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Hexo Losses Rise as Canadian Cannabis Market Right-Sizes

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Hexo Corp. (TSX: HEXO) (Nasdaq: HEXO) achieved positive net income before tax for the first time in its history despite slumping cannabis prices across the market.

The Canadian cannabis producer reported its financial results for the period ending Jan. 31, 2023.

By maintaining fair prices and focusing on profitable brands, the company said it saw decent financial improvements in the fiscal second quarter.

Overall, net revenue totaled C$24 million, missing Yahoo Finance’s analyst average projection by C$2.5 million. Net income rose sequentially to C$722,000 from a net loss of C$56.3 million, while the total gross margin before adjustments improved from 40% to 45%.

Earnings were at a loss of 26 Canadian cents, an improvement of 10 cents since the same period last year, though missing analysts’ projection by 10 cents (C$0.16).

“While cannabis prices have dropped sharply across the market, it is our view that slashing prices is not a sustainable strategy,” president and CEO Charlie Bowman said in a statement. “We’re confident our products will continue to deliver excellent value to customers and shareholders alike.”

Adjusted EBITDA loss rose to C$2.4 million, but improved by C$3.2 million versus the second quarter in fiscal 2022.

Hexo also generated C$5.3 million of cash from operations and reduced SG&A expenses by 11% versus the previous quarter.

Additionally, it launched several new high-quality products that received positive feedback from customers, while production of its Redecan straight edge pre-roll products rose, indicating meaningful movement toward profitable brand share.

Going concern

Still, the company’s cash burn remains concerning. Operating losses totaled C$29.7 million over the past three months.

Stretch that horizon a bit, and losses totaled C$70.3 million in the six months trailing Jan. 31, 2023.

Hexo wrote in filings that it experienced cash outflows from operating activities worth C$23.4 million in the same six-month period and has yet to generate positive cashflows or earnings.

With a working capital deficiency of C$111 million (around US$80 million) and cash and cash equivalents of C$34.2 million (US$25 million), the company is subject to a minimum liquidity covenant of US$20 million under a senior secured convertible note, which may be difficult to meet.

The company’s covenants require an adjusted EBITDA of not less than US$1 (C$1.347) for each financial period starting in the third quarter ending April 30, 2023. Given the current financial situation, management is exploring potential private and public financing opportunities through the issuance of equity.

Hexo said that it has commenced discussions with its lender regarding potential amendments to and/or covenant relief under the senior secured convertible note, but no agreement has been reached to date.

Its at-the-market program, which authorizes it to issue equity up to US$40 million from treasury to the public, remains available, but its ability to access this entire amount may be affected by market conditions and the performance of the company’s share price.

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