Hexo Reports Staggering Quarterly Loss Of C$289 Million

HEXO Corp. (NYSE: HEXO)  reported a staggering net loss of C$289 million for fiscal 2020 second-quarter ending January 31, 2020. The net revenue for Hexo increased 17% to $17 million from $14.5 million in the first quarter. The earnings are reported in Canadian dollars.

The loss from operations for the quarter was $289.4 million, compared with a loss of $60.6M in the prior period. The company said that excluding non-cash write-downs and impairment charges in the quarter, the adjusted net loss was ($23.2M) compared with ($34.0M) in Q1’20. This was basically one of those kitchen sink quarters. The company just tossed everything but the kitchen sink into the loss column and just ripped the bandaid off.

“We have continued our focus on improving our operations and expanding distribution across Canada.  Our strategy with Original Stash has demonstrated that we can directly compete with the black market,” said Sebastien St-Louis, CEO, and co-founder of HEXO Corp. “The industry continues to see challenges ahead, and following a strategic review of the Company’s core and non-core assets we believe we have positioned HEXO to meet these challenges head-on.”

Impairment Charges

The bulk of the net loss was due to impairment charges that the company took with the first being its Niagara facility. Hexo said, “After completing a strategic review of its cultivation capacity, the company made the decision to list the Niagara facility for sale.  As a result of the decision to sell, the company undertook impairment testing of the facility, its property, plant and equipment, and the intangible assets acquired from Newstrike Brands Ltd.  The company determined that an impairment loss of $138.3M was required.

The next big chunk came from a charge on impairment of goodwill. In a statement, Hexo said, “In addition, slower than expected retail store rollouts in Canada and delays in government approval for cannabis derivative products resulted in constrained distribution channels which have adversely affected overall market sales and profitability. As a result of these factors, management performed an indicator-based impairment test of goodwill as of January 31, 2020.  As a result of this assessment, the company recorded an impairment in goodwill of $111.9M.”

Inventory Write-Down

In addition to the impairment charges, Hexo also wrote down inventory to the tune of $16.1 million in the quarter versus $23 million during the first quarter. The write-downs included surplus cannabis trim (trim is primarily used for extraction purposes) and milled products in the amount of $3.1 million due to an excess of stock relative to the company’s short-term demand for cannabis distillate production. There was also a discounting of a concentrated bulk purchase of $11.8 million, in part to an oversupply in the bulk product market, which lowered the value when compared to the contracted price.  Hexo did note that the bulk product was acquired through a supply agreement, which is currently the subject of litigation and is alleged to be void as it was negotiated in bad faith at prices well in excess of the current market.

In addition to those markdowns, another $1.2 million was recognized due to sunk costs related to packaging reconfiguration.

Revenue Increases

While the quarter just seemed completely ugly, there was some slim good news for the company. The gross revenue increased 23% sequentially to $23.8 million.  Adult-use cannabis shipped revenue increased 21% sequentially to $24.4 million.  Net adult-use revenue increased 20% to $16.3 million from $13.6 million in Q1’20. The primary driver of the increase in sales during the quarter was the launch of Original Stash in Ontario, British Columbia, and Alberta during the quarter, and the increased volume sold in Quebec.  Adult-use sales volume in Q2’20 increased by 57% to 6,579 kg from 4,196 kg sold in the prior quarter.

Cannabis consumers have been bargain hunting. Gross adult-use revenue per gram equivalent decreased to $3.49 in Q2’20 from $4.35 as the company’s value brand Original Stash has become more popular. The adult-use net revenue per gram equivalent decreased to $2.47 in Q2’20 from $3.24 in Q1’20.

The company has also managed to cut costs. A 21% decrease in operating expenses for the quarter came as a result of a decrease in marketing expenditures and headcount.

The stock was dropping over 15% in early trading to lately sell at 92 cents, still higher than the year low of 34 cents.

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