Gross adult-use revenue per gram equivalent decreased to $5.29 from $5.83 reflective of lower revenue and higher gram and gram equivalents sold. This is reflective of increased dry flower sales in the sales product mix during the quarter which command lower market sales prices per gram. The adult-use net revenue per gram equivalent decreased to $4.30 from $4.81 in the previous quarter reflecting the 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, 91% of all adult-use sales were realized through the SQDC with the remaining 9% derived in Ontario and British Columbia via the OCS and BCLDB.
As the Company begins realizing sales from its first harvests of from its B9 greenhouse in the fourth quarter of fiscal 2019 net revenues are expected to approximately double those of the current quarter.
MEDICAL SALES
Gross medical revenue in the three months ended April 30, 2019 increased 7% to $1,323 compared to $1,240 in the same period in fiscal 2018. Grams and gram equivalents sold increased marginally to 145 kg from 134 kg in the third quarter of 2018. The higher revenue was driven by higher oil sales which command a higher revenue per gram equivalent when compared to dried gram sales. Compared to the prior quarter, the sequential revenue decreased by 5% from $1,387, reflecting lower oil sales as well an oil product mix sold of a lower average value per gram equivalent.
The Company realized $4,146 of gross medical sales during the nine months period ended April 30, 2019 which is an increase of 18% from the $3,523 of gross medical sales during the comparative nine months ended April 30, 2018. This increase is due to those reasons as stated above.
Net medical revenues decreased during the quarter by 7% to $1,090 as compared to the second quarter of fiscal 2019 due to the overall decrease in medical sales during the period.
Sales volume increased 8% to 145 kg when compared to 134 kg in the same prior year period. Gross revenue per gram and gram equivalent decreased to $9.11 as compared to $9.24 the same prior year period and $9.15 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, Excise Taxes and Fair Value Adjustments
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.
| For the three months ended | For the nine months ended | |||||||||||
| April 30, 2019 | April 30, 2018 | April 30, 2019 | April 30, 2018 | |||||||||
| Excise taxes | $ | 2,974 | $ | – | $ | 6,792 | $ | – | ||||
| Cost of sales | 6,577 | 479 | 15,905 | 1,393 | ||||||||
| Fair value adjustment on sale of inventory | 4,665 | 572 | 9,072 | 2,419 | ||||||||
| Fair value adjustment on biological assets | (20,057 | ) | (2,477 | ) | (33,534 | ) | (6,169 | ) | ||||
| Total fair value adjustment | $ | (15,392 | ) | $ | (1,905 | ) | $ | (24,462 | ) | $ | (3,750 | ) |
Cost of sales for the quarter ended April 30, 2019 were $6,577, compared to $479 for the same quarter ended in fiscal 2018. The increase in cost of sales is the result of increased sales volumes due to the legalized adult-use market not present in the comparative period. Also, increases to transformation costs were incurred as oil and other value-added products production mix has increased from the third quarter of fiscal 2018.
For the nine months period ended April 30, 2019, cost of sales increased to $15,905 from $1,393 from the comparable period of fiscal 2018 for the reasons as noted above.
Fair value adjustment on the sale of inventory for the third quarter ended April 30, 2019 was $4,665 compared to $572 for the same quarter ended April 30, 2018. This variance is due to increased sales volume of inventory sold when compared to the same quarter in fiscal year 2018. Which was 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 April 30, 2018.
Fair value adjustment on biological assets for the current quarter was ($20,057) compared to ($2,477) 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 when compared to the comparative period. The increase in plants is due to the fully licensed 250,000 sq. ft. greenhouse which began harvests in Q1 of fiscal 2019 as well as the activation of the 1 million sq. ft. greenhouse during the quarter. This results in significantly increased expected gram yields in the quarter and increased production costs of operating newly in-use facilities. The increase in scale and total plants on hand is the result of meeting the demand of the adult-use market.
For the nine months ended, the fair value adjustments on the sale of inventory and biological assets increased to $9,072 and ($33,534) respectively from $2,419 and ($6,169) 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 $2,974 an increase of 6% from the prior quarter which is contestant with trend of the increase to underlying sales quantities. This was offset by the decrease in total gross sales for the quarter based on the product mix consisting of a higher balance of lower valued dried flower sales. This reduced gross margin before fair value adjustments by approximately 9% during the quarter which is consistent with the sequential quarter. 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
| For the three months ended | For the nine months ended | ||||||||
| April 30, 2019 | April 30, 2018 | April 30, 2019 | April 30, 2018 | ||||||
| General and administration | $ | 10,495 | $ | 2,028 | $ | 23,572 | $ | 5,074 | |
| Marketing and promotion | 5,122 | 2,102 | 21,671 | 4,528 | |||||
| Stock-based compensation | 8,162 | 783 | 17,811 | 3,064 | |||||
| Depreciation of property, plant and equipment | 140 | 163 | 1,166 | 475 | |||||
| Amortization of intangible assets | 137 | 243 | 360 | 513 | |||||
| Total | $ | 24,056 | $ | 5,319 | $ | 64,580 | $ | 13,654 | |
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 $10,495 in the third quarter of fiscal 2019, compared to $2,028 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 $2,965. New rental space in our Belleville location resulted in an increase of $794 which was obtained to house product processing and transformation as well as the administration department of the Belleville location. Total professional, listing and legal expenses increased by $900, 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 $1,836 due to increased property, plant and equipment balances and the listing on the NYSE-A.
Total general and administrative expenses for nine months ended April 30, 2019 increased to $23,572 from $5,074 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 in the next quarter as the Company completes and operationalizes its current expansion projects over the remaining quarter of the fiscal year. Research and development expenses are expected to significantly increase in the final quarter 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 $5,122 in the third quarter, compared to $2,102 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 increased modestly 6% from $4,839 due to an additional advertising campaign and branding efforts incurred during the period.
Total marketing and promotion expenses for the nine months period ended April 30, 2019 significantly increased to $21,671 from $4,528 as compared to the same period of fiscal 2018. This significant increase reflects the Company’s marketing and branding campaign 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 market.
The Company expects marketing and promotion expenses to trend with revenues in the final quarter of the fiscal year.
STOCK-BASED COMPENSATION
Stock-based compensation increased by to $8,162 when compared to $783 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 third 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 nine months ended April 30, 2019 increased to $17,811 from $3,064 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 decreased slightly to $140 in the quarter, compared with $163 for the same period in fiscal 2018. The decrease is due to the capitalization of production equipment and building amortization in the period.
Total amortization of property, plant and equipment for the nine months ended April 30, 2019 increased to $1,166 from $475 as compared to the same period of fiscal 2018 as 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.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets decreased to $137 in the quarter, compared with $243 for the same period in fiscal 2018. The decrease is the result of the implementation of an inactive new ERP system which was only put into use during the period ended April 30, 2019. This system is replacing certain fully amortized software programs.
Total amortization of intangible assets for the nine months ended April 30, 2019 decreased to $360 from $513 as compared to the same period of fiscal 2018 for those reasons as outlined above.
Loss from Operations
Loss from operations for the third quarter was ($2,224), compared to ($2,653) for the same period in fiscal 2018. The increased operating expenses due to the expanding scale of operations were offset by higher revenues and increased biological fair value adjustments as our production capacity continues to increase.
Other Income/Expenses
Other income/(expense) was ($5,527) for the three months ended April 30, 2019 compared to $682 in the same period of fiscal 2018. Revaluation of financial instruments of ($1,121) 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 loss on convertible note receivable of ($4,117) as well as an unrealized loss on a long term investment of ($277). Interest income of $1,242 was realized for the three months ended April 30, 2019 reflective of the interest generated from the increased cash holdings and the interest accrued on the convertible debentures and promissory note which was settled on April 30, 2019.
Total other income/(expense) was ($979) for the nine months ended April 30, 2019 compared to ($5,068) of the same period of fiscal 2018. The increase is primarily due to the $1,862 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 $645 when compared to the nine months ended April 30, 2018 due to a decrease in the remaining number of underlying warrants. Interest income increased $1,350 due to increased cash holdings, convertible note interest and interest earned on a public security investment.
About HEXO Corp
HEXO Corp is an award-winning consumer packaged goods cannabis
company that creates and distributes innovative products to serve
the global cannabis market. Through its hub and spoke business
strategy, HEXO Corp is partnering with Fortune 500 companies,
bringing its 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
operates with 2.4 million sq. ft of facilities in Ontario and
Quebec. The Company is also expanding internationally and has a
foothold in Greece to establish a Eurozone processing, production
and distribution centre. The Company serves the Canadian
adult-use markets under its HEXO Cannabis and Up Cannabis brands,
and the medical market under HEXO medical cannabis. For more
information please visit hexocorp.com.
Forward-Looking
Statements
This press release contains forward-looking information and
forward-looking statements within the meaning of applicable
securities laws (“forward-looking statementsâ€). 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.
Investor Relations:
Jennifer Smith
1-866-438-8429
invest@HEXO.com
www.hexocorp.com
Media Relations:
Caroline Milliard
(819) 317-0526
media@hexo.com
Director
Adam Miron
819-639-5498
A video accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/ac3726ad-b136-4048-80fa-b386164aa2a5