Hexo Corp Closes Heavily Dilutive $70 Million Financing

Hexo Corp (TSX: HEXO) (NYSE: HEXO) has finally closed its long running financing that was initially announced on October 23, 2019. The financing, for a total of $70 million in unsecured convertible debentures, was initially expected to close by November 15. The financing has closed, however on materially different terms than was originally announced.

Initially, the $70 million financing was to occur via 8% unsecured convertible debentures for a period of three years. Conversion of the debentures was to occur at a price of $3.16 per common share, with investors unable to convert within the first year following the financing. At time of announcement, insiders were to subscribe for approximately $8.676 million of the financing.

With the financing now closed, the terms still stipulate that the debentures cannot be converted in the first year. And while the conversion price remains at $3.16 per common share during the duration of the three years, there is a material change upon maturity.

Upon maturity, debenture holders have the option to have the debt repaid in full, or to convert the debt at a price per share equal to the five day volume weighted average price of the equity. This makes the debentures highly dilutive in nature. It essentially puts a cap on the price of the equity, without having a floor in place – enabling debt holders to capitalize further on the falling price of the equity. Dilution is expected as well, as within this mornings news release Hexo indicated that if the dilution amounts to 25% of currently outstanding common shares at the time of conversion, shareholders will be required to vote on the matter.

“It is important to note the one-year anti-dilution feature in this arrangement, meaning that the financing does not dilute current shareowners’ ownership of the Company in the short term,”

Sebastien St-Louis, CEO and co-founder of HEXO Corp, October 23, 2019

Furthermore, insider purchases fell short of the initial commitment, with insiders subscribing for only $8.02 million of the total financing.

The convertible debentures mature on December 5, 2022. Should the volume weighted average price exceed $7.50 per share for a period of 15 days, Hexo can force the conversion of the debentures – at a price per share of $3.16.

Hexo Corp last traded at $2.69 on the Toronto Stock Exchange.

Information for this briefing was found via Sedar and Hexo Corp. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.