HEXO Corp. (NASDAQ:HEXO) (TSX:HEXO) net revenue in FY22 was CA$191.1 million ($141.2 million), a 54% increase compared to CA$123.8 million in FY21. This increase is mainly attributable to the acquisitions of Redecan and Zenabis, which contributed CA$60.3 million and CA$30.8 million of net revenue in FY22, respectively. Excluding the impact of business acquisitions, net revenues have declined by 19%.
FY22 Financial Highlights
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Gross profit was a loss of CA$75.7 million, compared to profit of CA$48.8 million in FY21.
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Net loss was CA$1.1 billion, compared to 114.8 million in FY21.
Q4 2022 Financial Highlights
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Adjusted EBITDA loss of CA$7.5 million in Q4’22, an improvement of CA$10.9 million, from Q3’22, and an improvement of CA$3.3 million from the fourth quarter of FY21.
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Net revenue of CA$42.5 million, an increase of 10% compared to CA$38.8 million in Q4’21 and a decrease of 7% compared to CA$45.6 million net revenue in the third quarter of FY22.
Other Highlights
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HEXO closed the Tilray (NASDAQ:TLRY) transaction, amending the terms of the senior secured convertible notes and reducing the associated liquidity and dilution pressures under the previous debt structure.
“Re-financing of the senior secured convertible note deleverage the balance sheet and boosted cash reserves, allowing us to focus on profitable growth,” stated Julius Ivancsits, acting CFO of HEXO. “We are hyper-focused on cash flow, and to this end, reduced our personnel cost by CA$65 million, divested from businesses that do not offer HEXO a competitive advantage and focused on our quality of earnings, while also optimizing our working capital. We also rationalized to upgrade our product mix.”
Zenabis CCAA Filing and loss of control
On June 17, 2022, Zenabis Global Inc. and its direct and indirect wholly-owned subsidiaries filed a petition with the Superior Court of Québec for protection under the Companies’ Creditors Arrangement Act in order to restructure their business and financial affairs. Upon filing for CCAA, management determined that control of Zenabis was lost due to the cessation of management’s ability to have the power to direct the relevant activities of Zenabis.
Following the deconsolidation, the carrying value of assets and liabilities of Zenabis were removed from the company’s consolidated statements of financial position. The total amount deconsolidated from HEXO’s balance sheet was CA$82 million, including CA$3.4 million of cash, CA$29.6 million of inventory and biological assets, CA$13.8 million of property, plant and equipment and assets held for sale, CA$55.5 million of secured debenture and (CA$21.0) million of other assets and liabilities, net. The company recognized a gain on derecognition of the net assets of Zenabis in non-operating income totalling CA$25.0 million.
The company was informed that, on October 31, 2022, a subsidiary of SNDL Inc. (NASDAQ:SNDL) acquired certain assets and shares of the members of the Zenabis Group and, as of such date, the company no longer has any direct or indirect shareholdings in or corporate affiliation with the Zenabis Group.
Liquidity Risk
On July 31, 2022, the company held cash and cash equivalents of CA$83.2 million (CA$67.5 million at July 31, 2021) which management determines to be sufficient to meet the company’s expected working capital and operating cash flow needs over the next 12 months, however, the company remains subject to a minimum liquidity covenant of $20 million under the convertible note payable as well as certain financial and non-financial covenants. Furthermore, the company’s 8% convertible debenture matures in December 2022, which will require a cash repayment of CA$40.1 million.
There remains a risk that the company’s cost saving initiatives may not yield sufficient operating cash flow to meet its financial covenant requirements, and as such, these circumstances create material uncertainties that lend substantial doubt as to the ability of the company to meet its obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern.
Auditor Resignation
On October 11, 2022, the company’s auditor, PricewaterhouseCoopers LLP, notified the company of its decision, at its own initiative, to decline to stand for re-appointment as the company’s auditor following the issuance of its auditor’s report on the company’s consolidated financial statements for the financial year ending July 31, 2022.
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