Shares of the Gatineau, Que.-based cannabis producer were halted for just under an hour in afternoon trading on Wednesday pending news. HEXO announced it would push back its fourth-quarter earnings release by four days to Oct. 28, and plans to raise $70 million through a private placement of convertible debentures led by investors including the CEO and co-founder Sebastien St-Louis.
“As the funds do not seem necessary to execute existing plans, we believe the possibility exists that the company is looking to expand into the U.S. CBD market via acquisition,” John Zamparo wrote in a research note late on Wednesday.
HEXO has a joint venture with brewing giant Molson Coors Canada (TPX-B.TO) called the Truss Beverage Co., which has announced drinks including CBD-infused spring water. The company plans to have multiple non-alcoholic beverage products ready when cannabis 2.0 products begin hitting store shelves, which is expected in mid-December.
Canadian cannabis producers are looking to hemp-derived CBD, which is federally legal in the United States, as an entry point to the sprawling market south of the border. Most notably, Canopy Growth (WEED.TO)(CGC) announced plans earlier this year to invest up to US$150 million in New York to produce and process industrial hemp. Then-CEO Bruce Linton told analysts on a conference call that the stateside investment “will lend itself extremely well to cannabis” should legislation be passed allowing sales. Canopy Growth also announced plans earlier this month to buy a 72 per cent stake in a sports drink firm to develop CBD beverages.
HEXO’s convertible notes pay an annual interest rate of eight per cent — pricier than similar placements by Aurora Cannabis (ACB.TO)(ACB), which has a 5.5 per cent coupon on $345 million maturing in 2024, and Tiray’s (TLRY) five per cent payout on $450 million of convertibles maturing in 2023.
Zamparo said HEXO’s convertible price of $3.16 per share is “unusual,” as it reflects a five per cent discount to the stock.
“The five most recent convertible debt deals in the sector featured an average premium of +16 per cent,” he wrote. “We struggle to reconcile this difference. We also believe it is fair to wonder whether this type of deal is best negotiated at a time when the company's CFO has been in the role for less than one month.”
Stephen Burwash replaced Michael Monahan. Monahan cited “family needs” as the cause for his abrupt resignation. Six days later, HEXO pulled its financial guidance for fiscal 2020 and forecast weaker sales due to “uncertainties in the marketplace.”
Zamparo further questions the timing of the private placement, with shares trading near 52-week lows on the back of the lowered guidance, as well as the company’s “relatively strong” balance sheet.
“We project HEXO would not encounter potential capital shortfalls until mid-2022,” he wrote. “The decision to raise equity in these conditions is curious.”
HEXO declined to comment when asked for specifics about its investment plans.
Toronto-listed shares fell 3.13 per cent to $3.40 on Thursday at 11:10 a.m. ET. NASDAQ-listed shares declined 2.41 per cent to $2.63.