Canadian cannabis company Hexo stock tanks after offering that dilutes existing shares

Canadian cannabis company Hexo stock tanks after offering that dilutes existing shares

Secondary offering raises $25 million to fund R&D and other general corporate purposes

U.S.-listed shares of Canadian cannabis company Hexo Corp. tumbled more than 20% Thursday, after the Ottawa-based company said it has raised $25 million in a direct offering, diluting the value of its existing shares.

The decline puts the stock HEXO, +4.58% HEXO, -18.29% on track for its second-worst one-day percentage decline after a steep selloff on Oct. 10.

Hexo said it sold 14.9 million shares at $1.67 a pop, a discount to Tuesday’s closing price of $1.96. The company said it plans to use the proceeds for working capital and general corporate purposes, including to fund research and development.

The move is the latest dilutive financing by a Canadian cannabis company, as companies struggle to access capital to fund operations and grow their businesses. The sector has been hurt by a disappointing first year of adult-use legalization in Canada, as red tape has hampered the opening of retail stores, making it hard for companies to get their product to consumers and allowing the black market to thrive.

Hexo’s latest quarterly earnings released Dec. 16 showed the same losses that are weighing across the sector. The company posted a net loss that widened almost five-fold from a year ago, as revenue more than doubled but revenue per gram declined.

In October, Hexo shut down several facilities and announced 200 layoffs.

MKM analyst Bill Kirk said the job cuts had put the company is a better spot than rivals who had yet to make similar moves, praising the company’s focus on costs, which helped it keep operating expenses down in its fiscal first quarter.

“In addition to HEXO’s operational right sizing, we believe the company hasn’t yet seen the volume response to lower pricing architecture,” Kirk wrote in a Dec. 17 note to clients. “ Many of HEXO’s pricing changes, aside from new product introduction, have yet to reach retail.”

The analyst rates the stock as buy with a C$5.00 price target that is more than triple its current price.

Analysts polled by FactSet have an average hold rating on the stock and C$2.85 price target. The same analysts are expecting the company to post a 34 cents loss for fiscal 2020.

Hexo stock is still a favorite for short sellers, or those betting that the stock will fall, according to data and analytics firms S3 Partners. That’s despite the fact that Hexo has the fifth most expensive stock borrow fees, according to S3, at 68.04%. A full 14.3% of the company’s float has been shorted, equal to 65.9 million shares, S3 data shows.

Hexo shares have fallen 55% in 2019, while the ETFMG Alternative Harvest ETF has fallen 33%. The S&P 500 has gained 29% in 2019, while the Dow Jones Industrial Average has gained 22.5%.

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