RE:RE:RE:RE:RE:RE:Shares outstanding as of 1 February1. The note holder has taken every opportunity to De-risk SO FAR, we unfortunately cannot know if payment was waved for a few months. It was stated before that they made amendments to the note, which we unfortunately don't know what they are yet. I believe they have to press release all of these points, or disclose on SEDAR, given it is a material contract. Do you have a reference for an undisclosed amendment? Lots Of things weren't officially disclosed, such as monthly redemptions which were just know way later. From Q4 transcript "The company has maintained a positive relationship with the holder, with the holder having negotiated and agreed to two amendments favorable to the company while there exists a risk that significant cash outflows may be required over the next 12 months under the terms of the seniors secured convertible notes. The company has been working with the holder to renegotiate the terms of that note."
The reason no disclosure required on the monthly redemptions is that they were not a change in a material contract (simply operation of the previously disclosed contract in accordance with the terms) and the exchange will have said that the level of share issuance was not sufficient to be material from a disclosure standpoint. I disagree with the exchange on that point, but the exchange would have required a release absent that point.
2. We don't know if note holder is holding shares they are getting or if they are selling. If their intention is to hold and they now own close to 10% of Hexo (maximum allowed), it would be in their interest to wave a few payments until SP gets better for dilution. Once again I'm not saying they aren't selling, just saying we don't know. We know they are selling. If they were not selling, then they would already be avoe 10%. They have already received shares in excess of 10%. In addition, High Trail has a history of this, and is a convertible arbitrage fund. Convertible arbitrage funds do not achieve economics by being long. They achieve their economics through their role of convertible arbitrage. Haven't seen anything that shows me they were ever over 10%, can you please share? Last figures we saw they were at like 9.7%. They could have received cash instead of shares for redemptions since. Again not saying they aren't selling, just saying we have no official news regardings this.
Not that they were over 10% at one time. Just that they were over 10% on a cumulative basis, which means they have sold in order to remain below the threshold.
3. Raised through ATM. Unless I've missed this info, we don't have an update on cash since October 31. They had 56M in the bank at the time + If they use the ATM a lot in November/December, that was at a way higher SP and therefore dilution might be lower. What I would perceive to be their "stretch" goal was to be Adjusted EBITDA positive. But that does not mean operating cashflow positive, given most cannabis companies simply generate massive amounts of inventory and then use periodic writedowns to pretend they are Adjusted EBITDA positive while continuing to burn massive amounts of cash. I would say there is some meaningful operating cost burn. Using cash on hand for the note payments before they are actually cashflow positive would be insane from a liquidity management standpoint. It is possible, but if that was the approach then there they have made themselves even more susceptible to the Secured Noteholder. Again, not saying at all they were cash flow positive. It just makes a huge difference in this calculation if they need 5M a month for operations or 20M a month. With all the acquisitions it is a bit hard to dissect with all one time costs. Last yearly report, Hexo reported burning like 48M for the entire year for operations.
Agreed on the level of uncertainty. They really should have provided a reconciliation between operating cashflow and operating cashflow excluding one-time items for the period ending October 31, 2021. That is a brutal strike against the management team and board. You are allowed to provide non-IFRS measures like that so long as you show a bridge from the closest IFRS measure.
4. Pretty hard to find how much they need for operations with all the costs related to acquisitions in the past couple earnings. We should have a better idea with the next report (if all one time costs are finally over with). Covered in my point three response. In point 3 you didn't discuss the ATM portion, if they raised a lot in Nov December, it would been at a way higher SP. I agree with your point on the ATM. This could actually lead to an overstatement of my estimate. Sadly, they did not disclose any raise between 1 November and 14 December on the ATM. However, the share count increased by 44,371 shares, and they settled the November and December optional payments in equity (page 31 of the MD&A). This should have been CAD56m in shares (by value), and should have been ~16m (November) and ~22m (December) in shares. So there is ~18m in shares (I will say ~CAD25m likely) that could have been used to raise cash to fund the January and February optional redemptions, which could cover approximately one of the payments if they did not raise in advance for the subsequent payments.
I still think my estimate is a reasonable one, but thank you for responding on a factual basis, as opposed to an ignorant or purely emotional basis. I also think your estimate is a reasonable one. Just telling you all the unknowns that made me give up on calculating it. I just feel like the margin of error is really high with those unknown. My bet is that I could be off by up to one entire month of payments if they used the ATM cash to cover the next cash payment rather than operations. So my range widens if you cut as much as one payment out.
Thoughts?