A Hexo Corp. employee examines cannabis plants in one of the company's greenhouses on Oct. 11, 2018 in Masson Angers, Que.Adrian Wyld/The Canadian Press
Cannabis producer Hexo Corp. HEXO-T has reported a large second-quarter loss after writing down almost $616-million in one-time impairment losses in order to enable “a clean slate for future growth.”
Hexo wrote down its property, plant and equipment value by $100-million, its intangible assets by $141-million and its goodwill by $375-million. According to the company, the writedowns arose from revised forecasts, market demand, production capacity and opportunities for efficiencies. Intangible assets include brand recognition, intellectual property and goodwill.
When goodwill is written down after an acquisition, it is often a signal that the value of that asset has fallen below it purchase price. Hexo made several large acquisitions last year, including cannabis producers Redecan for $925-million, Zenabis Global Inc. for $235-million and 48North Cannabis Corp. for $50-million.
In its financial statements, the company cited “full impairment of the goodwill arising from the acquisitions of Zenabis, Redecan and 48North.”
In a news release, chief executive Scott Cooper said his priority since taking the helm in November has been to “clean up a very challenged balance sheet,” which had been troubled since the issue of a senior secured convertible note debt in 2021.
Mr. Cooper maintained that the company plans to become cash-flow positive in the next four quarters.
International sales were a particular bright spot, growing 36 per cent quarter on quarter. Zenabis’s international sales nearly doubled quarter-on-quarter and accounted for 54 per cent of total international volume.
Hexo’s net revenue was $52.8-million, up from $32.9-million in the same quarter last year. While it was a second consecutive quarterly high, revenue missed consensus estimates of $58.1-million, according to a report by Royal Bank of Canada analyst Douglas Miehm.
Many cannabis companies have yet to become profitable in the face of vigorous competition between producers and a continuing battle with the illegal market. The Canadian cannabis industry continues to struggle, with the value of some of the industry’s biggest players, including Canopy Growth Corp., Aurora Cannabis Inc. and Tilray Brands Inc., declining more than 60 per cent over the past year.
While many consider the industry’s regulations too onerous, there is one bright spot: In early March, Health Canada opened a consultation period for proposed changes to the limit on the number of beverages that can be purchased at one time. Under the proposed new rules, that amount could jump from five to as many as 48. That would be good news for Truss Beverage Co., Hexo’s joint venture with Molson Coors Canada.
This is partly owing to a recent debt financing by Tilray, which said in early March that it would acquire US$211-million in Hexo senior secured convertible notes from a New Jersey investment fund and create a strategic partnership to help both companies benefit from cost savings.
Under this new deal, Hexo would no longer have to pay a monthly redemption fee and would gain access to $80-million in cash that was previously restricted. Tilray would acquire the rights to convert its notes into common shares, bringing its ownership in Hexo to about 37 per cent. The proposed agreement is expected to close in May, according to a Tilray spokesperson.
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