HEXO CORP. (TSX: HEXO)
Quebec Superior Court of Justice, Court File No.: CV-500-06-001029-194
Ontario Superior Court of Justice, Court File No.: CV-20-634579-00CP
This securities class action relates to the Defendants releasing core and non-core documents which contained omissions of material fact about its April 11, 2018 supply agreement with the province of Quebec and representing that all of its operations, including the grow facility in Niagara, Ontario were properly licensed. The Plaintiff further alleges that the value and price of HEXO’s securities were artificially inflated after the Defendants released each impugned statement alleged to contain a misrepresentation.
First, on June 12, 2019, the Defendants released its Q3 2019 earnings and provided a conference call to clarify the numbers. In doing so, the Defendants conceded that it only sold 5,500 kg of product to Quebec was not on track to sell 20,000 kg of product to Quebec during the first year of the contract but, rather, it may be pushed out to as late as December 2019. Nevertheless, the Defendants stressed that Q4 would double Q3 numbers.
Second, on October 10, 2019, the Defendants released a statement about its preliminary Q4 2019 numbers. It shocked the market announcing that it was withdrawing its previously issued financial outlook of net revenues and sales and, as a result, reconfiguring its operations. On June 12, 2019, it projected approximately $31.8 million in net revenues but reduced to $14.5 to $16.5 million in net revenues and removed its 2020 guidance of $400 million in revenues.
Third, on October 28, 2019, the Defendants released its MD&A for its 2019 fiscal year ended July 31, 2019, announcing that it was suspending its newly acquired production and cultivation plant in Niagara, Ontario, and suspending cultivation at its main facility in Gatineau, Quebec.
Lastly, on November 15, 2019, the Defendants released statements revealing that by July 30, 2019, it learned that one of the buildings that it acquired from Newstrike Brands Ltd. was, in fact, not licensed to grow cannabis. HEXO’s management immediately ceased cultivation and production activities in the unlicensed space. The Defendants, however, did not inform investors at that time.
In an effort to focus the litigation and ensure the best outcome for investors, the claims against the company will henceforth be litigated exclusively in Quebec, where Hexo is based. All of the putative class members of the Ontario class action will be represented in Quebec instead.
Claim or Motion for Authorization issued: November 19, 2019 (Quebec) and January 16, 2020 (Ontario with Alberta)
Class Period: April 11, 2018 through November 15, 2019
Judge: Belobaba J.
Motion Record in Support for Statutory Claim Filed: 1Q 2020
Shareholders’ Canadian Counsel: Faguy & Co. (Montreal, Quebec)
Chronology of Disclosures: Commencing April 11, 2018, HEXO described the contract with Quebec as:
- February 14, 2018. “Hydropthecary signs letter of intent to supply Quebec market,” “Hydropothecary will supply 20,000 kg of cannabis for the year year of the adult-use of recreational cannabis.” “The final terms are subject to negotiation and execution of a definitive supply agreement.”
- March 2, 2018. On February 14, 2018, the Company announced an letter of intent (LOI) with Societe des alcolls du Quebec (SAQ), for the supply of cannabis for the Quebec market. Hydropothecary will supply 20,000 kg of cannabis products in the first year of adult-use recreational cannabis. Final terms are subject to the negotiations and execution of a definitive supply agreement.
- March 28, 2018. “Letter of intent signed with the SAQ for the supply of 20,000 kg of cannabis in Year 1 following legalization.”
- April 11, 2018. “Hyrdopothecary signs 5-year preferred supplier agreement with SAQ, for an estimated volume of 200,000kg.” “Under the agreement, Hydro will supply 20,000 kg of products in the first year of the agreement…”
- April 20, 2018. Material Change Report. “Hyrdopothecary signs 5-year preferred supplier agreement with SAQ, for an estimated volume of 200,000kg.” “Under the agreement, Hydro will supply 20,000 kg of products in the first year of the agreement…”
- June 27, 2018. MD&A. The SQDC Supply Agreement. “We will supply 20,000 kg of cannabis products in the first year of adult-use recreational cannabis and expect…”
- October 26, 2018. MD&A. “We hold the single largest forward supply contract among licensed producers, based upon announced agreement for year one legalization, with 20,000 kg to be supplied to Quebec in the first year.” “The additional facilities and associated production capacity have positioned the Company to meet the SQDC first-year demand of 20,000 kg.”
- November 9, 2018, December 13, 2018 (MD&A), and December 20, 2018 (Prospectus); same language.
- January 21, 2019. Prospectus. .” “Under the agreement, Hydro will supply 20,000 kg of products in the first year of the agreement, which is subject to a take-or-pay feature for that year. The Company estimates that this represents an approximate 35% market share of the province’s adult-use sales in the first year of legalization based on the volumes disclosed by other publicly traded cannabis companies who have also entered into SQDC supply agreements.” (New language)
- March 13, 2019. MD&A. Same language plus, “We believe all of this positions us to become one of the top two companies in Canada serving the legal adult-use market.”
- June 12, 2019. Same language plus, “The strategic value of our SQDC relationship cannot be understated… We will supply the SQDC with 20,000 kg of product in the first year,… Based on the current publicly disclosed agreements signed between the SQDC and seven other licensed producers, we have obtained the highest year one volume, representing approximately 30+% market share within Quebec, and we are aiming to remain the largest supplier.”“The Niagara facility is currently undergoing a retrofit which is expected to be completed during early summary of 2019. Once complete, the retrofit will approximately 215,000 sq. ft. of additional space and will bring the total Niagara campus to approximately 455,000 sq. ft. of cultivation, production, packaging, shipping and administrative space. Management expect the additional retrofitted space to increase dried cannabis annual output at the Niagara facility to approximately 40,000 kg.”
- October 28, 2019. Financial Statements. The language above has disappeared.
- October 28, 2019. AIF. “Under the agreement, the Company was slated to supply 20,000 kg of product in the first year of the agreement and expect to to supply 35,000 kg in the second year… The volumes for the final 2 years of the agreement will be established based on the sales generated in the first 3 years… During the first year of the agreement, HEXO supplied approximately 10,000 kg under the agreement.“The SAQ is not required to purchase a minimum volume of cannabis under this agreement other than in the first year. The SQDC originally contracted approximately 60 tons for purchase in the first year from all licensed producers. Initial sell-through was expected to be a little less than half of that amount, however, as retail store roll-out in Quebec has been slow to develop… During this start-up phase, HEXO sold 10,250 kg, achieving approximately 33% market share based on volume.” (New language but, ironically, HEXO continues with the approximate 30% market share).