If you thought Hexo Corp (TSX: HEXO) was a mess before, buckle up as it appears things are about to get a whole lot worse.
Zenabis Global, the Canadian cannabis operator that Hexo acquired just thirteen months ago, has evidently filed for protection under the Companies Creditors Arrangement Act, or the CCAA as it is commonly referred to. The subsidiary has filed for such protection as it looks to “restructure their business and financial affairs.”
The company listed three reasons for the cause of the filing, which include:
- Margin pressures within the cannabis industry,
- Operational and financial underperformance, and
- Pressures from obligations owing to creditors.
In making the filing, the company addressed that it has significant unsecured and senior secured debt, which it is no longer capable of paying off. As a result, the firm is seeking a stay of creditor claims so as to give the firm time to find potential purchasers of its assets.
As part of the process, the firm has entered into an agreement for purchase and sale with a subsidiary of Sundial Growers (NASDAQ: SNDL). A sale and investment solicitation process is to be undertaken by Ernst & Young, whom is serving as monitor for the proceedings. The process is to use the offer from Sundial as the stalking horse bid under the process.
Hexo completed the purchase of Zenabis on June 1 of last year, in an all-stock deal initially valued at $235 million at the time of announcement. Weeks before that deal was announced, the firm had entered a secured debt deal with Sundial, after which Sundial attempted to secure assets due to a default on the debt. Although it was announced that Zenabis had secured a $60 million loan to pay off that debt, based on the CCAA filing and its references to Sundial being a secured creditor, that loan appears to have fallen through.
The petition is said to be exclusively related to Zenabis Group, and is not expected to impact Hexo’s other operations.
The development follows Hexo earlier this week cancelling guidance as a result of its poor performance within the cannabis industry as of late.
Hexo Corp last traded at $0.265 on the TSX.
Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
As the founder of The Deep Dive, Jay is focused on all aspects of the firm. This includes operations, as well as acting as the primary writer for The Deep Dive’s stock analysis. In addition to The Deep Dive, Jay performs freelance writing for a number of firms and has been published on Stockhouse.com and CannaInvestor Magazine among others.