Extraction Firm Sues Cannabis LP for Missing Payment

A new legal clash in the cannabis industry is in focus after it was revealed which licensed producer (LP) is being targeted by an extraction firm in a new claim.

Last Friday (January 28), MediPharm Labs (TSX:LABS,OTCQX:MEDIF) informed investors that it had officially filed a statement of claim in the Ontario Superior Court of Justice targeting an undisclosed LP.

On Monday (January 27), a report from BNN Bloomberg confirmed the lawsuit is against Quebec-based LP HEXO (NYSE:HEXO,TSX:HEXO).

MediPharm Labs alleges it is owed a payment for “outstanding amounts,” which it calculates to be C$9.8 million. This missing payment is connected to a cannabis oil sale deal from February 2019.

According to the original agreement, the extraction firm had signed the agreement to supply HEXO, which was then not named, with its private label purified cannabis oil concentrates. The deal was set so HEXO would buy C$7.66 million worth of cannabis oil from MediPharm upfront while agreeing to the purchase of at least C$$27 million worth of product over a 12 month period starting in March 2019.

At the time, it was the fourth agreement of that kind that MediPharm had been able to sign with an LP.

“The contract is a supply agreement for which we had serious concerns and, in an effort to drive value for our shareholders, we attempted to work in good faith towards a resolution that was suitable for both parties. Unfortunately, these efforts were unsuccessful,” a HEXO spokesperson told BNN Bloomberg.

The LP confirmed that the deal was originally worked out between MediPharm and UP Cannabis, a division of Newstrike Brands, a company HEXO acquired in March 2019.

HEXO has not issued a press release confirming the suit, but it did tell BNN Bloomberg it will “vigorously defend” itself against the claim by MediPharm.

After its statement of claim against the Canadian LP was publicized, shares of MediPharm Labs took a hit on the open market. The company began dropping dramatically at the start of the trading week on Monday, and it closed that day at a price of C$3.03, a double-digit decline in value.

HEXO also saw a decline, although a smaller one. The company opened Tuesday’s (January 28) trading session in Toronto with an initial fall in value of over 3 percent for a price per share of C$1.30.

This isn’t the first time its acquisition of Newstrike has caused issues for HEXO and its shareholders. In November, the LP was forced to reveal that there were active unlicensed areas within Newstrike’s cannabis facility in Niagara, Ontario.

“The company notified Health Canada instantly, and the regulator was satisfied with HEXO management’s corrective actions,” HEXO said in a statement following the disclosure.

Leading Canadian cannabis companies are currently under pressure from the public, and HEXO has faced the ire of investors after being forced to adjust its revenue guidance recently.

After releasing disappointing results for its first 2020 fiscal quarter in December, HEXO was slammed by CIBC Capital Markets analyst duo John Zamparo and Krishna Ruthnum. They slapped the company with an “underperformer” rating and assigned it a price target of C$2.

The researchers also dropped their projections for sales from HEXO in its fiscal 2020 and 2021 years to C$75 million and $175 million, respectively.

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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.