UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of November 2022
Commission File Number: 001-38781
HEXO Corp.
(Translation of registrant's name into English)
3000 Solandt Road
Ottawa, Ontario, Canada K2K 2X2
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F [ ] Form 40-F [ X ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant's "home country"), or under the rules of the home country exchange on which the registrant's securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant's security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.
On October 31, 2022, the Registrant issued a press release, a copy of which is attached hereto as Exhibit 99.1 and is incorporated herein by reference.
(c) Exhibit 99.1. Press release dated October 31, 2022
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HEXO Corp. | ||
(Registrant) | ||
Date: November 1, 2022 | /s/ Joelle Maurais | |
Joelle Maurais | ||
General Counsel | ||
EXHIBIT 99.1
HEXO Reports Q4’22 and FY22 Financial Results
Organizational reset strengthened the business and has positioned HEXO for long-term success
This news release constitutes a “designated news release” for the purposes of the Company’s prospectus supplement dated May 2, 2022 to its short form base shelf prospectus dated May 7, 2021 and amended and restated on May 25, 2021.
GATINEAU, Québec, Oct. 31, 2022 (GLOBE NEWSWIRE) -- HEXO Corp. (TSX: HEXO; NASDAQ: HEXO) ("HEXO" or the “Company"), a leading producer of high-quality cannabis products, today reported its financial results for the fourth quarter (“Q4’22”) and fiscal year ended July 31, 2022 ("FY22"). All currency amounts are stated in Canadian thousands unless otherwise noted.
“The fourth quarter was a period of strategic realignment for HEXO,” said Charlie Bowman, President and CEO of HEXO. “We focused on making the changes that will enable HEXO to maintain and expand our strong position within the Canadian cannabis market. By committing to three key priorities - aligning the Company for success, resetting the organization for profit and growth, and delivering a preferred cannabis experience for its customers and other stakeholders - we took the necessary steps to position the Company for long-term success and have come out stronger as a business.”
“Re-financing of the senior secured convertible note deleverage the balance sheet and boosted cash reserves, allowing us to focus on profitable growth,” said Julius Ivancsits, Acting Chief Financial Officer of HEXO. “We are hyper-focused on cash flow, and to this end, reduced our personnel cost by $65M, divested from businesses that do not offer HEXO a competitive advantage and focused on our quality of earnings, while also optimizing our working capital. We also rationalized to upgrade our product mix.”
“With a solid foundation now in place, HEXO has moved to the second phase of our transformation – focusing on producing the core brands and products that customers want, leading in innovation and reinforcing our market share,” added Mr. Bowman. “We evolved our leadership across the organization and are benefiting from strong integration across our most successful brands. By concentrating on these products and ensuring that they do not compete against each other, we have built a loyal customer following and refined what truly sets HEXO apart from our peers.”
Significant Financial Results
Significant Events
Amended Senior Secured Convertible Note
On July 12, 2022, the Company, Tilray Brands Inc. (“Tilray”) and HT Investments MA LLC (“HTI”) amended and restated the terms of the outstanding senior secured convertible note originally issued by the Company to HTI (the “Original Note”). The amended and restated convertible note (the “A&R Note”) was immediately assigned to Tilray pursuant to the terms of an amended and restated assignment and assumption agreement. Tilray acquired 100% of the remaining outstanding principal balance of US$173.7 million of the A&R Note.
The Original Note originally allowed the holder to require the Company to partially redeem the Original Note under certain conditions. The holder’s optional redemption payments mechanism has been removed from the A&R Note, which eliminates the previous risk of forced monthly redemption payments, payable in cash, when the Company did not satisfy the equity condition defined in the agreement. Management was not able to elect satisfying the Optional Redemptions through the issuance of equity. The amended salient terms under the A&R Note include a three-year extension of the maturity date to May 1, 2026, adding semiannual interest payments at 5%, removal of the 9.99% ownership limitation and unrestricting cash of US$85.7 million.
Zenabis CCAA Filing and loss of control
On June 17, 2022, Zenabis Global Inc. (“Zenabis”) and its direct and indirect wholly-owned subsidiaries (collectively, the “Zenabis Group”) filed a petition with the Superior Court of Québec for protection under the Companies’ Creditors Arrangement Act (the “CCAA”) in order to restructure their business and financial affairs. Upon filing for CCAA, management determined that control of Zenabis was lost due to the cessation of management’s ability to have the power to direct the relevant activities of Zenabis.
Following the deconsolidation, the carrying value of assets and liabilities of Zenabis were removed from the Company’s consolidated statements of financial position. The total amount deconsolidated from HEXO’s balance sheet was $82 million, including $3.4 million of cash, $29.6 million of inventory and biological assets, $13.8 million of property, plant and equipment and assets held for sale, $55.5 million of secured debenture and ($21.0) million of other assets and liabilities, net. The Company recognized a gain on derecognition of the net assets of Zenabis in non-operating income totalling $25.0 million.
The Company was informed that, on October 31, 2022, a subsidiary of SNDL Inc. acquired certain assets and shares of the members of the Zenabis Group and, as of such date, the Company no longer has any direct or indirect shareholdings in or corporate affiliation with the Zenabis Group.
Liquidity Risk
As stated above, during Q4’22, management recapitalized the Company’s senior debt and significantly improved its liquidity position and working capital. Concurrent with the debt restructuring, in Q3’22 the Company entered into a definitive agreement with an affiliate of KAOS Capital Ltd (“KAOS”), to provide a $180 million equity purchase agreement (the “ELOC”), which could provide the Company access to $5 million capital per month over a 36-month period in order to help ensure debt and interest repayments under the amended and reassigned secured note can be met. The common shares to be issued under the ELOC (the “ELOC Shares”) will be issued at a 7% discount to the 20-day volume weighted average price of the common shares on the Toronto Stock Exchange at the time the demand is made. The Company intends to utilize 60% of the acquired proceeds towards the debt and interest payments associated with the Convertible note payable. As of the date of this press release, the prospectus supplement qualifying the ELOC Shares had not been filed and the ELOC had therefore not been drawn upon.
During the latter half of the fiscal year, the Company’s new management identified and commenced certain opportunities and cost savings initiatives to fundamentally realign the operating expenses and cashflows to drive profitability and address the liquidity issues. These initiatives include:
On July 31, 2022, the Company held cash and cash equivalents of $83,238 ($67,462 at July 31, 2021) which management determines to be sufficient to meet the Company’s expected working capital and operating cash flow needs over the next 12 months, however, the Company remains subject to a minimum liquidity covenant of US$20 million under the Convertible note payable as well as certain financial and non-financial covenants. Furthermore, the Company’s 8% convertible debenture matures in December 2022, which will require a cash repayment of $40,140.
There remains a risk that the Company’s cost saving initiatives may not yield sufficient operating cash flow to meet its financial covenant requirements, and as such, these circumstances create material uncertainties that lend substantial doubt as to the ability of the Company to meet its obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern.
Key Financial Results
For the three months ended | For the years ended | ||||
July 31, 2022 | April 30, 2022 | July 31, 2021 | July 31, 2022 | July 31, 2021 | |
$ | $ | $ | $ | $ | |
Revenue from sale of goods | 60,227 | 63,590 | 53,022 | 265,418 | 173,081 |
Excise taxes | (17,910) | (18,021) | (14,365) | (74,717) | (49,583) |
Net revenue from sale of goods | 42,317 | 45,569 | 38,657 | 190,701 | 123,498 |
Ancillary revenue | 177 | – | 103 | 402 | 271 |
Net revenue | 42,494 | 45,569 | 38,760 | 191,103 | 123,769 |
Cost of goods sold | (83,432) | (55,179) | (37,261) | (282,985) | (89,594) |
Gross loss before fair value adjustments | (40,938) | (9,610) | 1,499 | (91,882) | 34,175 |
Fair value adjustments1 | 5,075 | 4,335 | 1,735 | 16,210 | 14,623 |
Gross (loss)/profit | (35,863) | (5,275) | 3,234 | (75,672) | 48,798 |
Operating expenses | (73,903) | (127,704) | (63,116) | (992,053) | (134,293) |
Loss from operations | (109,766) | (132,979) | (59,512) | (1,067,725) | (85,495) |
Other expenses and losses2 | 3,592 | (19,723) | (9,630) | (44,696) | (29,664) |
Loss before tax | (106,174) | (152,702) | (69,512) | (1,112,421) | (115,159) |
Current and deferred tax recovery | 5,787 | 7,697 | 397 | 38,813 | 397 |
Other comprehensive income | (1,980) | (1,658) | 1,156 | 17,323 | 1,152 |
Total net loss and comprehensive loss | (102,367) | 127,704 | 63,116 | (1,056,285) | 134,293 |
1 Realized fair value amounts on inventory sold and unrealized gain on changes in fair value of biological assets.
2 Net interest expenses and non-operating income (expenses)
Operating Expenses
July 31, 2022 | April 30, 2022 | July 31, 2021 | July 31, 2022 | July 31, 2021 | |
$ | $ | $ | $ | $ | |
General and administration (“G&A”)1 | 12,586 | 23,605 | 19,160 | 81,243 | 58,187 |
Selling, Marketing and promotion (“S,M&P”) | 4,975 | 5,366 | 3,665 | 22,932 | 10,348 |
Share-based compensation | 786 | 5,769 | 827 | 14,396 | 11,731 |
Research and development (“R&D”) | 231 | 540 | 934 | 3,216 | 3,835 |
Depreciation of property, plant and equipment | 2,652 | 1,579 | 1,728 | 7,428 | 6,097 |
Amortization of intangible assets | 3,338 | 2,957 | 1,002 | 21,347 | 2,050 |
Restructuring costs | 3,788 | 2,804 | 1,562 | 15,105 | 3,283 |
Impairment of property, plant and equipment | 7,899 | 83,171 | 19,350 | 215,003 | 20,230 |
Impairment of intangible assets | – | – | – | 140,839 | – |
Impairment of goodwill | – | – | – | 375,039 | – |
Recognition of onerous contract | 1,000 | – | – | 1,000 | – |
Impairment of Investment in joint ventures and associates | 30,835 | – | – | 57,760 | - |
Disposal of long-lived assets | – | – | – | - | 1,294 |
Loss/(gain) on disposal of property, plant and equipment | 396 | (2,935) | 19 | (2,466) | 64 |
Acquisition transaction costs | 5,417 | 1,175 | 14,869 | 35,538 | 17,174 |
Health Canada Recovery Fee’s1 | – | 3,673 | – | 3,673 | – |
Total | 73,903 | 127,704 | 63,116 | 992,053 | 134,293 |
1 The Company has adjusted the presentation of the Selling, General and Administrative expenses to breakdown the Health Canada Recovery Fee’s for ease of user review and identification.
Select Balance Sheet Metrics
As at | July 31, 2022 | July 31, 2021 |
$ | $ | |
Cash & cash equivalents | 83,238 | 67,462 |
Restricted cash | 32,224 | 132,246 |
Biological assets & inventory | 82,315 | 149,611 |
Other current assets | 73,870 | 476,485 |
Accounts payable & accrued liabilities | 72,581 | 63,557 |
Current debt | 248,680 | 421,264 |
Working capital1 | 123,730 | 189,920 |
Property, plant & equipment | 285,866 | 393,902 |
Assets held for sale | 5,121 | – |
Total Assets | 680,949 | 1,311,803 |
Total Liabilities | 367,257 | 579,538 |
Shareholders' equity | 313,692 | 732,265 |
1 Defined as the Company’s current assets less current liabilities net of the amended and reassigned senior secured convertible note. The note is classified as a current liability as the lender possess the ability to unilaterally convert the note to equity and therefore does not represent a cash-based liability to the Company within one-year of July 31, 2022. Working capital is utilized as a key metric for management in assessing the Company’s ability to meet its future obligations.
Adjusted EBITDA
Q4’22 | Q3’22 | Q4’21 | |
$ | $ | $ | |
Total net loss | (106,174) | (152,702) | (69,512) |
Finance expense (income), net | 3,870 | 4,964 | 23,211 |
Depreciation (cost of sales) | 5,112 | 4,814 | 2,308 |
Depreciation (operating expenses) | 2,652 | 1,579 | 1,728 |
Amortization (operating expenses) | 3,338 | 2,957 | 1,002 |
Standard EBITDA | (91,202) | (138,388) | (41,263) |
Investment (gains) losses | 9,036 | 14,346 | (13,471) |
Non-cash fair value adjustments | (2,023) | 61 | 537 |
Non-recurring expenses | 9,205 | 3,979 | 16,431 |
Other non-cash items | 67,517 | 101,665 | 27,018 |
Adjusted EBITDA | (7,467) | (18,337) | (10,748) |
Quarter over quarter the Company’s Adjusted EBITDA improved by $10,870. This was driven by the Company’s 39% total cost savings in general, administrative, marketing and promotion expense. The improvements are the result of the restructuring efforts and rightsizing of its operations and headcount (payroll expenses). The Company notes that the impact of the $3,673 Health Canada cannabis fee (a 2.3% levy based upon the Company’s total cannabis sales from the period of April 1, 2021 to March 31, 2022, net of shipping and purchased cannabis costs) is recognized in the third quarter each fiscal year. The Company’s G&A, R&D and S,M&P operating expenses as a percentage of net sales in Q4’22 was improved by 20% from the previous quarter. Offsetting the above improvements to Adjusted EBITDA is the lower adjusted gross margin recognized in the period.
Auditor Resignation
On October 11, 2022, the Company’s auditor, PricewaterhouseCoopers LLP (“PwC”), notified the Company of its decision, at its own initiative, to decline to stand for re-appointment as the Company’s auditor following the issuance of its auditor’s report on the Company’s consolidated financial statements for the financial year ending July 31, 2022. In accordance with the requirements of National Instrument 51-102 - Continuous Disclosure Obligations (“NI 51-102"), a change of auditor notice and PwC’s acknowledgment letter have been filed under HEXO’s profile on SEDAR. There were no “reportable events” (within the meaning of NI 51-102) involving PwC.
Non-IFRS Measures
In this press release, reference is made to gross profit before adjustment, profit/margin before fair value adjustments, adjusted gross profit/margin, adjusted EBITDA, and adjusted working capital which are not measures of financial performance under International Financial Reporting Standards (IFRS). These metrics and measures are not recognized measures under IFRS, do not have meanings prescribed under IFRS, and are unlikely to be comparable to similar measures presented by other companies. These measures are provided as information complementary to those IFRS measures by providing a further understanding of our operating results from the perspective of management. As such, these measures should not be considered in isolation or in lieu of a review of our financial information reported under IFRS. Definitions and reconciliations for all terms above can be found in the Company's Management's Discussion and Analysis for the fiscal year ended July 31, 2022, filed under the Company's profile on SEDAR at www.sedar.com and EDGAR at www.sec.gov respectively.
About HEXO Corp.
HEXO is an award-winning licensed producer of innovative products for the global cannabis market. HEXO serves the Canadian recreational market with a brand portfolio including HEXO, Redecan, UP Cannabis, Original Stash, 48North, Trail Mix, Bake Sale and Latitude brands, and the medical market in Canada and Israel. The Company also serves the Colorado market through its Powered by HEXO® strategy and Truss CBD USA, a joint venture with Molson-Coors. With the completion of HEXO's acquisitions of Redecan and 48North, HEXO is a leading cannabis products company in Canada by recreational market share. 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 Statements”) including and not limited to: the the Company’s cash flow projections; the success of cost savings initiatives implemented to realign operating expenses and improve operating cashflows the use of the proceeds from the ELOC. 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. 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.
The following press release should be read in conjunction with the management’s discussion and analysis (“MD&A”) and consolidated financial statements and notes thereto as at and for the year ended July 31, 2022. Readers should also refer to the section regarding “Non-IFRS Measures” in the immediately following section of this press release. Additional information about HEXO is available on the Company’s profile on SEDAR at www.sedar.com and EDGAR at www.sec.gov, including the Company’s Annual Information Form for the year ended July 31, 2022 dated October 31, 2022.
For media or investor inquiries please contact:
Hayley Suchanek, Kaiser & Partners
hayley.suchanek@kaiserpartners.com