Cannabis giant Hexo Corp. is replacing its chief financial officer and chairman as part of a continuing executive-level overhaul in the wake of debt woes and a dramatic decline in the company’s stock price.
Trent MacDonald, who has been CFO since September, 2020, will leave the company in March. The company has also announced that John Bell, who was chairman of rival Canopy Growth Corp. from 2014 to 2020, will replace current chair Michael Munzar.
The management changes were announced Tuesday morning alongside Hexo’s first-quarter earnings results for fiscal 2022, which saw increased revenue but an inflated net loss. The Gatineau-based cannabis producer is facing a severe debt overhang issue as it attempts to pay back a US$327-million convertible loan that was used to fund its $925-million purchase of private cannabis producer Redecan Inc. in May.
In October, PricewaterhouseCoopers LLP, Hexo’s auditor, raised concerns about the company’s finances because of how the convertible debt deal was structured: It required Hexo to pay back the loan in cash over the next year if its share price were to fall below US$1.50.
Hexo’s stock has fallen a whopping 77 per cent over the past year and now hovers at the 90 US cents mark on the Nasdaq. Its stock is also listed on the Toronto Stock Exchange and, as of midmorning Tuesday, was valued at $1.16 per share, a decline of 6 per cent from the previous day’s closing price.
The company said it has engaged a number of investment banks, as well as its current, unnamed debt holder, to figure out how to restructure the debt in a manner that “maximizes shareholder value.”
Part of the reason the company’s stock has been in freefall is because of the dilutive nature of the debt: Hexo has to essentially sell its own stock in order to pay back the loan. As of Dec. 14, the company said it has paid back US$118-million in principal but still has US$241-million outstanding.
In a conference call with analysts, Hexo CEO Scott Cooper declined to provide specifics on how the terms of the debt deal would be revised. “We are working with the board and advisers. … We want to remain very liquid, but I can tell you that all our decisions are made around maximizing shareholder value,” he said.
For the quarter ended Oct. 31, 2021, the company reported a net loss of $117-million, bringing its total losses to almost $900-million over the past five years.
Revenue, however, grew significantly this quarter, mostly because of sales generated by Redecan and Zenabis, another cannabis producers HEXO purchased this year. Total net revenue increased 29 per cent, to $50.2-million, compared with $38.7-million in the quarter ending July 31. Redecan alone contributed $13.5-million to the quarter’s revenue.
Hexo has $55.8-million in cash on hand but forecasts that it could stretch that amount to $175-million over the next two years with further cost-cutting measures such as closing facilities and fully integrating its acquisitions.
The company has been plagued by reputational issues lately. In October, former CEO and co-founder Sebastien St-Louis abruptly left Hexo and was replaced by Mr. Cooper, who ran the company’s beverages business, Truss. Then, in November, Health Canada and Quebec authorities, including the anti-corruption division of the Sûreté du Québec, said they were looking into the company after pictures on social media emerged of a prominent Redecan shareholder, Josh Hill, posing with a member of the Hells Angels.
The Journal de Montréal, which published the pictures, reported that one of them showed Mr. Hill embracing Peter Montour, currently a Hexo director, as well as Will Montour, who will become a Hexo board member in January.
The Montours are co-owners of Redecan, an Indigenous-led cannabis producer located on the Six Nations reserve in Brantford, Ont. Hexo’s acquisition of Redecan was widely seen as a much-needed win when it was announced six months ago, given that the company – like many others in the highly competitive recreational cannabis space – was struggling to maintain market share.
Hexo did not immediately respond to a Globe and Mail query Tuesday about whether the investigations by both Health Canada and Quebec authorities were still continuing. In previous correspondence with The Globe, the company said it had no business ties to Mr. Hill and that it had collaborated closely with Health Canada to address any “potential concerns.”
With files from Nicolas Van Praet
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