On December 26, HEXO (HEXO) announced a registered direct share offering for raising $25 million from institutional investors. The company is offering 14.97 million shares at $1.67 per share. HEXO plans to use the proceeds for working capital, R&D, and other general purposes. The company expects to close the offering by today.
After this news, the company’s stock crashed by 21.74% and closed at $1.53 on December 26. The stock was down 55.39% year-to-date, and 81.78% lower than its 52-week high of $8.40. Between November 29 and December 26, HEXO stock fell 29.17% from $2.16 to $1.53. Investors also reacted adversely to Aurora Cannabis’s (ACB) dilutive convertible debt swap deal in the last week of November. Let’s see what’s causing the dramatic slide in HEXO’s stock price.
Limited cash on its balance sheet
At the end of the first quarter (ended October 31), HEXO had 73.5 million Canadian dollars in cash. The company managed to reduce its operating expenses sequentially in the quarter by 25% from $46.9 million to $35.1 million.
However, as reported by Investor’s Business Daily (or IBD), MJBiz Investor Intelligence expects HEXO’s cash (on December 17) to sustain its operations for just the next 1.2 years. MJBiz Investor Intelligence has based this calculation on FactSet estimates for HEXO’s operating cash flow and capex in fiscal 2020. The research agency also included the debt due in fiscal 2020 in these calculations.
IBD also reported that at MJBizCon 2019, Entourage Effect Capital managing director Codie Sanchez highlighted the need for cannabis companies to have at least 12 months’ worth of cash. He believes this cash cushion is required to face difficult conditions in the cannabis industry.
AltaCorp prefers to avoid HEXO
On December 17, Cantech Letter reported that AltaCorp Capital analyst David Kideckel had expressed concerns for HEXO’s growth prospects. The analyst reiterated his “sector perform” rating for the stock. However, he reduced its 12-month target price from 3.75 Canadian dollars to 3.15 Canadian dollars.
Kideckel expects HEXO’s revenue to be 67.7 million Canadian dollars in fiscal 2020 and $104.5 million Canadian dollars in fiscal 2021. He forecasts the company’s adjusted EBITDA to be -37.9 million Canadian dollars in fiscal 2020 and 7.9 million Canadian dollars in fiscal 2021.
AltaCorp anticipates several challenges for HEXO in the near term
In the first quarter, the company’s net revenue rose 154.38% YoY (year-over-year) to 14.5 million Canadian dollars, near the lower end of its 14 million–18 million Canadian dollar guidance. Its revenue was lower than Wall Street’s estimate of 15.6 million Canadian dollars and Kideckel’s estimate of 15.0 million Canadian dollars.
In the first quarter, HEXO’s gross margin before fair value adjustments narrowed sequentially by 200 basis points to 31%, missing Kideckel’s estimate of 33.7%. Additionally, the company’s adjusted EBITDA loss of 24.6 million Canadian dollars was larger than Wall Street’s loss estimate of 21.4 million Canadian dollars and Kideckel’s estimate of 18.9 million Canadian dollars.
Kideckel pointed out HEXO’s pricing pressures, which are also an industry-wide issue. HEXO’s average price per gram and gram equivalent of adult-use cannabis dropped 20.18% YoY to 4.35 Canadian dollars. The analyst attributed this problem to a cannabis supply-demand imbalance in the Canadian market. This imbalance resulted in HEXO writing off 25.5 million Canadian dollars in inventory in the first quarter. The company had to offer 1.2 million Canadian dollars in price concessions. It also offered a provision of 0.7 million Canadian dollars for the potential return of unsold inventory. Kideckel expects retail infrastructure challenges and the demand-supply imbalance in Canada to pressure HEXO’s pricing and margins in the near term.
AltaCorp optimistic about HEXO’s long-term growth prospects
Kideckel expects the development of retail infrastructure in Canada to be a key growth driver for HEXO. He also expects the company’s focus on innovation and strategic collaboration to strengthen its position in the newly opened cannabis derivatives market.