The Hexo Corp. Dumpster Fire Continues To Burn Bright

HEXO Corporation (TSX: HEXO) (Nasdaq: HEXO) is once again the subject of an activist shareholder complaint and we are not surprised by the development due to the business being a major underperformer.

The shareholder Adam Arviv plans to nominate five new independent directors through his fund KAOS Capital Ltd., which owns approx. 2% of HEXO. Following the acquisition of Redecan, Arviv started to speak out against the company and said that Redecan was deceived by former Chairman Dr. Michael Munzar and former CEO Sebastien St-Louis. 

In the letter, Arviv claims that the Dr. Munzar and St-Louis destroyed shareholder value by completing a number of destructive financings and were fully aware what they were doing. We believe that five of the most significant points from the letter include: 

1. HEXO’s leadership team knew that Redecan’s group of investors was primarily comprised of First Nations individuals and supporters of First Nations groups, who invested their savings into the company and lost a significant amount of their net worth
2. The leadership team took advantage of the minimal amount of capital markets knowledge that Redecan’s group of investors had
3. A few days before completing the Redecan acquisition, HEXO’s management team announced a $145 million underwritten public offering that included a half warrant at $3.45. This comes after HEXO raised $359 million by selling senior secured convertible notes to fund the acquisition. The combination significantly increased the number of shares outstanding which ended up putting considerable pressure on the stock
4. According to the letter, HEXO is in severe financial distress and is on track to run short of capital to manage day-to-day operations. Arviv believe the company is on a path to bankruptcy and can avoid this by completing another destructive financing 
5. HEXO shareholders have made it clear that they have no confidence in the direction of the company and that change is needed

We find the letter to be pretty damning for HEXO and expect to see additional changes to the management team and the board of directors in the near future. Currently, the company’s listing on the Nasdaq is in jeopardy and we consider this to be an important aspect of the story. 

If you are interested in learning more about HEXO and the activist investor, please send an email to support@technical420.com with the subject “HEXO Comes Under Fire” to be added to our distribution list. 

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Michael Berger is Managing Partner of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

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