Hexo Posts Net Loss of $298.2 Million, Effectively Writes Off Newstrike Transaction

Hexo Corp (TSX: HEXO) (NYSE: HEXO) released its second quarter financials this morning, in what might be referred to as a “kitchen sink” quarter given how much the company has impaired in terms of assets. Total net loss for the quarter came in at $298.2 million as a result of the cumulative write offs and impairments.

In terms of revenue, Hexo actually posted an improvement over the first quarter of 2020, posting net revenues of $17.0 million, as compared to $14.5 million in the first quarter. Adult use cannabis made up the bulk of this revenue, with net proceeds of $16.3 million via the sale of 6,579 kg of product. Net revenue per gram however decreased significantly, to $2.47 versus $3.24 in the prior quarter as a result of increased sales from the firms value line of product.

Largely, this is where the bad news begins for current Hexo shareholders.

Here’s a laundry list of the write downs and impairments taken by the company in the second quarter:

  • Inventory impairment of $16.1 million, compared to an impairment of $23.0 million during the first quarter. Impairment is a result of falling cannabis prices, excess inventory, and sunk costs for package reconfiguration.
  • Restructuring costs of $0.3 million connected to the “rightsizing of operations”
  • Impairment of property, plant and equipment to the tune of $32.0 million related to the firms facilities acquired from Newstrike Brands which will now be posted for sale
  • Impairment of intangible assets by $106.1 million related to the Newstrike Brands assets which are now up for sale.
  • Impairment of goodwill to the tune of $111.8 million which is also related to the Newstrike acquisition, effectively writing off nearly the entire transaction less than a year after it closed.
  • Realization of onerous contract of $3.0 million, in relation to the ongoing litigation with Medipharm Labs, a contract which has been labeled as being “bad faitth”

Also of interest for current shareholders, is that covenants related to current outstanding debt of $35.0 million with CIBC and BMO requires that the company close on at minimum $40 million in net cash proceeds from the issuance of equities by April 30, 2020. The funding can occur via an at-the-market offering, or via the sale of equity in a funding of at least $15.0 million, either of which must be announced on or before April 10, 2020.

Hexo Corp has $80.4 million in cash and cash equivalents as of January 31, 2020.

Hexo Corp last traded at $1.09 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.