David George-Cosh

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Shares of Hexo Corp. plunged to a new low Friday after the company disclosed a going concern about its looming debt load in the release of its fourth-quarter results. 

While the company beat analysts’ revenue expectations in its Q4 results, much of their attention focused on Hexo's disclosure that there is an "ongoing concern with its senior secured convertible notes" issued in May that helped raise US$327.6 million but used the company's assets as collateral to obtain that financing. That led Hexo shares to fall by about 10 per cent on the Toronto Stock Exchange on Friday. 

Hexo noted it may not have enough cash coming in to help pay down the debt under the terms of its agreement with the unnamed institutional investor it secured that financing with, although it has already secured two amendments to help it manage its payments to the lender. Hexo has a total of $404 million owed in convertible debt and $715 million in total liabilities it owes to lenders. 

It also led to an awkward 34-minute-long call with analysts on Friday where newly appointed Chief Executive Officer Scott Cooper and Chief Financial Officer Trent MacDonald deflected questions posed about the company's ability to manage its debt going forward. 

"We've maintained that positive relationship with the note holder and look, we understand the risks it now poses and we're taking it very seriously. So, we're actively working to address that issue and as soon as we have a material update on that we will absolutely notify our shareholders," MacDonald said. 

Hexo representatives declined to make Cooper available for an interview on Friday. 

Cantor Fitzgerald Analyst Pablo Zuanic said in a note to clients Friday that the convertible debt is due in May 2023 and will award the investor with 9.9 per cent of Hexo's stock once fully exercised. He added that Hexo would have to issue about 227 million more shares to fully pay down that debt, something that may make investors uneasy given the company's dilutive efforts in August that ultimately led to co-founder Sebastien St-Louis' ousting as CEO earlier this month. 

"It would not make sense for Hexo to issue stock at current levels to pay the amount left, especially given the note holder cannot own more than 9.99 per cent of HEXO shares at any point and the notes remain out of the money," Zuanic said. 

In addition to the company's debt concerns, Hexo also disclosed "material weaknesses" in its financial reporting, acknowledging that it didn't maintain an "effective control environment" for its internal results especially as it looked to consolidate its recent acquisitions of 48North, Redecan and Zenabis. Those weaknesses, the company said in a filing on Friday, "could result in a material misstatement of the company’s accounts or disclosures that would not be prevented or detected." Hexo added it has begun a remediation plan aimed at fixing those financial reporting weaknesses. 

Hexo reported $38.6 million in revenue in its fourth quarter, up from $27 million at the same time last year and exceeded than the $33 million analysts were expecting. It also posted a $67.9 million net loss in the quarter, better than the net loss of $169.5 million in the same quarter last year. Hexo reported a $19 million adjusted EBITDA loss in the quarter, well below the $5.7 million loss analysts expected. 

The company maintains a 13 per cent share of the Canadian recreational cannabis market, good enough to be in the top spot domestically, according to Headset data cited by RBC Capital Markets. Tilray Inc. lies in second place with 10.7 per cent of the market while Canopy Growth Corp. is third with 9.4 per cent.