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Oct 29, 2019

Hexo slumps after pot firm's loss was triple forecasts

Hexo laying off 200 employees

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Hexo Corp. reported a fourth-quarter loss that was three times larger than analysts’ estimates, sending shares of the beleaguered Canadian pot company plunging as much as 11% per cent to the lowest since 2017.

Gatineau, Quebec-based Hexo said its adjusted net loss for the quarter was $43.7 million, compared with the average analyst estimate of a $13.2 million loss. Revenue stood at $15.4 million.

Hexo also also took a $17 million inventory writedown, citing price compression, which BMO analyst Tamy Chen called “an unsettling development considering the sizable amount of unfinished inventory” held by Canadian licensed producers.

Hexo’s share price has tumbled 46 per cent from the close of trading on Oct. 4, when it announced its chief financial officer would step down after about four months on the job.

That was followed by a guidance cut, when the company said its quarterly revenue would be between $14.5 million and $16.5 million, after previously saying it would double from the $13 million reported in the prior quarter.

Suspends Operations

It also withdrew its fiscal 2020 guidance for $400 million in sales and said last week it would cut about 200 jobs, or approximately a quarter of its workforce. As a result, it will suspend its operations in Niagara, Ontario and in 200,000 square feet of its facility in Gatineau.

Its recent plan to issue $70 million of convertible debentures with a conversion price below its stock price also raised eyebrows. It said Tuesday it’s also in the process of setting up an at-the-market financing, in which a company raises money by selling shares incrementally at prevailing prices.

Chief Executive Officer Sebastien St-Louis framed the quarter as a positive one, where the company managed to maintain its 33% market share in its home province of Quebec while making the difficult decisions that its competitors will also be forced to make sooner or later.

“If you look to the metrics and the way Hexo is managing its business, the way we’re making hard decisions on operations and the market share we’ve managed to keep, that tells a much stronger story than the quarterly revenue numbers,” St-Louis said Tuesday on a call with analysts.

Top Three

He added that his goal is to make Hexo a top-three player in Canada by achieving 20% market share nationally.

“As competitors fail in the next 12 months, and we’ll have lots of them failing, especially the small ones, I think that opens up space” in the market, St-Louis said.

Hexo said it expects first-quarter net revenue to be between C$14 million and C$18 million and it’s “targeting to achieve positive adjusted Ebitda in calendar 2020.” It also expects to deliver gross margins in the low-40 per cent range going forward.

Short interest stood at 12 per cent of its float or US$68.5 million last week, according to data from financial analytics firm S3 partners.

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