2019 was an extremely tough year for HEXO shareholders. The stock saw highs in April of over $8 only to see it trade currently under $2.
Not long ago the company issued a statement and revised its 2020 forecast lower that sent the stock plunging. In their recent quarter the company also disappointed analysts with lower than expected revenue numbers.
Despite all of the negativity their CEO Sebastien St-Louis has remained extremely confident regarding the future of the company. Positive remarks are one thing, but at the end of the day, investors are growing impatient and we need to see results.
Just last week, on December 26, 2019, HEXO announced that the company would enter into a definitive agreement to sell 14,970,062 shares to institutional investors. The offering price for the shares would be $1.67. This deal was offered at a 14% discount to market prices and raised gross proceeds of $25 million. In addition to the shares the offering also includes warrants to purchase 7,485,032 shares at an exercise price of $2.45 per share.
As a result, HEXO fell over 20% to $1.48 when the surprise financing was announced. This shows that the market was not pleased with this surprise announcement as liquidity issues persist.
HEXO ended this past quarter with a cash position of $73.5 million.
Just a few months ago in October HEXO raised $70 million through a direct placement of 8.0% unsecured convertible debt. Those investors included the CEO Sebastien St-Louis and other board members which is nice to see confidence from within the company. There is no doubt that financing concerns are an issue throughout the cannabis industry. Many companies have had to make strong efforts to raise additional capital and clean up their balance sheets, many of these deals resulting in dilution.
The company also had a at the market offering that would look a lot more appealing than a discounted offering not to mention the issuance of warrants. Issuing warrants is not common for strong growth companies and this could raise concerns in the next earnings call.
Something that we see as a positive for HEXO was their reduction in operating expenses. In their last quarter, HEXO reduced operating expenses dramatically by 25%, but they still recorded an EBITDA loss of $24.6 million. The company currently has an operating expense base of $35.1 million and net sales of only $14.5 million.
If you are looking at HEXO as a possible growth pick for 2020 there are a few things you should consider before purchasing any stock. The company generates 70% of its revenues from Quebec. In Quebec, the cannabis 2.0 products are essentially banned so if you are hoping for a dramatic increase in revenue from that market you should be conservative.
Something we do find appealing is their discount line of cannabis being launched to combat the black market. Their discount brand called Original stash will sell at almost half the price of most of the current cannabis and could gain traction from many consumers looking to make the switch to the legal market. The company still has a joint venture with Molson Coors which could eventually generate substantial revenues when beverages gain traction.
HEXO still has issues in terms of profitability, and there are many reasons for investors to be cautious. However, if we start to see positive results faster than expected HEXO could see explosive gains for 2020. With that being said, the stock could see further downside if revenues do not pick up or the company can not continue to cut costs. We remain cautiously optimistic about HEXO but emphasize extreme caution.
(Disclosure: The author owns share of HEXO)
HEXO shares were unchanged in after-hours trading Wednesday. Year-to-date, HEXO has declined -53.64%, versus a 31.22% 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...
