Quebec cannabis producer Hexo Corp. is shutting down three production facilities and laying off 155 employees barely two weeks after the company’s auditors raised serious concerns about its future amid burgeoning financial losses.
Two of the facilities that Hexo is closing – one in Kirkland Lake, Ont., and the other in Brantford, Ont. – were only recently added to the company’s production portfolio when it acquired 48North Cannabis Corp. in September for approximately $50-million. Both these facilities are slated for closing by the end of January.
The third facility that is being shut, located in Stellarton, N.S., belonged to the New Brunswick-based cannabis company Zenabis Global, which Hexo acquired for $235-million in February.
In a statement announcing the moves Tuesday morning, the company said it is relocating some of its employees to take on roles at Hexo’s main facilities in Quebec. “This was a very difficult decision, but it is a key component of our integration plan, and one that we believe best positions HEXO for continued growth,” Hexo’s newly appointed chief executive officer Scott Cooper said in the statement.
Shares of Hexo, which trade on the TSX and Nasdaq, have already lost 75 per cent of their value over the past six months. They closed relatively unchanged on Tuesday.
Hexo’s revenue, like that of many of its rivals, had been relatively stagnant over the past 18 months as the industry continues to suffer from a product oversupply problem, shifting brand loyalty, and fluctuating demand from consumers. Yet, under the tenure of former CEO Sebastien St-Louis, the company embarked on an expensive acquisition spree this year, spending close to $700-million on acquiring 48North, Zenabis, and most recently, private pot producer Redecan.
To finance those acquisitions, the company raised US$327.6-million in May through a debt offering due May 1, 2023. The deal included a redemption feature allowing bondholders to elect to have Hexo redeem part of the debt in equity. However, a clause in the terms of the deal stated that if Hexo’s share price dropped below US$1.50, the company could not redeem its debt with shares and would have to pay bondholders out in cash.
That effectively compelled the company’s auditors, Pricewaterhouse Coopers LLP, to issue a report on Oct. 29 saying that the company did not maintain “effective internal control” over its financial management and had insufficient cash to fund debt repayments. Mr. St-Louis abruptly left the company in mid-October.
This is not the first time Hexo has attempted to resize its operations. In late 2019, the company laid off 200 employees amid a drive to become profitable, a goal that it has yet to achieve.
Earlier this week, rival cannabis producer Canopy Growth Corp. reported sluggish revenue, with recreational cannabis sales declining by a significant 34 per cent year over year, notably worse than what some analysts had expected.
The Smiths Falls, Ont.-based company also wrote down $87-million worth of cannabis inventory after lagging demand for its products, which it attributed to shifting consumer preferences. In a note to clients, Bank of Montreal analyst Tamy Chen said Canopy’s performance left her feeling “uneasy” that after almost two years at the helm, the company’s management is “still being outcompeted” by smaller producers.
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Vanmala Subramaniam