Last month, Aurora Cannabis (ACB.TO) (ACB) conducted a reverse stock split in order to comply with New York Stock Exchange (NYSE) listing requirements and the development was not initially received well by the market.
Following the reverse split, we decided to conduct further analysis the Canadian cannabis industry to better understand which company(ies) may have to execute on a strategy that is similar to Aurora Cannabis.
In regard to Canadian Licensed Producers (LPs) that could be forced to conduct a reverse stock split, HEXO Corp. (HEXO.TO) (HEXO) is the first company to come to mind. In March, the stock price broke below $1 and this is a price level that our readers need to be aware of.
According to the NYSE, a company’s stock price must trade at or above the $1 level to remain listed on the exchange. This level is significantly higher than the $4 stock price that is required in order to be approved to trade on the NYSE. With that being said, a stock price does not need to remain above the $4 level to remain listed on the exchange.
If a NYSE listed company’s stock price falls below $1 for 30 trading day, the exchange can delist the company. At that point, the company will be sent an initial price violation notice and must inform the NYSE of its plans to increase the stock price to avoid being suspended or delisted.
In order to prevent being delisted, a company can conduct a reverse stock split to raise the stock price while decreasing the number of shares outstanding. This transaction has no impact on the valuation of the company, and we want to discuss why HEXO might be forced to head this route.
HEXO has been trading below the $1 level since late March and is nearing the window for a potential delisting. If the stock price does not surge higher in the very near future, we expect the company to receive a letter from the exchange.
Another avenue that HEXO might be forced to take could be similar to CannTrust Holdings, which was delisted from the exchange. Due to the issues that CannTrust was dealing with at the time of the delisting, we believe that it did not have the option to complete a reverse split and are of the opinion that it was forced to delist.
HEXO started the week on a positive note and reported to have received its 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.
Although the market responded positively to the development, HEXO is trading below the $1 level on the US side and this is a level that we are closely monitoring. The granting of the license should improve the growth prospects that are associated with HEXO and we will monitor how the management team is able to execute on this.