Large Canadian cannabis companies are selling equity at highly dilutive prices to avoid defaulting on loans or running out of cash, with the negative impact on share prices the least of their concerns amid the economic fallout from the new coronavirus and the continued underperformance of the legal marijuana industry.
Quebec cannabis grower Hexo Corp. closed a $46-million financing on Monday, led by investment bank Canaccord Genuity Corp., which had priced Hexo’s shares 20 per cent below the market when the deal was announced last Wednesday. The market share price has since declined by more than 30 per cent.
British Columbia-based Tilray Inc. cut a similar deal in mid-March, raising $90-million by selling shares at a 20-per-cent discount.
Aurora Cannabis Inc.'s share price, meanwhile, closed down 13 per cent on Monday after the company announced plans to raise US$350-million using a so-called “at the market" (ATM) share-issuance program, which allows the company to incrementally sell stock at prevailing market prices. The Edmonton-based grower already sold around $200-million worth of shares over the past two months using an ATM program, even as its stock price cratered.
Equity financing across most industries has ground to a halt over the past six weeks, as companies have avoided issuing new shares and further diluting their declining stock prices. For cannabis companies, however, dilution concerns are less pressing than immediate balance sheet problems.
Hexo, for instance, was prodded to market by its creditors Canadian Imperial Bank of Commerce and Bank of Montreal, which loaned the company $65-million in 2019.
In late March, CIBC and BMO altered the covenants on the loan, giving Hexo until the end of April to raise at least $40-million in equity to shore up its balance sheet or risk defaulting. Hexo’s balance sheet has withered amid a string of quarterly losses, including a $298-million net loss last quarter, and a cash burn from operations of $85.5-million during the second half of 2019.
Hexo chief executive officer Sébastien St-Louis played down the negative impact on existing shareholders of doing an equity deal when shares are near historic lows.
“At the end of the day, the discount relative to the opportunity is irrelevant,” Mr. St-Louis said, noting that there is a multibillion-dollar marijuana market in Canada, even if legal producers have only captured a fraction of it to date.
“It’s a question of scale and it’s a question of survival and both those things are very challenging, and we’re in an environment where most companies can’t access capital the way Hexo can,” he added.
Hexo, which issued a going concern warning in mid-March, is far from alone in facing an existential crisis. Canadian cannabis companies were already struggling before the coronavirus hit, with legal marijuana sales coming in far below company projections and investors losing patience with the sector and withholding new capital desperately needed by loss-making companies.
Marijuana producers, including industry leaders such as Aurora and Canopy Growth Corp., had been shedding staff by the hundreds in recent months and shuttering massive cultivation operations.
Aurora’s share price has taken such a drubbing over the past year that the company announced a one-for-12 share consolidation on Monday to stay onside New York Stock Exchange rules that don’t list companies with share prices below US$1. The value of Aurora shares have declined more than 90 per cent over the past 12 months.
"The coronavirus black swan event has sort of been the one-two punch for the industry, because we were already in such bad shape coming into 2020,” said Aaron Salz, who runs Stoic Advisory Inc., a capital markets consulting firm focused on cannabis.
“A lot of [cannabis companies] have convertible debt due that’s massively out of the money, so now it’s just debt they have to repay or refinance. And they’ve already levered up a lot of their assets with more traditional term debt, so it makes it more challenging to refinance the convertible debt,” Mr. Salz said.
Bankruptcies have begun in earnest. CannTrust Holdings Inc., which had its cannabis licences suspended last year for growing plants in unlicensed parts of its facility, and James E. Wagner Cultivation Corp. filed for creditor protection in late March and early April. That follows insolvency proceedings by Wayland Group Corp., AgMedica Bioscience Inc. and Invictus MD Strategies Corp.
There had been some optimism in March that the COVID-19 pandemic could be good for Canada’s legal cannabis industry, as retail data showed an uptick in sales as consumers stocked up ahead of quarantine. Sales have since come down, however, and cannabis stores in the key market of Ontario have been limited to curbside pickup or home delivery.
“We believe the COVID-19 fallout presents incremental downside for industry sales over the balance of this year as we believe there will be further delays in the approval turnaround for new store licences in Ontario,” wrote BMO analyst Tamy Chen in a recent note.
As coronavirus further dims the prospects for many legal marijuana growers, companies that are still able to raise money are doing so on very different terms than a year ago, said Mr. Salz of Stoic Advisory.
“You’re seeing some of these equity deals get done, they’re just relatively small sometimes compared to the needs of these companies, and how much money they have historically raised,” Mr. Salz said.
“It’s also less new money looking at this like it’s a value opportunity. I think it’s more existing investors looking at it as a way to support their investment and see it become successful," he added.
Mark Rendell