As the effects of the COVID-19 crisis wreaks havoc on the cannabis sector, cash has become an even more valuable asset.  Many cannabis companies have had to resort to dilutive financing options and shareholders have taken the brunt of it.

On Tuesday HEXO Corp. (HEXO) announced that they would initiate a C$50 million underwritten public offering. The company stated the pricing of its previously announced overnight marketed public offering at C$0.90 per unit. The underwriters for the offering agreed to purchase 55,600,000 units from the company which totals gross proceeds of C$50,040,000 for HEXO.

Each unit will consist of one common share of the company along with one half of one common share purchase warrant of HEXO. The warrant will be exercisable to purchase one common share of HEXO for up to 5 years following the closing date of the offering. The warrant’s exercise price is $1.05 per warrant share which is subject to adjustment in certain events.

The two main underwriters on the deal are Canaccord Genuity Corp and Canaccord Genuity LLC but they will work together with a syndicate of underwriters to complete the transaction. 

HEXO has also granted the underwriters a 30-day option to purchase up to an additional 8,340,000 units in the offering on the same terms and conditions. The company plans to use the additional liquidity from the offering for working capital and other general corporate purposes.

This transaction is expected to close on or close to May 21, 2020, and will be subject to market and other customary conditions, including approvals of the Toronto Stock Exchange and the New York Stock Exchange.

Shares of HEXO dropped roughly 33% on this news, to $0.50.

There has been widespread speculation that HEXO will be forced to follow in Aurora Cannabis’ (ACB) footsteps and initiate a reverse stock split to stay on the NYSE or face being delisted. 

Though we are hopeful that their discount cannabis brand, Original Stash, will be a winner for HEXO, we are taking a wait-and-see approach before we buy anymore shares of the company.  The headwinds are just too strong right now from the dilution of their shares, their sub-$1 share price, and the fierce competition they are seeing from Aurora Cannabis (ACB) and Canopy Growth (CGC).    

(Disclosure: The author is long HEXO)

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HEXO shares were trading at $0.49 per share on Wednesday afternoon, down $0.04 (-7.32%). Year-to-date, HEXO has declined -69.18%, versus a -7.05% rise in the benchmark S&P 500 index during the same period.

About the Author: Aaron Missere

Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...

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