Hexo warns that there is not enough cash flow to support its debt payments – .

Hexo warns that there is not enough cash flow to support its debt payments – .

Hexo recorded a net loss of $ 67.9 million in the fourth quarter, compared to $ 169.5 million in the same quarter last year.CHRIS WATTIE/Reuters

Cannabis producer Hexo Corp. on Friday warned its shareholders it did not have enough cash to cover future debt payments and was exploring ways to raise new funding.

The company said that while it has sufficient funding for its working capital needs, it has insufficient liquidity to fund its future growth plans and repay its senior secured convertible debt. The new financing could take the form of equity or public or private debt instruments, supplemented by operating cash inflows from operations, the company said.

In its recent audit of the Ottawa-based cannabis company’s fourth quarter earnings report, PricewaterhouseCoopers LLP said Hexo had incurred operating losses “and had financial liabilities that could require significant cash outflows over the course of the year. of the next twelve months ”.

Auditors issued a continuity warning, calling Hexo’s existing funds and operating cash flow “not sufficient” to cover a variety of repayments.

The company’s funding problems follow a $ 144 million public offering in August 2021, to meet its expansion needs and pay the cash portion of its recent $ 925 million acquisition of Redecan , an Ontario-based cannabis company. Hexo also recently acquired 48North Cannabis Corp. for $ 50 million in stock and Zenabis Global Inc. for $ 235 million.

Today, some analysts are calling the deterioration of the company’s capital structure its overzealous growth goals.

While it’s not uncommon for companies in the cannabis industry to be strapped for cash, Hexo has a history of equity dilution, said Frederico Gomes, analyst at Alberta-based ATB Capital Markets.

“I think making three acquisitions fairly quickly and trying to focus on integration kept them from focusing on operations. They were a bit distracted, ”Gomes said.

Hexo reported record revenue of $ 38.7 million for the fiscal fourth quarter, an increase of 71% from the previous quarter. This figure includes Zenabis revenue for the first time and compares to $ 27 million the year before.

Andrew Carter, director of St. Louis-based investment banking firm Stifel, said quarterly revenue exceeded his firm’s estimates and Zenabis’s $ 6.8 million contribution was higher than expected.

However, Mr Gomes said that without the revenue from the recently acquired Zenabis, the company’s net sales would have declined.

Meanwhile, net revenue for fiscal 2021 increased 53% to $ 123.5 million, from $ 80.6 million in 2020.

Hexo recorded a net loss of $ 67.9 million in the fourth quarter, compared to $ 169.5 million in the same quarter last year.

Hexo has not released its cash flow figures, but ATB Capital Markets estimates the company has negative cash flow of $ 48 million for the last quarter.

Hexo stock, which peaked at around US $ 10 in May, fell 11% on Friday to close at US $ 1.49 on the Nasdaq exchange.

Carter attributed the decline since May to the company’s “toxic” convertible debt structure.

To finance its recent acquisitions and business needs, the company raised US $ 327.6 million in May through a senior secured convertible note, maturing May 1, 2023, from an institutional lender.

The deal included a repayment function allowing bondholders to choose whether Hexo had part of the debt repaid in the form of debt or equity. However, a restriction stipulated that once the share price fell below US $ 1.50, the company could no longer repay its debt in shares and would have to pay in cash.

Alternatively, Hexo could ask the bondholder to lower the price limit again. The volume-weighted initial average price attached to the deal was US $ 5.00, traded at US $ 1.50 on October 22, 2021.

Mr Carter said analysts have been voicing concerns about debt financing since its first announcement in May.

“I think we underestimated how bad it was. We did not know that they would be like this against the wall, ”he said. “They put shareholders in a bad position. “

Hexo CFO Trent MacDonald told analysts on Friday that the company understands the risk of the rating “and we take it very seriously.”

Analysts have also warned of the company’s declining market share. In an August statement, Hexo claimed that if it succeeds in acquiring 48North and Redecan, it would become the number one cannabis product company in Canada by recreational market share.

However, analysts noted the company’s declining market share. RBC Capital Markets analysts Douglas Miehm and Sahil Dhingra said the data they examined suggests Hexo’s market share in Alberta, British Columbia and Ontario increased from 16% to 13%. between March and August.

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