Investors Slam Canadian Cannabis Company Over Use of Unlicensed Facility

(CN) – A cross-border securities class action against Canadian cannabis company HEXO Corp. alleges the company inflated revenue figures, misstated inventory, and grew cannabis in an unlicensed facility leading to hundreds of millions of dollars in market capitalization loss.

The lawsuit was filed in the U.S. District Court for Southern New York on behalf of investors who purchased HEXO stock between Jan. 25, 2019 and Nov. 15, 2019. HEXO, based in Quebec, Canada, produces, markets and sells cannabis for recreational and medical use. The company is listed on the Toronto Stock Exchange, and on July 16, 2019 began trading on the New York Stock Exchange.

The lawsuit alleges that HEXO misled investors and failed to disclose pertinent information regarding the company’s financial condition after failing to write-off “obsolete” product. The class also claims HEXO was engaged in “channel stuffing” to inflate revenue and meet or exceed revenue guidance provided to investors, and that the company was cultivating cannabis in an Ontario facility that was unlicensed by Health Canada.

On Oct. 4, 2019, HEXO announced the resignation of Chief Financial Officer Michael Monahan just several months into the position. HEXO’s stock price fell by 6.4 percent on October 7 closing at $3.80 per share, and on October 10, HEXO issued a press release scaling back the company’s financial outlook for 2020. The company previously stated expected revenue for the fourth quarter 2020 at $24.8 million, but in the press release revealed HEXO’s expected revenue for the fourth quarter to be $14.5-$16.5 million. By November 15, HEXO stock traded at $1.79 per share, but has since recovered slightly, and hovers above $2.10.

HEXO investors purchased shares at artificially inflated prices, the lawsuit says, and “the declines in the price of HEXO stock were the direct result of the nature and extent of defendants’ fraud finally being revealed to investors and the market,” the suit alleges.

Investors are represented by Jason A. Zweig of Hagens Berman Sobol Shapiro LLP in New York, with Reed R. Kathrein, Danielle Smith and Lucas E. Gilmore in Berkeley, Calif., and Steve W. Berman in Seattle.

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