Hexo’s Acquisition by Tilray Hangs in the Balance, Putting Hexo at Risk of Default

LOS ANGELES– Canadian licensed cannabis producer Hexo Corp. faces a critical juncture as its acquisition by Tilray Brands hangs in the balance. In a near-unanimous vote, Hexo shareholders approved the acquisition on Wednesday. However, the deal must be completed by the end of the month; otherwise, Hexo could face default, as warned in its third-quarter earnings report released the same day.

Hexo President and CEO Charlie Bowman highlighted the definitive arrangement agreement with Tilray, expressing hope for a successful outcome. The acquisition by Tilray could potentially provide a lifeline for Hexo, which reported a net loss of C$129.6 million for the three months ending April 30.

Hexo’s revenue also experienced a significant decline, dropping 11% sequentially from the previous quarter and 53% year-over-year, amounting to C$31.7 million. The company attributed these losses to increased competition in the cannabis market.

Under the terms of the acquisition deal, announced in April, Tilray will acquire Hexo through a stock-swap transaction. Hexo shareholders will receive 0.4352 common stock shares in Tilray for each of their Hexo shares. The deal is anticipated to be finalized by June 30, pending regulatory approval.

While the stock swap terms appear unchanged from the initial announcement, Seeking Alpha noted that, based on current swap terms, the purchase price would be $1.25 per share, representing a “24% discount” compared to the valuation in April. At the time of the announcement, Tilray estimated the deal to be worth $56 million.

As part of the acquisition, Hexo paid Tilray C$26.3 million for a waiver agreement that nullifies the requirement for Hexo to achieve a positive adjusted EBITDA for the quarter ending April 30, as well as subsequent quarters. The financial covenant under the Note was also amended to reduce the minimum liquidity threshold from US$20 million to US$4 million.

However, Hexo acknowledged the possibility that the acquisition may not be completed, which could spell significant financial trouble for the company due to major cash flow issues. Hexo has reported losses of over C$190 million in the past nine months and cash outflows of C$23 million.

Hexo’s accumulated deficit stands at C$2,014,326, and the company is yet to generate positive cash flows or earnings. In light of these circumstances, Tilray agreed to revise the acquisition deal, reducing Hexo’s required liquidity to just $1, down from the previously agreed-upon level of $4 million.

Hexo noted that if the arrangement fails to materialize, there is a significant probability that the company will be unable to meet its obligations within the next 12 months following April 30, 2023, casting doubt on the appropriateness of the going concern assumption.

In the past three months, Hexo managed to reduce its losses substantially from C$145 million. However, the company had to write off a substantial amount of inventory due to aging. As of April 30, Hexo had C$20 million in cash and C$396 million in total assets, along with C$253 million in total liabilities.