My older sister once complained that our mother favored me because, “Every time she looks at you, she experiences a spasm of gratitude that you have not died of unnatural causes.”
And so it is with Hexo (HEXO.T) – a consumer packaged-goods cannabis company that surged 20% by mid-morning on 18 million shares traded after it announced that it is still alive.
Late last week, Hexo raised $57.5 million by issuing 64 million new shares at .90.
Each share comes a half-warrant, exercisable for 5 years at CND $1.05 per share.
If you’re wondering what Hexo plans to do with the $57.5 million – here’s the answer: “Hexo expects to use the net proceeds for working capital and other general corporate purposes.”
Canaccord Genuity, Alliance Global Partners, AltaCorp Capital and BMO Nesbitt Burns underwrote the financing. They are now tasked with selling Hexo shares to skeptical retail investors.
Our take: this is like lending a drowsy 14-year-old boy $1,000 “to do stuff”.
A year ago, Hexo’s share price peaked at $10.
By mid-morning it’s trading at $1.07.
To be blunt, Hexo is selling $15 pizzas with food-costs of $40.
It’s not a great business model.
Six weeks ago Hexo released its Q2, 2020 financials revealing a net loss of CND $289 million for the quarter ending January 31, 2020. The net revenue for Hexo increased 17% to $17 million from $14.5 million in the first quarter.
After completing a strategic review of its cultivation capacity, Hexo decided to list its Niagara grow facility for sale – booking an impairment loss of $138 million.
“Slower than expected retail store rollouts in Canada resulted in constrained distribution channels which have adversely affected market sales and profitability,” stated Hexo, “As a result of these factors, management performed an indicator-based impairment test of goodwill, booking a further loss of $111 million.”
Key Q2, 2020 Highlights:
- Net Revenue increased 17% to $17.0M from $14.5M
- Adult-use grams sold increased 57% to 6,579 kg
- Production levels increased to 22,305 kg from 16,107 kg
- Expanded Original Stash to Ontario, BC and Alberta
- Obtained Phase 1 licence for Belleville facility
- Obtained sale of cannabis topicals, extracts, edibles and beverages licence for Gatineau facility,
- Closed a $70M private placement of 8% unsecured convertible debentures, including key management and board participation of over 10%
- Closed two registered direct offerings totalling USD $45 Million
“Following a strategic review of the company’s core and non-core assets we believe we have positioned HEXO to meet these challenges head on,” stated Sebastien St-Louis, CEO and co-founder of HEXO.
Meanwhile Hexo is being sued by MediPharm Labs who claims that Hexo has reneged on a cannabis oil supply deal signed in 2019.
As of January 31, 2020, Hexo held cash equivalents of about $81 million. Barring further developments, Hexo estimated it will run out of cash in eight months.
Hexo’s published net loss of $298 million was 6,800% worse than its net loss of $4.3 million from the same period of the year prior.
“Borrowing money and expanding hard in competition with MedMen (MMEN.C) is a two-edged sword,” explained Equity Guru’s Chris Parry, “In a strong market, you’re building far more value than you’re borrowing but, in a down market, you’re under extra pressure to keep things together when debts come due.”
To be fair Hexo isn’t the only well-intentioned weed company to be hemorrhaging money.
Two weeks ago, Hexo received notification from the New York Stock Exchange (NYSE) must regain a price of USD $1.00 per share to maintain its listing. Hexo stated that it is considering all options to regain compliance, including a share consolidation “if necessary.”
My sister had a point.
Older siblings are held to higher standards.
When you screw up consistently over an extended period of time, your mere survival as a functioning enterprise becomes a cause for celebration.
After today’s 20% share-price surge, Hexo Corp is trading at USD .62 on the NYSE.
Full Disclosure: no dog in this fight.
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