Bad News For Hexo Liquidity Risk
During the three and six months ended January 31, 2023, the Company reported operating losses of $29.7 million and $70.3 million, respectively; cash outflows from operating activities of $23.4 million in the six months ended January 31, 2023 (positive operating cashflows of $5.36 million generated in three months ended January 31, 2023) and an accumulated deficit of $1.8 billion and has yet to generate positive cashflows or earnings. The Company had a working capital deficiency of $111.0 million and held cash and cash equivalents of $34.2 million as at January 31, 2023 ($83.2 million at July 31, 2022).
The Company remains subject to, amongst other covenants, a minimum liquidity covenant of US$20 million under the Senior secured convertible note as well as a requirement to achieve Adjusted EBITDA of not less than US$1.00 for each quarter beginning in the three months ended April 30, 2023.
These circumstances lend substantial doubt as to the ability of the Company to meet its obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern.
Management will continue to evaluate potential private and public financing opportunities through the issuance of equity. Notably, the Company’s at-the-market program as initiated in May 2022, remains available to the Company (following certain legal and administrative filings) and authorizes the Company to issued equity up to US$40 million from treasury to the public, although the Company’s ability to access this entire amount may be affected by market conditions and the performance of the Company’s share price. Management may look to utilize this program to bridge cashflows during certain periods of volatility in order to manage its working capital obligations and remain compliant with the minimum liquidity covenant.
The Company has also commenced discussions with its lender regarding potential amendments to and/or covenant relief under the Senior Secured Convertible Note. No agreement has been reached to date and there can be no assurance that such agreement will be reached.
There can be no assurances however that financing alternatives will be available or available on terms that are acceptable to the Company, that the Company will be able to obtain favourable waivers and/or covenant relief from its lender under the Senior Convertible Note or that the Company’s savings initiatives alone will yield sufficient liquidity to meet the minimum liquidity or generate positive Adjusted EBITDA, in order for the Company to meet its covenant requirements and execute on its business plan. Should these efforts prove unsuccessful, there is uncertainty as to the Company’s ability to remain in compliance with the covenants of the Senior Secured Convertible Note over the next 12-month period. These circumstances create material uncertainties that lend substantial doubt as to the ability of the Company to meet its obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern.