Hexo’s cannabis loss improves to CA$114M, but auditor sounds warning

Did you miss the webinar “Women Leaders in Cannabis: Shattering the Grass Ceiling?” Head to MJBiz YouTube to watch it now!

Canadian cannabis producer Hexo Corp.’s net loss improved to 113.6 million Canadian dollars ($92 million) in its fiscal year ended July 31, 2021, on record adult-use marijuana revenue and growing international sales, the company announced Friday.

Hexo’s fourth-quarter sales of CA$38.7 million were its best to date, an increase from CA$22.6 million in the previous quarter.

It was the first quarter the company included revenue from Zenabis, which Hexo acquired June 1, adding CA$6.8 million in sales over two months.

The CA$85.5 million loss from operations was a substantial improvement over the previous year’s CA$476.6 million loss.

By category, Hexo’s biggest jump came in adult-use marijuana sales.

Fiscal 2021 recreational sales rose to CA$143 million, up from CA$101.7 million last year.

Other categories were:

  • Cannabis beverage sales rose to CA$15.8 million, up from CA$2.8 million last year.
  • International revenue grew to CA$9.9 million, increasing from the previous year’s CA$1.3 million.
  • Medical cannabis sales decreased to CA$1.8M. Last year’s sales were CA$3.3 million.
  • Wholesale sales more than doubled to CA$2.5 million compared to 2020’s CA$996,000.

Including beverages, cannabis sales were CA$158.9 million for the year.

Hexo’s acquisition of rival cannabis producer Redecan closed Sept. 1, after the fiscal year ended, so its revenue was not felt in the quarter.

In a six-page note accompanying Hexo’s annual consolidated financial statements, 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.

“Management is exploring several options to secure the necessary financing, which could include the issuance of new public or private equity or debt instruments, supplemented with operating cash inflows from operations.

“Nevertheless, there is no assurance that certain sources of additional future funding will be available to the Company or will be available on terms which are acceptable to management.”

The company’s new CEO, Scott Cooper, and Chief Financial Officer Trent MacDonald addressed the concerns during a conference call with analysts.

“The company acknowledges the ongoing concern with the senior convertible note,” MacDonald said in reply to an analyst question.

“We understand the risk the note poses, and we’re taking this very seriously.”

He said the company will notify shareholders after there is a material update.

MacDonald added: “I’ll reiterate that we are in conversations with the debt holders themselves. They have been cooperative.

“They’ve negotiated and agreed to a couple of amendments that were beneficial for Hexo, and we’re looking at resolving the issue as fast as we can, and we hope to give an update as soon as possible to our shareholders on what that might look like.”

The auditor’s lengthy note said the financial statements present the financial position of the company fairly.

But PricewaterhouseCoopers also said: “Also in our opinion, the company did not maintain, in all material respects, effective internal control over financial reporting as of July 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date related to the company’s control environment, risk assessment procedures, monitoring activities, antifraud control activities, information and communication processes, control activities, period-end financial reporting, non-routine, unusual or complex transactions, transaction-level control activities, and information technology general controls.”

Hexo ended the quarter with CA$67.5 million in cash.

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

Matt Lamers can be reached at matt.lamers@mjbizdaily.com.