Ecofibre to sell hemp seed and food business to Elixinol for $3m

Medicinal cannabis and hemp company Ecofibre (ASX: EOF) is selling its food business to fellow ASX-lister Elixinol Wellness in a deal worth up to $3 million after the seller's chairman deemed the division "too small to deliver near-term cash profits".

The two parties have struck a deal for Ananda Food involving a $2 million upfront payment, most likely in late March, followed by a $1 million earnout subject to sales between April 2024 and 30 June 2025.

Elixinol shareholders are set to experience major dilution as the company raises $3.16 million to pay for the transaction, with plans to almost double the number of shares on its register and issue new securities at a 50 per cent discount to the last traded share price of 1 cent per share (cps) on 9 February. 

This Elixinol share price is but a miniscule fraction of its $4.58 peak in 2019, although Ecofibre hasn't fared so well since then either with its shares now trading at less than 10 cps - down from $3.65 in late 2019 when it had unicorn status with a valuation of more than $1 billion.

Elixinol is raising capital at half a cent per share as group CEO and managing director Ron Dufficy claims the Ananda Food acquisition will strengthen its ingredients portfolio and make Elixinol "one of the largest suppliers of hemp ingredients in Australia across both branded and private label products".

"It is complementary to our existing hemp product range and will bring improved unit economics through increased production yields and asset utilisation and create opportunities for significant cost and revenue synergies," Dufficy explains.

One of the biggest drawcards of Ananda Food is its world-leading intellectual property (IP) database of hemp seed genetics, which are sold to domestic growers from Tasmania to North Queensland, as well as to the US where the company claims its ECO-MS77 variety is "widely considered to be the best fibre genetic in the US based on yield and ability to grow in all US latitudes".

This variety does face competition however from another Australian hemp genetics company, Hemp Farms Australia, and last year Ananda Food copped a $3 million hit to revenue as planting seed was damage in transit and US seed crops in the ground suffered from weather related damages.

Ananda Food is also a producer of food products including hemp flour, hemp protein, hemp seed and hemp seed oil, with Australian customers including Woolworths Group (ASX: WOW) and Coles Group (ASX: COL).

The division's FY23 sales of $2.2 million represented just 6.7 per cent of total sales, which were dominated by proprietary materials division Hemp Black and cannabidiol (CBD) oil purveyor Ananda Professional.

In the December half Ananda Food has improved somewhat in the wake of those issues, achieving almost the entirety of FY23 sales in six months while it is also pursuing an insurance claim of around $500,000 relating to the damaged seed in transit.

Ecofibre, whose longstanding CEO Eric Wang abruptly left the company in late 2023, is focusing on its core businesses as it looks to recover from a headline loss of $40 million in FY23.

Funds from the Ananda Food sale will be used to provide additional working capital for the group as part of that focus, as well as reducing debt.

"Ananda Food is currently too small to deliver near-term cash profits from its hemp food and pet products business," says chairman Vanessa Wallace.

"This sale will deliver a good outcome for Ecofibre’s shareholders and enable a sustainable future for the combined business.

"I’d like to acknowledge and thank Kieren Brown and his team at Ananda Food for their dedication and efforts over the years to establish a high quality Australian hemp food business."

The Elixinol board says the offer has received strong support from new and existing institutional and sophisticated investors, with the capital raising supporting a pathway to EBITDA breakeven expected to be achieved by mid-calendar year 2024.