketing and promotion expenses increased to $4,839 in the second quarter, compared to $1,358 for the same period in fiscal 2018. This reflects the implementation of our adult-use marketing and promotional events undertaken in the quarter as we build brand recognition and establish HEXO in the adult-use cannabis market. This is inclusive of higher staff and travel-related expenses, printing and promotional materials as well as advertisement costs. Quarter over quarter total marketing and promotion expenses were significantly reduced from $11,711 as it was during this period in which HEXO underwent an extensive branding and marketing campaign which involved concerts, conventions and social events to launch the HEXO brand to the adult-use market.
Total marketing and promotion expenses for the six months period ended January 31, 2019 significantly increased to $16,550 from $2,426 as compared to the same period of fiscal 2018. This dramatic increase reflects the Companies agreement marketing and branding campaigned which was primarily realized in the first quarter of fiscal 2019 as we prepared for the launch of the adult-use brand HEXO into the legalized Canadian adult-use market.
The Company expects marketing and promotion expenses to trend with revenues over the next two quarters of the fiscal year.
Stock-based compensation increased by to $4,960 when compared to $1,968 for the same period in fiscal 2018. The increase is a function of the increased number of outstanding stock options which is a direct correlation to the increased headcount of the Company. Underlying market prices of those options granted subsequent the second quarter of fiscal 2018 were significantly higher, resulting in an increase to the expensed value on a per stock option basis during the period.
Total stock-based compensation for the six months ended January 31, 2019 increased to $9,649 from $2,281 as compared to the same period of fiscal 2018 for those reasons as outlined above.
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
Amortization of property, plant and equipment increased to $452 in the quarter, compared with $188 for the same period in fiscal 2018. The increase is the direct result of the Company’s newly built greenhouses and acquired cultivation equipment. Additionally, increases to cultivation and production equipment were incurred in order to support the larger production demands and scalability of the Company.
Total amortization of property, plant and equipment for the six months ended January 31, 2019 increased to $1,025 from $312 as compared to the same period of fiscal 2018 for those reasons as outlined above.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets decreased to $74 in the first quarter, compared with $207 for the same period in fiscal 2018. The decrease is the result of the implementation of an inactive new ERP system as at the period ended January 31, 2019. This system is replacing certain fully amortized software programs.
Total amortization of intangible assets for the six months ended January 31, 2019 decreased to $224 from $270 as compared to the same period of fiscal 2018 for those reasons as outlined above.
Loss from Operations
Loss from operations for the second quarter was ($6,883), compared to ($4,739) for the same period in fiscal 2018. The increased loss from operations is due mainly to higher expenses in line with the expanding scale of operations as we prepared for the legalization of the adult-use market and the realization of stock-based compensation expenses due to the increased headcount and market share price value of the Company. This dramatic increase in scale of the Company and its operations was also offset by the 10.28x increase in net revenues as compared to the same quarter in fiscal 2018.
Other income/(expense) was $2,558 for the three months ended January 31, 2019 compared to ($4,213) in the same period of fiscal 2018. Revaluation of financial instruments of ($815) in the latest quarter reflects the revaluation of an embedded derivative related to USD denominated warrants issued in the prior year. Additionally, we had an unrealized fair value gain on convertible note receivable of $2,545. Interest income of $1,304 was realized for the three months ended January 31, 2019 reflective of the interest generated from the increased cash holdings and the interest accrued on the convertible debentures and promissory note held as at January 31, 2019.
Total other income/(expense) was $4,553 for the six months ended January 31, 2019 compared to ($5,750) of the same period of fiscal 2018. The increase is primarily due to the $5,978 unrealized gain on the convertible debenture which was issued in the first quarter of fiscal 2019. The loss due to revaluation of the financial instruments decreased $1,461 when compared to the six months ended January 31, 2018 due to a decrease in the remaining number of underlying warrants.
Webcast and Conference Call Information
HEXO Corp will host a conference call at 8:30 a.m. EDT on March 14, 2019.
A replay of the call will be accessible by telephone until 11:59 a.m. EDT on March 28, 2019.
Toll Free Dial-In Number: 1-888-390-0541
Replay Password: 432690#
About HEXO Corp
HEXO Corp is an award-winning consumer packaged goods cannabis company that creates and distributes products to serve the global cannabis market. Through our hub and spoke business strategy, we are partnering with Fortune 500 companies, bringing our brand value, cannabinoid isolation technology, licensed infrastructure and regulatory expertise to established companies, leveraging their distribution networks and capacity. As one of the largest licensed cannabis companies in Canada, HEXO Corp has over 1.8 million sq. ft of facilities in Ontario and Quebec and a foothold in Greece to establish a Eurozone processing, production and distribution centre. We serve the Canadian adult-use market under the HEXO brand while continuing to provide our medical cannabis clients with consistent access to Hydropothecary medical cannabis products. For more information please visit hexocorp.com.
This press release contains forward-looking information and forward-looking statements within the meaning of applicable securities laws (“forward-looking statements”). Forward-looking statements are based on certain expectations and assumptions and are subject to known and unknown risks and uncertainties and other factors that could cause actual events, results, performance and achievements to differ materially from those anticipated in these forward-looking statements. Forward-looking statements should not be read as guarantees of future performance or results. A more complete discussion of the risks and uncertainties facing the Company appears in the Company’s Annual Information Form and other continuous disclosure filings, which are available on SEDAR at www.sedar.com and EDGAR at www.sec.gov. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company disclaims any intention or obligation, except to the extent required by law, to update or revise any forward-looking statements as a result of new information or future events, or for any other reason.
Source: GlobeNewswire (March 14, 2019 – 6:30 AM EDT)
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