Concerned shareholder, Adam Arviv, through his fund KAOS Capital Ltd. announced on Wednesday his plan to nominate five new independent directors at HEXO Corp.(NASDAQ:HEXO) with a goal of replacing the majority of the currently entrenched legacy board members and turning around the company's performance.
What Happened?
Arviv, who currently owns an approximate 2% stake in HEXO, has been waging a battle with management at the cannabis company over the past months, since the company's August 2021 acquisition of Redecan.
He alleged that former chair Dr. Michael Munzar and former CEO Sebastien St-Louis deceived the Redecan group of investors and destroyed shareholder value by completing a number of destructive financings and that the incumbent board of directors, led by current coard chair John Bell and director Vincent Chiara, was grossly remiss in approving these transactions.
He also said that the HEXO management and board were fully aware the Redecan group of investors was primarily comprised of First Nations individuals and supporters of First Nations groups, who, trusting in the professional management of the publicly-listed HEXO, invested their savings into this stock. This was the first foray into the capital markets for many of these First Nations individuals, who have now lost significant net worth and feel betrayed by the mismanagement of the company.
As of the date of this letter, HEXO common shares traded at a 52-week low of C$0.58, down from a high of CA$14.00, within the span of one year.
Since St-Louis’ departure, HEXO shares plummed more than 50%. Even the lift in Canadian cannabis stock performance this week has had little effect on the feeble HEXO share value.
Key Missteps & Errors
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, according to Arviv:
- During the May 2021 raise of US$359 million as a senior secured convertible note to fund the Redecan acquisition, management and the board concurrently ran an At-The-Market financing – the combination of the two led to an ever-increasing number of shares and a precipitous decline in the Share price.
- Just days before closing the Redecan transaction in August 2021, management and the Board undertook a subsequent $145 million underwritten public offering, attaching a half warrant priced at $3.45. This is further evidence of the company's lack of disciplined capital market stewardship. The discounted financing and attached warrant all but guaranteed an incremental decline in the Share price of the company.
- As would be expected, when this financing was announced on August 19, 2021, the share price declined 28% overnight, bringing the already beaten share price to a new 52-week low. HEXO now faces going-concern risk as highlighted by the company's most recent audited financial statements.
- The board continued to move forward with the pursuit of distressed issuers by leveraging HEXO, which not only further diluted HEXO's shareholders but required continuous and increasing cash infusions to stay afloat.
- In consequence, HEXO is in severe financial distress and is on track to run short of capital to run day-to-day operations. The sSelling, general, and administrative expenses at the company are alarming and exceed revenue, a clear indication that the company is on a path to bankruptcy or at the very least, the impetus for another value-crashing financing.
The Nominees For The New Board
Arviv will submit the names of five independent nominees to replace the majority of the incumbent board members at the upcoming annual and special meeting of shareholders scheduled for March 8, 2022.
The five new independent director nominees include:
- Adam Arviv - currently the CEO of KAOS Capital Ltd. and a strategic advisor for ORYX Gaming.
- Mark Attanasio - currently a director of Nocera Investment Corp, a private investment fund focused on high growth venture companies.
- Craig Bromell - currently the president of The Building Union of Canada, a construction union.
- Rob Godfrey – currently the 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.
- Aidan Rasalingam – currently the executive vice president of retail at Canyon Cannabis, a licensed cannabis retailer in Ontario.
The concerned shareholder reserves its right to nominate additional directors in accordance with applicable securities and corporate law.
Photo: Courtesy of Rodeo Project Management Software on Unsplash
