HEXO Corp. (NASDAQ: HEXO) reported its financial results for the second fiscal quarter ended January 31, 2022. Hexo reported total net revenues increased 61% to $52.8 million. The company reported a total net loss of $690 million. The company wrote-down $616 million in impairments.
Still, at the end of its second quarter, Hexo was not in compliance with the positive Adjusted EBITDA covenant set forth in its Senior Convertible Notes resulting in a net fair value loss of $56 million. Subsequent to quarter end, the Noteholder irrevocably waived, on a temporary basis, any rights in relation to the breach of that covenant of the company.
“Since joining HEXO in November, my top priority has been to clean up a very challenged balance sheet as a result of the Secured Note that was previously put in place,” said Scott Cooper, President & CEO of Hexo. “We’re now on the path to establishing a strong foundation that we expect will, once finalized, enable us to become a cash flow positive business within the next four quarters, along with continuing to grow our significant market share.”
The company said it has identified a way to save $30 million yearly. It will be a combination cutting employees and outside contractors. Half of these positions were related to the previously announced closure of the Stellarton facility. The remaining reductions were related to reducing back-office positions where there is significant overlap as a result of recent acquisitions, simplifying HEXO’s operating model to drive clearer accountability and de-layering management.
The company also said it would transition from co-packaging agreement towards in-house production capabilities, leveraging its scale to deliver on procurement savings and reconfiguring the company’s production network to achieve greater efficiencies; for example, moving vape production and distillate production to the Redecan facility.
“This has been a transformational quarter for the Company and we’re very pleased with the progress we’ve made on a number of fronts,” said Mark Attanasio, Chair of the Board and Executive Chair of HEXO. “We’ve finalized terms of a number of proposed agreements, including the recently announced strategic investment from Tilray, that will, once finalized, restructure the more onerous repayment and liquidity terms of the Secured Note. We expect this much improved structure will allow us to accelerate our growth path and unlock the full potential of the organization.”
HEXO provided notice on March 11, 2022 to HT Investments MA of the occurrence of an event of default under the company’s senior secured convertible note due May 2023 as it was not in compliance with the covenant of the company in the Secured Note to have positive Adjusted EBITDA for the quarter ending on January 31, 2022.
Following provision of the notice by the Company, the Holder irrevocably waived its rights due to the Event of Default until the earlier of May 17, 2022 or the date the proposed transaction announced on March 3, 2022 among the Company, the Noteholder and Tilray Brands, Inc. (“Tilray”) under which Tilray is expected to purchase the Secured Note from the Holder is terminated (the “End of Forbearance Date”), provided further that the Company, HTI and Tilray have agreed to extend the End of Forbearance Date in the event that they remain engaged in good faith negotiations to consummate the proposed transaction.