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Red White & Bloom and Aleafia Health execute binding letter agreement for business combination

(Globe Newswire) Toronto — Red White & Bloom Brands Inc. and Aleafia Health Inc. are pleased to announce that the company and Aleafia have entered into a binding letter agreement on June 6, 2023 whereby the company has agreed to acquire Aleafia and its subsidiaries in a business combination transaction.

Under the terms of the letter agreement, each outstanding common share in the capital of Aleafia will be exchanged for 0.35 of a common share in the capital of the company, subject to customary adjustment. Upon the completion of the proposed transaction, existing RWB shareholders are expected to own approximately 76 per cent of the combined company resulting from the proposed transaction and Aleafia shareholders are expected to own approximately 24 per cent of the combined company.

The letter agreement provides for the parties to enter into a definitive arrangement agreement setting out the final terms and conditions of the proposed transaction, at which time additional information will be provided in a subsequent press release.

Management commentary

“The intended acquisition of Aleafia expands our footprint to the largest federally legal cannabis market globally. Combining our award-winning brands and IP with Aleafia’s proven cultivation, manufacturing, and distribution capabilities, creates one of the most dynamic cross border companies in the industry. We continue to focus on delivering significant value to our shareholders and believe this transaction aligns with that commitment.” — Brad Rogers, CEO and director, RWB

“The Canadian cannabis market has the potential to be a dynamic industry and is rapidly experiencing consolidation. In 2022 and 2023, Aleafia has achieved significant milestones including growing the Divvy brand through expansion into five provincial markets and bolstering its international business through sales into Europe and Australia. The Proposed Transaction is a next step in the Aleafia story as it enhances our size and scale which is a critical requirement to compete in this market and provides Aleafia improved access to capital to execute on our strategic growth opportunities.” — Tricia Symmes, CEO, Aleafia

“This is a prime opportunity for Aleafia to merge with a multi-state operator. The proposed transaction would recapitalize Aleafia’s balance sheet and provide our shareholders with access to a larger market capitalization and exposure to the U.S. recreational and medical cannabis markets. The improved financial flexibility and capacity of the Combined Company will enhance the ability to execute on organic and acquisitive growth strategies.” — Matt Sale, CFO, Aleafia

Summary of the proposed transaction

The proposed transaction is expected to be completed by way of a court-approved plan of arrangement under the Business Corporations Act (Ontario). Under the terms of the letter agreement, RWB will acquire all of the issued and outstanding Aleafia Shares in exchange for RWB Shares on the basis of the Exchange Ratio. Outstanding options and warrants to purchase Aleafia shares will become exercisable to acquire RWB shares on the same terms and conditions, on the basis of the exchange ratio. Outstanding restricted and deferred share units of Aleafia will be settled upon closing in RWB Shares on the basis of the exchange ratio.

Completion of the proposed transaction will be subject to customary closing conditions and receipt of necessary court and regulatory approvals, including stock exchange approval. Subject to receipt of all necessary approvals, the proposed transaction is expected to close by no later than 5:00 p.m. on October 31, 2023.

A copy of the letter agreement will be filed on Aleafia and RWB’s SEDAR profiles at www.sedar.com. Prior to entering into a definitive arrangement agreement, all members of the board of directors of Aleafia, all officers of Aleafia and certain other security holders of Aleafia, will enter into customary support and voting agreements.

The letter agreement provides for the parties to enter into a definitive arrangement agreement setting out the final terms and conditions of the proposed transaction on or before July 31, 2023. The letter agreement contains, and the arrangement agreement will continue to contain, standard non-solicitation and superior proposal provisions and a break fee of C$2 million.

The letter agreement includes, and arrangement agreement will continue to include other provisions such as conditions to closing the proposed transaction, and representations and warranties and covenants customary for arrangement agreements. Further details with respect to the proposed transaction will be included in the arrangement agreement and in an information circular to be mailed to Aleafia shareholders in connection with the Aleafia Meeting and to holders of Aleafia convertible debentures, as applicable, and to RWB shareholders in connection with the RWB meeting (if required).

Fairness opinion

Prior to entering into a definitive arrangement agreement, the disinterested members of the board of directors of Aleafia will engage a financial advisor to provide Aleafia with an opinion stating that the consideration offered pursuant to the letter agreement and subsequent definitive arrangement agreement is fair, from a financial point of view to the holders of Aleafia common shares and, if required pursuant to MI 61-101, Aleafia will obtain a formal valuation from an independent valuator.

Aleafia board approval

As previously announced by Aleafia, a committee of disinterested members of the board of directors of Aleafia was previously established to review and evaluate all options available to Aleafia, including the proposed transaction. After conducting an analysis of the options available, including the proposed transaction, the committee unanimously recommended the proposed transaction to the board of directors as being in the best interests of Aleafia and Aleafia’s security holders.

RWB Board Approval

From an RWB perspective, Colby De Zen has a disclosable interest with respect to the proposed transaction given his involvement with certain affiliated parties that may be directors, creditors and/or shareholders of RWB and Aleafia, and which are owned and controlled by members of Colby De Zen’s family. In accordance with Canadian corporate law requirements, he declared the nature and extent of his interest in the proposed transaction and recused himself from consideration and voting on the proposed transaction. The disinterested directors of RWB participated in evaluating and recommending the proposed transaction.

Assignment of secured debt

Concurrent with entering into the letter agreement, the loan agreement made as of December 24, 2021, between Aleafia and certain of its subsidiaries, as borrower, with certain of Aleafia’s other subsidiaries as guarantors, and NE SPC II LP, as lender, as amended on March 28, 2022, June 17, 2022, April 26, 2023, May 15, 2023, and May 31, 2023 was assigned by NE SPC II LP to RWB.