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HEXO Gets Downgraded Due to Lawsuit Concerns

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On Monday, BNN Bloomberg reported that MediPharm Labs (NYSEARCA:LABS) filed a lawsuit against HEXO (TSE:HEXO) in the Ontario Superior Court of Justice. Citing the documents obtained from the court, BNN Bloomberg stated that MediPharm filed a statement of claim for an outstanding amount of approximately $9.8 million related to the 2019 cannabis oil sale agreement.

MediPharma signed a supply agreement worth 35 million Canadian dollars with Newstrike Brands in February 2019. According to the agreement, Newstrike Brands purchased 7.66 million Canadian dollars of cannabis oil upfront in February 2019. Also, the company agreed to buy the remaining 27 million Canadian dollars worth of cannabis oil concentrate over the next 12 months starting in March 2019. The agreement had an option to purchase an additional 13.5 million Canadian dollars worth of cannabis oil over the same period.

In March 2019, HEXO acquired Newstrike Brands for 260 million Canadian dollars. Now, MediPharm claims that HEXO didn’t pay for the purchases in November, December, and January, as reported by BNN Bloomberg.

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MKM Partners downgraded Hexo

On Tuesday, MarketWatch reported that MKM Partners downgraded HEXO to “neutral” from “buy.” MKM Partners also lowered its target price from 5 Canadian dollars to 1.50 Canadian dollars. Speaking about the lawsuit, Bill Kirk of MKM Partners said, “The hairy just got hairier,” since the company was going through a rough phase. He pointed out that the company’s CFO resigned in October. The company withdrew its guidance, missed its earnings, laid-off employees, closed some of its facilities, and faced concerns about illegal cultivation operations and dilutive equity raisings.

Kirk also said, “With a weak track record on accurately making positive predictions, it is difficult to handicap this latest issue. Of 104 positive predictions made by HEXO over the last two years, just 3 of the 48 resolved were correct.”

Overall, analysts favor a “hold” rating for HEXO. Among the 15 analysts, seven recommend a “hold,” two recommend a “buy,” and six recommend a “sell.” As of Tuesday, analysts’ consensus target price was 2.41 Canadian dollars. The target price implies a 12-month return potential of 39.3%.

Analysts’ estimates

For fiscal 2020, analysts expect HEXO to report revenue of 80.84 million Canadian dollars with YoY growth 70.0%. In fiscal 2021, they expect the company’s revenue to rise by 107.8% to 168 million Canadian dollars. Analysts expect HEXO’s EBITDA to improve marginally this fiscal year. They expect the company to post a negative EBITDA of 57 million Canadian dollars in fiscal 2020. In fiscal 2019, the company reported a negative EBITDA of 64.1 million. For fiscal 2021, they expect the company’s EBITDA to improve to negative 1.9 million Canadian dollars.

HEXO’s stock performance

After falling 63.3% last year, HEXO has lost another 16.4% this year as of Tuesday. The company’s stock price fell due to news about the lawsuit and MKM’s downgrade. Investors are concerned about HEXO’s current cash position. After MKM Partners downgraded HEXO, its stock fell to a low of 1.66 Canadian dollars on Tuesday. However, the stock improved and closed the day at 1.73 Canadian dollars, which implies a fall of 1.1% from the previous day’s closing price. Meanwhile, Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON) have returned 15.2% and 1.6%, YTD, respectively. Aphra (NYSE:APHA) stock has fallen by 3.5% during the same period.

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