Canadian cannabis producer HEXO Corp. (TSX: HEXO and NYSE: HEXO) is posting staggering impairment charges and write-downs in its latest quarterly report, while citing communications with black market drug dealers that its value product is cutting into their sales.
On Monday, Hexo released the earnings report for its Q2 period ending Jan. 31, 2020.
The report detailed a modest 20 per cent gain in quarterly net revenues, and a total net loss of $298.2 million.
During its follow-up conference call Monday morning, CEO Sébastien St-Louis claimed its Original Stash value product — a 28-gram package of dried flower that sells for $140 at the Ontario Cannabis Store — is driving illicit sellers to call him personally to complain.
“Anecdotally, I get calls from black market dealers for the first time telling me ‘What are you doing to our business?’ That’s when I knew we were succeeding,” he said.
Unsurprisingly, perhaps, not everyone is convinced of the validity of St-Louis’s statements.
“If you don’t know a lie when you hear one…,” said #potstocks Twitter commentator Betting Bruiser, who has leaked important cannabis industry insider information in the past.
Sebastien on the $HEXO call saying he got a call from his black market dealer complaining because $HEXO is taking their market share from original stash. If you don’t know a lie when you hear one … #PotStocks
— Betting Bruiser (@BettingBruiser) March 30, 2020
Bruiser also took to Twitter on Monday to point out more troubling information related to Hexo’s liquidity.
“Existing funds on hand, combined with existing debt facilities are not sufficient to support ongoing operations, existing commitments, and costs of acquiring new investments for increased product offerings,” reads the posted documents.
St-Louis said international expansion plans are being shelved for the moment, but he expects to need an additional $150 million in capital to fulfill Hexo’s needs in the Canadian market alone.
That may be difficult as the company is burning about $85 million in operating expenses each quarter, and has a current cash balance of $80 million, according to comments made by Jefferies LLP analyst Owen Bennett reported by BNN Bloomberg.
Telling sign: $HEXO financial statements slapped on a huge going concern warning that they haven't had before this quarter. It is now item #1 in the notes, preceding the description of the business. Anyone still holding this stock is clueless. #PotStocks pic.twitter.com/jsoPhfnr8M
— Betting Bruiser (@BettingBruiser) March 30, 2020
In the report, Hexo said its net revenue from adult-use sales increased to $16.3 million, from $13.6 million in the previous quarter.
Among the report’s most damaging details are a $138.3 million impairment charge related to the sale of its Niagra facility, and a goodwill impairment charge of $111.9 million from a re-assessment of the value of the company’s total net assets. Quarterly operating expenses totaled $281.5 million.
The company also reported write-downs totaling $16.1 million related to unfinished inventory, and a purchase of $11.8 million in concentrate. The latter is related to a supply deal with MediPharm Labs, who sued Hexo earlier this year.
Read more: Hexo drops on share offering, inventory writedown
Hexo said the agreement “is currently the subject of litigation and is alleged to be void as it was negotiated in bad faith at prices well in excess of market.”
Shares in the company plunged almost 30 per cent Monday to $0.79 cents a share at publication time.
Top image via HEXO Corp.
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@nick_laba
