HEXO Corp. has reported its financial results for the first quarter fiscal 2020 ended October 31, 2019. All amounts are expressed in Canadian dollars.
“We have done some pretty heavy lifting on our operations, as we work towards profitability in 2020. The choices that we have made and implemented have already led to a 25% reduction in our operating expenses,” said Sebastien St-Louis, CEO and co-founder of HEXO Corp. “Cost control combined with our multi-brand approach, an updated strain mix, as well as the introduction of new products, will help us increase our market share and total revenue, leading us towards great results in 2020. I am more confident than ever in our ability to continue down this path and to pivot with more speed and assertiveness should market conditions evolve again.”
2020 Q1 highlights
According to the company's report, shipped revenue in Q1’20 decreased slightly to $20.2M, compared with $22.8M in Q4’19. Shipped revenue was reduced by price concessions of $1.2M in Q1’20, compared with $2.8M in Q4’19 and return provisions of $0.7M in Q1’20 compared with $1.0M in Q4’19, which yielded gross adult-use sales of $18.3M in Q1’20 and $19.0M in Q4’19. Additionally, the company realized sales returns of $0.6M in Q1’20 and $Nil in Q4’19 was reversed from the provision for returns made during the previous quarter. Overall during the period gross adult use sales decreased moderately by 4%. The provisions are reflective of a general best estimate provision for returns and price adjustments based on the Company’s assessment of sell-through and slow-moving inventory.
Net revenue in Q1’20 decreased slightly to $14.5M, compared to $15.4M, in Q4’19, and increased from $5.7M in Q1’19. Adult use sales volume in Q1’20 increased 5% to 4,196 kg from 4,009 kg equivalents sold in the prior quarter. The SQDC contributed 3,080 kg, ALGC contributed 474 kg, OCS contributed 518 kg, other provinces and private retailers contributed 124 kg.
Gross adult-use revenue per gram equivalent decreased to $4.35 in Q1’20 from $4.74 in Q4’19, reflective of the provision for sales returns and price adjustments recorded in the quarter. The provision is reflective of a general best estimate provision for returns and price adjustments based on the Company’s assessment of sell-through and slow-moving inventory. This was partially countered by the addition of the premium brand Up cannabis, which commands revenue of $7.03 per gram on dried flower during the quarter. The adult-use net revenue per gram equivalent decreased to $3.24 in Q1’20 from $3.51 in Q4’19, reflecting the impact of the provision above.
Gross margin before fair value adjustments for Q1’20 was $4.6M or 31% of net revenue from sale of goods, compared to $5.1M and 33% in the prior quarter.
The Company incurred an impairment loss on inventory of $25.5M during Q1’20 compared with $16.9M in Q4’19. The impairment loss was realized on the Company’s inventory in comprised of the following;
- Impairment of a surplus of cannabis trim (trim is the accumulation of the cannabis’ sugar leaves during the dry trimming process and is primarily used for extraction purposes) and milled products the amount of $16.4M due to an excess of stock relative to the Company’s short-term demand for cannabis distillate production;
- Impairment of bulk purchased product of $4.4M due, in part, to an oversupply in the market of bulk products with lower potencies as well as a relatively low value when compared to competing bulk goods with a higher potency in the current adult-use market;
- Impairment of oil based finished goods of $3.4M due a surplus of finished goods as oil-based products haven’t captured the market share as originally estimated. Also contributing to the impairment is the decision made by certain provinces to return oil products with packaged dates greater than 3 to 4 months old; and
- Impairment of finished goods of $1.2M which are required to be archived as at October 31, 2019 due to Health Canada requirements with a net realizable value of $nil.
Operating expenses decreased 25% quarter over quarter to $35.1M in Q1’20, compared with $46.9M in Q4’19 as a result of a decrease in G&A expenses of 30%, marketing expenses of 35% and stock-based compensation expense of 20%, as the Company continues to reduce previous spending levels to refocus operations on becoming adjusted EBITDA positive.
Operating expenses increased from $22.0M in Q1’19, reflecting the significant increase to the scale of our operations over the last year.
Loss from operations for the quarter was ($58.5M), compared with ($60.7M) in the prior period and ($14.7M) for the comparable quarter year over year. Excluding non-cash impairment charges in Q1’20, adjusted net loss was ($33.0M) compared with ($43.7M) in Q4’19. The increase in loss year over year is attributable to the larger magnitude of the Company’s operations, the expanding scale production and sales in the period, and an impairment loss.