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Stay Away From Troubled Cannabis Producer Hexo Corp

  • Down 99% from its all-time high, cannabis producer Hexo (HEXO) is struggling to maintain its listing on the Nasdaq exchange
  • The company reported a quarterly loss of nearly $700 million at the end of March, shaking investor confidence
  • Efforts to right the ship at Hexo Corp. have yet to produce any significant or beneficial results
Image of cannabis on top of dollar bills
Source: Shutterstock

Down 75% over the past six months and falling, troubled Canadian cannabis stock Hexo Corp. (NASDAQ:HEXO) stock is quickly going up in smoke.

Now trading for just 45 cents a share, HEXO stock is 99% below its all-time high of $31.24 a share reached in 2019 after Canada officially legalized cannabis consumption nationwide. Since then, it has been all down hill for Hexo and its shareholders.

Due to a raft of internal and external problems, Hexo stock is barely hanging on today and has been threatened with delisting by the Nasdaq exchange if it can’t get its share price above $1 for a sustained period of time.

While the Gatineau, Quebec-based company has taken a number of steps to improve its situation, it is not apparent that any of its efforts have improved the dire situation.

HEXO Hexo Corp. 45 cents

Bad To Worse

Hexo last reported its financial results at the end of March, and they were abysmal. The cannabis producer reported a net loss of $690.3 million. While the bulk of that loss was due to a one-time impairment charge of $616 million, the massive amount of red ink did nothing to inspire confidence in the fledgling cannabis concern.

Hexo’s second-quarter loss amounted to $1.94 per diluted share for the fiscal period ended Jan. 31, compared with a net loss 17 cents a share a year earlier. Revenue in the period amounted to $52.8 million, up from $32.9 million in the same quarter last year but did nothing to make-up for the massive loss.

Management at Hexo did their best to explain the quarterly loss, stressing that it was due mainly to massive internal restructuring and promising that, moving forward, they will reduce manufacturing and production costs, better manage revenue, and achieve cost synergies.

Hexo used the earnings report to announce that it is laying off 180 staff, which is expected to deliver about $15 million of savings on an annualized basis, and closing several production facilities as well as its back office. Sadly, the cost cutting plan did nothing to appease investors and HEXO stock continued to slide lower. It likely didn’t help that Nasdaq said publicly that Hexo has been found non-compliant with minimum bid price requirements and its stock would be delisted if Hexo’s financial situation and stock price do not improve tout suite.

Grasping at Straws

While Hexo’s earnings were embarrassingly bad, the company has also struggled to appease an activist shareholder who forced the company to shake-up its board of directors through a proxy fight. Hexo announced in late February that it would add two directors nominated by activist shareholder Adam Arviv.

Also, Hexo’s current board chair John Bell and chief executive officer Scott Cooper resigned from the board. As a result of the changes, Hexo’s board of director’s size has been reduced to seven members, all of which are now independent.

The changes at the board of directors ended a six-month standoff between Arviv and Hexo management. Arviv took issue with Hexo’s acquisition of several cannabis producers last year, stating in a letter to the company’s board that those financing deals were poorly constructed and ill-timed. With the board drama behind it, Hexo’s management team announced that they are planning a reverse stock split to raise the share price above the $1 minimum threshold and abide by Nasdaq’s listing requirements. It is not clear if shareholders will vote to approve a reverse stock split.

At the same time, Hexo has struck a deal with fellow Canadian cannabis company Tilray Brands (NASDAQ:TLRY) that it hopes will improve its finances. Under terms of the agreement, Tilray will acquire up to $211 million of senior secured convertible notes issued by Hexo.

They will also launch a joint venture to provide shared services to both companies. While it sounds encouraging, it remains to be seen how the arrangement with Tilray will benefit Hexo and improve the company’s bottom line. Taken together, the cost reductions, board changes, potential reverse stock split, and deal with Tilray give the impression of a company that is grasping at straws as it struggles for survival.

Do Not Buy HEXO Stock

Should anybody buy a stock that is 99% below its all-time high? The answer is a resounding “no.” Hexo Corp. is a failing cannabis company, one that is struggling to remain a going concern and avoid both bankruptcy and delisting from the Nasdaq exchange.

Massive losses, poor sales, declining market share, and an activist shareholder are hurting the cannabis producer. And none of the company’s efforts to improve its situation appear to be helping in a meaningful way.

With a wave of bankruptcies and consolidation sweeping through Canada’s struggling cannabis sector, it might not be long before Hexo ceases to be a going concern. HEXO stock is not a buy.

On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.

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