Hexo raising $70 million in private placement
TORONTO Shares of Hexo Corp. rose Wednesday following news the cannabis company would be raising money through a $70-million private placement of convertible debentures led by a number of investors including company CEO and co-founder Sebastien St-Louis.
Hexo also announced that it would push back its earnings release by four days, to Oct. 28 in light of the financing and “additional time required to finalize year-end filings.” Hexo’s stock was halted for just under an hour on Wednesday prior to the news.
The proceeds of the private placement debentures — which are being issued at an interest rate of eight per cent, and will mature in three years — will be used for “working capital and general corporate purposes,” the company said in a statement.
“The confidence in HEXO Corp. that this $70 million private placement demonstrates is a testament to the value the company is expected to bring to shareholders,” said St-Louis in the company’s release.
Besides St-Louis, board members Michael Munzar, Vincent Chiara, Nathalie Bourque and co-founder Adam Miron are expected to participate in the placement, purchasing approximately $8.67 million of the debentures. It is unclear, given the private nature of the deal, who else is part of the raise.
The Gatineau, Que.-based licensed producer has seen its stock plunge 35 per cent over the past few weeks after reducing its revenue guidance for their most recently completed quarter and withdrawing its forecast for the upcoming year. The shares jumped 3.5 per cent to close at $3.51 in Toronto on Wednesday.
Hexo had previously forecast revenue of $26 million for the quarter ending July 31, 2019, but cut that assessment by 40 per cent to $14.5 million to $16.5 million in early October. It also withdrew its full-year 2020 projection of $400 million in revenue, attributing the move to “delayed store rollouts and price pressure.”
Hexo is in the process of turning a two-million-square-foot Sears Warehouse in Belleville, Ont., into a cannabis facility that will be used primarily to package its products. The company also has a joint venture (Truss Brewing Co.) with multinational brewing giant Molson Coors, and is aiming to introduce seven new CBD-infused beverages to the Canadian market come December.
In an attempt to draw consumers away from the illicit market, Hexo announced last week that it would be introducing a new line of cannabis products called “Original Stash” that would be priced at $4.49 per gram, roughly equivalent to the price of a gram of weed on the black market.
One investment firm analyst, who asked not to be named, described the decision to delay the release of the company’s earnings as “unusual.”
“This is not a reason to push back your earnings call. They are already reporting very close to the 90-day allotment period. All you have to do to report this raise in your financials is copy and paste the press release into a note called ‘subsequent events’,” the analyst said.
Michael Miller, an independent financial consultant who was formerly with cannabis company White Sheep Corp., said he did not find anything unusual about Hexo’s release, except the emphasis company CEO St-Louis made on the one-year anti-dilution feature in the deal, which basically reassures shareholders that their stock will not be diluted for at least another year.
“Cannabis retail investors are nervous about dilution because that’s been a feature of this industry’s equity for so long, and management is trying to reassure them on that,” he said.
Miller also said the postponement of the earnings call was probably just the case of management wanting to be “very prepared,” given the current investor sentiment towards Canadian cannabis companies.
“They were probably taking time to close this deal, and really, they don’t have to file till the end of the month. I wouldn’t think it was nefarious,” he added.
The company is expecting the deal to close on Nov. 15.