HEXO Corp. (HEXO) Accused of Artificially Inflating Revenue Through
Channel-Stuffing
According to the complaint complaint for alleged violations of the Securities Exchange Act of 1934 between January 25, 2019 and November 15, 2019, HEXO Corp. (HEXO) announced its definitive agreement to acquire Newstrike, parent company of a licensed producer of Cannabis, touting that HEXO was on its way to becoming one of the largest cannabis companies in the world and committed itself to achieving over $400 million in net revenue in FY 2020. Throughout the relevant period, HEXO continued to positively represent the Company’s financials, consistently reporting net revenues and inventory values in the tens of millions. However, HEXO failed to disclose that its reported revenues had been inflated through the use of channel-stuffing to meet its FY 2020 revenue guidance and that its reported inventory was misstated due to failure to write-off obsolete product. The truth of its financial situation was revealed on October 10, 2019, when HEXO provided preliminary Q4 revenue results that were nearly 50% lower than its previous guidance and withdrew its previously announced FY 2020 guidance. Then, on October 29, 2019, HEXO further disappointed investors with wider than expected losses in Q4 2019, which included an impairment loss of nearly CA$17 million. Following all of its disclosures, HEXO’s stock plummeted almost 58% and has yet to recover.
