HEXO Corp. (TSX: HEXO; NASDAQ: HEXO) (“HEXO” or the “Company”), a leading producer of high-quality cannabis products, today provided an update on its previously announced strategic plan, “The Path Forward”, designed to solidify HEXO’s position as the number one cannabis company in Canada by recreational market share, with the goal of becoming the first amongst its peers to be cash flow positive from operations.
The plan is expected to generate incremental cash flow of approximately $37.5 million in fiscal 2022 and an additional anticipated and approximate $135 million in fiscal 2023 for a total of $175 million over the two years, from a combination of cost reductions and anticipated organic revenue growth.
“It is a strategic imperative for HEXO to strengthen its capital position and restructure the Company’s operations to ensure a path to achieving positive cash flow from operations within the next three quarters,” said Scott Cooper, President and CEO of HEXO. “As an organization we are making strategic decisions quickly to ensure we have the optimal operating footprint we need for the next phase in HEXO’s strategic evolution, while remaining focused on the needs of customers and in our continued efforts in product innovation.”
HEXO is committed to providing its shareholders with updates as the Company executes the strategic plan. Today’s announcement provides updates on two of the five strategic pillars: (i) Streamline and Simplify the Organizational Structure, and (ii) Reduce Manufacturing and Production Costs.
Streamline and Simplify the Organizational Structure
To more closely align the Company’s operating costs with its size, HEXO announced significant cost-saving initiatives to reduce SG&A expenses. These initiatives are expected to represent a 30% reduction in the Company’s SG&A by Fiscal Year End 2023. These cost reductions will be achieved through a combination of reduced reliance on outside consultants, streamlining the organization as a new IT platform is implemented, right-sizing the organization, and realizing the synergistic benefits of the recent acquisitions.
Reduce Manufacturing and Production Costs
In addition to the SG&A savings, the Company has also identified approximately $30 million in additional savings from optimizing HEXO’s production network and leveraging the capacities of its recent acquisitions. Specifically, this includes:
- Transitioning from co-packaging agreement towards in-house production capabilities;
- Leveraging HEXO’s scale to deliver on procurement savings; and
- Reconfiguring the Company’s production network to achieve greater efficiencies, for example, moving vape production and distillate production to the Redecan facility.
Sale of Non-Core Assets and Debt Reduction
Under the strategic plan, the Company has also identified certain non-core assets which may be divested. The Company intends to apply the proceeds from any such sales principally to debt reduction.
As such, HEXO sold its 25% interest in the Belleville Complex Inc. (“BCI”) to Olegna Holdings Inc. (“Olegna”), for approximately $10.1 million. Olegna is the owner of the other 75% of the facility and HEXO will continue to lease the facility for processing, manufacturing and distribution with no changes to the existing lease arrangements. The proceeds will be used to amortize the High Trail Note, as required under the terms of the Note.
The sale of the Company’s interest in BCI to Olegna is a “related party transaction” within the meaning of Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (“MI 61-101”) because Olegna is majority owned and controlled by Mr. Vincent Chiara, a director of HEXO. HEXO is relying on applicable exemptions from the minority approval and valuation requirements of MI 61-101 on the basis that neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction exceeds 25% of HEXO’s market capitalization.
The sale price for the Company’s interest in BCI was determined by an arm’s length third party appraisal.
The Company will continue to provide updates on the progress of The Path Forward as they develop.
