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Tilray Brands Inc
Symbol TLRY
Shares Issued 446,156,841
Close 2022-07-12 C$ 4.19
Recent Sedar Documents

Hexo, Tilray close note transaction, commercial deals

2022-07-12 17:00 ET - News Release

See News Release (C-HEXO) Hexo Corp (2)

Mr. Charlie Bowman of Hexo reports

HEXO COMPLETES TRANSACTIONS WITH TILRAY BRANDS, CREATING A STRATEGIC ALLIANCE BETWEEN TWO CANADIAN CANNABIS LEADERS

Hexo Corp. has closed its previously announced transaction with Tilray Brands Inc.

The transactions with Tilray Brands solidify the strategic partnership between Hexo and Tilray Brands, and provide Hexo with a recapitalized balance sheet and the financial flexibility necessary to accelerate its transformation into a cash flow positive business within the next four quarters.

"This partnership with Tilray Brands is a game-changer for Hexo," said Charlie Bowman, chief executive officer of Hexo. "It provides us with the opportunity to reset the organization onto a path of profitable, sustainable growth and allows us to leverage our leading market share into becoming the preferred cannabis experience for consumers. We're now able to pro-actively plan for the second half of 2022 and beyond, focusing on meeting evolving consumer demand and innovative product development."

"Refinancing our balance sheet and funding future growth has been a top priority," said Julius Ivancsits, chief financial officer of Hexo. "Finalizing this agreement accomplishes both objectives, placing Hexo on solid financial footing and increasing shareholder value."

"This is a unique opportunity to realize our vision of building Canada's leading cannabis alliance," noted Irwin D. Simon, chairman and chief executive officer of Tilray Brands. "The partnership will create substantial synergies and commercial benefits, as well as allowing us to capitalize on our respective strengths in product innovation, accelerating growth across global markets."

Pursuant to a transaction agreement dated April 11, 2022, and amended pursuant to an amending agreement dated June 14, 2022, among Hexo, Tilray Brands and HT Investments MA LLC, the terms of the outstanding senior secured convertible note, originally issued by Hexo to HT, were amended and restated and the note was immediately thereafter assigned to Tilray Brands, pursuant to the terms of an amended and restated assignment and assumption agreement dated June 14, 2022.

Hexo and Tilray Brands have also entered into certain commercial agreements, providing the two companies with cost saving synergies and production efficiencies. The commercial agreements are expected to create significant efficiencies, with a target combined cost savings of up to $80-million (U.S.) within two years to be shared equally between the two companies.

Strategic Rationales for Hexo and Tilray Brands Strategic Alliance

In furtherance of Hexo's and Tilray Brands' respective independence, the strategic alliance with Tilray Brands will provide several financial and strategic benefits to Hexo, including the following:

  • Deleveraging: Tilray Brands purchased the amended note at a lower price than the one at which HT has been redeeming the amended note over the past 13 months.
  • Operational flexibility: The amended note provides Hexo with immediate operational flexibility by modifying the terms to be more favourable to Hexo. This includes eliminating the monthly redemption feature, amending the financial covenants and extending the maturity by three additional years. These amendments limit shareholder dilution moving forward and remove the going concern risk that acted as an overhang on the business for the past several quarters. The terms of the transaction unlock $80-million (U.S.) of previously restricted cash which, when combined with the standby commitment, provides Hexo with significant liquidity to invest in organic growth initiatives.
  • Substantial synergies: The commercial agreements are expected to deliver significant cost synergies and will target combined cost savings of up to $80-million (U.S.)within two years of the completion of the transaction. The two companies have identified and will continue to work together to evaluate additional cost saving synergies as well as other production efficiencies, including with respect to cultivation and processing services, and certain cannabis 2.0 products, including prerolls, beverages and edibles, and shared services and procurement.
  • Increases product breadth and commitment to innovation: Leveraging both companies' commitment to innovation, brand building and operational efficiencies, Hexo and Tilray Brands will share expertise to strengthen market positioning and capitalize on opportunities for growth through a broadened product offering and new innovation.

Transaction summary

Pursuant to the terms of the transaction agreement, Tilray Brands acquired 100 per cent of the remaining outstanding principal balance of $173.7-million (U.S.) of the amended note. The purchase price paid by Tilray Brands to HT for the amended note was $155-million (U.S.), reflecting a 10.8-per-cent discount on the outstanding principal amount. As consideration for the amended note, Hexo issued 56.1 million common shares and 11,674,266 rights exercisable for common shares to HT, representing (x) 12 per cent of the outstanding principal of the amended note at the closing, divided by (y) 40 cents. Pursuant to the transaction agreement, Tilray Brands has nominated Denise Faltischek and Roger Savell to Hexo's board of directors. Tilray Brands is also entitled to an observer on Hexo's board of directors.

The conversion price of the Hexo note of 40 cents per share implies that, as of July 11, 2022, Tilray Brands would have the right to convert into approximately 48 per cent of the outstanding common stock of Hexo (on a non-diluted basis).

Hexo did not receive any proceeds as a result of Tilray Brands' purchase of the amended note from HT.

Commercial agreements

Hexo and Tilray Brands have finalized and entered into various commercial agreements on mutually agreeable terms, designed to strengthen each entity's independent position and covering the following key areas:

  • Co-manufacturing: The parties have agreed to complete certain production and processing as a third party manufacturer of products for the other. The co-manufacturing agreement initially contemplates the manufacturing of V-Cone prerolls in bulk format by Tilray Brands for Hexo, using production equipment supplied by Hexo, and the manufacturing of gummies and straight edge prerolls by Hexo for Tilray Brands.
  • International sales: The parties have agreed to leverage Tilray Brands' existing facility in Portugal and will negotiate a mutually agreeable international supply agreement providing for the transfer by Hexo to Tilray Brands of Hexo's customers in the international markets, to the extent legally permitted, and, in certain circumstances, Hexo will source and purchase all of its cannabis products for international markets, excluding Canada and the United States, exclusively from Tilray Brands.
  • Procurement and cost savings: The parties have executed a procurement and cost savings agreement to identify and take advantage of cost savings in their respective businesses. Under the agreement, the parties will share certain services to achieve efficiencies and savings, including administrative services, third party commercial services, and procurement and internal distribution services. The agreement creates an efficiencies committee, reflecting joint and equal representation from both companies, to periodically identify additional cost savings and shared cost opportunities that can be realized in their respective operations. As part of these initiatives, the parties have agreed to share in the resulting cost savings realized from the Belleville facility, with Hexo paying Tilray Brands a one-time $10-million (U.S.) dollar fee for such shared savings.
  • Advisory services and monthly fee: Under an advisory services agreement, Tilray Brands will provide Hexo with certain advisory services on an as-needed-basis in the areas of investor relations, internal audit, company marketing and market positioning. Hexo has agreed to pay Tilray Brands a monthly fee of $1.5-million (U.S.) for these advisory services.

The performance of the company's previously announced equity purchase agreement with 2692106 Ontario Inc. and KAOS Capital Ltd. remains subject to the fulfilment of certain conditions, including receipt of exemptive relief from securities regulators. The company expects to receive such exemptive relief in the coming weeks and expects the standby commitment to be available to the company upon receipt of same.

The foregoing is only a summary of the transaction agreement, the amended note and the commercial agreements described above, and investors should refer to the full text of the transaction agreement, the form of amended note and such commercial agreements under the company's profile on SEDAR and its EDGAR profile.

Transaction advisers

Lazard served as financial adviser and Norton Rose Fulbright Canada LLP served as legal counsel to Hexo. Canaccord Genuity Corp. served as financial adviser and DLA Piper (Canada) LLP served as legal counsel to Tilray Brands.

About Hexo Corp.

Hexo is an award-winning licensed producer of innovative products for the global cannabis market. Hexo serves the Canadian recreational market with a brand portfolio including Hexo, Redecan, UP Cannabis, Original Stash, 48North, Trail Mix, Bake Sale and Latitude brands, and the medical market in Canada and Israel. The company also serves the Colorado market through its Powered by Hexo strategy and Truss CBD USA, a joint venture with Molson-Coors. With the completion of Hexo's acquisitions of Redecan and 48North, Hexo is a leading cannabis products company in Canada by recreational market share.

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