Hexo Corp (TSX: HEXO) (NYSE: HEXO) reported its first quarter 2020 financials this morning for the period ended October 31, 2019. The firm reported net revenues of $14.4 million for the quarter, down 6% from the prior quarters figure of $15.4 million. The decrease in revenues was despite the issuer selling more cannabis than in the prior period.
Hexo is quick to identify within its news release that “shipped revenues” during the quarter amounted to $20.2 million, however excise taxes, price concessions, and return provisions result in the firm being able to recognize only $14.4 million in net revenues for the quarter, with a gross margin before fair value adjustments of $4.5 million. The biggest impact however was that of the average selling price of recreational product, which dropped from $4.74 to $4.35 over the three month period once price concessions are included. Net of excise taxes, that figure is $3.24 per gram.
Also significant during the quarter is inventory impairments suffered by the company as a result of weakening cannabis pricing. In total, a $25.5 million impairment loss was taken as a result of a number of factors, including surplus trim inventory levels, which has seen a complete falling out in market pricing, impairment of bulk purchases of product due to THC content, impairment of finished goods for oils, and impairment of finished dried cannabis goods.
Amazingly, Hexo did not impair product which was found to be illegally grown in Block B of its Niagara facility. Instead, the company has indicated that it will in fact be selling this illegally grown product: “The inventory was kept on the books and although destruction was a possible outcome, the Company has reassessed any risks related to such inventory and concluded that it is cleared for sale and will not be subject to destruction. Note that Block B is now fully Licensed by Health Canada.” How this is up to the company, and not the regulator, is anyone’s guess.
What the issuer really tried to dictate the story as this quarter however, is their decreasing operational expenses. Which is curious, given that their quarter expenses are still more than double their net revenues. Operating expenses during the quarter came in at $35.1 million, as compared to $46.9 million in the prior quarter. While showing a marked improvement as a result of layoffs conducted, it is still not nearly enough for the company to show a path to profitability at this time.
General and administrative expenses made up the bulk of operating expenses during the quarter, at $15.9 million, or 110% of net revenues. This was followed by share-based compensation, which amounted to $8.1 million for the ninety day period. Marketing and promotion came in third at $6.2 million. A total net loss of $62.4 million was recorded during the period.
Operating cash flow came in at ($34.2 million) during the quarter, while financing cash flows and investing cash flows came in at ($1.1 million) and ($36.9 million) respectively. Hexo finished the quarter with a cash position of $41.2 million, which was bolstered subsequent to quarter end via a $70 million financing. Cash position was down from the previous quarters figure of $113.56 million.
Hexo Corp last traded at $2.24 on the NYSE.
Information for this briefing was found via Sedar and Hexo Corp. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
As the founder of The Deep Dive, Jay is focused on all aspects of the firm. This includes operations, as well as acting as the primary writer for The Deep Dive’s stock analysis. In addition to The Deep Dive, Jay performs freelance writing for a number of firms and has been published on Stockhouse.com and CannaInvestor Magazine among others.