Hexo Corp, an Ottawa-based cannabis products maker, has formed a strategic partnership with Tilray Brands that includes a debt financing agreement. Tilray, a Toronto-based cannabis business, will acquire $211 million of senior secured convertible notes originally issued by Hexo to High Trail Capital, a US hedge fund manager. Kaos Capital and partners have also agreed to provide Hexo with a C$180 million equity backstop commitment.
GATINEAU, Quebec, March 03, 2022 (GLOBE NEWSWIRE) — HEXO Corp. (TSX: HEXO; NASDAQ: HEXO) (“HEXO” or the “Company”), a leading producer of high-quality cannabis products, today announced that the Company has taken a significant step in executing on its strategic plan -The Path Forward – by finalizing a strategic partnership with Tilray Brands, Inc. (“Tilray Brands”) which includes a new debt financing agreement.
Under the new agreement, Tilray Brands will acquire US$211 million of senior secured convertible notes (the “Notes”) that were originally issued by HEXO (the “Transaction”) to HT Investments MA LLC (“HTI”). The new terms of the Notes are significantly more favourable to HEXO and will enable the Company to strengthen its balance sheet and accelerate its transformation into a cash flow positive business within the next four quarters. The new partnership also brings together Canada’s top two cannabis market share leaders and is expected to create efficiencies of up to C$50 million within two years which will be shared equally between HEXO and Tilray Brands.
“My top priority since I joined in November has been to fix a very challenged balance sheet as a result of the Notes that were previously put in place, and today, after an exhaustive search for alternatives, we are announcing the most optimal agreement to strengthen our balance sheet, preserve value for shareholders and provide HEXO with the capital to execute on our The Path Forward plan,” said Scott Cooper, HEXO President & CEO. “This strategic alliance will help lower our costs, preserves our stand-alone optionality and we look forward to reaching a definitive agreement shortly.”
Irwin D. Simon, Tilray Brands’ Chairman and CEO, said, “We believe the proposed transaction is a win-win for Tilray Brands and HEXO as it would launch a strategic partnership between two leading Canadian cannabis producers with complementary brand portfolios. For us, it provides a path for meaningful future equity ownership of HEXO and enables us to participate in HEXO’s share price appreciation as it continues to execute on its growth initiatives. We also expect to realize further commercial and production efficiency savings of up to C$50 million within two years, which would be shared equally and would allow us to continue being the leading, low-cost Canadian producer. I look forward to working with HEXO’s management team and Board to create additional brand awareness and shareholder value.”
“Restructuring HEXO’s debt is a critical first step in allowing the Company to move forward with its Path Forward strategy and to begin to unlock significant shareholder value,” said Mark Attanasio, Chair of the Board of Directors of HEXO. “The company has endured a crippling overhang for the past twelve months, due to punitive redemptions and discounted dilutive financings, and we needed to solve this issue in order to make positive progress. This new deal accomplishes this and places HEXO solidly on a path to growth.”
In addition to the restructured debt, HEXO has also signed an agreement with KAOS Capital (“KAOS”) and its partners to provide a C$180 million equity backstop to the Company, to maintain HEXO’s newly strengthened balance sheet and ensure that all interest and operational costs are covered going forward.
“Our first priority was to refinance the debt that the Company had taken on,” said Adam Arviv, CEO of KAOS. “By bringing on Tilray as a strategic partner and alleviating the unsustainable monthly redemptions, we’ve allowed HEXO to refocus their strategic plan. In order to reiterate our support and give the Company room to grow and realize its immense potential, we’ve also put a substantial backstop commitment in place, and in doing so, we are very confident in HEXO’s new outlook.”
Strategic Rationales for Hexo and Tilray Brands Strategic Alliance
We believe the strategic alliance between Hexo and Tilray Brands will provide several financial and strategic benefits including the following:
Operational Flexibility: The purchase of the Notes would provide HEXO with immediate operational flexibility by eliminating the monthly redemption feature, amending the financial covenants and extending the maturity, among other things. The terms of the transaction unlock US$80 million of previously-restricted cash which, when combined with the C$180 million equity backstop commitment, provides HEXO with significant liquidity to invest in organic growth.
Substantial Synergies: Tilray Brands and HEXO have entered into an agreement to form a strategic partnership, which is expected to deliver up to C$50 million of cost synergies within two years of the completion of the transaction. Both companies have been working together to evaluate cost saving synergies as well as other production efficiencies, including with respect to cultivation and processing services, certain Cannabis 2.0 products, including pre-rolls, beverages and edibles and shared services and procurement.