Auxly Cannabis Group's (OTC:CBWTF)(TSXV:XLY) stock popped more than 20% on July 25, after the company announced that Imperial Brands (OTC:IMBB.Y) will invest approximately 123 million in Canadian dollars in exchange for convertible debt that could give the tobacco giant a nearly 20% ownership stake in the Canadian cannabis company. 

As part of the deal, Auxly will receive global licenses to Imperial Brands' vaping technology for cannabis use and access to its vapor research and development operations. Auxly will also work closely with an Imperial Brands team to develop a "portfolio of new and enhanced vapor products and brands." Additionally, Auxly will be Imperial Brands' exclusive partner for the "future development, manufacture, commercialization, sale, and distribution of cannabis products of any kind anywhere in the world."

A vaporizer on a table next to some dried cannabis

Auxly Cannabis Group and Imperial Brands are forming a partnership to create cannabis-containing vapor products. Image source: Getty Images.

"This investment from Imperial Brands will enhance Auxly's ability to continue to deliver on our business plans and accelerate our growth initiatives to expand our portfolio of branded derivative products," Auxly President Hugo Alves said in a press release. "The timing is ideal as we prepare to bring our portfolio of innovative cannabis products to the Canadian market following the legalization of edibles, extracts, and topicals later this year."

In return for its CA$123 million cash investment, Imperial Brands will receive a debenture that can be converted into 19.9% ownership of Auxly at a conversion price of $0.81 per share at anytime over its three-year term. If Imperial Brands chooses to not convert the debenture into Auxly stock, the loan will be repayable in full at the end of the term.

The deal is expected to close in the third quarter of 2019, subject to approval by the TSX Venture Exchange.

Editor's note: This article has been updated to clarify that the amount invested by Imperial Brands is in Canadian dollars rather than U.S. dollars.

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