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 Pop. The 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 into 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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