HEXO shares fall after staggering $546.94 million net loss in second quarter

HEXO Corp. (TSX:HEXO (NASDAQ:HEXO) published its financial results for the fiscal quarter ended January 31, 2022 (T2’22), revealing a net loss of 690.2 million Canadian dollars ($546.94 million) compared to C$20.8 million in the same period of 2021.

Q2 2022 Key Financial Highlights

  • Total net revenue of C$52.8 million reached a second consecutive quarterly high, a 61% increase from Q2’21;
  • Quarter-over-quarter adjusted gross margin improvement from 25% to 36%;

  • Adjusted EBITDA was a loss of C$5.6 million compared to a loss of C$11.2 million in the previous quarter;

  • Completes C$616 million in write-downs, eliminating past issues and clearing a clean slate for future growth

  • At the end of its second quarter, the company did not comply with the positive Adjusted EBITDA covenant set forth in the senior convertible bond which has a fair value of 115% of the principal amount outstanding under the secured note, resulting in a net fair value loss of C$56 million. Subsequent to the end of the quarter, the noteholder irrevocably waived, on a temporary basis, any right relating to the breach of this covenant by the company.

  • HEXO’s financial position is positioned to be significantly strengthened by the proposed debt restructuring, providing access to approximately C$282 million in cash

  • International sales growth of 36% vs. Q1 22 and 312% vs. Q2 21, including Zenabis international sales – representing 54% of net sales in the quarter – which increased 91% quarter-on-quarter the other.

“Since joining HEXO in November, my top priority has been cleaning up a very difficult balance sheet as a result of the secure rating that was previously put in place,” said Scott Cooper, President and CEO of HEXO. “We are now on track to establish a solid foundation which, when completed, will enable us to become a cash flow positive business over the next four quarters, while continuing to grow our significant market share.”

Update on the way forward

The “Path Forward” is a strategic plan that uses HEXO’s current assets and capabilities to drive accelerated organic growth, expand market share and generate positive operating cash flow over the next four quarters.

The way forward includes five priorities:

  1. Continue to reduce manufacturing and production costs

  2. Streamline and simplify the organizational structure

  3. Achieve cost synergies through acquisitions and recent plant closures

  4. Focus on revenue management, including more disciplined pricing

  5. Accelerate growth through organic market share gains and capture missed revenue opportunities

The plan is expected to generate incremental cash flow of C$37.5 million in fiscal 2022 and incremental cash flow of C$135 million in fiscal 2023, for a total of 172, C$5 million over two years, through a combination of cost reductions. and expected revenue growth.

Other significant developments and subsequent events

On March 11, 2022, HEXO notified HT Investments MA LLC on March 11, 2022 of the occurrence of an event of default under the company’s senior secured convertible bond due May 2023, as it was not consistent with the Company’s commitment in the Guaranteed Rating to have positive Adjusted EBITDA as defined and calculated in the Guaranteed Rating for the three-month period ending January 31, 2022.

After notice has been given by the company, the holder has irrevocably waived its rights in the event of default until May 17, 2022 or the date of the proposed transaction announced on March 3, 2022 between the company, the holder and Tilray Brands, Inc. (NASDAQ: TLRY) under which Tilray should buy the guaranteed ticket of the holder is terminated, provided further that the company, HTI and Tilray agreed to extend forbearance end date in the event that they remain engaged in good faith negotiations to complete the proposed transaction.

Following the Event of Default, the Holder would have had the right to declare the Secured Note or any part thereof to become due and payable immediately in cash for an amount equal to 115% of the unpaid principal amount of the Secured Note. Remark. The current outstanding principal amount of the secured note, which was issued with an initial principal amount of $360 million but has been reduced by redemptions by HTI, is $208,665,185.

price action

HEXO shares were trading down 9.35% at $0.562 per share at the time of writing in Friday’s pre-market session.

Ann J. Cox