Hexo (NASDAQ:HEXO) is on its knees. It is bleeding cash in a manner that could eat through all of its cash balance. Since announcing a “strategic alliance” deal on March 3 with a much larger cannabis company, Tilray (NASDAQ:TLRY), HEXO stock has tanked. It was at 60.1 cents on March 3. Today, HEXO stock is at30 cents. This implies the deal might have some issues.
On April 12, Tilray came to the rescue of Hexo by signing an agreement to purchase some of Hexo’s debt. It is acting as a sort of “white knight” by relaxing some conditions as the new major creditor to Hexo. This releases cash that was previously restricted and allows the company to finance its burn rate. However, Hexo has not yet announced whether the deal has closed and the debt was purchased by Tilray.
All of a sudden on April 29, Hexo appointed a new CEO and a new CFO. That seems to imply that there was a boardroom issue. Has the deal with Tilray actually closed yet? Was this why there was a boardroom shuffle? It is important to note that April 29 was the close of Hexo’s fiscal Q3. So were the fiscal Q3 results so disastrous that management had to be replaced?
Keep in mind that Tilray has a market cap of $2.1 billion vs. Hexo’s $129 million market value. One wonders whether is might make better sense for Tilray simply to buy Hexo. Tilray could wait until Hexo runs out of money and make an offer they couldn’t refuse. Who knows, maybe that is what is happening now.
Where This Leaves Investors in HEXO Stock
On May 3, HEXO announced an “ATM” (At the Market) equity sales program. This is sort of like the old “Off the Shelf” equity distribution agreements, except that Hexo is a Canadian company.
The bottom line here is that this equity sales program is going to dilute the hell out of shareholders. If they raise $40 million as announced, that will dilute existing shareholders by at least 30% (i.e., $40 million/$134 million and likely closer to one-third).
This means that you can expect HEXO stock to keep falling. It will drop until Hexo announces that it has raised sufficient cash to cover its burn rate. Moreover, once the market wants to know whether its turnaround is starting to work. The layoffs, cost reductions and revenue management plan have to be put in gear before HEXO stock makes a turnaround.
On the date of publication, Mark Hake did not hold (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 InvestorPlace.com Publishing Guidelines.