Cannabis producer Hexo’s loss surges; cultivation suspended in Niagara

Hexo said on Oct. 28 it received licenses from Health Canada for its Centre of Excellence in Belleville, Ontario.

Gatineau, Quebec-based, federally licensed producer Hexo recorded annual and quarterly net losses of 82 million Canadian dollars ($62 million) and CA$57 million, respectively, for the period ending July 31.

That’s significantly worse than the same period last year, when the company posted annual and quarterly net losses of CA$23 million and CA$11 million, respectively.

In a note to investors after Hexo posted its earnings late Monday night, Bank of Montreal (BMO) analyst Tamy Chen highlighted a number of negative developments.

The average selling price for adult-use sales was “below expectations due to return provisions,” she wrote, noting the company’s CA$17 million inventory write-down.

Management blamed the impairment loss on “price compression in the market” after purchasing cannabis “to help meet the demands of the adult-use market in which the cost is now exceeding its net realizable value.”

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) was CA$25 million in the quarter, which was well below the CA$15 million BMO expectation.

Hexo’s net revenue of CA$15.4 million for the quarter was in line with its own lowered guidance issued earlier in the month, when it cited “lower-than-expected product sell-through.”

Hexo is among a number of Canadian cannabis producers feeling the squeeze from disappointing earnings in the first year of Canada’s regulated adult-use cannabis market.

In an effort to “rightsize its operations,” Hexo also said it is suspending cultivation at its Niagara facility, which the Quebec producer acquired as part of the CA$263 million Newstrike deal earlier this year.

Production has also been suspended in the company’s 200,000-square-foot main facility in Gatineau, Quebec.

“The company determined that this cultivation space is not required at this time given the current market conditions in Canada,” Hexo said in a regulatory filing alongside its earnings.

Last week, Hexo announced a workforce reduction of about 200 jobs, representing 20% of the Quebec-based company’s workforce.

On Oct. 10, Hexo withdrew its fiscal year 2020 outlook, which had advised investors it was “on track” to ramping up to CA$400 million in revenue.

At the time, the company blamed slow store rollouts across Canada and a delay in government approval for edibles, extracts and topicals products – even though no such delay occurred. (Those products were never expected to be available in stores before the end of 2019 and well into 2020.)

Hexo’s new guidance for 2020 includes a very cautious expectation to be EBITDA-positive in 2020, “subject to certain assumptions regarding store count, operational improvements and cost saving initiatives.”

Hexo’s shares opened 8% lower on the Toronto Stock Exchange the morning after its earnings were released.

Matt Lamers can be reached at [email protected]

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