Jun 15, 2022

Hexo hits record low after Q3 results, will lay off 450

Cannabis industry taxes remain too high for long-term sustainability: Smitherman


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Hexo Corp. shares hit a fresh record low Wednesday after the company reported fiscal third quarter results that failed to meet analyst expectations. It also announced 450 job cuts in its latest effort to turn the beleaguered cannabis giant around.

Hexo, Canada’s biggest cannabis producer by market share, reported third-quarter revenue climbed by 101 per cent to $45.6 million from a year earlier but fell 14 per cent from the prior quarter amidst ongoing competition in the Canadian market.

The Gatineau, Que.-based company said it lost $146.6 million in the quarter while taking an $83.1 million impairment charge tied to the closure of its Belleville, Ont. production facility. It also said it would take a $14.6 million charge related to an inventory write-down.

Despite leading Canada’s recreational cannabis market with a 9.7 per cent share, according to industry data tracker Hifyre, Hexo has been suffering from the same woes plaguing the rest of the industry. An oversupplied market led by a glut of producers combined with a fickle consumer base and an onerous taxation regime has led many of Canada’s pot companies to struggle to report profits.

Hexo reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $18.4 million, a steeper decline from the $10.8 million loss it reported a year earlier.

Hexo opted to withdraw its previously provided financial forecasts in light of a mix of “deteriorating market and macro-economic conditions”, management changes, and its ongoing financing deal with Tilray Brands Inc. As a result, Hexo did not provide an update on when it plans to become EBITDA positive or generate positive cash flow. 

The company also disclosed it would lay off 450 staff and reduce its selling, general and administrative expenses by 30 per cent in a filing Wednesday. The layoffs and cost cuts are believed to save Hexo $30.6 million on an annualized basis, the company said.

“Hexo is committed to streamlining our operations across all functions, allowing our top-selling brands to remain competitive in the marketplace whilst aligning to our long-term financial objectives of becoming cash flow positive and driving growth,” said Charlie Bowman, Hexo’s chief executive officer, in a statement.

On Tuesday, Hexo and Tilray both announced they were repricing certain terms of their financing deal to allow the latter to buy senior secured convertible notes formerly owned by a U.S. hedge fund. Those convertible notes would now give Tilray a 50 per cent stake in Hexo once exercised, although Tilray Chief Executive Officer Irwin Simon told BNN Bloomberg previously that he has no immediate plans to take any ownership position in his rival in the near term.

Alliance Global Partners Analyst Aaron Grey said a theoretical combination of Tilray and Hexo would see the company control more than 17 per cent of the Canadian cannabis market, which would be more than double its nearest competitor.

While Hexo’s share of the market has declined in lock-step with many other leading players, the company saw a bounce-back in May due to higher pre-roll sales, Grey said. He downgraded his recommendation on Hexo shares to neutral from a buy and lowered his 12-month price target on the company’s stock to $0.30 a share.