Hexo Corp. (TSX: HEXO) is starting the new decade in a financial funk.
In just over a week’s time, the Quebec-based producer revealed two issues that could both serve as warning signs to the entire cannabis industry: shrinking cash reserves and looming oversupply.
Hexo said Thursday it successfully raised US$25 million through a share offering with institutional investors, selling 14.97 million common shares at US$1.67 per share.
But when the company first announced the deal on Dec. 26, it surprised some analysts because the shares were being offered at a 14 per cent discount to its US$1.94 close on Dec. 24.
Hexo dropped 21 per cent on the New York Stock Exchange after the offering diluted the value of its existing stock.
In a separate offering, the company issued five-year purchase warrants — 7.5 million total in additional shares — at US$2.45 per share.
The share offering deals punctuate concerns about how much pot firms have left in the bank as financing dries up. Analysts are bracing for a number of bankruptcies in 2020 due to weak sales and piling debt.
Hexo said it plans to use the US$25 million to fund its research and development and advance the company’s “innovation strategies.”
The company slashed 200 jobs last October in a bid to slow down its rapid cash burn rate.
In Hexo’s latest quarterly report for the three-month period ended Oct. 31, 2019, it said it held $73.5 million in cash with $65 million in credit with Canadian chartered banks. The company reported a first quarter net loss of $60 million.
Hexo writes down ‘cannabis trim’
Hexo also announced Thursday a write-down and corrections to some accounting errors.
While the accounting correction showed the company’s net loss for the fiscal year ended July 31, 2019, was overstated by $14.3 million, the $2.4 million “increased impairment loss” on cannabis trim is what caught analysts’ attention.
According to Health Canada, licensed producers held more than 316,000 kilograms of dried cannabis inventory as of September.
But producers sold less than 13,000 kilograms in that same month — and it’s uncertain how much of the total inventory is trim.
Unlike cannabis flower that contains higher levels of THC, trim consists of the leaves, stems and seeds and contains significantly less of the psychoactive ingredient.
The Cannalysts director Andrew Uddell told The Financial Post growers have been accumulating vast amounts of the byproduct to be extracted for cannabis 2.0 products.
Uddell believes the trim will decline in value faster than flower, leading to further write downs.
“And then the economics comes into play,” he said. “If you’re storing tons of low-value products, it might not make sense to store them at all.”
Hexo’s latest write-down comes in addition to $25.5 million of impairment losses — when the value of inventory decreases — in the last quarter.