HEXO Corp reports fiscal Q4 and 2020 results (HEXO, TAP)

Cannabis 2.0 (beverages) is bad for margins?

For the fiscal fourth quarter ended July 31, 2020, Canadian LP Hexo reported net revenues of C$27.1 million vs. FactSet C$24.1 million, beating consensus estimates by 12.3%. Net revenues grew QoQ by 23% and YoY by 76%. Gross revenue of C$36.1 million, the highest in the company’s history, increasing 17% QoQ and 76% YoY. The primary drivers of the increase were the company’s cannabis 2.0 products, launching cannabis vapes into the market, which is a new sales stream and contributed C$1.3 million to gross sales, as well as C$2.4 million of beverage based adult-use sales, another new revenue stream that began the mid-fiscal year, and from international sales of C$1.3 million reflecting the company’s purchase agreement established with an Israel based medical cannabis company. The quarter's total net loss was -C $ 169.5 million, driven by impairment charges and inventory write-downs.  The Company recorded write-downs to inventory of $43M and recorded impairments to property, plant, and equipment of $46.4M.  

The company made major strides by launching Truss cannabis-infused beverages in Canada.  For fiscal Q4, adult-use beverage sales made up 7% of revenues in its debut quarter. However, its introduction caused the gross margin before fair value adjustment to fall 10% YoY to 30%. The company’s adult-use beverage launch hurt margins in 4Q20 as operating and overhead costs were recognized in sales cost without the benefit of fully scaled production and sales.

For fiscal 2020, revenue from the sale of goods increased 86% YoY, totaling C$110.1 million compared to C$59.3 million in fiscal 2019. The company’s net revenue from the sale of goods for fiscal 2020 increased 70% YoY to C$80.6 million, compared with C$47.3 million in the prior year. Operating expenses spiked to C$418.6 million in fiscal 2020, compared to $111.5 million in fiscal 2019, driven mostly by impairment charges. Total loss from operations was C$476.6 million, compared to an operating loss of C$87.0 million for the prior year.

Signs of trouble more apparent when the company needed to hit the market with the May 2020 public offering ($54MM) and the June 2020 at-the-market offering ($33MM), respectively.  At the end of the quarter, the Company’s working capital was $223M, including $184M of cash.

A day not too long ago, the street was claiming HEXO as a winner in Cannabis beverages.  That day might be a few years off! 

Columbia Care completes $20.4M add-on debt financing.

Columbia Care announced the completion of an add-on debt issuance under its existing senior secured indenture via a private placement of 20,000 units for aggregate gross proceeds of approximately $20.4 million.  The financing deal was brought by unsolicited institutional demand, allowing the company to issue debt under the existing indenture at a premium on an accelerated basis without a market process.  With this add-on debt financing, the company’s overall cost of debt was reduced by 170bps. 

“This add-on debt financing highlighted the confidence and continued support Columbia Care enjoys with institutional investors,” said Nicholas Vita, CEO of Columbia Care. “Incoming calls for debt and equity have increased over the past two quarters as continued operational performance supports the market’s expectation that Columbia Care will crossover to EBITDA positive in 3Q 2020. We chose to move forward with this transaction because it reduced our overall capital cost, was institutionally driven by two blue-chip investors and required no marketing process. We remain committed to being disciplined stewards of capital while executing against our growth and profitability initiatives further to position Columbia Care as the leading nationwide cannabis operator.”

Canadian study finds a link between medical cannabis and reduced alcohol use.

Research from the University of Victoria found that authorized medical marijuana patients using cannabis to reduce their drinking experienced a reduction or even discontinuation of alcohol use. The research used reflects survey data from 2,102 medical marijuana patients registered with Tilray.

Overall, 973 survey participants reported past or current alcohol use, with 419 (44%) reporting decreases in alcohol usage frequency over 30 days, 323 (34%) decreasing the number of standard drinks they had per week, and 76 (8%) reporting no alcohol use at all in the 30 days before the survey. Being younger than 55 years and reporting higher alcohol use rates before initiating medical cannabis use were both associated with greater odds of reducing alcohol use. The intention to use medical cannabis to reduce alcohol consumption was associated with significantly greater odds of reducing alcohol use altogether.