In late May, investors were getting very concerned about HEXO (HEXO - Get Rating) due to the fact that the stock price had fallen substantially below the $1 US minimum requirement to stay listed on the NYSE. The stock hit lows of $0.34 but managed to stage an almost 400% rally topping $1.20 per share in the beginning of June.

Unfortunately, this upward momentum could not be maintained.

Yesterday HEXO plummeted after announcing a C$34.5 million ($25.5 million) at-the-market stock offering program. This new program represents about 6.7% of the company’s market cap as of Tuesday’s closing price. The program will allow the company to issue the new shares, with sales executed through the Toronto Stock Exchange or the New York Stock Exchange, or other exchanges the shares are traded. 

The program’s agents are AltaCorp Capital Inc. in Canada and Oppenheimer & Co. Inc. in the United States. The stock closed down over 11% as the reality of further dilution sank in. HEXO is yet to achieve profitability so investors remain concerned as to when that will finally happen and whether or not the company will need to continue to dilute shareholders. 

HEXO also announced that it sold its Niagara facility.  The facility and its related assets sold for a total of $10.25 million in gross proceeds, with the sale being final as of June 15, 2020. 

This sale comes after their announcement three months ago that the company was putting its Niagara facility up for sale. Right now it’s not clear as to how much HEXO lost on the sale of this facility but we are sure it will be accounted for next quarter. The property was acquired when HEXO bought Newstrike Brands about one year ago. The total value of the Newstrike Brands acquisition was $263 million and the property, plant, and equipment at the time valued at $46 million. 

The company did however state that proceeds from the asset sale will be used to fund additional expansion at its Belleville, Ontario facility, and towards working capital and general corporate purposes.

It’s evident that HEXO is still in desperate need of cash and the company is not afraid to dilute shareholders further.  Therefore investors should remain cautious if they are considering buying the stock as we believe that in the short term more pain could be in store. 

(Disclosure: The author is long HEXO)

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HEXO shares were trading at $0.78 per share on Thursday afternoon, down $0.04 (-4.86%). Year-to-date, HEXO has declined -50.94%, versus a -2.84% 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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