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 |
| Onerous Contract | 3,000 | – | – | – | 3,000 |
| Convertible Debentures | – | 47,274 | – | – | 47,274 |
| Term Loan | 3,500 | 28,875 | – | – | 32,375 |
| Lease Obligation | 2,208 | 9,865 | 8,926 | 36,802 | 57,801 |
| Capital Projects | 23,266 | – | – | – | 23,266 |
| Investment in Associates | 8,075 | – | – | – | 8,075 |
| Service Contracts | 10,917 | 1,526 | 329 | 37 | 12,809 |
| Purchase Contracts | 1,530 | – | – | – | 1,530 |
| Operating Leases | 13 | 48 | – | – | 61 |
| Lease Based Operating Expenses | 1,923 | 7,676 | 6,872 | 20,348 | 36,819 |
| Total Obligations | 105,034 | 95,264 | 16,127 | 57,187 | 273,612 |
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 craigb@mjbizdaily.com.
