Hexo auditor raises ‘substantial doubt’ about company as it reports Q4, fiscal 2021 losses

Cannabis stock image
Cannabis stock image

Hexo Corp.’s auditor raised serious concerns about the company’s future as it reported a $67.9-million net loss in its latest quarter.

PricewaterhouseCoopers LLP said its recent review of the Ottawa-based cannabis business showed that Hexo “did not maintain, in all material respects, effective internal control over financial reporting” and several factors “raise substantial doubt about its ability to continue as a going concern.”

“The company has suffered recurring losses from operations, has had cash outflows from operating activities, and has financial liabilities that may require significant cash outflows over the next twelve months,” the auditor wrote in a six-page report filed along with Hexo’s fourth-quarter earnings.

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It also noted that Hexo’s existing funds and operational cash flow are “not sufficient” enough to fund debt repayments, capex budgets and potential cash requirements under a senior convertible note.

The auditor’s report comes as Hexo is trying to quell the upheaval stemming from a recent strategic reorganization that involved the departure of co-founder and chief executive Sebastien St-Louis and chief operating officer Donald Courtney last week.

St-Louis was replaced with Scott Cooper, who ran Truss Beverage Co., a joint venture between Molson-Coors Canada and Hexo that produces the Little Victory, Mollo and Veryvell beverages.

Steep learning curve

Cooper told analysts on Friday he was nine days into the job, but “quickly getting my arms around the business” by cramming in meetings with employees, investors, board members, analysts and customers.

“These will also help me understand where Hexo can capitalize on strengths and where we may need to augment capabilities to compete for and earn our customers’ and consumers’ business,” he said.

Cooper will also look for barriers he can break down to help the company meet its targets, address the risk presented by the company’s debt structure and work to help integrate Hexo’s recent acquisitions of Zenabis Global Inc., Redecan and 48North.

The company’s financial position and its senior convertible note will also factor into his and Hexo’s priorities.

“We maintain that positive relationship with the note holder,” chief financial officer Trent MacDonald said on the same call as Cooper.

“We understand the risk this note holds and we take it very seriously.”

Analysts are also watching the company’s share price closely.

RBC Capital Markets analyst Douglas Miehm and analyst Sahil Dhingra pointed out that the company’s stock has declined by about 70 per cent since its third-quarter results “came in weaker than expected due to what were expected to be transitory challenges.”

Its stock sat at $1.91 on the TSX in mid-morning trading Friday, a 6.4 per cent drop.

Revenues up 50%

That drop came as Hexo posted a net loss of $113.6 million for the fiscal year ending July 31, down from $546.5 million a year earlier. The firm booked net revenues of $123.5 million in fiscal 2021, an increase of more than 50 per cent from the previous year.

Hexo reported a $67.9-million net loss in its fourth quarter, which compared with a net loss of $169.5 million in the same quarter last year.

Its net loss amounted to 89 cents per share for the period ended July 31, down from a loss of $7.08 per share in the fourth quarter of 2020.

The company’s net revenue from sale of goods totalled $38.6 million, up from $27 million at the same time last year.

Hexo says its recent, $235-million purchase of Zenabis contributed $6.8 million in net revenue to the quarter.

But Miehm and Dhingra say data they analyzed shows the market share of a combined Hexo-Zenabis-Redecan-48North has dropped from about 16 per cent in March to 13 per cent in August across Alberta, B.C. and Ontario.

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