Tilray Brands Inc. (NASDAQ: TLRY) is leaning into its Hexo Corp. (NASDAQ: HEXO) debt buying with the announcement that it would buy Hexo’s remaining $193 million senior secured convertible note. The deal is expected to close by the end of May 2022. The Note will be amended to include conversion rights at a price of C$0.85 per Hexo Share, which would allow Tilray Brands to acquire a significant equity ownership position in Hexo and participate directly in its growth opportunities.
Irwin D. Simon, Tilray Brands’ Chairman and CEO, said, “We know that winning in Canada means a relentless focus on product innovation and operational excellence. The agreement with Hexo delivers on both fronts as it facilitates collaboration, the sharing of best-practices, and yields quantifiable operating efficiencies between two companies with unparalleled global cannabis expertise. In addition, we believe the timing is right given Hexo’s progress executing its operational turnaround plan that could deliver tangible value to Tilray Brands shareholders upon equity conversion of our investment. We look forward to working with Hexo to deliver on the promise and the potential of this partnership for our shareholders, consumers, and employees.”
Tilray said the purchase is expected to be immediately accretive to the company. The agreement provides that Hexo will pay Tilray Brands an annual fee of $18 million for advisory services with respect to cultivation, operations, and production matters. The terms of the Note, as amended, provided that the Note shall bear interest at a rate of 5% per annum, beginning on the date of transaction closing. In addition, Tilray Brands shall have the flexibility to either be paid the principal amount of the Note plus any accrued interest and payment-in-kind upon the maturity of the Note or, prior to maturity, convert such amount into a substantial ownership position in Hexo. Hexo will not receive any proceeds as a result of Tilray Brands’ purchase of the Note from HTI.
Tilray To the Rescue
Tilray had originally announced in March that it was buying $211 million of the troubled company’s debt. The senior secured convertible notes were issued by Hexo and were held by funds affiliated with HT Investments MA LLC. Tilray said that the notes would be amended to permit Tilray Brands to exercise conversion rights at a price of C$0.90 per Hexo share.
In December, Hexo warned that the company was in trouble. Hexo noted in its filing that “existing funds on hand, when combined with operational cash flow, would not be sufficient to fund the potential Senior Secured Convertible Note redemption payments. Additionally, the ability to fund capex budgets, convertible debt, and other commitments may be at risk due to cash payments towards the Senior Secured Convertible Note. Management is exploring several options to secure the necessary financing, which could include the issuance of new public or private equity or debt instruments, supplemented with operating cash inflows from operations. Subsequent to October 31, 2021, management has resumed the previous at-the-market public offering. Nevertheless, there is no assurance that certain sources of additional future funding will be available to the company or will be available on terms which are acceptable to management.”