In another swing to fix its balance sheet amid falling share prices, Canadian pot producer Hexo Corp. (TSX: HEXO) (Nasdaq: HEXO) says it’s working with its competitor, cannabis giant Tilray Brands, Inc. (Nasdaq: TLRY) (TSX: TLRY), on a new debt financing agreement.
On Thursday, the firms said Tilray has agreed to acquire US$211 million of senior secured convertible notes that were originally issued by Hexo to HT Investments MA LLC, and acquire a significant equity ownership position in Hexo.
Tilray says the notes will be amended at an initial conversion price of $0.90 per Hexo shares, and that Tilray has the right to convert about 37 per cent of the shares.
Through the deal, the companies expect to save up to $50 million within two years, which will be shared equally.
Hexo says the new terms are significantly more favourable, and will enable the firm to strengthen its balance sheet and help it become a cash-flow-positive business within the next year. The firm has already released ambitious plans to turn its business around, including cutting costs, selling off non-core assets and layoffs.
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Hexo CEO Scott Cooper says his top priority has been to fix “a very challenged balance sheet” since he joined in November.
“This strategic alliance will help lower our costs, preserves our stand-alone optionality and we look forward to reaching a definitive agreement shortly,” he adds in a statement.
Tilray CEO Irwin D. Simon calls the proposal a win-win between the two Canadian cannabis companies.
“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,” he says in a statement.
Included at the bottom of its statement, Tilray said it has filed a prospectus supplement with the U.S. Securities and Exchange Commission, under which it can sell up to US$400 million in common stock.
The agreement comes as Hexo’s share prices have been falling, enough to risk losing its Nasdaq listing, and after its board came under fire by one of its shareholders.
Last month, KAOS Capital Ltd. CEO Adam Arviv, who owns about a 2-per-cent stake in Hexo, called for a shakeup of the pot firm’s board over its “disappointing performance.” Since then, Hexo said it reached a transition deal with Arviv and new board members will be elected at the upcoming annual shareholder meeting on March 8.
When the debt acquisition closes, Tilray plans to nominate Denise Faltischek to Hexo’s board of directors as well as appoint one board observer.
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On Thursday, Hexo also revealed it signed an agreement with KAOS and its partners to provide a $180-million equity backstop to the firm, as an added layer of protection to maintain its balance sheet and ensure all interest and operational costs are covered going forward.
“Our first priority was to refinance the debt that [Hexo] had taken on,” Arviv says in a statement.
“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.”
At the shareholder meeting next week, Hexo will also vote on consolidating its shares to keep its Nasdaq listing.
Hexo stock was up 5 per cent to US$0.60 on the Nasdaq while Tilray’s was down over 7 per cent to US$5.38 on that exchange on Thursday.
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