Shares of Canadian cannabis company Hexo Corp. fell to new lows Monday after an analyst downgrade and a statement from the company’s auditor questioning its viability.
dropped 4% to $1.41, its deepest discount since it began as a publicly traded company in 2017, a day after it reported a narrower quarterly loss for its fiscal fourth quarter ending July 31.
CIBC Capital Markets analyst John Zamparo on Sunday cut his rating on Hexo to neutral from outperform.
While the company will become profitable with a 20%-plus Ebitda margin from its $925 million Redecan acquisition that closed in September, Hexo faces a shortage of cash stemming from payment requirements on its $360 million senior secured convertible notes offering earlier this year, he said.
“Its cash needs are greater than what was previously communicated by management, and terms of its convertible debt deal are far more punitive than previously believed,” Zamparo said. “We believe another equity offering is possible, and recommend investors await clarity on the balance sheet and cash needs before becoming constructive on the stock.”
The debt holder has the option to demand monthly cash redemptions, up to $20 million per month if Hexo’s stock falls below $1.50, he said.
“By our estimates, unless Hexo cuts growth capex to zero, the company will run out of cash in four quarters (though this could be two quarters if the lender exercises its monthly redemption rights),” Zamparo said.
Hexo CFO Grant MacDonald told analysts on Friday that it’s talking to its debt holder.
“While there exists a risk that significant cash outflows may be required over the next 12 months under the terms of the senior secured convertible note, the company has been working with the holder to renegotiate the terms of that note,” he said.
PricewaterhouseCoopers said Friday in its auditor’s report on Hexo’s 12-month results ending July 31 that it has doubts about the company’s ability to continue as a going concern.
“The company has suffered recurring losses from operations, has had cash outflows from operating activities, and has financial liabilities that may require significant cash outflows over the next 12 months,” the firm said in a filing.
In recent weeks, Hexo launched a strategic overhaul, named Scott Cooper its new CEO and announced the departure of founder and CEO Sebastien St-Louis. Cooper formerly worked at Truss Beverage Co., a joint venture between Molson-Coors Canada