What's the Next Step for HEXO Corp.?

As a result of the COVID-19 global pandemic, many cannabis companies have felt the effects of the economic market downturn. 

Investors had hoped that 2020 would be a year when cannabis stocks businesses would rise from the ashes and start to generate some real profits. COVID-19 crisis started to unfold. 

Initially in February and March, we saw cannabis stocks take a dramatic blow, pushing some major listed players well under a dollar on the NYSE. If any NYSE listed stock falls below $1 it is faced with a harsh reality that delisting could be a possibility if management can’t get the price up. 

Two stocks come to mind which have dropped below $1 and those are Aurora Cannabis (ACB) and HEXO Corp. (HEXO). In April ACB initiated a reverse stock split but HEXO has yet to do so. 

There has been widespread speculation that HEXO will be the next company to initiate a reverse stock split in order to avoid being delisted, as it trades at roughly $0.75.

Now just because the stock has traded under a dollar does not mean it will be instantly delisted. Based on the NYSE requirements, a company’s stock price must trade at or above the $1 level to remain listed on the exchange. If a NYSE listed company’s stock price falls below $1 for 30 consecutive trading days, the stock exchange can delist the company. Once the company reaches this point they will be sent an initial price violation notice. Following the notice, the company needs to inform the NYSE of its plans to increase the stock price to avoid being suspended or delisted.

Therefore, like ACB, HEXO has the option to remedy this situation by initiating a reverse stock split, which would ensure that the company’s share price meets the minimum requirements. However, a reverse stock split often deals a deadly blow to investor confidence due to the fact that most of the time a reverse stock split is initiated due to poor performance. Reducing the share count and raising the price of the stock opens up another dangerous window for short-sellers. 

HEXO does have the option to just let the NYSE delist their stock and move to a smaller exchange. The only downside with that is the fact that smaller exchanges usually attract less capital and have lower liquidity. 

HEXO did have some positive news recently as they received their Health Canada license amendment for the sale of dried and fresh cannabis, cannabis extracts, cannabis topicals, and edible cannabis products for its cannabis manufacturing and processing facility in Ontario.

Their new license should improve their ability to grow revenues in the Canadian recreational market but these results might not materialize fast enough.

Long story short HEXO needs immediate action and execution from management or the company will be forced to do a reverse stock split, or simply just get delisted. Either way, we remain cautiously optimistic on HEXO.  We hope to see improvements regarding their SG&A expenses next quarter along with an uptick in revenues. If that can be accomplished we will feel a lot more positive about the company’s future.

(The author is long HEXO)

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HEXO shares were trading at $0.76 per share on Friday afternoon, up $0.03 (+4.38%). Year-to-date, HEXO has declined -52.20%, versus a 0.10% rise in the benchmark S&P 500 index during the same period.

Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles.

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