Amid restructuring and layoffs in the cannabis industry, Gatineau-based Hexo Corp. is offering contract growing services to smaller companies in a bid to create a “win-win” situation.
Hexo CEO and president Charlie Bowman told OBJ the move benefits smaller firms that no longer have enough full-time staff to maintain a consistent supply of cannabis to meet market demand by allowing them to leverage Hexo’s cultivation and processing capabilities.
The strategy is part of Hexo’s move to “right-size” its own capacity and product lines as it copes with an uncertain and competitive market. In June 2022, Hexo announced cost-cutting measures, including the reduction of 450 jobs. In December 2022, the company reported a $52.1-million net loss for the quarter ended Oct. 31, 2022, compared with a net loss of more than $116.9 million a year earlier.
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In January, Hexo reported that it had regained compliance with minimum bid price requirements on the Nasdaq after becoming non-compliant when its closing bid price for common shares listed on the Nasdaq dropped below US$1 for 30 consecutive trading days.
Bowman took over as Hexo CEO in May 2022 after a period of high turnover in the company’s C-suite. Under Bowman’s leadership, Hexo scaled down from a capacity of 400 metric tonnes to 205 tonnes.
“We took down capacity, we right-sized the business, and that takes a few quarters to go through. We still see some of that going on right now, to get the business down to where every sale is a profitable sale,” Bowman said.
A focus on core brands including Redecan, Original Stash and Bake Sale is allowing Hexo to leverage its genetic bank to create new strains for other brands, the CEO sa.
“When the price reset in September to January, a lot of growers were underwater,” Bowman explained. “Our cost of scale allowed them to basically be able to have products that are profitable business in the market. And it allowed us to do what we do quite well, and that is cultivate, grow and focus on our core brands.”
Bowman says the contract growing strategy is focused on smaller boutique or craft licensed producers in the Quebec market. He says Hexo is currently growing about 130 tonnes and has the capacity to supply 35 to 40 tonnes to smaller firms. The move is in addition to Hexo’s existing partnerships with Tilray Brands and Entourage Health.
Bowman says it also aligns with market demand for a more balanced approach to growing cannabis, focusing on the ratio of tetrahydrocannabinol (THC), pot’s psychoactive component, and cannabidiol (CBD). CBD is a non-intoxicating cannabis compound associated with therapeutic benefits such as relaxation, reduced anxiety and pain relief.
“That’s the beauty of this. This industry is so new. We have the ability now — through the next generation over the next, let’s call it, 18 months — of generating these next rounds of new cultivars and commercializing them. That’s going to reset more of the craft boutique growth in 2023, 2024 and 2025,” Bowman said.
Despite recent setbacks in the cannabis market, including significant layoffs at Canopy Growth in Smiths Falls, Bowman sees reason for optimism.
He says the perception of cannabis as being only for recreational purposes is changing to include its therapeutic use by a broader demographic, including the elderly and millennials.
“That’s where Canada is so far ahead of the rest of the world, and we now have the ability to take the next step,” Bowman said. “We can help a lot of brands put great products on the market at really good prices.”
Bowman says licensed producers will continue to see their business models tested by an oversupply of cannabis in the Canadian market and not enough export opportunities to offset the excess supply. While he says he expects more mergers, consolidations and acquisitions in the cannabis industry in the coming year, he feels Hexo is well positioned in the market.
