Hexo faces ‘pervasive’ reporting issues following acquisition spree

Hexo’s (HEXO.TO)(HEXO) new chief executive officer spent part of his first earnings call reassuring analysts after auditors flagged concerns about debt repayment and reoccurring losses. The cannabis company’s latest quarterly filings also warn of “pervasive issues” related to its financial reporting, following a string of recent acquisitions.

Scott Cooper was named CEO of Ottawa-based Hexo last week, days after co-founder Sebastien St-Louis was ousted from the top job, following a scathing letter from an activist investor to the company’s board.

On Friday, Hexo issued a “going concern” warning, raising the risk of the company’s inability to repay about $370 million in convertible notes due May 2023. Hexo used the funds to bankroll the cash portion of recent acquisitions. The company purchased a trio of Canadian cannabis firms; Redecan, Zenabis, and 48North.

“We are in conversations with the debt holders themselves. They have been cooperative,” Cooper told analysts on a conference call Friday morning. “They have agreed to a couple amendments that were beneficial for Hexo. And we’re looking to resolve the issue as fast as we can.”

Toronto-listed Hexo shares fell 7.35 per cent to $1.89 per share at 10:57 a.m. ET.

Auditor PwC warned in a six-page note accompanying Hexo’s financial statements that the company’s current funds and cashflows are not sufficient to support potential cash requirements under the senior secured convertible notes. Hexo’s management says it’s exploring financing options, which could include issuing new equity.

"The company has suffered recurring losses from operations, has had cash outflows from operating activities, and has financial liabilities that may require significant cash outflows over the next twelve months," the auditor wrote in their report.

“There is no assurance that certain sources of additional future funding will be available to the company, or will be available on terms which are acceptable to management.”

In its financial filings, Hexo also warned of “pervasive issues” impacting its ability to maintain effective financial reporting in the wake of the company’s recent acquisitions.

“The company identified multiple deficiencies in internal controls, primarily due to the control environment not being mature enough to support the increasing complexity of the business and rapid expansion through acquisitions,” the filing reads. “As a result, pervasive issues exist.”

Hexo reported a $67.9 million net loss in its fiscal fourth quarter on Friday, compared to a $169.5 million loss in the same period last year. The company booked $38.8 million in sales, and an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $13 million. Analysts polled by Bloomberg called for $32.2 million in sales, and an adjusted EBITDA loss of $6.7 million.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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