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Aphria to Invest in Proposed Merger of Tokyo Smoke and DOJA

December 21, 2017


On the heals of the recently announced $100 million CAD bought deal financing round for Aphria Inc. (TSX:APH) (OTC:APHQF), the company has announced that it has committed to make a $10 million CAD equity investment in the combination of two premium cannabis brands - DOJA Cannabis Company Limited (CSE:DOJA) (OTC:DJACF) and ​​TS ​​Brandco ​​Holdings ​​Inc., the holding company of Tokyo Smoke


This morning, the two cannabis brand companies announced that they've entered into a binding ​​Letter ​​of ​​Intent for DOJA to acquire all outstanding shares of Tokyo Smoke and merge to create a new company called Hiku ​​Brands ​​Company ​​Ltd. DOJA's ​​Board ​​of ​​Directors ​​and ​​Tokyo ​​Smoke's ​​Board ​​of ​​Directors ​​have ​​already approved ​​the ​​merger.


Hiku will be a new 'brand house' ​​containing ​​​premium ​​Canadian cannabis ​​brands such as ​​DOJA, ​​Tokyo ​​Smoke, ​​and Van ​​der ​​PopThe combination of Tokyo Smoke and British Columbia based DOJA would bring together two premium lifestyle brands to serve the highly anticipated recreational cannabis market. Aphria's investment in the combined entity represents a furthering of the company's strategic positioning to be a leader in the recreational market, once legalized in Canada.


Merger ​​Structure ​​and ​​Terms


Under ​​the ​​terms ​​of ​​the ​​merger, ​​DOJA ​​will ​​acquire ​​all ​​of ​​the ​​outstanding ​​Tokyo ​​Smoke ​​Shares ​​in exchange ​​for ​​shares ​​of ​​DOJA. The ​​LOI ​​currently ​​contemplates ​​the ​​parties ​​entering ​​into ​​a ​​definitive ​​agreement ​​​​prior ​​to ​​January ​​15, ​​2018, ​​and ​​completing ​​the ​​merger ​​by ​​no ​​later ​​than ​​March ​​31, ​​2018, unless ​​otherwise ​​agreed ​​by ​​the ​​parties.


Based ​​upon ​​the ​​number ​​of ​​Tokyo ​​Smoke ​​Shares ​​outstanding ​​as ​​at ​​December ​​21, ​​2017, ​​if ​​the ​​Merger ​​is completed, ​​DOJA ​​will ​​issue ​​approximately ​​55.6 ​​million ​​DOJA ​​Shares ​​to ​​the ​​shareholders ​​of ​​Tokyo ​​Smoke in ​​exchange ​​for ​​their ​​Tokyo ​​Smoke ​​Shares.


Strategic ​​Financing Structure


Aphria, ​​along ​​with ​​Uji ​​Capital ​​have ​​entered ​​into ​​binding agreements ​​with ​​DOJA ​​pursuant ​​to ​​which ​​the ​​iInvestors ​​will ​​acquire ​​from ​​DOJA, ​​on ​​a non-brokered ​​private ​​placement ​​basis, ​​8,992,805 ​​subscription ​​receipts ​ ​​of DOJA ​​at ​​a ​​purchase ​​price ​​of ​​$1.39 CAD ​​per ​​subscription receipt, ​​equivalent ​​to ​​DOJA's ​​five ​​day ​​volume weighted ​​share ​​price, ​​for ​​aggregate ​​gross ​​proceeds ​​of ​​$12.5 ​​million ​​CAD.


Of the $12.5 million CAD to be invested, $10 million CAD of it comes from Aphria. 


The ​​Subscription ​​Receipts ​​will ​​be ​​automatically ​​convertible ​​in​to ​​units ​​of ​​Hiku upon ​​the satisfaction ​​of ​​certain ​​escrow ​​release ​​conditions, ​​with ​​each ​​unit ​​comprised ​​of ​​one ​​common ​​share ​​of ​​Hiku ​​and ​​one ​​common ​​share ​​purchase warrant ​​of ​​Hiku. ​​


Each ​​warrant will ​​be ​​exercisable ​​to ​​acquire ​​one ​​common ​​share ​​for ​​a ​​period ​​of ​​two ​​years ​​from ​​the closing ​​date ​​of ​​the ​​merger ​​at ​​an ​​exercise ​​price ​​of ​​$2.10 CAD ​​per ​​warrant ​​share.


​​If, ​​following ​​the ​​closing ​​of ​​the merger, ​​the ​​volume ​​weighted ​​average ​​price ​​of ​​the ​​common ​​shares ​​on ​​the ​​Canadian ​​Securities ​​Exchange is ​​equal ​​to ​​or ​​greater ​​than ​​$3.05 CAD ​​for ​​any ​​twenty ​​consecutive ​​trading ​​days, ​​Hiku ​​may, ​​upon ​​providing written ​​notice ​​to ​​the ​​holders ​​of ​​the ​​warrants, ​​accelerate ​​the ​​expiry ​​date ​​of ​​the ​​warrants ​​to ​​the ​​date ​​that ​​is 30 ​​days ​​following ​​the ​​date ​​of ​​such ​​written ​​notice.


Aphria Bolsters Relationship with Tokyo Smoke


The equity investment in Hiku builds on Aphria's existing investment in Tokyo Smoke. On June 30, 2017, Aphria entered into a subscription agreement with Tokyo Smoke for the purchase of 140,845 common shares, for a total cost of $1,000,000 CAD. As part of an existing licensing agreement signed in September 2016, Aphria also produces and ships Tokyo Smoke branded cannabis in Canada to registered patients through the ACMPR system. The existing licensing agreement also contains provisions for the agreement to apply to the anticipated adult recreational use market.


"This exciting announcement marks a major step forward in Aphria's recreational cannabis strategy and represents Aphria's first venture into the lucrative British Columbia premium cannabis market." said Vic Neufeld, CEO of Aphria. "In Hiku, we are investing in refined, up-market brands that align with our commitment to encouraging a more dignified positioning of recreational cannabis use, something we expect will be an important and valuable differentiator for Aphria as Canada moves closer to legalizing recreational cannabis. We look forward to working closely with Hiku to support its success and brand leadership in the recreational market."


"This ​​strategic ​​investment ​​in ​​and ​​supply ​​agreement ​​with ​​Hiku ​​further ​​bolsters ​​our ​​relationship ​​with ​​Tokyo Smoke ​​and ​​now ​​DOJA, ​​and ​​reaffirms ​​our ​​commitment ​​to ​​expanding ​​our ​​product ​​offering ​​ahead ​​of ​​the recreational ​​market," ​​said ​​Vic ​​Neufeld, ​​Chief ​​Executive ​​Officer ​​of ​​Aphria. ​​"This ​​transaction ​​has ​​the ​​twofold benefit ​​of ​​providing ​​us ​​access ​​to ​​strong ​​brands, ​​through ​​Tokyo ​​Smoke ​​and ​​DOJA, ​​and ​​craft-cultivated British ​​Columbia ​​bud, ​​through ​​DOJA. ​​Quality ​​product ​​and ​​recognizable ​​consumer ​​brands ​​will ​​be ​​key differentiators ​​for ​​patients ​​and ​​consumers, ​​and ​​we're ​​looking ​​forward ​​to ​​continuing ​​our ​​work ​​with ​​Hiku ​​to create ​​premium ​​cannabis ​​brands ​​in ​​Canada."


"This strategic partnership and investment from Aphria represents the ultimate validation of Hiku's vision to offer the leading cannabis consumer experience. We are ecstatic to be partnering again with Aphria, a proven operator and greenhouse cannabis cultivator, to bring our products to the Canadian medical and future recreational markets," said Alan Gertner, Chief Executive Officer of Hiku. "With this landmark partnership, we have the opportunity to offer Canadians a compelling combination of craft British Columbia product, top notch branding, greenhouse supply and owned retail that will allow Hiku to have a distinct business with high quality control, high demand and high margin."


Agreement Between Aphria and Hiku


In addition to the contemplated equity investment in Hiku, Aphria will establish an agreement with Hiku that includes:

  • A supply agreement that builds on the existing supply agreement for the dried flower between Aphria and Tokyo Smoke that adds high-quality cannabis oil to the list of products Aphria will white label for the Tokyo Smoke brand; and,

  • The issuance of 0.8 million units in Hiku, on the same terms as the equity investment, to Aphria in exchange for entering the supply agreement.

In addition to the agreement noted above, Aphria and Hiku are currently in the process of finalizing the following, to take affect once DOJA's wholly-owned subsidiary receives its license to sell cannabis under the ACMPR:

  • A supply agreement whereby Aphria will have access to DOJA's premium West Coast cannabis;

  • A tolling agreement whereby Aphria will process cannabis oil for Hiku using dried cannabis supplied by DOJA;

  • A distribution agreement whereby Aphria will have access to Hiku's independent retail locations in provinces where private licenses will be granted; and

  • DOJA will leverage Aphria's distribution network to sell branded cannabis. DOJA's subsidiary has requested a pre-sales license inspection from Health Canada, the last step prior to issuance of a sales license under the ACMPR.



Additional Transaction Details


  • The share value for Aphria's equity is $1.39 CAD, priced at the 5-day VWAP (volume weighted average price) as of today's market close. As a result, Aphria would receive 7,194,244 common shares in Hiku;

  • Aphria will receive a full warrant for each common share it receives, exercisable for a two-year period, priced at $2.10 CAD, a 50% premium to the share value of its investment on the date of announcement; and,

  • The warrant maintains a forced conversion feature, for the benefit of Hiku, priced at $3.05 CAD or 120% premium on the share value of Aphria's investment.  


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