Analysts scrutinize latest Hexo plan to trim marijuana costs after years of losses

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Analysts are skeptical about plans outlined by Canadian marijuana producer Hexo Corp. to slash manufacturing and production costs and sell some noncore assets as the Quebec company looks to turn itself around after years of losses.

The moves, disclosed in a Wednesday morning corporate update, come a month after Hexo embarked on a “transformative plan” in which some of the company’s top executives and board members were replaced.

Hexo now says it can save 30 million Canadian dollars ($24 million) by leveraging its recent acquisitions, including moving vape production and distillate production to the Redecan facility it acquired last year.

The company also sold its 25% interest in its Belleville complex for approximately CA$10.1 million to Olegna Holdings, which is majority owned by Hexo Director Vincent Chiara.

Hexo expects the plan to generate additional cash flow of roughly CA$37.5 million this fiscal year and another CA$135 million in fiscal 2023 from a combination of cost cuts and anticipated revenue growth.

Hexo, which lost CA$117 million ($91 million) in its first quarter, aims to achieve positive cash flow from operations within the next three quarters.

However, analysts aren’t sure the plan goes far enough.

“Considering Hexo’s indebtedness and cost structure, we continue to view material financing, dilution, and going concern risks impacting the company until a comprehensive balance sheet restructuring occurs,” ATB Capital Markets analyst Frederico Gomes wrote in a note to investors.

ATB estimates that Hexo’s debt currently stands at about CA$402 million.

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“While the Belleville Complex sale is a positive step, the proceeds from this transaction represent only 3% of our estimated total indebtedness for Hexo,” the analyst wrote.

In October, Hexo auditor PricewaterhouseCoopers warned of “substantial doubt” about the company’s ability to continue as a going concern.

“Existing funds on hand, when combined with operational cash flow, are not sufficient to fund existing debt repayments, capex budgets, and potential cash requirements under the Senior Secured Convertible Note,” the auditor warned at the time.

Hexo started overhauling its C-suite in mid-October with the departure of longtime CEO Sébastien St. Louis.

In December, Hexo appointed its fifth chief financial officer in three years and shuffled out board Chair Michael Munzar.

Hexo has lost almost CA$900 million since 2016.

The company’s shares trade as HEXO on the New York Stock Exchange and Toronto Stock Exchange.