Canadian CANNAINVESTOR Magazine April / May 2018 | Page 122

Page 2
Alliance-
Pharmagreen
LOI
Alliance Growers enters binding LOI with WFS Pharmagreen Inc. for development of
the Cannabis Botany Centre
On December 28, 2017, Alliance announced that it had entered into a binding Letter of Intent
(“LOI”) with WFS Pharmagreen Inc. (“Pharmagreen”) to acquire an equity stake in
Pharmagreen’s subsidiary, BC New Co.
BC New Co will build and operate the cannabis botany centre. Pharmagreen is Alliance’s
partner in the cannabis botany centre, through which Alliance has access to Botanical
Research in Motion’s (B.R.I.M) superior tissue culture technology. Readers may refer to our
initiating report, in which we discuss Alliance’s plan to utilize B.R.I.M’s technology at the
cannabis botany centre to produce genetically superior, uniform quality cannabis plantlets,
for wholesale and retail consumers. B.R.I.M is a related party of Pharmagreen, who will
retain majority ownership of the cannabis botany centre.
The execution of the announced LOI is to be followed by a formal Definitive Agreement and
initiates the cannabis botany centre project that both Alliance and Pharmagreen have
developed for over a year. Pharmagreen has purchased the land (located east of Mission,
British Columbia) upon which the proposed cannabis botany centre will be built, and intends
for the land to be leased (financing lease) to BC New Co. The price at which Pharmagreen
purchased the land for development was not disclosed.
As per the terms of the agreement, which mirror the deal terms we disclosed in our initiating
report, Alliance will purchase a non-dilutive 30% equity interest in BC New Co. Alliance
will purchase 15% of issued BC New Co shares for $1.5 million, with the option to increase
their ownership interest to 30% via an additional $1.5 million. The deadline for the first $1.5
million is March 15, 2018, with the second $1.5 million due June 15, 2018. Alliance has
already made an initial payment of $0.25 million.
In addition, the LOI allows Alliance to appoint a director to the board of BC New Co, which
will have a three-member board of directors. We see this as an important section of the deal
as Alliance will need representation on BC New Co’s board of directors in order to exert
influence on the subsidiary’s activities. These are likely to include items such as dividend
policy, and capital expenditures, that would directly impact Alliance’s earnings, and
therefore, Alliance’s shareholders. However, as the board of directors will have three
members, Alliance will still be a minority influence.
We view this LOI as a significant development for the company. In our initiating report, we
identified the lack of binding documentation as a major risk/ flaw in Alliance’s ability to
execute their business plan. However, the binding LOI, which we believe will be followed up
with a Definitive Agreement in the near future, signifies a material development of the
cannabis botany centre.
However, Alliance’s right to buy-out the outstanding shares of BC New Co in five years, as
mentioned in our initiating report, has not been included in the binding LOI. Though the LOI
was not shared publicly, management has advised us that instead of a share purchase option,
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PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT