Vancouver, B.C. – Avanco Capital Corporation (TSXV:AAA.P) (the “Issuer”), a capital pool company, announced that it has entered into a letter of intent (“LOI”) dated September 14, 2017 to acquire Hill Street Marketing Inc. dba Hill Street Beverage Co. (“Hill Street”). The LOI is to be replaced by a definitive agreement to be entered into by the parties in due course. Pursuant to the terms of the LOI the Issuer intends to complete a business combination with Hill Street (the “Transaction”) and acquire all of the issued and outstanding securities of Hill Street. Upon closing of the Transaction (the “Closing”), Hill Street is expected to be a wholly owned subsidiary of the Issuer and the Issuer will change its name to “Hill Street Beverage Company” (the “Resulting Issuer”).
This Transaction is intended to constitute the Issuer’s Qualifying Transaction and is not a NonArm’s Length Qualifying Transaction (as defined by the policies of the TSX Venture Exchange (the “Exchange”). The Transaction is subject to Exchange approval.
Overview of Hill Street
History
Hill Street is a leader in the marketing and distribution of alcohol-free wine and beer in Canada. Its products are currently available in approximately 4,000 major chain stores in Canada and online through their direct to consumer subscription service at www.hillstreetbevco.com. Hill Street was incorporated as an Ontario corporation in 2008. It was originally conceived as a cause marketing company; founded on the premise that it is possible for a corporation to do
well by doing good. All of the company’s sales include a donation to leading charities, especially those researching treatment and cures for conditions caused or complicated by the consumption of alcohol. The Company’s product line currently includes MADD Virgin Rouge, MADD Virgin Blanc, and MADD Virgin Brut wines, and MADD Virgin Craft Brewed Lager, the world’s first and most award winning alcohol-free craft beer. MADD Virgin Craft Brewed Lager won the Retail Council of Canada’s 2014 Grand Prix Award for Best New Product in Canada, and has won Gold Medals at the US Open Beer Championship in 2014, 2015, and 2017, and a Silver in 2016.
In July 2016, Hill Street launched Designated Draft, an alcohol-free American style pilsner, which has since gone on to receive Bronze (2016) and Silver (2017) medals at the US Open Beer Championship. Starting in November 2017, Hill Street is launching the Vin(Zero) line of wines. Vin(Zero) wines will have seven grape varietals: Merlot, Cabernet Sauvignon, Shiraz, Sauvignon Blanc, Chardonnay, Brut Rose, and Brut. Hill Street is also preparing to launch its Hill Street Craft line of alcohol-free beer. Craft beer is currently the fastest growing segment of the beer industry, with over 500 craft brewers appearing over the past twenty years in Ontario alone. The segment has grown to nearly 24% of the North American beer industry’s revenues, in a market that is shrinking annually around 0.7%, according to Beer Canada’s website. To complement the Vin(Zero), Designated Draft, and Hill Street Craft brands, Hill Street has also
entered into exclusive licensing and marketing agreements to distribute a Belgian line of wines known as Vintense. Vintense will be sold with the following grape varietals: Sauvignon, Cabernet Sauvignon, Syrah, Blanc Fines bulles, Brut Rose, Chardonnay, and Merlot.
Industry Trends
Market research firm, Nielsen, and trade publisher Beverage Daily, segment the alcohol-free and low alcoholic beverage category into four main categories: (i) malt beverages (alcohol free/low alcohol beer), (ii) cider, (iii) other low alcohol beverages (including mocktails, mixers, non-alcoholic wines, sangrias and spritzers), and (iv) private label products which includes all of the above but measured as a single category for competitive reasons. Based on accumulated third-party research, Hill Street estimates that annual growth in this market will be, conservatively, at a 15% compounded annual growth rate (“CAGR”) per year. For context, according to market research firm Canadean, the US market for alcohol-free/low alcohol beer and wine is measured at approximately 20 times the size of the Canadian market, or roughly $1.57B in 2016. Further, according to Canadean, the segment has been growing at roughly 5% CAGR globally, and is expected to grow at an even more robust rate of 5.25% according to the Packaging Industry of America’s projections. However, these global numbers pale in comparison to actual regional sales growth numbers from AC Nielsen (19% in 2016, and 40% in 2015) measuring the Canadian market.
The Transaction
Pursuant to the terms of the LOI, the Issuer will acquire all of the issued and outstanding securities of Hill Street from its existing shareholders, and as consideration, the Issuer will issue forty million (40,000,000) common shares in the capital of the Issuer to the current shareholders of Hill Street, at a deemed price of $0.175 per share for a deemed value of $7 million. The transaction will result in a reverse takeover of the Issuer by Hill Street shareholders. The deemed valuation of Hill Street is, in part, dependent on Hill Street concluding two prevaluation transactions (the “Pre-Valuation Transactions”); the first to convert a existing $1 Million trade payable into equity of Hill Street, and the econd being an equity infusion of $1 Million into Hill Street by the control person of Hill Street or its assignee. Immediately prior to Closing, Hill Street will issue 3,400,000 inducement warrants to the existing shareholders of the Issuer (each a “Hill Street Warrant”). On closing, each Hill Street Warrant shall be exchanged on a 1 for 1 basis with warrants of the Resulting Issuer (the “Resulting Issuer Warrants”), with each Resulting Issuer Warrant entitling the holder thereof to acquire 1 common share of the Resulting Issuer at a price of $0.20 for a period of two years from the date of closing of the Transaction. Finders in connection with the Transaction will be issued 468,000 common shares in the capital of the Issuer, together with 234,000 finder warrants (“Finder Warrants”), with each Finder Warrant entitling the holder thereof to acquire 1 common share of the resulting company at a price of $0.20 for a period of two years from the date of closing.
Concurrent Financing
As a condition to completing the Transaction, Hill Street intends to complete a concurrent private placement financing (“Financing”) of subscription receipts (“Subscription Receipts”) at a price of $0.175 per Subscription Receipt, for minimum gross proceeds of $1,000,000 and an estimated maximum of $4,000,000. Each Subscription Receipt, shall upon the closing of the Transaction, be automatically exchanged for one common share in the capital of the Resulting Issuer. Assuming the minimum Financing is completed an aggregate of 5,714,258 Resulting Issuer common shares will be issued. If the maximum Financing is completed an aggregate of 22,857,143 Resulting Issuer common shares will be issued. The gross proceeds of the Financing will be held in escrow and will only be released upon the completion of the Transaction. It is expected that insiders of Hill Street, their assigns, or their friends, family or business associates, shall subscribe for a minimum of $1,000,000 worth of Subscription Receipts in the Financing.
Capitalization
The Issuer currently has (i) 6,800,000 common shares issued and outstanding; (ii) stock options outstanding exercisable into 680,000 common shares of the Issuer (476,000 options exercisable at $0.10 per share; 204,000 options exercisable at $0.15 per share) expiring one year following closing of the Transaction, and (iii) 400,000 broker warrants outstanding exercisable into 400,000 common shares of the Issuer at $0.10 per share expiring in March, 2019. The estimated post-Transaction capitalization of the Issuer is as follows:
Distribution Requirements
Upon completion of the Transaction, it is expected that the Resulting Issuer will meet the public distribution requirements of an Exchange Tier 2 issuer. Shareholders of the Issuer and the Resulting Issuer will be subject to applicable Exchange escrow policies. It is also expected that Rudy Sawatzky who is a controlling shareholder of Hill Street, will control approximately 25% of the Resulting Issuer, assuming the maximum financing is completed (33% assuming the minimum financing is completed).
Waivers Sought
The Issuer intends on seeking a waiver from the Exchange with respect to obtaining Issuer shareholder approval of the Transaction, and will also seek a waiver from the sponsorship requirement.
Conditions Precedent
The completion of the Transaction will be subject to at least the following mutual conditions
precedent:
- the execution of a definitive agreement (“Definitive Agreement”) including standard representations, warranties and covenants for an agreement of this nature;
- the completion of due diligence by the parties;
- the completion of the Pre-Valuation Transactions;
- the completion of the Financing;
- the Issuer completing a name change to Hill Street Beverage Company or such other name as requested by Hill Street;
- the receipt of all necessary regulatory, corporate and third party approvals, including the acceptance of the Exchange, and compliance with all applicable regulatory requirements and conditions in connection with the Transaction;
- the confirmation of the representations and warranties of each party to the Definitive
Agreement as set out in such agreement; - the absence of any material adverse effect on the financial and operational condition or the assets of each of the parties to the Definitive Agreement;
- the delivery of standard completion documentation including, but not limited to, legal opinions from Canadian legal counsel, officers’ certificates and certificates of good standing or compliance; and
- other condition precedents customary for a transaction such as the Transaction.
The conditions precedent in favour of the Issuer may be waived in whole or in part by the Issuer and the conditions precedent in favour of Hill Street may be waived in whole or in part by Hill Street. The completion of the Transaction is expected to occur as soon as is practicable following the satisfaction or waiver of the conditions precedent (other than those conditions precedent to be completed concurrent with the closing) or such other date as mutually agreed to by the Parties, but in any event no later than December 15, 2017 save and except for regulatory, corporate and/or third party approvals that are beyond the control of the parties but are in process. Each of the Issuer and Hill Street will generally bear their own respective costs and expenses associated with the Transaction.