After announcing yesterday morning that they would be releasing financials that same evening, Hexo Corp (TSX: HEXO) finally filed its second fiscal quarter financial results just after 10:00 PM EST. And after delving into the results, the company released the results late at night for good reason.
The company saw modest growth in the second quarter, with net revenue climbing 5.1% on a sequential basis from $50.2 million to $52.8 million. And that’s about where the positive news ends.
Cost of goods sold for the quarter were again higher than net revenue, coming in at $61.3 million, resulting in a gross loss of $8.5 million, as compared to a gross loss of $32.8 million in the prior period, before fair value adjustments. Things got even worse from here, with substantial impairments resulting in total operating expenses of over half a billion for the three month period.
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Impairments were lead by the impairment of goodwill at $375.0 million, with the company writing off all goodwill associated with both Redecan as well as 48North. This was then followed by impairments to intangible assets of $140.8 million, of which $100.2 million was associated with impairments to the Redecan brand, cultivation facilities, and production “know-how.” Finally, impairments of $100.1 million to property, plant and equipment were also registered.
Collectively, at least $375.6 million in relation to the Redecan purchase was written off one quarter after the closing of the transaction. The company paid $402.2 million in cash for the company, while also issuing 69.7 million shares, which at the time were valued at $214.0 million.
Overall, the company posted a loss from operations of $669.9 million, of which $22.6 million was association with SG&A expenses. After an additional $5.1 million in interest expense and $61.2 million in non-operating expenses, the firm posted an overall net loss of $710.9 million for the three month period.
As of January 31, the company posted cash and cash equivalents of just $37.7 million, as compared to $55.8 million in the prior period.
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That’s not where the trouble ends for shareholders however.
While the cash position a cause for concern due to the current rate of cash burn, the bigger issue lays in the fact that the company has seen negative adjusted EBITDA for the period ended January 31, 2022. The implication of this is that the company has not met a covenant related to its secured debt agreement, and has as such defaulted under that debt.
The default, which has been waived until May 17 as a result of a recent proposed transaction with Tilray Brands (TSX: TLRY), among other items means that the company can no longer issue equity to settle monthly redemption payments. Any such monthly payments must now be settled in cash. The holder also has the option to declare the note to be due and payable, which would result in the company being forced to pay 115% of the outstanding principal of the note immediately. As of January 31, that figured was pegged at $329.5 million.
Despite the default, it appears that some mercy has been granted to Hexo in relation to the cash component requirement, with the company indicating that both the February and March optional redemptions were conducted in the form of equity, while a cash settlement waiver has also been granted for May – although nothing was said on the April settlement. It is unclear just how many shares were issued for the settlement.
Finally, it should be noted that during the quarter the firms share structure ballooned by a further 70.6 million shares. 20.7 million of those shares were issued in connection with the firms at the market equity program, while the remainder were issued in connection with the settlement of its senior secured debt. A further 43.2 million shares have been issued since the end of the quarter through to March 17, although a breakdown on those additional share issuances was not provided.
Hexo Corp last traded at $0.79 on the TSX.
Information for this briefing was found via Edgar and the companies mentioned. 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.
