Investors are taking Hexo Corp. (TSX: HEXO)(NYSE: HEXO) shares on a wild ride this week after the company admitted late Friday it was growing cannabis in an unlicensed area of its Niagara greenhouse.
Investors hammered the pot stock Monday pushing it down 11 per cent and to a two-year low. But Hexo shares quickly rebounded Tuesday, up 14 per cent, after reports surfaced that Health Canada will forgive the company for the apparent illicit growing.
The Quebec-based pot producer said in a Friday release it wanted to address false information that was being circulated about a section of its UP Cannabis cultivation site, called Block B, which it bought from Newstrike Brands Ltd. in May 2019 acquisition deal worth $263 million.
Hexo said on July 30, shortly after the acquisition closed, it discovered that cannabis cultivated in Block B was not appropriately licensed and immediately ceased cultivation and production activities at the unlicensed space. The company said it notified Health Canada instantly, and the regulator was satisfied with Hexo’s corrective actions.
Health Canada corroborates that statement, according to a late-Monday MJBizDaily report.
“In this case, Hexo proactively notified Health Canada and took actions to rectify the situation and return to compliance. Health Canada determined that the actions taken by Hexo to rectify the situation were acceptable,” the federal regulator said.
Hexo said when Newstrike gained a Health Canada cultivation licence for UP Cannabis in October 2018, it was under the impression that Block B was included in the licence. The regulator inspected the Niagara facility in February 2019, including Block B and made no observations about any illegal growing taking place, further convincing operators their facility was fully licensed.
It was only after the acquisition that Hexo discovered Block B wasn’t licensed, and the company said all inventory at the site was placed on hold and destroyed.
HEXO Corp provides additional transparency on licensing https://t.co/YtaM5dk8fe
HEXO Corp apporte encore plus de transparence sur les licences https://t.co/KU1HytKU1j pic.twitter.com/227pJKG46m
— HEXO Corp (@Hexocorp) November 15, 2019
As fragile sentiment hangs over pot sector, analysts say Hexo should have acted quicker
News of unlicensed growing at Hexo comes on the heels of one of the most disastrous weeks in the cannabis sector since it became legal in Canada, and months after the CannTrust (TSX: TRST) regulatory fiasco was first came to light.
CannTrust was stripped of its licence in September prompting the company to destroy $77 million worth of cannabis to try and get back in Health Canada’s good books. Shares of the company have plunged more than 80 per cent since it first revealed the compliance breach in July.
Hexo shares have dropped 78 per cent since its April high following weak financial quarters, layoffs and executive shuffling.
BMO Capital Markets analysts Tamy Chen and Peter Sklar said while Hexo has stated that the unlicensed growing was not intentional, how long the company took to reveal the illegal activity to the public likely won’t sit well with investors.
“We believe investors may feel that Hexo should have disclosed this immediately upon discovering the unlicensed growing given the sensitivity around the industry following CannTrust,” the analysts said in a note.
The pair also said they believe investors might feel that the company should have identified the issue in the due diligence process while acquiring of Newstrike.
Chen and Sklar maintain their Hexo share price target of $3.00.
Meanwhile, Canaccord Genuity analyst Matt Bottomley cut his price target to $2.75 from $3.00 on Monday.
Hexo shares traded at $2.41 on the Toronto Stock Exchange on Tuesday.
