HEXO posts loss of $56 million

Setback driven by $17-million write-down on cannabis inventory

MONTREAL — HEXO Corp. posted a net loss of $56 million, including a $17 million write-down on cannabis inventory for its fourth fiscal quarter ending July 31, 2019, amid significant turbulence for the Gatineau, Que.-based licensed producer which led it to lay off close to 20 per cent of its workforce last week.

HEXO attributed its inventory loss to “price compression” and the overall net loss to the scale of its operations and increased research and development expenses.

The company brought in a net revenue of $15.4 million from the sale of 4,009 kilograms of cannabis for the three months ending July 31, 2019 but its average selling price on the recreational market was just $3.51 per gram.

HEXO had sold 2,759 kilograms of cannabis at $4.30 per gram in its previous quarter.

“We are at the end of the first year of adult use legalization in Canada, which was an incredible year full of successes and challenges across the industry. We’ve gone from $4.9M to $59.3M in gross revenue in just one year. This type of revenue growth is a testament to the Company’s resilience and capacity to pivot in the face of uncertainty,” said Sebastien St-louis, CEO and co-founder of HEXO in a statement put out by the company late Monday evening, ahead of an earnings call with investors Tuesday morning.

Last week, the company laid off 200 employees and suspended cultivation at its Niagara facility (acquired from Newstrike Brands) and 200,000 square feet of its Gatineau facility.

“The company has determined that given the current market conditions in Canada, additional cultivation space is not required at this time,” the statement said.

While the company’s revenue increased by 19 per cent from its previous quarter, its expenses soared over 90 per cent during the same period. Its gross margins declined to 33 per cent, significantly below most analysts’ expectations.

HEXO had slashed its revenue guidance by more than 40 per cent earlier this month and withdrew its fiscal 2020 guidance of $400 million in annual cannabis sales, as it struggled to compete in the cannabis market outside its home province of Quebec.

Bank of Montreal cannabis analyst Tamy Chen called the inventory write-down an “unsettling development” considering the amount of unfinished inventory held by licensed producers across the country, which is roughly 340,000 kilograms according to Health Canada data.

Royal Bank of Canada analyst Douglas Miehm also appeared unimpressed with HEXO’S results, specifically expressing concern over the pricing and product return dynamics with the company’s wholesaler. HEXO has a threeyear distribution contract with Quebec’s cannabis retailer, SQDC.