Hexo Warns Of Going Concern

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Hexo Corp. (TSX: HEXO; NASDAQ: HEXO)  reported its outcomes for the fiscal first quarter of 2022 ending October 31, 2021, with income rising 29% sequentially to $50.2 million. Hexo additionally reported a complete internet lack of $116 million or ($0.46) per share. Along with the numbers, the corporate additionally up to date shareholders on its new strategic plan with regard to the corporate debt points.

“We’re taking instant steps by means of our new strategic plan, The Path Ahead, to strengthen our capital place, enhance operations, speed up natural development and full our transformation to be money stream optimistic from operations inside the subsequent 4 quarters,” stated Scott Cooper, President & CEO, HEXO. “Having visited all our core websites, and in assembly with our staff and prospects, I’m extra assured than ever in HEXO’s future and our means to speed up the creation of brief and long-term worth for shareholders.”

Going Concern

Hexo famous in its submitting that “current funds available, when mixed with operational money stream, wouldn’t be enough to fund the potential Senior Secured Convertible Observe redemption funds. Moreover, the power to fund capex budgets, convertible debt, and different commitments could also be in danger because of money funds in direction of the Senior Secured Convertible Observe. Administration is exploring a number of choices to safe the mandatory financing, which might embody the issuance of recent public or non-public fairness or debt devices, supplemented with working money inflows from operations. Subsequent to October 31, 2021, administration has resumed the earlier at-the-market public providing. However, there is no such thing as a assurance that sure sources of further future funding might be out there to the corporate or might be out there on phrases that are acceptable to administration.”

As of October 31, 2021, Hexo has $55 million of money and money equivalents and $46 million (July 31, 2021 – $37,421) in commerce receivables. Nonetheless, Hexo has present liabilities of $411 million on the assertion of monetary place. Hexo has remaining contractual commitments of $40.695 million due earlier than July 31, 2022. The corporate stated it has restricted funds to

fulfill debt of $50 million introduced in present liabilities. The corporate stated it at present plans to settle a good portion of this legal responsibility in fairness. Nonetheless, if the corporate is unable to fulfill the necessities of Fairness Situation Waiver, the Holder might demand settlement in money. In the course of the three months ending October 31, 2021 the corporate settled all of the optionally available redemption funds in fairness and subsequent to the interval, the corporate settled the November and December 2021 optionally available redemption funds in fairness. The corporate has additionally acquired a money settlement waiver for the Might 2023 optionally available redemption.

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CFO Stepping Down

It appears the CFO is taking the autumn for the debt points. Hexo stated that CFO Trent MacDonald was stepping down efficient March 11, 2022. The corporate stated MacDonald will proceed in his position till March 11, 2022, to make sure a easy transition whereas it searches for a brand new CFO. Plus the corporate has appointed John Bell as the brand new Chair of the Board, efficient instantly. Bell is at present Chairman of Stack Capital, Pure Jamaican Restricted, and a board member of Remedy Pharmaceutical. Dr. Michael Munzar is stepping down from the board instantly.

 The Path Ahead

Hexo introduced, “The Path Ahead”, a brand new strategic plan to drive accelerated development and develop into cash-flow optimistic inside the subsequent 4 quarters.

The Path Ahead is made up of 5 priorities in accordance with the corporate assertion:

  1. Scale back manufacturing and manufacturing prices;
  2. Streamline and simplify the organizational construction;
  3. Notice price synergies from acquisitions and up to date plant closures;
  4. Deal with income administration, together with extra disciplined pricing; and
  5. Speed up development by means of natural market share features and seize missed income alternatives, together with bettering our means to align cultivation planning with market demand, reintroduce a give attention to medical and strengthen our business capabilities and innovation pipeline.

The corporate stated these initiatives are anticipated to generate incremental money stream of $37.5 million in fiscal 2022 and an extra $135 million in 2023 for a complete of $175 million over the 2 years, cut up virtually evenly between price reductions inside our management and income alternatives.

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Keystone Canned

As a part of the evaluation of capital-intensive initiatives, Hexo determined to halt the Keystone Isolation Applied sciences challenge indefinitely as of October 31, 2021, leading to a one-time cost of $11.3 million.

Authorized Points

Along with the debt issues, Hexo additionally faces a number of authorized points. The submitting said: “As of October 31, 2021, the corporate and its former Chief Govt Officer are defendants in a putative class-action lawsuit pending within the Québec Superior Court docket introduced on behalf of sure purchasers of shares of the Firm and filed on November 19, 2019. The lawsuit asserts causes of motion for misrepresentations below the Québec Securities Act and the Civil Code of Québec in reference to sure statements contained in HEXO’s prospectus, public paperwork and public oral statements between April 11, 2018 and November 15, 2019. The allegations relate to: (1) statements made by the Firm concerning its settlement with the Province of Québec to produce hashish; (2) statements made by the Firm concerning its acquisition of Newstrike, notably the licensing of the Newstrike amenities and the forecasted synergies and/financial savings from the Newstrike acquisition; (3) statements made by the Firm concerning the internet revenues in This fall 2019 and financial yr 2020; and (4) the certifications by Sebastien St-Louis and the  underwriters of the Firm.”

Hexo can also be named as a defendant in a proposed shopper safety class motion filed on June 16, 2020, within the Court docket of Queens’ Bench in Alberta on behalf of residents of Canada who bought hashish merchandise over specified durations of time. The submitting said: “A number of different licensed producers are additionally named as co-defendants within the motion. The lawsuit asserts causes of motion, together with for breach of contract and breach of shopper safety laws, arising out of allegations that the Tetrahydrocannabinol (THC) or Cannabidiol (CBD) content material of medicinal and leisure hashish merchandise bought by the Firm and the opposite defendants to shoppers was completely different from what was marketed on the merchandise’ labels. Most of the hashish merchandise bought by the Firm and different defendants had been allegedly bought to shoppers in containers utilizing plastic bottles or caps that will have quickly absorbed or degraded the THC or CBD content material inside them. By allegedly over-representing the true quantity of THC or CBD within the merchandise, the plaintiff claims that customers can be required to eat considerably extra product than they in any other case would have in an effort to receive the specified results or, within the different, would have consumed the product with out acquiring the specified results. The motion has not but been licensed as a category motion.”

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