Hexo Corp.’s (TSX: HEXO) fiscal second-quarter 2020 results, released Monday, were in line on revenue at CA$17.0 million and beat on EBITDA (a loss of CA$10.3 million versus estimated loss of CA$11.7 million).
More importantly, the company disclosed that it needs to raise an additional CA$23.6 million – at least – just to satisfy cash needs for fiscal 2020, which total CA$105 million.
The Ottawa, Ontario-headquartered company provided a detailed breakdown of its obligations due in fiscal 2020 through fiscal 2024 as shown below:
|Values in CA$ (000s)||F2020||F2021-2022||F2023-2024||Thereafter||Total|
|Accounts Payable & Accrued Liabilities||45,131||–||–||–||45,131|
|Excise Tax Payable||5,473||–||–||–||5,473|
|Investment in Associates||8,075||–||–||–||8,075|
|Lease Based Operating Expenses||1,923||7,676||6,872||20,348||36,819|
As of right now, Hexo’s $81.4 million of cash on hand isn’t enough. However, the company’s management discussion and analysis (MD&A) explains how the additional capital will be raised through amended covenants for a credit facility.
Terms of the credit facility with CIBC indicate that Hexo will:
- Raise at least CA$15 million through an equity offering by April 10.
- Raise at least CA$40 million total through equity offerings by April 30.
If Hexo can raise CA$40 million, that will provide the company with about CA$120 million to satisfy its CA$105 million of obligations.
Raising that amount at the current price of $1.14 would require about 35.1 million new shares to be issued, resulting in a roughly 9.3% dilution to the total share base. If the shares are sold for less than the current stock price $1.14 – which we believe is likely – the dilution will be even greater.
|Existing Share Count||341,983,225|
|New Shares to be Issued||35,100,000|
|Total NEW Shares||377,083,225|
|Percentage of Dilution||-9.3%|
Hexo needs to start producing positive cash flow very soon because the company has another CA$95 million of obligations due in fiscal 2021-2022. While the equity raise will get the company through the next 6-12 months, management still has a difficult road to travel on its way to becoming a healthy, self-funding business.
Unfortunately, this type of massive, persistent dilution is all too commonplace for cannabis equity holders.
Investors should focus on cannabis companies that:
- Are generating positive cash flow to fund their business plans.
- Have ample funds on hand to reach cash-flow positive so they don’t have to massively dilute shareholders on their path to profitability.
Craig Behnke can be reached at firstname.lastname@example.org.