Hexo Corp. has outlined how it plans to generate as much as $175 million in new cash flow through a significant cost-cutting exercise one month as it attempts to meet terms of a debt financing deal used to help finance its acquisition of Redecan Pharm. 

Hexo said in a release Wednesday that it plans to reduce its selling, general, and administrative expenses (SG&A) 30 per cent by the end of its fiscal 2023 by ending consulting contracts, moving to a new IT platform and "right-sizing the organization," without providing further details.

The company also said it identified approximately $30 million in additional savings by optimizing assets. The strategy includes moving vape and distillate production to a Niagara Falls, Ont.-area 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 load. It sold a 25 per cent interest in its Belleville, Ont. production facility to Olegna Holdings Inc. for $10.1 million and entered into a lease agreement with the firm.

"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, Hexo's chief executive officer and president, in a statement.

Hexo announced a strategic plan in December meant to reduce costs, streamline its business, and improve growth following the departure of company co-Founder and Chief Executive Sebastien St-Louis amid a string of losses, mounting debt, and misaligned supply-demand dynamics.

The company is also under pressure to meet terms of a debt financing deal announced in May 2021 that raised US$360 million in senior secured convertible notes from New Jersey-based hedge fund High Trail Capital LP that was used to acquire Redecan.

That deal, which propelled Hexo to become one of the country'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, according to company filings.

The filings state that if Hexo is in default of that covertible note deal, then the High Trail can demand repayment of the loan in cash plus an 15 per cent premium and any accrued interest.

According to ATB Capital Markets Analyst Frederico Gomes, Hexo still has US$241.6 million in outstanding debt owed to High Trail from those secured notes, and a total of $402 million in total debt on its balance sheet. The company ended its last quarter with $55.8 million in cash and raised about $14 million through an at-the-market equity program, Gomes added.

"Considering Hexo's indebtedness and cost structure, we continue to view material financing, dilution, and going concern risks impacting the company until a comprehensive balance sheet restructuring occurs," Gomes said in a report to clients on Wednesday. Gomes maintains an "underperform" rating on Hexo's stock with a 80 cents per share 12-month target price. 

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