David George-Cosh

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Hexo Corp. said Tuesday it has settled a board dispute with one of its investors who sought to restructure the cannabis giant's director slate through a proxy battle amid a steep decline in the company's stock. 

Hexo said it will add two directors nominated by Kaos Capital Ltd. Chief Executive Officer Adam Arviv to its board - Nocera Investment Corp. Director and former Eight Capital CEO Mark Attanasio and Brown Lab Industries Inc. President Rob Godfrey - effective immediately. 

In addition to the new appointments, Hexo's Chair John Bell announced he would step down from his role and will be replaced by Attanasio, while Emilio Imbriglio, Adam Miron, and current Chief Executive Officer Scott Cooper will also resign from the board. As a result, the board's size will be reduced to seven members, all of which are independent, and will stand for election during a shareholder meeting on March 8. 

"We’ll work closely with the management team as they continue to fast-track the company’s path to becoming a cash flow positive business," said Arviv in a statement. Arviv, who owns about three per cent of Hexo's shares, will also have the right to nominate an eighth member to the board after the shareholder meeting. 

Canaccord Genuity Analyst Matt Bottomley wrote in a note to clients Tuesday that Hexo continues to face a challenging environment. 

"With the company continuing to face operational headwinds, including recent material asset impairments, a declining organic growth profile, and a balance sheet that carries a heavy debt burden, we believe [that] Hexo's new board will need to continue to look for ways to right the ship," Bottomley said. 

However, The settlement appears to end a six-month-long stand-off between Arviv and Hexo management following the company's financing efforts over the past year aimed at acquiring several cannabis producers to help it emerge as the top-ranked Canadian pot company by sales. In a letter to Hexo's board in September, Arviv stated those financing deals were poorly constructed and called for the resignation of then-CEO Sebastien St-Louis. 

St-Louis stepped down from the top job a month later but Arviv continued to press Hexo's board for further changes as the company's stock has plunged more than 91 per cent over the past year while also alleging that it was running short of capital to handle day-to-day operations and could be at risk of potentially filing for bankruptcy. 

He submitted a slate of five independent directors he would like shareholders to vote for earlier this month that included Attanasio and Godfrey, as well as himself. 

With Hexo's board battle appearing to be over, the company's attention will likely turn to resolving issues with its listing on the Nasdaq exchange as its stock currently is not compliant with minimum pricing requirements. 

Hexo said in a management circular that it is in the best interests of the company to conduct a reverse stock split to raise its shares above the US$1 per share minimum threshold and abide by Nasdaq listing requirements. It plans to ask shareholders during its March meeting to vote on the proposed reverse stock split plan. 

Earlier this month, Hexo announced it would lay off 180 staff in another move to cut costs as it looks to increase cash flow and report positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). 

The layoffs are part of Hexo's turnaround plan, which was first disclosed in December. The plan is expected to generate approximately $37.5 million this fiscal year in new cash flow and about $135 million in its next fiscal year.