Hexo Corp. (HEXO) has outlined an aggressive cost cutting plan aimed at helping the cannabis producer generate $175 million in cash flow.
The cash raise is being used to meet the terms of a debt financing deal used to help finance Hexo’s acquisition of Redecan Pharm.
Hexo said in a news release that it plans to reduce its expenses by 30% by the end of its fiscal 2023 year. Cancelling consulting contracts, moving to a new technology platform and “right-sizing the organization,” will be used to help lower costs, the company said.
Hexo said it identified approximately $30 million in additional savings by optimizing assets. The strategy includes moving vape and distillate production to a Niagara Falls, Ontario facility it acquired in the Redecan Pharm acquisition last year.
Lastly, Hexo said it has begun to divest some of its non-core assets to help pay down its debt. It sold a 25% interest in its Belleville, Ontario production facility to Olegna Holdings for $10.1 million and entered into a lease agreement with the firm.
Hexo is under pressure to meet terms of a debt financing deal announced in May 2021 that raised $360 million U.S. in senior secured convertible notes from New Jersey-based hedge fund High Trail Capital LP that was used to acquire Redecan.
The Redecan deal, which propelled Hexo to become one of Canada’s largest cannabis producers, comes with a key covenant that states the company must report positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of this month or it will default on its secured debt.
The filings state that if Hexo is in default of that covertible note deal, then High Trail can demand repayment of the loan in cash plus a 15% premium and any accrued interest.
