AF1 Announces Execution of Business Combination Agreement to Acquire Interest in PureKana, LLC

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Vancouver, British Columbia–(Newsfile Corp. – November 23, 2020) – AF1 Capital Corp. (TSXV: AFC.P) (“AF1” or the “Corporation“) is pleased to announce that it has entered into a business combination agreement dated November 20, 2020 (the “Business Combination Agreement“) with Heavenly Rx Ltd. (“Heavenly“), Heavenly Rx, LLC (“Heavenly Subco“), PureKana, LLC (“PureKana“), Cody J. Alt and Jeff Yauck (the “PureKana Founders“) pursuant to which AF1 will acquire Heavenly’s indirectly-held 50.1% equity interest in PureKana (the “Proposed Transaction“). The Proposed Transaction is expected to constitute AF1’s Qualifying Transaction under Policy 2.4 – Capital Pool Companies (“Policy 2.4“) of the TSX Venture Exchange (the “TSXV“), subject to TSXV final approval. Upon completion of the Proposed Transaction, it is the intention of the parties that the Resulting Issuer (as defined below) will be named “PureK Holdings Corp.” and will continue the business of PureKana as a Tier 1 Industrial Issuer on the TSXV. A copy of the Business Combination Agreement will be made available on AF1’s SEDAR profile at www.sedar.com.

AF1 is also pleased to announce that it has received conditional approval from the TSXV for the Proposed Transaction and will file its filing statement dated November 20, 2020 with respect to the Proposed Transaction on its SEDAR profile at www.sedar.com (the “Filing Statement“). It is anticipated that the closing of the Proposed Transaction will occur on or about December 3, 2020.

About PureKana, LLC

PureKana is recognized as a leading cannabidiol (“CBD“) brand in the United States and has operated a profitable direct-to-consumer online business since its inception in 2017. Its product lineup includes high quality CBD that can be consumed in the form of tinctures, capsules, topical salves, oral sprays, and gummies. PureKana’s brand and direct-to-consumer marketing expertise has helped to establish PureKana as one of the leading online CBD brands in the United States. PureKana operates legally in the jurisdictions where it carries on business.

The following table sets out selected financial information of PureKana for the periods indicated. The selected financial information for the years ended December 31, 2018 and 2019‎ has been derived from PureKana’s audited annual financial statements for such periods. The selected financial information for the six month period ended June 30, 2020 has been derived from PureKana’s condensed unaudited interim financial statements for such period.

(All tabular amounts expressed in millions of USD) Six months ended
June 30, 2020
Year ended
December 31,
2019
Year ended
December 31,
2018
Revenue 7.8 25.3 15.5
Gross (loss) profit 5.0 16.8 10.0
Operating expenses (4.6) (11.1) (6.2)
Other (income) and expense, net 0.0 0.0 0.1
(Loss) income before taxes 0.5 5.8 3.9
Net (loss) income 0.5 5.8 3.9
Adjusted EBITDA 0.8 5.8 3.9
Total assets 3.1 3.7 3.3
Total liabilities 0.9 1.3 0.9

 

The Proposed Transaction

Prior to and in connection with the closing of the Proposed Transaction, AF1 will: (a)‎ amend its articles and notice of articles to create a series of convertible preferred shares (“AF1 Series 1 Preferred Shares“); (b) consolidate all of its issued and outstanding AF1 common shares (“AF1 Common Shares“) on the basis of 40 existing common shares for one ‎consolidated AF1 Common Shares (the “Consolidation“); and (c) change its name to “PureK Holdings Corp.”.

Under the terms of the Business Combination Agreement, the parties have agreed to complete a business combination involving a triangular merger among AF1, a subsidiary of Heavenly Subco (“Heavenly LLC 2“) and a wholly-owned subsidiary of AF1 (“AF1 Subco“), each to be formed under the laws of Delaware in connection with the Proposed Transaction, whereby Heavenly LLC 2 will merge with and into AF1 Subco under the Delaware Limited Liability Company Act, with AF1 Subco continuing as the ‎‎‎surviving ‎corporation (the “Merger“). Pursuant to the Merger, former holders of common units of Heavenly LLC 2 will receive from AF1 (at and after the Merger, the “Resulting Issuer“, as defined under the policies of the TSXV) post-Consolidation AF1 Common Shares (“Resulting Issuer Shares“) and former holders of preferred units of Heavenly LLC 2 will receive AF1 Series 1 Preferred Shares (“Resulting Issuer Preferred Shares“). Upon completion of the Proposed Transaction, AF1 Subco will be a wholly-owned subsidiary of the Resulting Issuer and the Resulting Issuer will indirectly own a 50.1% equity interest in PureKana. The PureKana Founders will own the remaining 49.9% equity interest in PureKana.

Pursuant to the Merger, Heavenly will indirectly receive 4,000,000 Resulting Issuer Shares and the PureKana Founders will received an aggregate of 2,818,125 Resulting Issuer Shares, each at ‎a ‎deemed price of US$8.00 per Resulting Issuer Share. The PureKana Founders will also receive an aggregate of 1,025,000 Resulting Issuer Preferred Shares, each at a deemed price of US$8.00 per Resulting Issuer Preferred Share. In addition, the Resulting Issuer will have indirectly assumed Heavenly Subco’s obligations under outstanding promissory notes held by the PureKana Founders in the aggregate principal amount of US$‎6,943,769‎.

Immediately following the Merger, Heavenly will distribute to its shareholders an aggregate of ‎‎1,349,934 ‎Resulting Issuer Shares, and contribute to certain arm’s length third party limited partnerships an aggregate of 2,050,000 Resulting Issuer Shares (collectively, the “Heavenly Distribution“), and the PureKana Founders intend to sell the 1,025,000 Resulting Issuer Preferred Shares ‎to arm’s length parties for aggregate gross proceeds of US$8,200,000.

If the Proposed Transaction and the Heavenly Distribution are each completed, it is anticipated that, immediately ‎thereafter, the Resulting Issuer will have ‎‎‎‎‎‎‎7,005,625‎ Resulting Issuer Shares issued and outstanding, with (a) the PureKana Founders holding an aggregate of ‎‎‎‎2,818,125‎‎ Resulting Issuer Shares, representing ‎approximately 40.2% of the outstanding Resulting ‎Issuer Shares, (b) Heavenly holding an aggregate of ‎‎‎‎600,066 Resulting Issuer Shares, representing approximately 8.6% of the outstanding Resulting ‎Issuer ‎Shares, (c) the Heavenly shareholders and certain arm’s-length third party transferees holding an aggregate of ‎‎‎3,399,934 Resulting Issuer Shares, ‎representing approximately 48.5% of the outstanding Resulting ‎Issuer Shares, and (d) current AF1 ‎shareholders holding an aggregate of 125,000 ‎Resulting Issuer Shares, ‎representing approximately ‎‎1.8% of the outstanding Resulting Issuer Shares‎.

Completion of the Proposed Transaction is subject to a number of conditions including, but not limited to, third-party and board approvals and consents, and satisfaction or waiver of all conditions set forth in the Business Combination Agreement, including TSXV final approval of the Proposed Transaction.

AF1 has received shareholder approval from a majority of its shareholders with respect to the Consolidation by way of written consent resolution.

Management Team, Board of Directors and Insiders

Upon completion of the Proposed Transaction, it is anticipated that the board of directors of the Resulting Issuer will be comprised of four individuals. The following individuals are anticipated to be the directors, officers and insiders of the Resulting Issuer following completion of the Proposed Transaction:

Paul Norman – Chairman and Director

Mr. Norman has been the Chief Executive ‎Officer and Chairman of Heavenly since ‎June 2019. Prior ‎thereto, Mr. Norman was ‎the President North America of Kellogg ‎Company from June 2015 through April ‎‎‎2018, with a cumulative 30 years with the Kellogg Company. Mr. Norman is a consumer products expert ‎and over the years he has led major M&A initiatives from selection to post integration. Mr. Norman’s ‎multi-decade tenure at Kellogg was defined by leading transformational change and profitable growth ‎through strategic portfolio management, innovation and brand building, whilst successfully navigating ‎challenging regulatory environments of the food industry.‎ Mr. Norman has a Bachelor of Arts from the ‎University of Portsmouth.

Kathy Casey ‎ – Chief Executive Officer

Ms. Casey is a proven sales executive and general manager with 30 years of experience in the consumer ‎packaged goods (CPG) industry. Her ‎career has traveled from blue-chip companies, like Procter & ‎Gamble and Kellogg to the entrepreneurial ‎start-up of importing an Italian Food portfolio at North ‎American Enterprises. Ms. Casey’s intellectual curiosity has enabled her to leverage sales, marketing, ‎and general management capabilities ‎in every class of trade: foodservice, convenience, vending, ‎grocery, drug, dollar, discount, and ‎ecommerce. Most recently, she was the Vice President of U.S. ‎Channels leading a US$2B profit and loss in the ‎growth channels of Drug, Dollar, Club, and Discount. ‎Ms. Casey has a strong track record of leveraging insight to convert shoppers, joint customer ‎development, profit and loss management, capability building, and building a high-performing culture.‎ ‎Ms. Casey holds a BBA in marketing from Western Michigan University.‎

Brian Meadows – Chief Financial Officer and Corporate Secretary‎

Mr. Meadows has over 25 years’ experience in finance, accounting and business development obtained ‎in the ‎telecommunications and food ingredient business. During the early part of his career, Mr. ‎Meadows worked for both ‎large public telecoms companies in Canada as well as several start-ups in ‎Europe, holding several senior ‎level positions including Vice President Business Development and ‎Director of Operations at TELUS. The ‎two start-ups he was involved with were sold for $100-$500 million ‎after two years of operations. Brian ‎then spent 12 years in the food ingredient industry where he was the ‎Chief Financial Officer of a Toronto Stock Exchange and NASDAQ-listed ‎public natural ‎sweetener company. Mr. Meadows has successfully lead multi-million dollar commercial ‎agreements with ‎Cargill, Tate and Lyle and Archer Daniel Midlands during his tenure as Chief Financial Officer. He has ‎‎worked on 9 GRAS (generally recognized as safe) filings for new food ingredients, all of which received ‎letters of no objections from the ‎FDA and has in-depth knowledge of the food ingredient and dietary ‎supplement regulatory environment in ‎the United States and Canada. He has raised over $100 million in ‎equity financings in both the United States and Canadian ‎markets and is experienced in developing and ‎filing IFRS and US GAAP financial statements, and US and ‎Canadian public company regulatory filings. ‎Mr. Meadows joined PureKana in September 2018. Brian holds ‎CPA (CMA) and CFA designations as well ‎as an international MBA‎.

Jeff Yauck – Director

Mr. Yauck is the co-founder of PureKana ‎and has been the Chief Marketing Officer of ‎PureKana since ‎December 2019. Mr. Yauck ‎previously served as Chief Operating Officer ‎of PureKana from inception ‎until December ‎‎2019. Mr. Yauck is the Chief Executive ‎Officer of PJ Marketing LLC, a CBD ‎company he ‎founded in 2018. Mr. Yauck ‎also founded Oats Overnight in January 2016, a high protein instant ‎breakfast product sold in the United States. Oats Overnight was originally conceived and developed by ‎Mr. Yauck and ultimately, resulted in a multi-million dollar business after only 12 months of operations. ‎Mr. Yauck has strong experience in the start-up and growth of e-commerce brands, marketing, product ‎development, e-commerce operations and establishing strategic partners. ‎

Cody Alt – Director

Mr. Alt is the co-founder of PureKana and was the Chief Executive Officer from May 2017 to August 2020. Mr. Alt is ‎currently the Chief Executive Officer of Kushly LLC, a CBD company he founded in 2018 and the ‎Chief Executive Officer of BodyFuel Foods, a fitness meal preparation and delivery company he ‎founded in 2017.‎

Michael Galloro – Director

Mr. Galloro is a Chartered Professional Accountant and a Principal at ALOE Finance. ‎Mr. Galloro is the ‎CEO, CFO and a director ‎of AF1 Capital Corp since January 2019. ‎Since September 2012, Mr. Galloro ‎has ‎been the CEO, CFO and a director of Gold-‎stream Minerals Inc. Mr. Galloro is also ‎presently a ‎director of the following listed-‎entities: Sustainco Inc. (TSXV), Cool Hold‎ings Inc. (NASDAQ), Fountain ‎Asset Corp. ‎‎(TSXV), and World-Class Extractions Inc. ‎‎(CSE).‎ Previously, Mr. Galloro was a director of ‎Bragg Gaming Group Inc. (TSXV), Liberty Health Sciences Inc. (CSE), Eviana Health Corporation (CSE) ‎and Santa Maria Petroleum Inc. (TSXV). He was the CFO of Yangaroo Inc. (TSXV) from December 2010 ‎to February 2019, and was the CFO of Firm Capital American Realty Partners Corp. from March 2014 ‎through July 2016. ‎

Arm’s Length Transaction, Sponsorship & Regulatory Matters

The Proposed Transaction is not a Non-Arm’s Length Qualifying Transaction for the purposes of Policy 2.4.

AF1 has applied for, and the TSXV has provided AF1 with, a waiver ‎from the sponsorship requirement in accordance with TSXV policies‎.

Trading of the AF1 Common Shares on the TSXV is currently halted and will remain halted until the completion of the Proposed Transaction.

Completion of the Proposed Transaction is subject to a number of conditions, including but not limited to, TSXV acceptance and, if applicable pursuant to the Exchange Requirements, majority of the minority shareholder approval. Where applicable, the Proposed Transaction cannot close until the required shareholder approval is obtained. There can be no assurance that the Proposed Transaction will be completed as proposed or at all.

Investors are cautioned that, except as disclosed in the management information circular or filing statement to be prepared in connection with the transaction, any information released or received with respect to the Proposed Transaction may not be accurate or complete and should not be relied upon. Trading in the securities of a capital pool company should be considered highly speculative.

The TSX Venture Exchange Inc. has in no way passed upon the merits of the Proposed Transaction and has neither approved nor disapproved the contents of this news release.

For further information:

Michael Galloro
CEO, CFO, Corporate Secretary and Director of AF1
Telephone: (416) 907-5644 ext. 105

Forward-Looking Information

When used in this news release, the words “estimate”, “project”, “belief”, “anticipate”, “intend”, “expect”, “plan”, “predict”, “may” or “should” and the negative of these words or such variations thereon or comparable terminology are intended to identify forward-looking statements and information. Although the Corporation believes, in light of the experience of its officers and directors, current conditions and expected future developments and other factors that have been considered appropriate that the expectations reflected in these forward-looking statements and information in this news release are reasonable, undue reliance should not be placed on them because the Corporation can give no assurance that they will prove to be correct. The forward-looking statements and information in this news release include information relating to the business plans of AF1, Heavenly and PureKana, the Proposed Transaction (including TSXV approval, satisfaction of the conditions set forth in the Business Combination Agreement, and the closing of the Proposed Transaction) and the officers, directors and insiders of the Resulting Issuer upon completion of the Proposed Transaction. Such statements and information reflect the current view of AF1, Heavenly and/or PureKana, respectively. Risks and uncertainties may cause actual results to differ materially from those contemplated in these forward-looking statements and information.

By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause AF1’s actual results, performance or achievements, or other future events, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following risks: (i) there is no assurance that AF1, Heavenly and PureKana will obtain all requisite approvals for the Proposed Transaction, including the approval of the TSXV for the Proposed Transaction (which may be conditional upon amendments to the terms of the Proposed Transaction); (ii) following completion of the Proposed Transaction, the Resulting Issuer may require additional financing from time to time in order to continue its operations and financing may not be available when needed or on terms and conditions acceptable to the Resulting Issuer; (iii) new laws or regulations could adversely affect the Resulting Issuer’s business and results of operations; and (iv) the stock markets have experienced volatility that often has been unrelated to the performance of companies. These fluctuations may adversely affect the price of the Resulting Issuer’s securities, regardless of its operating performance. There are a number of important factors that could cause AF1 and PureKana’s actual results to differ materially from those indicated or implied by forward-looking statements and information. Such factors include, among others: changes to the regulatory environment; product viability and liability; industry competition; changing consumer preferences‎ and customer retention; inability to implement growth strategy; results of operations and activities;‎ and general market and industry conditions. The Corporation undertakes no obligation to comment on analyses, expectations or statements made by third parties in respect of the Corporation, PureKana, their respective securities, or their respective financial or operating results (as applicable).

AF1 cautions that the foregoing list of material factors is not exhaustive. When relying on AF1’s forward-looking statements and information to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. AF1 has assumed that the material factors referred to in the previous paragraph will not cause such forward-looking statements and information to differ materially from actual results or events. However, the list of these factors is not exhaustive and is subject to change and there can be no assurance that such assumptions will reflect the actual outcome of such items or factors. The forward-looking information contained in this news release represents the expectations of AF1 as of the date of this news release and, accordingly, is subject to change after such date. Readers should not place undue importance on forward-looking information and should not rely upon this information as of any other date. AF1 does not undertake to update this information at any particular time except as required in accordance with applicable laws.

Non-IFRS Measures ‎

This news release refers to certain financial measures that are not ‎determined in accordance with ‎International Financial Reporting Standards (“IFRS“). Measures such as ‎”Adjusted EBITDA” are not standard ‎measures under IFRS ‎and, therefore, may not be comparable ‎to similar measures reported by other entities. ‎Management of ‎PureKana believes that these supplemental measures ‎facilitate the understanding of PureKana’s ‎results ‎of operations and financial position. These ‎financial measures are considered non-IFRS ‎financial measures. Readers are ‎cautioned that these measures should not be construed as an ‎alternative to ‎measures determined in ‎accordance with IFRS as an indication of PureKana’s ‎performance, and should be considered in addition to, but not as a substitute for, measure of financial performance prepared in accordance with IFRS. PureKana defines “Adjusted EBITDA” as income or loss before ‎finance costs, taxes and depreciation, share-based compensation, unrealized gains/losses on derivative ‎contracts, non-cash items, transaction costs and other items considered non-recurring in nature. ‎Reconciliation of this measure to net income (loss) for the relevant periods can be found and is ‎discussed in “Non-GAAP Financial Measures” that appears in PureKana’s Management’s Discussion ‎and Analysis attached to the Filing Statement as Appendix D.‎

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the ‎policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this press ‎release.‎

To view the source version of this press release, please visit https://www.newsfilecorp.com/release/68826