Cannabis producer Hexo touts ‘significant’ shareholder return despite tumbling stock price

Image depicting a decline

Ahead of its annual meeting, Canadian cannabis producer Hexo Corp. is trumpeting “a significant positive total cumulative return” for its shareholders between 2017 and last July – even though the stock tumbled more than 20% during that time and is at risk of being kicked off the Nasdaq.

Quebec-based Hexo’s description of its stock performance is contained in a February filing with the U.S. Securities and Exchange Commission and was used to justify significant pay increases for its top executives.

The proxy circular, sent by the company in advance of its coming annual meeting on March 8, also asks shareholders to give management authority to consolidate shares and regain compliance with the Nasdaq’s continued listing standards.

In the filing, a “performance graph” compares the total cumulative shareholder return for 100 Canadian dollars ($78)  invested in Hexo shares between 2017 and July 31, 2021, versus the same amount of money invested in the S&P/TSX Composite Index. July 31 marks the end of Hexo’s fiscal year.

According to the chart and accompanying table, CA$100 invested in Hexo shares in 2017 would be worth CA$79.84 as of July 31, 2021, amounting to a 21% loss.

Graf showing how Hexo shares have depreciated.
According to this chart sent out to Hexo shareholders ahead of an upcoming annual general meeting, CA$100 invested in Hexo shares in 2017 would have been worth CA$79.84 on July 31, 2021.

Despite the loss, Hexo’s circular states the trend represents “a significant positive total cumulative return” for shareholders since 2017.

In the next sentence, Hexo uses the numbers to justify skyrocketing executive compensation.

“During the same period, total compensation received by (executives) increased in line with this trend as the transaction was completed and the Corporation raised substantial capital and significantly expanded its business,” according to the filing.

“Based on the growth and results of the corporation over this period and the return to Shareholders, no material misalignment exists between the compensation of the (executives) and the return to shareholders.”

The filing doesn’t identify the transaction Hexo conducted during that particular year.

In 2017, Hexo’s highest-paid executives collectively earned CA$1.4 million in total compensation. That rose to CA$3.5 million the following year.

In 2019 and 2020, the figures rose again to CA$15.2 million and CA$15.8 million, respectively, before falling to CA$8.6 million in 2021.

When queried by MJBizDaily about the disclosure, Hexo said it wasn’t a mistake.

“Over the 4-year time period between March 21, 2017 and July 31, 2021, Hexo’s shareholders have on balance received positive total cumulative returns,” a spokesperson told MJBizDaily.

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In a follow-up email, the spokesperson said: “We agree that, over the last two exercises, Hexo’s share has underperformed compared to the previous three exercises,” referring to the years between 2017 and 2021.

“However, as shown in the table below, Hexo’s average share performance on a netted basis over the 4-year period has generated a positive return.”

In the accompanying table provided to MJBizDaily, Hexo showed that the stock was in the green some of the past four years and in the red in one of them.

For example, the chart provided to MJBizDaily shows the stock:

  • Rose 186% between July 31, 2017, and July 31, 2018.
  • Rose 28% between 2018 and 2019.
  • Fell 84% between 2019 and 2020.
  • Rose 36% from 2020 to 2021.

Essentially, Hexo appears to be telling its shareholders they would have a “significant” return had they bought and sold the stock annually, at the right time, over each of the past four years in question.

However, if they held the shares over that time without selling, they would be in the red.

Analysts contacted by MJBizDaily called the disclosure unusual.

The analysts asked not to be identified because they don’t have permission to speak about this specific issue.

None had ever heard of a company calculating an investor “cumulative return” in such a way.

Hexo did the same thing in 2020, but the move hadn’t been noticed.

Graf showing Hexo shares in 2020
According to this chart sent to Hexo shareholders ahead of an annual general meeting in 2020, CA$100 invested in Hexo shares in 2017 would have been worth CA$44.84 at the end of the 2020 fiscal year.

In Hexo’s circular for fiscal 2020, the “performance graph” shows that CA$100 invested in the Quebec company’s shares in 2017 would have been worth CA$44.84 as of July 31, 2020.

Despite the 55.2% loss in the value of the company’s shares between 2017 and July 31, 2020, Hexo’s filing states “the trend shown by the above graph is a significant positive total cumulative return for a shareholder.”

“During the same period, total compensation received by the Named Executive Officers increased in line with this trend,” the filing states.

“Based on the growth and results of the Corporation over this period and the return to Shareholders, no material misalignment exists between the compensation of the Named Executive Officers and the return to Shareholders.”

In the 2020 financial year, Hexo awarded its then-CEO, Sebastien St. Louis, total compensation of CA$11.2 million – mostly in option-based awards.

The CEO was fired one year later, after auditor PricewaterhouseCoopers warned of “substantial doubt” about the company’s ability to continue as a going concern.

The company’s shares trade as HEXO on the Nasdaq and Toronto Stock Exchange.

Matt Lamers can be reached at matt.lamers@mjbizdaily.com.