Canadian licensed cannabis producer Hexo Corp. (TSX: HEXO) (Nasdaq: HEXO) is set to be acquired by Tilray Brands, following a formal sign-off on Wednesday by Hexo shareholders in a near-unanimous vote.
If the deal doesn’t go through as planned by the end of the month, Hexo could wind up in default, the company warned in its third-quarter earnings report, which was also released Wednesday.
“In the third quarter, we entered into a definitive arrangement agreement whereby Tilray will acquire all outstanding shares of Hexo,” president and CEO Charlie Bowman said in a press release.
The acquisition by Tilray could give a lifeline to the struggling Hexo, which reported a net loss of C$129.6 million for the three months ended April 30.
Hexo’s revenue also dropped sharply, down 11% sequentially from last quarter and 53% year-over-year, to C$31.7 million. The company chalked up the losses to “increased competition.”
Under the terms of the acquisition deal – which was announced in April – Tilray will acquire Hexo in a stock-swap deal. All Hexo shareholders will receive 0.4352 common stock shares in Tilray for their respective shares in Hexo. The deal is expected to close by June 30, pending regulatory approval.
While the stock swap terms of the deal appear unchanged from when it was announced, Seeking Alpha noted that today the swap terms would equate to a purchase price of $1.25 per share, which it calculated was a “24% discount” from the April announcement. At that time, Tilray estimated the deal to be worth $56 million.
In conjunction with the acquisition, Hexo paid Tilray C$26.3 million for a waiver agreement that rescinds a requirement that Hexo “achieve a positive adjusted EBITDA” for the quarter that ended April 30, “and for subsequent quarters, and to amend the financial covenant set out under the Note to reduce the minimum liquidity threshold from US$20 million to US$4 million.”
But, Hexo noted, there’s still a chance the acquisition may not close, and if so, the company could be in big financial trouble due to major cash flow issues, with losses of more than C$190 million in the past nine months and cash outflows of C$23 million.
Hexo had “an accumulated deficit of C$2,014,326 and has yet to generate positive cashflows or earnings,” the company reported. As such, Tilray agreed to amend the acquisition deal so that Hexo’s liquidity had to be just $1, instead of the previously agreed-upon liquidity level of $4 million.
“In the event the arrangement is not consummated, there is a significant probability of the company not being able to meet its obligations as they come due within the 12 months following April 30, 2023, and, accordingly, there would be significant doubt about the appropriateness of the going concern assumption,” Hexo reported.
In the past three months, Hexo trimmed its losses significantly, down from C$145 million, but it still had to write off sizable chunks of product “due to the aging out of inventory,” it reported.
As of April 30, Hexo had C$20 million in the bank and C$396 million in total assets, along with C$253 million in total liabilities.