HEXO (NASDAQ:HEXO) has had a rough year, to put it lightly. Between releasing disappointing sales numbers, pulling its forecast for fiscal 2020, and watching its CFO resign after less than a year on the job, the company has seen its share of bad press over the past 12 months. HEXO's biggest problem, though, could be related to cash flow, and there's growing evidence that it may be running low on its most important and most liquid asset.

Company announces issue of 15 million shares

On Dec. 26, HEXO's stock plummeted 22% when investors learned the company would be issuing 15 million additional shares in order to raise $25 million. That meant the offering price would be just $1.67 per share, well below the $1.96 at which HEXO's stock closed the previous day. In addition, 7.5 million warrants would be available for investors to purchase at $2.45 per share. The warrants are available to be exercised over a five-year term.

That was bad news for investors, as the share issue would dilute existing shareholders of the company, effectively devaluing the stock. Typically, companies prefer to issue shares when the stock is high and they can obtain a higher offering price. That wasn't the case with HEXO. Prior to the announcement, its shares had declined 43% since the beginning of the year, performing even worse than the Horizons Marijuana Life Sciences ETF, which was down around 36% over the same period.

A red line falls across a stock chart as a man holds his head and looks on.

Image source: Getty Images.

Why would the company issue shares when its stock price is so low?

A company doesn't issue shares unless it needs to. It's the easiest way to raise cash -- taking on debt can be burdensome and involve taking on restrictive covenants, and it requires payments along the way. With a share issue, a company's stock price may go down, but it won't have to worry about interest payments and maintaining certain debt ratios to keep creditors away.

In the press release announcing the share issue, HEXO said it "expects to use the net proceeds from the offering for working capital and other general corporate purposes, including funding the Company's research and development to further advance the Company's innovation strategies."

That phrasing is concerning -- to raise shares to fund working capital needs as well as for "general corporate purposes" -- as those are some very ambiguous purposes. This likely didn't sit well with shareholders. If the share issue were needed to fund some big expansion or growth opportunity, it would certainly be easier to justify. However, to fund day-to-day operations with a share issue suggests that there could be more offerings in the future -- and that the company could be very low on cash.

HEXO has been burning lots of money

As of Oct. 31, 2019, HEXO had 41 million Canadian dollars on its books in cash and cash equivalents. That's down more than CA$72 million from the CA$114 million in cash it had on hand as of July 31, 2019. Over the course of that time, HEXO spent CA$34 million on its operating activities and another CA$37 million to fund its investing activities, including the purchase of property, plant, and equipment.

Even if the company burned through another CA$30 million since October, that would significantly chip away at its current cash position and likely require it to either liquidate other assets or get the money from somewhere else -- such as by issuing more shares. That's without factoring in any capital purchases, either.

Based on its rate of cash burn and the funds it has available, there are likely some cash-flow issues affecting the company today, and they'll need to improve in a hurry if the stock is going to turn things around.

What does this mean for investors?

All signs point to one conclusion: HEXO is in trouble. While the company can turn things around and slash costs to free up cash flow, its current financial position makes the stock a very risky buy -- one investors are likely better off steering clear of. Marijuana stocks are continuing to decline in value, and HEXO is among the worst of them.

Until HEXO can start generating positive cash flow from its operations, investors should stay away from its stock, as it's likely to continue to drop in value.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.