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Canada House Wellness Group Inc
Symbol CHV
Shares Issued 194,189,765
Close 2020-05-29 C$ 0.045
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Canada House to acquire Quebec cannabis company

2020-05-29 12:26 ET - News Release

Mr. Steven Pearce reports


Canada House Wellness Group Inc. has executed a definitive agreement for the strategic acquisition of IsoCanMed Inc. (ICM) a privately owned, fully operational cannabis company located in Louiseville, Que. The acquisition provides access to the large and rapidly growing Quebec cannabis market, leading cultivation technologies, and a significant increase in production capacity to meet Canada House's current demand and drive rapid growth.

Transaction overview

Canada House has entered into a binding share exchange agreement dated May 29, 2020, to acquire 100 per cent of the issued and outstanding securities of ICM in exchange for the issuance of approximately 273.5 million common shares of Canada House, representing approximately 40 per cent of the aggregate number of issued and outstanding Canada House common shares, along with the assumption of promissory notes owing by ICM in the aggregate amount of $12.5-million. The Canada House common shares issuable to ICM shareholders will be subject to a customary lock-up agreement pursuant to which the ICM shareholders will only be able to transact in the Canada House common shares they receive in accordance with a release schedule over a 24-month period following the date of closing. The obligations of Canada House under the promissory notes, once assumed, will be guaranteed by ICM and subject to a general security interest over the assets of ICM only. The promissory notes will bear interest at a rate of 5 per cent per annum, paid annually, and shall have a maturity date of June 12, 2023. The promissory notes also include terms requiring the earlier repayment of portions of the outstanding principal in certain circumstances.

Strategic rationale

ICM's state-of-the-art production facility of 64,000 square feet is capable of producing over 6,000 kilograms of low-cost dried flower annually, using state-of-the art aeroponic grow methodologies. ICM also owns 450,000 square feet of adjacent land on which expansion facilities can be built with incremental production capacity of 50,000 kilograms once fully developed. In addition, ICM has signed a letter of intent with the Societe quebecoise du cannabis (SQDC) for a potential supply of 3,000 kilograms of cannabis product, which is expected to represent significant recurring revenues for Canada House.

The increase in production capacity, along with Canada House's existing production through its wholly owned subsidiary, Abba Medix Corp., will allow Canada House to increase the supply of medical cannabis products offered through its robust clinic network primarily focused on servicing military veterans, and leverage its established agreements and provincial distribution channels with the Alberta Gaming and Liquor Commission, British Columbia Liquor Distribution Branch, SQDC, and European distribution partners.

"As the cannabis industry continues to advance, companies are being evaluated based on their ability to provide and distribute high-quality products and formats, and their ability to deliver strong financial performance. The acquisition of IsoCanMed addresses these attributes immediately," says Canada House chief executive officer Chris Churchill-Smith. "This transformative acquisition positions Canada House for a rapid increase in revenue and transforms CHV by acquiring a state-of-the-art, operational, Quebec-based licensed producer, a remarkable operating team, led by Mr. Erik Bertacchini, and a valuable distribution channel in Quebec. By teaming up, ICM can leverage Abba's necessary licences to package and sell ICM product to the SQDC while the company benefits from leading cultivation technology and cost advantages of ICM's production."

Dennis Moir, chairman of Canada House, stated: "This is a transformational transaction for Canada House as it aligns squarely with our strategic vision for the company. With the ICM acquisition, Canada House has a clear view of its future, focused on the cultivation of high-quality cannabis, the distribution both medically and recreationally of cannabis products, and the support and servicing of our patients through our clinic network. It is the culmination of many months of work by Chris, his team and the board, and I welcome Mr. Bertacchini and the broader ICM team to the Canada House family."

Mr. Bertacchini, president of ICM, added: "At ICM, we have concentrated our efforts on completing and operating our wholly owned licensed facility in Louiseville, Que., to achieve our ultimate goal of supplying more than 6,000 kg of dried flower production to the 'buy local' market of Quebec. We are excited about the clear and immediate synergies that this alliance will bring, specifically as it relates to the acceleration of our distribution to the SQDC. This newly formed group is fully licensed and will be able to ensure our presence in every market. Once again, we are very satisfied and look forward to having Canada House move its head office to Louiseville, Que."

Benefits to Canada House shareholders

Additional supply to meet demand and high-value distribution channel: ICM is a fully built out, operational, licensed producer using novel aeroponic grow methodologies in its state-of-the-art facility to grow and sell high-quality cannabis. ICM has signed a letter of intent with the SQDC providing for minimum annual delivery of 3,000 kilograms. The first delivery under the supply agreement is expected to occur in the second half of calendar year 2020. The transaction also ensures security of supply to Abba's medical patients and the growing demand from provincial distributors across Canada. As part of the transaction and its strategic plan of having the SQDC become a cornerstone distribution channel and preferred partner, Canada House intends to relocate its head office to Quebec.

Margin improvement and stability of revenue generation: Canada House expects to immediately benefit from improved gross margins, as it replaces supplemental wholesale product with internally produced ICM supply. Canada House will leverage Abba's multiple sales licences to cultivate, process and sell Abba and ICM products through to end users. In addition, ICM's agreement with the SQDC represents a well-defined, long-term, stable and recurring revenue stream, which forms a meaningful part of the foundation on which Canada House can continue to accelerate growth.

Board of directors and regulatory matters

Upon the closing of the acquisition, Mr. Bertacchini is to be added to the company's existing board of directors. The ICM shareholders also have the right to nominate one additional director to the board of Canada House at a special meeting of Canada House shareholders to be held following closing of the acquisition. In addition, the existing ICM team members will remain in their current positions with ICM following closing of the acquisition.

The acquisition is expected to close on June 12, 2020. No Canada House shareholder approval is required in connection with the acquisition; however, there will be a special meeting of Canada House shareholders related to the additional ICM board nominee and a proposed move of Canada House's head office to Quebec. The meeting date is yet to be determined but is expected to occur in August, 2020, or earlier.

Completion of the proposed transaction is subject to a number of conditions, including, without limitation, receipt of applicable approvals in accordance with applicable securities laws and stock exchange rules, together with any other applicable third party and regulatory or governmental authority consents and approvals, and other customary conditions to closing a transaction of this nature.

Fairness opinion and recommendation

Canada House's board of directors has unanimously approved the acquisition and determined that the transaction is in the best interests of Canada House and its shareholders.

The Canada House board also received a fairness opinion provided by Cormark Securities Inc. that, subject to the assumptions, qualifications and limitations contained in the fairness opinion, the consideration being paid to ICM pursuant to the acquisition, is fair, from a financial point of view, to Canada House.

Other news

The company has issued 530,875 common shares at a deemed price per share of five cents for medical consulting services rendered pursuant to a consulting agreement with an independent third party.

About Canada House Wellness Group Inc.

Canada House is the parent company of: Abba Medix, a licensed producer in Pickering, Ont., that produces high-quality medical-grade cannabis; Canada House Clinics Inc. with clinics across the country that work directly with primary care teams to provide specialized cannabinoid therapy services to patients suffering from simple and complex medical conditions; and Knalysis Technologies, a provider of fully customizable, cloud-based software that links physician, provider and patient to data that support treatment with medical cannabis.

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