On March 17, Hexo (TSE:HEXO) announced that it hasn’t filed its interim results and associated MD&A (management’s discussion and analysis) for the quarter and six months that ended on January 31, 2020. The company needed to file the results by March 16. Hexo announced that it had incurred significant impairment losses during the last quarter. The company has identified a value range for these impairments. However, due to the complex nature of these impairments, the company hasn’t determined the final amount.
Hexo also announced that it needs to make some amendments to its MD&A for fiscal 2019, which ended on July 31, and the first quarter of 2020, which ended on October 31. The company added that these changes were made to address the issues raised by the Ontario Securities Commission staff. So, management added that it would delay filing its earnings for the second quarter of fiscal 2020. The company needs to incorporate some specific elements for the amended MD&A in its filings. Meanwhile, Hexo announced that it has blacked out its directors, officers, and other insiders from trading the stock until it files its second-quarter earnings.
Hexo’s second-quarter performance
Although Hexo delayed the announcement of its second-quarter earnings, it made the following announcements.
- For the second quarter, Hexo has reported gross revenue of 23.8 million Canadian dollars. The revenue represents a rise of 23% from 19.3 million Canadian dollars in the previous quarter. Meanwhile, the company’s net revenue increased by 17% from 14.5 million Canadian dollars in the first quarter to 17.0 million Canadian dollars.
- Hexo announced that it completed the strategic review of its cultivation assets on March 2. The results indicated that the company’s cultivation capacity was higher than its forecasted demand. So, the company has decided to sell its Niagara Facility.
- Hexo’s management announced that the carrying value of its total assets was significantly higher than the company’s market capitalization as of January 31. The company’s management has blamed the slower roll-out of cannabis retail stores and delays in the government’s decision to legalize cannabis derivatives for the decline in its sales and profitability. These factors have caused impairments, which the company is assessing. Meanwhile, management expects its impairment losses to be 265 million–280 million Canadian dollars.
The delay in Hexo filing its second-quarter performance and the expectation that its impairments will rise to 280 million Canadian dollars led to a fall in the company’s stock price. By the end of Tuesday, the company traded at 0.65 Canadian dollars on the Toronto Stock Exchange, which represents a fall of 33.7% from the previous day’s closing price. Meanwhile, cannabis ETFs and most of Hexo’s peers were trading in the green on Tuesday.
Hexo has lost 68.6% of its stock value YTD (year-to-date). The MediPharm’s lawsuit, the new equity offering, and weakness in the cannabis sector have dragged the company’s stock down. Hexo has underperformed its peers. Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB), and Aphria (NYSE:APHA) have declined by 46.6%, 63.8%, and 54.0% YTD, respectively. On the NYSE, Hexo was also trading below $1 and could face delisting. Read Cannabis Stock: Will Hexo Get Delisted Next? to learn more.
Last year, Hexo withdrew its fiscal 2020 guidance, which dented management’s credibility. On Tuesday, the announcement about the delay in reporting Hexo’s second-quarter performance could make investors skeptical. With the cannabis sector going through tough times, I think that investors should avoid Hexo in the near term.
To learn about how Canopy Growth plans to deal with the coronavirus outbreak, read Canopy Growth Temporarily Closes Its Retail Outlets.