Did HEXO Get Itself into a Licensing Scandal?

Last week, HEXO Corporation (HEXO) issued a press release that provided more information about its Niagara facility license. The company recently acquired Newstrike Brands, which held a license to cultivate cannabis in Niagara. The company, however, was found to be growing cannabis in a facility that was not “adequately licensed,” according to HEXO.

HEXO’s next steps

After discovering cultivation activity in an unlicensed facility, HEXO stated that it had stopped all operational activities there. In addition, it informed regulators about its actions.

HEXO’s latest announcement of noncompliance couldn’t come at a worse time. The entire cannabis sector is currently experiencing a reality check. Investors have seen the value of their investments in cannabis erode drastically. In addition, the situation was aggravated last week when some major cannabis companies reported their earnings. Aurora Cannabis (ACB) (ACB.TO) and Canopy Growth (WEED) (CGC) both fell short of analysts’ expectations on November 14.

Last week, HEXO lost nearly 21% of its value. Consequently, its year-to-date decline clocked in at about 86%. HEXO’s peers have also experienced large declines in value since the beginning of the year. As a result, investors are beginning to question whether the cannabis industry was experiencing a bubble.

Downsizing

Following the discovery of the unlicensed facility, HEXO also announced that it was “right-sizing its operations and winding down operations in Niagara.” Consequently, the company will grow its cannabis at its Gatineau facility in Quebec. In our view, the company’s downsizing isn’t just the result of its discovering an unlicensed facility. We think it’s more likely due to the weakness in expected cannabis demand in Canada.

In an earlier article, we pointed out five reasons why cannabis earnings disappointed in the recent quarter. Toward the end of that article, it’s mentioned that two other companies, Aurora Cannabis and Zenabis, are downsizing. It’s highly likely that many others in the industry could follow suit.

CannTrust under fire

CannTrust (CTST) was also recently under pressure for growing cannabis in an unlicensed space. Following the news, we said we expected the company’s stock to fall below $1. The stock has since dwindled to become a penny stock and is currently trading at $0.82, in line with our forecast. Read CannTrust Loses License: Will It Fall below $1? for more info.