Yesterday, the huge Canadian cannabis grower Hexo (HEXO) declared its target to achieve a private placement worth $70 million Canadian dollars. This funding is in the form of convertible debentures. Apart from this, Hexo also delayed the release of its Q4 2019 earnings for October 28. The company cited the reason that it required additional time.
Hexo’s private placement of $70 million Canadian dollars
Hexo decided to raise finance via a private placement of convertible debentures. This involves financing in the form of debt that can be converted into equity at a certain price later.
With this deal, Hexo must shell out 8% interest and the principal amount to be returned after three years. Moreover, investors have an opportunity to convert their debentures to shares at a conversion price of $3.16 per share. CEO Sebastien St-Louis and chief board members find this deal attractive and are a part of it. This private placement deal should close by November 15.
Hexo said that it will be using the proceeds of this deal to finance its working capital requirements. St-Louis said, “The confidence in HEXO Corp that this $70 million private placement demonstrates is a testament to the value the company is expected to bring to shareholders. We remain focused on garnering significant market share, driving growth, and in shaping this company into a mature, resilient and valued leader in our industry.”
Hexo Q4 2019 preliminary results fell short of guidance
In early October, Hexo released its earnings expectations for the fourth quarter and full-year, ending on July 31, 2019. The company expected to record a net revenue of $14.5 to $16.5 million Canadian dollars for Q4 2019. This compares to the revenue of $1.4 million Canadian dollars in Q4 2018. This translates to about 11x the YoY (year-over-year) growth.
For 2019, it expected net revenue amounting to $46.5 to $48.5 million Canadian dollars. This compares to 10x the revenue seen in fiscal 2018. Also, it took back the $400 million Canadian dollars in revenue guidance for fiscal 2020.
However, this falls short of the guidance given at the time of the Q3 2019 earnings release. As per the release, Hexo expected to double its Q3 2019 revenue for Q4 2019. This translates to revenue of approximately $26 million Canadian dollars for Q4 2019. Further, for the year ending 2020, the company expected to achieve net revenue of $400 million Canadian dollars. However, this translates to more than 81x its revenue realized during fiscal 2018. Hexo expected to achieve this revenue growth as a result of volume increase from the capacity expansion.
New facility boosts production but Q4 results fall short
At the start of 2019, the company had set up a new 1,000,000-square-foot greenhouse facility. The company licensed it as a B9 facility. This facility is important because the total size after buying Newstrike Brands results in a total production capacity of 150,000 kg of dried cannabis. With this expansion, Hexo readies “for the legalization of edibles and concentrate cannabis derivatives expected in the fall of 2019.”
Hexo expressed its disappointment regarding its Q4 2019 revenue. Also, the company said that the shortfall in the Q4 2019 revenue was a result of the lower-than-anticipated volume of products sold by the retailers. Further, the company criticized the slowdown in the cannabis approval for extracts and edibles. However, the company is confident it will get better results by modifying its sales and operational strategy.
Stock performance after delayed results
On October 23, Hexo shares saw a steady rise after the news about the company’s plan to raise money via the private placement of $70 million Candian dollars was out. Then, the shares were stopped from trading for an hour before the release of the news regarding the delay in the release of Q4 2019 results. Following the announcement of the slash in the forecast, the cannabis stocks dived down, pulling down the entire sector.
On Thursday, shares of Tilray (TLRY) shrunk almost 13.5%, Canopy Growth (CGC) slumped 10.8%, and Aurora Cannabis (ACB) slipped 9.3%. The cannabis sector was shaken up since the delay in earnings news outweighed the positive news on the financing through private placement.