CBD enters prospective merger arrangement with Eqalis

For Public Release NZX Limited Wellington 19 December 2022 Cannasouth Limited (NZX:CBD) is pleased to announce that it has signed a binding term sheet ("Term Sheet") with the Board of Bay of Plenty based, medicinal cannabis company, Eqalis Group New Zealand Limited (Eqalis) to advance a 50:50 merger between the two companies. Details of the proposed merger The Terms Sheet outlines the principal terms and conditions of a potential merger between the two companies, and are as follows: 1. Notwithstanding that the transaction is in substance a "merger of equals", the transaction is to be structured as the purchase by Cannasouth of 100% of the shares on issue in Eqalis ("Eqalis Shares") from the Eqalis shareholders. 2. The value attributable to Eqalis Shares has been notionally set at $48.8 million. 3. The notional sum of $48.8 million will be satisfied by Cannasouth issuing 147,891,069 new ordinary fully paid Cannasouth shares, at an issue price of $0.33 per share, to the Eqalis shareholders ("Consideration Shares"). The Consideration Shares to be issued will equal the existing number of shares on issue in Cannasouth. 4. The Eqalis Board intends to circulate to the Eqalis shareholders a Share Sale Deed in a form acceptable to the Cannasouth Board ("Sale Deed") which documents the proposed transaction for the approval of, and execution by the Eqalis Shareholders. 5. The Sale Deed, once it is signed by all parties, will be the principal agreement which documents the transaction. Therefore, in order for the transaction to advance, the Sale Deed must first be executed by Cannasouth and by the Eqalis shareholders. 6. As the Sale Deed will be circulated to a significant number of Eqalis shareholders, Cannasouth and Eqalis considered it prudent to disclose the existence of the potential transaction prior to the disclosure of the transaction to Eqalis shareholders, and the execution of the Sale Deed by the Eqalis shareholders and Cannasouth. This ensures that Cannasouth complies with its obligations of keeping the market fully informed. 7. Other material terms of the proposed transaction are as follows: (a) Cannasouth would undertake a capital raising initiative in conjunction with Eqalis to raise approximately $9 million of new capital to fund the working capital of the merged group post completion of the transaction. It is intended that the new capital will be raised from an offer of new ordinary shares to the existing Cannasouth shareholders, existing Eqalis shareholders and a number of third-party investors. Further details of the capital raising initiative will be provided to the market in due course. (b) The Eqalis shareholders shall be entitled to nominate three new directors to join the Cannasouth Board. (c) Cannasouth CEO Mark Lucas will continue as Chief Executive of Cannasouth post completion of the merger. (d) Eqalis Managing Director Greg Misson will be appointed Chief Innovation Officer of Cannasouth post completion of the merger. (e) Certain Eqalis executives will be issued share options as part of Cannasouth's existing Employee Share option Plan - the details of which are still to be finalized. (f) The proposed merger is conditional upon: (i) Cannasouth entering into the Sale Deed with Eqalis shareholders; (ii) Cannasouth shareholders approving the proposed merger, the issue of the Consideration Shares, the capital raising referred to above, and the other matters collateral to the merger; (iii) Both Cannasouth and Eqalis obtaining any regulatory approvals that may be required to the proposed merger; (iv) Cannasouth securing commitments from investors to invest not less than $9 million of new capital into Cannasouth in conjunction with the merger. (g) On completion of the merger it is intended that three new directors will be appointed to the CBD Board by Eqalis - those directors will be Greg Misson, Mark Scapens and Hilary Webber. Current CBD non-executive director Juliet Hull will retire from the CBD Board. Tony Ho, Christine Pears and Mark Lucas will remain as directors of CBD post merger. About Eqalis Established in 2019 Eqalis has proven to be a pioneer in New Zealand's medicinal cannabis industry, building an innovative and collaborative culture to disrupt the sector from the ground up and solve accessibility and affordability pain points for patients. Their strengths include outdoor cultivation, GMP active pharmaceutical ingredients (API) and medicine manufacture, and an online cannabis clinic. Under the leadership of Managing Director, Greg Misson, Eqalis has made significant progress in the industry while largely flying under the radar. Cannasouth CEO Mark Lucas says "When Cannasouth engaged with Eqalis about manufacturing its new next generation medicinal cannabis medicines at their GMP certified API and medicine manufacture facility, it quickly became apparent to both parties how complementary our business models are. "The creation of the merged company brings diversification and eliminates cost duplication to the industry and is expected to result in a substantial lowering of costs to patients using medicinal cannabis." Eqalis CEO Greg Misson says "A 50:50 merger between Cannasouth and Eqalis has innovation at its core. We intend to deliver better outcomes for patients in New Zealand and globally. "The merger will create a more resilient business, building towards diversified income streams, higher margins and a larger company that will provide better access to capital and is better positioned to compete globally and attract funding." Key Benefits o Diversified product and services portfolio with a pipeline of future products, which provides alternate revenue streams and reduces risk o Delivers the critical mass required to satisfy the New Zealand market and compete internationally o Combines technologies to deliver more affordable and effective medicines to consumers o Accelerates innovation by combining knowledge and experience from the companies' complementary skill sets o Wealth of expert leadership from both companies bringing their combined industry knowledge to improve health outcomes for Kiwi patients o Driving new revenue and value creation for shareholders. Timeline The merger is subject to approval by the shareholders of Cannasouth under the NZX Listing Rules and the Takeovers Code. Cannasouth expects to send information to shareholders before the end of February 2023, to enable them to vote on the merger at a shareholders' meeting shortly thereafter. The information to shareholders will include a Notice of Meeting with a comprehensive disclosure regarding the business operations of Eqalis and the merits of the merger, together with an independent adviser report prepared to comply with requirements of the Takeovers Code and Takeovers Panel guidance. Subject to the approvals from the shareholders meeting, it is anticipated that the capital raising initiatives will be completed shortly thereafter in conjunction the completion of the merger proper. Mr Lucas says, "we believe together Cannasouth and Eqalis will have greater ability to lead and shape the New Zealand medicinal cannabis industry and reduce costs to patients." Accompanying Documentation The following materials accompany this announcement: o A communication from the Eqalis Board of Directors to the Eqalis shareholders; o A Fact Sheet which provides some additional high-level information about the proposed merger. -ENDS- For further information visit www.cannasouth.co.nz or contact: Mark Lucas CEO / Executive Director Email: mark.lucas@cannasouth.co.nz Mobile: 021 484 649 Colin Foster CFO / Company Secretary Email: colin.foster@cannasouth.co.nz Mobile: 027 577 1498 End CA:00404318 For:CBD Type:TRANSACT Time:2022-12-19 12:04:37