Hexo Corp. has been repeatedly making a mistake in its financial statements since June 2017, according to a MarketWatch analysis.
The Quebec-based cannabis company
has been incorrectly tabulating the remaining lifetime weighted average of its employee stock options. In financial statements analyzed by MarketWatch, the company appears to add up each option’s remaining life to arrive at the total weighted average of all the options outstanding in a given quarter.
Because accountants have been adding up the amount of remaining time versus arriving at an average, either the remaining life of the options or the figure purported to be the average value is incorrect. Hexo is supposed to disclose the amount of stock reserved for options, including the correct terms and amounts, according to International Financial Reporting Standards.
The error first appeared in Hexo’s fiscal 2017 third-quarter interim financial statements and continued through the company’s fiscal first-quarter 2020 results — including two sets of audited financial statements — according to a MarketWatch analysis of the filings. Over the past year, Hexo has employed three chief financial officers.
If the options error had made its way into the company’s valuation of its stock options, it could potentially hurt Hexo’s net income. MarketWatch could not determine whether the mistakes affected the company’s net income.
Three of the quarterly filings and one annual audited filing did not include the total weighted average of employee stock option’s lifetime, though it was not immediately clear why. Hexo did not respond to requests for comment.
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Hexo has already restated its fiscal first-quarter 2020 results in a filing with Canadian regulators on Dec. 31, but the restated earnings suffer from the options mistake too. The restatement corrected an error in how the company calculated its deferred tax liabilities and the value of its cannabis trim inventory.
“When companies make mistakes in simple arithmetic, it raises the question about whether they are getting the more complicated things right,” former internal PwC auditor and KPMG consultant Francine McKenna said in a telephone interview. “The recent re-statement shows they make material mistakes. Investors should be looking at what they say and what they do very carefully.”
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Before the first error appeared in June 2017, the company, which was then known as Hydropothecary Corp., changed auditors to MNP LLP from UHY McGovern, Hurley, Cunningham LLP, according to a June 2017 filing with Canadian regulators. An MNP LLP spokesman declined to comment, saying that the firm doesn’t discuss its work for clients.
Ed Chaplin served as Hexo CFO for about four years and resigned in May. The company appointed Stephen Burwash to serve as interim CFO until it tapped Michael Monahan for the position at the end of May. Monahan abruptly stepped down Oct. 7, and was replaced by Burwash.
Canadian weed stocks fell sharply in 2019, which led to most of them trading well lower than the exercise price of stock options granted to employees prior to the decline. In all but a few cases, the businesses would have to notch double or triple-digit percentage gains in order for the employee options to be in the money.
Taking into account the restated results for the fiscal first quarter, Hexo reported losses of C$60 million, which amounts to 23 cents a share, on net revenue of C$14.5 million. Shares of Hexo closed down 8.99% to $1.62 in Friday trading, as the ETFMG Alternative Harvest ETF rose 0.3% and the Horizons Marijuana Life Sciences Index ETF gained 0.9%.