Hexo Corp (HEXO) today held a reverse stock split to avoid being delisted with its stock price hovering below one dollar for 30 consecutive trading days. Hexo was initially planning an 8-1 share price, but management updated it to a 4-1 split because of their confidence in the company. Reverse stock splits are rarely seen as a positive, and can sometimes increase the amount of short position on the stock given the better short risk/reward for higher priced stocks.
The company is currently around half a billion in market cap, is not profitable and is heavily in debt. Even though the company has struggled, the company treats its executives very well. In 2019 the CEO’s annual compensation was around CA$8.8m. According to simplywallstreet research, compensation for CEO’s companies of similar market caps is CA$1m.
Hexo Bulls will point that company has partnered with Molson Coors to produce an adult beverage which may present promising future growth opportunities. While there may be some hope there, this is hardly a competitive advantage as Aphria(APHA) purchased beermaker SweetWater and Tilray(TLRY) has partnered with Anheuser-Busch InBev.
Another huge problem with this company is the wild dilution, which is one of the catalysts that almost got this stock delisted. And while adjusted EBITDA has been improving, the cash flow from operations for the previous year was reported to be over CA$90 million. In addition, the company spent over CA$100 million in capital expenditures and then plowed $10 million in debt service. On top of this, Hexo thought it was a great time to pay over CA$30 million on acquisitions. All this combined, this equated to a cash burn rate of almost CA$250 million on the year. To cover all this expenditure, the company issued even more shares this year, further diluting its shareholders. This year alone, Hexo issued CA$186 million in new shares and also borrows another CA$70 million.
While cannabis may be a promising area for future growth, we are not going anywhere near HEXO. In our opinion, there are much better weed companies for investors to invest it.
This site references only our opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. Disclaimer: We have no long or short position in HEXO and are not planning on opening one.