Latest Hexo Earnings Include Massive Write-Down In Setup For Must-See Turnaround

Last fall, Quebec-based cannabis company Hexo (NASDAQ:HEXO) (TSX:HEXO) was forced to face some hard realities when auditors flagged what they called “substantial doubt about its ability to continue as a going concern.”

HEXO Weekly TTM

For a company looking to the future, the auditors’ views created a challenging path forward. But the cannabis grower took action, making changes throughout its operation. It started at the top, replacing co-founder Sebastien St-Louis as CEO. Then, management worked its way down, cutting jobs and closing facilities. Its actions were harsh and swift.

Last week, when the marijuana grower unveiled its latest earnings, the evidence of its strong moves were laid bare. For the three-month period that ended Jan. 31, the company registered a massive C$690.25 million (USD$548.28 million) loss. The shortfall was mainly attributed to a C$616 million (USD$488.35 million) impairment write-down.

The one bright spot: revenues jumped 61% compared with the same period the year prior, hitting C$53 million ($42.01 million), according to a statement released by the company on Mar. 18,

Revenues in all categories improved: medical was up 83%, international sales jumped 54%, adult recreational revenues increased 34%, while wholesale figures improved by 8%.

The increases in revenues, however, are not enough to remove the cloud of risk that hangs over the company. The catalyst that will predict whether Hexo will see sunny skies again rests with its pending deal with Tilray (NASDAQ:TLRY). The forecast, of course, could change if Hexo finds other sources of financing.

According to it latest earnings report, Hexo’s moves to cut costs included laying off 180 employees at a growing facility in Nova Scotia, which it intends to close.

But the pressure bearing down on Hexo is significant. Although it has negotiated an extension to a deadline included in the terms of a debt financing deal with a US hedge fund that raised $360 million in secured convertible notes to finance Hexo’s acquisition of Redecan, an Ontario-based cannabis cultivating and processing operation, the commitment still must be met. The original deal included a requirement that Hexo hit positive adjusted EBITDA by Jan. 31. This deadline has now been pushed to May.

Hexo’s EBITDA was listed at just shy of -$5.6 million. The company operates in recreational marijuana markets in Canada and the US and in the medical cannabis space in Canada, Israel and Malta.

With a deal with its creditors in hand, Hexo was perhaps being strategic in piling up its huge impairment write-downs in one quarter so it can focus on moving forward.

Said new CEO Scott Cooper:

“We’re now on the path to establishing a strong foundation that we expect will, once finalized, enable us to become a cash flow positive business within the next four quarters, along with continuing to grow our significant market share.”

But it still has an uphill climb. And the clock is ticking.

On Jan. 31, Hexo also received notice that its listing on the NASDAQ exchange is in jeopardy, as its stock has been trading below the required $1 threshold for 30 consecutive days. The stock closed on Monday at 58 cents.

The NASDAQ notification was a warning; it continues to have no immediate effect, but it did start the clock on a 180-day probationary period. If the stock does not move above the $1 threshold by July 25, shares will be dropped from the exchange.

Hexo stock has inched up slightly since Jan. 31, when it closed at 56 cents. But the stock is still 48% below the one-dollar threshold.

In an industry that's on a strong downward trajectory, can Hexo’s price gain 43 cents in the next 88 trading days and achieve positive EBITDA over a four-month period? That might sound like a bit of a joke to most investors given how frothy some portions of the equity market still are, but surely not to Hexo and its stakeholders.

Shares of Hexo have lost 91% in the last year.