HEXO Corp. (TSX:HEXO (NASDAQ: HEXO) reported its financial results for the fiscal quarter ended January 31, 2022 (Q2’22), revealing net loss of CA$690.2 million ($546,94 million) compared to CA$20,8 million in the same period of 2021.
Q2 2022 Key Financial Highlights
- Total net revenues of CA$52.8 million hit second consecutive quarterly high, a 61% increase compared to Q2’21;
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Adjusted gross margin improvement quarter over quarter from 25% to 36%;
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Adjusted EBITDA was a loss of CA$5.6 million compared to a loss of CA$11.2 million in the previous quarter;
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Completes write-down of CA$616 million in impairments, eliminating past issues and enabling a clean slate for future growth
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As of the end of its second quarter, the company was not in compliance with the positive Adjusted EBITDA covenant set forth in the senior convertible note which has a fair value of 115% of the outstanding principal amount under the secured note, resulting in a net fair value loss of CA$56 million. Subsequent to quarter end, the noteholder irrevocably waived, on a temporary basis, any rights in relation to the breach of that covenant of the company.
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HEXO’s financial condition is positioned to be significantly strengthened by the proposed restructuring of the debt, allowing for access to up to approximately CA$282 million in cash
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Achieved international sales growth of 36% from Q1’22 and 312% from Q2’21, including the international sales from Zenabis – comprising 54% of the quarter’s net sales – which grew 91% quarter-over-quarter.
“Since joining HEXO in November, my top priority has been to clean up a very challenged balance sheet as a result of the Secured Note that was previously put in place,” stated Scott Cooper, president & CEO of HEXO. “We’re now on the path to establishing a strong foundation that we expect will, once finalized, enable us to become a cash flow positive business within the next four quarters, along with continuing to grow our significant market share.”
Update on The Path Forward
The “Path Forward” is a strategic plan that utilizes HEXO’s current assets and capabilities to drive accelerated organic growth, build market share and become operationally cash flow positive within the next four quarters.
The Path Forward includes five priorities:
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Continue to reduce manufacturing and production costs
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Streamline and simplify the organizational structure
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Realize cost synergies from acquisitions and recent plant closures
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Focus on revenue management, including more disciplined pricing
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Accelerate growth through organic market share gains and capture missed revenue opportunities
The plan is expected to generate incremental run-rate cash flow of CA$37.5 million in fiscal 2022 and an additional CA$135 million of cash flow in fiscal 2023, for a total of CA$172.5 million over the two years, through a combination of cost reductions and anticipated revenue growth.
Other Significant Development and Subsequent Events
On March 11, 2022, HEXO provided notice on March 11, 2022 to HT Investments MA LLC of the occurrence of an event of default under the company’s senior secured convertible note due May 2023 as it was not in compliance with the covenant of the company in the secured note to have positive Adjusted EBITDA as defined and calculated in the secured note for the three-month period ending on January 31, 2022.
Following provision of the notice by the company, the holder irrevocably waived its rights due to the event of default until the earlier of May 17, 2022 or the date the proposed transaction announced on March 3, 2022 among the company, the noteholder and Tilray Brands, Inc. (NASDAQ:TLRY) under which Tilray is expected to purchase the secured note from the holder is terminated, provided further that the company, HTI and Tilray have agreed to extend the end of forbearance date in the event that they remain engaged in good faith negotiations to consummate the proposed transaction.
As a result of the event of default, the holder would have had the right to declare the secured note or any portion of it to become due and payable immediately for cash in an amount equal to 115% of the outstanding principal amount of the secured note. The current outstanding principal amount of the secured note, which was issued with an initial principal amount of $360 million but which has been reduced through redemptions by HTI, is $208,665,185.
Price Action
HEXO shares were trading 9.35% lower at $0.562 per share at the time of writing during Friday's pre-market session.
