Why are Shares of HEXO Trading Down 14% in the Past Week?

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January 30, 2020 11:23am ETF BASIC NEWS

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Earlier this week Hexo Corp. (HEXO) stock slid after MKM downgraded the stock on news of a breach of contract lawsuit.  

According to court papers, Hexo is being sued by Medipharm Labs Inc. for the non-payment of C$9.8 million ($7.5 million) related to shipments of cannabis resin.

The lawsuit alleges that marijuana extractor Medipharm signed a resin supply deal with Hexo subsidiaries last year, but Hexo refused to pay for an October 2019 shipment, among other things.

In the suit, Medipharm also claims that Hexo has failed to pay “contractual obligations” for November, December and January. In a statement, Hexo counters that the litigation involves a deal signed between two subsidiaries before they were acquired by Hexo, adding that the company had serious concerns about the agreement.

Nonetheless, the news did not bode well with analysts at MKM partners. “The hairy just got hairier,” said analyst Bill Kirk in response to the growing problems facing HEXO.

Following the resignation of Hexo’s chief financial officer last October, the company missed on earnings and pulled guidance, Kirk said. Hexo Corp also laid off employees, announced facility closures, was found to have undisclosed illegal growing operations and it undertook dilutive equity raisings, Kirk noted.

Kirk cut his stock price target from C$5.00 to C$1.50, saying that the recent lawsuit is “the straw that has broken our back.” Although Hexo intends on defending itself against the claims, Kirk remains skeptical.  

“With a weak track record on accurately making positive predictions, it is difficult to handicap this latest issue. Of 104 positive predictions made by HEXO over the last two years, just 3 of the 48 resolved were correct,” Kirk said.

More dilution of shares

The lawsuit news comes on the heels of HEXO‘s announcement last week that it had closed a direct stock offering, in the latest in a series of share sales, bringing in gross proceeds of $20 million.

HEXO lumped shares and warrants together, selling approximately 12 million shares, and warrants carrying the right to purchase nearly 6 million more. This spells bad news for investors concerned about share dilution.

With the stock sinking below $2 and ongoing operating losses, investors are wondering if the company will continue to need to raise even more funds. This is the third time the company has had to raise capital since October 2019.

The company had originally forecast revenue growth of double its current rate, but those sales gains have yet to materialize. HEXO had an original fiscal year 2020 sales guidance of C$400 million, but analysts now predict that number to be closer to C$60 million. The most recent analyst estimates see sales growing to only C$125 million in fiscal year 2021.

Desjardins analyst John Chu says, “Following a C $800m base shelf prospectus in November 2018, we could see more financings going forward. HEXO recognizes the cannabis environment has changed dramatically and access to capital has become very difficult.

“Consequently, if investors are willing to invest meaningfully in the company at terms it finds acceptable, the company will consider it. HEXO also indicated to us that its ATM should commence around January 22, 2020 (recall that Aurora had raised ~C$165m through its ATM in ~4-5 months).”

Shares of HEXO stock have dropped 75% in the last 12 months.

HEXO Corp. (HEXO) was trading at $1.26 per share on Thursday morning, down $0.01 (-0.79%). Year-to-date, HEXO has declined N/A%, versus a 21.87% rise in the benchmark S&P 500 index during the same period.

About the Author: Eric Bowler

eric-bowlerEric Bowler is an accomplished journalist providing in-depth insights for more than two decades. Over the past several years his focus has been on the marijuana industry, with a special interest in cannabis growth stocks. His daily coverage of the industry keeps him on top of the key trends with the goal of helping investors make well-informed decisions.

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