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The 3 Most Important Numbers in HEXO's Horrible Q2 Results

By Keith Speights - Mar 30, 2020 at 12:00PM

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HEXO reported two really problematic metrics and one encouraging result in its Q2 update.

HEXO (HEXO 2.94%) announced its fiscal 2020 second-quarter results before the market opened on Monday. And those results weren't what investors had hoped for, as evidenced by the stock's double-digit-percentage plunge in early trading during the day.

As you might expect, HEXO reported plenty of bad news. However, there was also some good news in the company's quarterly update. Here are the three most important numbers in HEXO's Q2 results.

Shadow of a Canadian maple leaf on a pile of cannabis leaves

Image source: Getty Images.

1. Dwindling cash position

There's no more important financial metric for Canadian marijuana stocks right now than their cash position. Unfortunately for HEXO, it's quickly running out of cash.

The company reported cash, cash equivalents, and short-term investments totaling CA$81.4 million as of Jan. 31, 2020. HEXO acknowledged that it will need to raise additional capital to fund operations in the current fiscal year.

Some cannabis producers conduct stock offerings to raise cash. Others issue convertible notes. HEXO could take either of these options, but the net impact will be the same: More dilution to the value of existing shares will be on the way.

2. Staggering net loss

HEXO's cash position wouldn't be so critical if the company were profitable. But it isn't. HEXO reported a total net loss in the second quarter of CA$298.2 million.

This net loss is by far the worst in HEXO's history. It's more than twice the size of the company's net losses in the previous four quarters combined. What happened? HEXO recorded some major writedowns.

The company posted an impairment of CA$138.3 million of its property, plant, and equipment and intangible assets related to its Newstrike Brands acquisition. HEXO also determined that the carrying amount of its total net assets was much greater than its market cap and recorded an impairment in goodwill of CA$111.9 million.

There is a sliver of good news hidden in HEXO's staggering net loss, though. Without these big writedowns, the company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) improved from the previous quarter. HEXO reported an adjusted EBITDA loss of CA$10.3 million in Q2 compared to an adjusted EBITDA loss of CA$19.4 million in Q1.

3. Increased sales

Probably the best news for HEXO in an otherwise dismal quarter came on the company's top line. HEXO announced Q2 net revenue of CA$17 million, up 17% from the previous quarter and a 27% year-over-year increase.

HEXO CEO and co-founder Sebastien St-Louis stated, "Our strategy with Original Stash has demonstrated that we can directly compete with the black market." The numbers appear to back up his claim. HEXO launched value cannabis brand Original Stash in October 2019. The brand was the primary driver of the company's 20% quarter-over-quarter growth in net adult-use cannabis revenue in Q2.

Sales volume for adult-use cannabis in the second quarter jumped 57% from Q1 to 6,579 kilograms. However, this volume growth didn't translate to equally high sales dollar increases because of lower selling prices. Original Stash is much cheaper than HEXO's other cannabis brands. This low price contributed to the company's gross adult-use revenue per gram equivalent dropping to CA$3.49 in Q2 from CA$4.35 in Q1. HEXO's adult-use net revenue per gram equivalent fell to CA$2.47 in Q2 from CA$3.24 in the previous quarter.

Looking ahead

HEXO's biggest challenge right now is raising the capital it needs to stay in business. The company noted earlier this month that "there is no assurance that it will be able to obtain additional financing or that such financing will be available on reasonable terms."

Like most businesses, HEXO also faces uncertainties related to the coronavirus pandemic. The cannabis industry has been defined as essential businesses in both Ontario and Quebec, which is good news for the company. All of HEXO's facilities also remain open, although the company has implemented additional safety measures in light of the COVID-19 outbreak.

Sebastien St-Louis acknowledged that "the industry continues to see challenges ahead." However, he also said that after his company's strategic review of its core and noncore assets, "we believe we have positioned HEXO to meet these challenges head on." 

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