Shareholder calls for board changes at Hexo after share price sinks below a dollar

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Canadian cannabis company HEXO Corp., which has seen its share price drop precipitously in recent months as it struggled with debt taken on to fund a series of acquisitions, is facing a potential proxy battle with a shareholder seeking to replace five directors.

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Adam Arviv, who owns two per cent of HEXO’s shares and helped broker the company’s $925 million cash-and-share acquisition of Redecan last year, said in a news release that he and his firm KAOS Capital Ltd. are set on “replacing the majority of the currently entrenched legacy HEXO Board members and turning around the underachieving company’s disappointing performance.”

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Arviv, who plans to put himself and four others forward for election to the board at HEXO’s annual and special meeting of shareholders on March 8, accused the company of conducting a series of ill-advised financing transactions since last spring, including convertible notes and warrants, which have combined to put pressure on the share price.

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“The incumbent Board has demonstrated a notable lack of understanding of capital markets, as evidenced by a number of key missteps and errors over the past months,” said Arviv, who was a co-founder of cannabis company Green Growth Brands Inc. and BRN Group, which provided brand management services to the industry.

HEXO’s shares have slumped, recently slipping as low as 60 cents a share from more than $13 a year ago. Nasdaq warned this week that the company had breached minimum bid price listing requirements by trading below US$1 for more than 30 days.

There has been unrest between HEXO and its shareholders, including Arviv, since at least last fall. Chief executive and company co-founder Sebastien St-Louis departed suddenly in October. The same month, the company posted a quarterly net loss of $67.9 million and its auditor flagged “going concern” issues related to debt.

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“Despite the necessary removal of Mr. St-Louis, it is very clear that to reverse course, the majority of the Board needs to be replaced with new, independent directors who have the experience and expertise to successfully navigate back to exceptional performance,” Arviv said in a statement Wednesday.

In a statement Wednesday evening, HEXO said the board is reviewing Arviv’s submission and that the governance committee is in the midst of preparing “board composition recommendations” to be shared with shareholders for review “well in advance” of the company’s annual meeting in March.

“As HEXO’s Board and executive team does with all shareholders, we have welcomed an open and constructive dialogue with Mr. Arviv over the past months,” the statement said, adding that it is disappointing he has chosen to proceed with an “unnecessary, disruptive and expensive approach” rather than continuing working with them.

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The company said it will continue with a previously announced strategic plan to solidify HEXO’s position as the No. 1 cannabis company in Canada by recreational market share, with a goal of becoming the first of its peers to be cash-flow positive from operations.

“Today’s actions by Mr. Arviv serve as an unhelpful distraction,” the statement concluded.

Arviv criticized not only past financings, but also the company’s strategy of pursuing distressed issuers, which he said further diluted HEXO shareholders and required continuing cash infusions.

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“In consequence, HEXO is in severe financial distress and is on track to run short of capital to run day-to-day operations,” he said.

The other four nominees Arviv plans to put forward for board positions are: Mark Attanasio, a director of Nocera Investment Corp.; Craig Bromell, president of The Building Union of Canada, a construction union and form chief of security and intelligence at 3 Sixty Risk Solutions Ltd; Rob Godfrey, president of Brown Lab Industries Inc., a consulting and property management company, and the president and CEO of Vector Health Labs, a laboratory services company; and Aidan Rasalingam, executive vice president of Retail at Canyon Cannabis, a licensed cannabis retailer in Ontario.

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