MMJ to appoint Embark Ventures as Asset Manager and cancellation of Share Purchase Plan

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1. MMJ to appoint Embark Ventures as Asset Manager

MMJ Group Holdings Limited (ASX: MMJ) ("MMJ") is pleased to advise that MMJ has agreed terms with Embark Ventures (“Embark”) to act as asset manager of MMJ’s cannabis investment portfolio. The appointment will be for an initial term of three years.

Embark Ventures is part of the Embark Group which includes Embark Health Inc, a company in which MMJ holds an investment of $3.8m. One of the principals of Embark is Michael Curtis, who is a non-executive director of MMJ and will hold approximately 20% of Embark Ventures and holds 13.2% of Embark Health issued capital respectively.

The MMJ Board believes that MMJ should centre its asset management resource based in Canada to better manage the existing portfolio and access new investment opportunities as we expect the majority of MMJ’s investment portfolio to be located in North America. The terms of the proposed appointment of Embark are a cost-effective way to ramp up MMJ’s investment operations in the medium term without adding material fixed costs to MMJ’s cost structure.

The appointment of Embark comes after an invitational tender and negotiation over several months. MMJ Board has determined that the new operating structure will allow:

  • Access to new investment opportunities including unlisted investments

  • Add material value to existing investments

  • Minimise its fixed cost structure

  • Secure a meaningful investment presence in MMJ’s key investment market – North America

    The appointment of Embark will address these business objectives in a short period of time. The appointment of Embark will remove the immediate need to appoint a replacement chief executive officer as MMJ will have access to Embark’s full investment team including Bruce Dawson-Scully, Michael Curtis and Mohan Nair in Toronto. This contribution shall include, but not be limited to, assistance with deal sourcing, due diligence, deal negotiation, investment structuring, portfolio company monitoring and reporting, and representing MMJ on boards at portfolio companies.

    Embark will be required to give MMJ priority to invest in opportunities that fit the criteria set out in the MMJ Fund Investment Policy which will be imported in the consulting agreement to be executed between the parties.

    The MMJ board will continue to be responsible for the all investment decisions.
    The key terms of the proposed agreement with Embark are detailed in Appendix One. A presentation on Embark Ventures is attached to this announcement.

    a) Embark remuneration

    The bulk of Embark’s remuneration is linked to material increases in MMJ’s share price and net asset value, through the issue of Performance Rights to Embark. The Performance Rights shall convert on a one-for- one basis, into MMJ Shares in three (3) equal tranches upon MMJ achieving a simple average of month end net asset (after tax) value per share (“NAVS”) and 20 day VWAP share price (together, the “NAVS/SP Average”) hurdles which represent the following premiums to the relevant NAVS/SP Average at the date of executing a definitive binding agreement

For example, Tranche A would be issued if the hurdle of 43 cents is achieved within 18 months of Embark’s appointment, which represents a net asset value of 53 cents and a MMJ share price of 33 cents2 if the discount of MMJ share price and NAVS both rise by 35%. MMJ expects the discount to materially narrow through the changes announced today.

Embark will receive a base management fee of approximately $0.44m per annum based on current book value of investment portfolio. This additional cost will be largely offset by the non-replacement of the MMJ CEO and Michael Curtis ceasing to receive a director’s fee remuneration. In addition, the 6m performance rights issued to the previous CEO lapsed on 12 April 2019 albeit at higher vesting hurdles than those issued to Embark.

b) Position of MMJ Chief Executive Officer

The appointment of Embark Ventures as portfolio manager will allow the Board to remove the immediate need to appoint a new chief executive officer. MMJ’s current Chief Financial Officer and Company Secretary will be responsible for the operational aspects of the business including investor relations. The Board will be responsible for review and approval of investment proposals provided by Embark.

c) Process to complete appointment of Embark The appointment of Embark will be subject to:

  1. (i)  execution of the management agreement between Embark and MMJ (the “Definitive Agreement”):

  2. (ii)  satisfactory completion of due diligence by each of the Parties, their counsel and representatives on the business, regulatory, assets, financial condition and corporate records of the other Party, which due diligence process shall be concluded on or before the date of entering into the Definitive Agreements;

  3. (iii)  there being no prohibition at law against the completion of the Definitive Agreement; and

  4. (iv)  receipt of all required third party and regulatory approvals for the transaction.

It is expected that completion of the Definitive Agreement will occur within four weeks. MMJ will advise the market if there is any material change to this timing.

2. Cancellation of Share Purchase Plan

During the past 3 months, MMJ has taken advantage of improvement in Canadian listed cannabis markets byrealisingsomeinvestmentstoincreaseitscashreservesforfutureinvestment. MMJhasacashbalance of $11m and more than $70m of its investment portfolio in listed investees. It is expected that this will increase given the stated intention of two of its unlisted investments (Embark Health and BevCanna), to list on the TSXV during 2019.

In the same period, the discount of the MMJ share price to its net asset value has materially increased. As at 31 March 2019, MMJ’s share price was 24 cents compared to net asset value of 39 cents.

As such, MMJ does not consider an equity raising, at this time, to be in the best interests of shareholders. The Board has cancelled its intention to proceed with a Share Purchase Plan (SPP) offering which had been approved by MMJ shareholders on 22 February 2019.

It is expected that MMJ’s future investments for the foreseeable future will be funded by current cash reserves and realisation of investments in listed investees.

Investor and Media Enquiries

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Jim Hallam
Chief Financial Officer and Company Secretary

About MMJ

MMJ is a global cannabis investment company (ABN 91 601 236 417). MMJ owns a portfolio of minority investments and aims to invest across the full range of emerging cannabis-related sectors including healthcare, technology, infrastructure, logistics, processing, cultivation, equipment and retail. For MMJ’s latest investor presentation and news, please visit: https://www.mmjgh.com.au/investors/

Important Notice

This announcement contains reference to certain intentions, expectations, future plans, strategy and prospects of MMJ. Those intentions, expectations, future plans, strategy and prospects may or may not be achieved. They are based on certain assumptions, which may not be met or on which views may differ and may be affected by known and unknown risks. The performance and operations of MMJ may be influenced by a number of factors, many of which are outside the control of MMJ. All information is unaudited unless stated otherwise. No representation or warranty, express or implied, is made by MMJ, or any of its directors, officers, employees, advisers or agents that any intentions, expectations or plans will be achieved either totally or partially or that any particular rate of return will be achieved. Given the risks and uncertainties that may cause MMJ’s actual future results, performance or achievements to be materially different from those expected, planned or intended, recipients should not place undue reliance on these intentions, expectations, future plans, strategy and prospects. MMJ does not warrant or represent that the actual results, performance or achievements will be as expected, planned or intended. Nothing in this material should be construed as either an offer to sell or a solicitation of an offer to buy or sell securities. It does not include all available information and should not be used in isolation as a basis to invest in MMJ. This document does not constitute any part of any offer to sell, or the solicitation of an offer to buy, any securities in the United States or to, or for the account or benefit of any “US person” as defined in Regulation S under the US Securities Act of 1993 (“Securities Act”). MMJ’s shares have not been, and will not be, registered under the Securities Act or the securities laws of any state or other jurisdiction of the United States, and may not be offered or sold in the United States or to any US person without being so registered or pursuant to an exemption from registration including an exemption for qualified institutional buyers.

KEY TERMS OF THE DEFINITIVE AGREEMENT EMBARK VENTURES INC. AND MMJ GROUP HOLDINGS LIMITED

MMJ Governance:

Upon closing, and until termination, of the Definitive Agreement Michael Curtis shall remain a director of MMJ and will, if requested by MMJ board, resign at termination of the Definitive Agreement. The Definitive Agreement will include the names of authorized officers of MMJ and Embark.

Consideration:

In consideration for entering into the Definitive Agreement and the services of Embark contemplated therein, MMJ shall:

(i) subject to receipt of MMJ shareholder approval, issue 12,000,000 performance incentive units or rights (the “Performance Rights”) to Embark on the closing of the Definitive Agreement or as soon as practicable thereafter; and

(ii) pay to Embark annual fees in an amount equal to (A) 0.50% of the book value of MMJ’s investments on the closing date of the Definitive Agreement, plus (B) 1.5% of the book value of MMJ’s investments that are added after the closing date of the Definitive Agreement, with the total annual fee capped at 1% of MMJ’s quarter end net asset value (the “Consulting Fees”).

The Consulting Fees shall be calculated by the Parties, acting reasonably and in good faith, each calendar quarter and paid quarterly. Up to 50% of any Consulting Fees payable within 12 months of the closing of the Definitive Agreement may be satisfied by the issuance of ordinary shares in the capital of MMJ (“MMJ Shares”) based on a 20-trading day VWAP at the end of the last trading day of the calendar quarter, at MMJ’s option.

Subject to applicable tax and securities law compliance, the Performance Rights shall convert in accordance with the mechanics set out below, on a one-for-one basis, into MMJ Shares in three (3) equal tranches upon MMJ achieving a simple average of month end net asset (after tax) value per share (“NAVS”) and 20 day VWAP share price (together, the “NAVS/SP Average”) hurdles which represent the following premiums to the relevant NAVS/SP Average at the date of executing a definitive binding agreement to replace this Term Sheet:

Class A -35%; Class B - 70% and

Class C - 100%

Where a Performance Right vests as a result of achieving the NAVS/SP Average performance criteria outlined above, Embark will have 12 months to convert the Performance Rights into MMJ Shares or they will lapse.

Each grant/issue of Performance Rights shall have a period of 3 years to achieve the relevant NAVS/SP Average performance vesting hurdle and will lapse immediately if the hurdle is not achieved at the end of the 3-year term. The exception will be the Class A tranche of 4m Performance Rights which will lapse immediately if the hurdle is not achieved at the end of 18 months following issue.

Conditions Precedent:

The Definitive Agreement shall be subject to the following conditions:

  1. (v)  satisfactorycompletionofduediligencebyeachoftheParties,theircounseland representatives on the business, regulatory, assets, financial condition and corporate records of the other Party, which due diligence process shall be concluded on or before the date of entering into the Definitive Agreements;

  2. (vi)  there being no prohibition at law against the completion of the Definitive Agreement; and

  3. (vii)  receipt of all required third party and regulatory approvals for the Transaction.

Governance:

The Definitive Agreement shall provide that: (i) all investment decisions shall be approved by the MMJ Board; (ii) immediately following the execution of the Definitive Agreement, Embark and MMJ shall jointly review MMJ’s portfolio to ensure all investments are operating in full compliance with all federal, state and local laws in which they operate; and (iii) Embark and MMJ shall work in good faith to locate shared office space in Toronto, where MMJ will be allocated one office and will pay a pro-rata share of rent/outgoings accordingly.

MMJ Priority

Embark will be required to give MMJ priority to invest in opportunities that fit the criteria set out in the MMJ Fund Investment Policy which will be imported in the consulting agreement to be executed between the parties.

Term

The Definitive Agreement to be entered into between MMJ and Embark will have an initial term of 3 years. The agreement will be cancellable by either party after 1 year with a notice period of 60 days. For the avoidance of doubt, if the agreement is terminated, Embark shall be entitled to retain any fully vested, but not converted, Performance Rights subject to continuation of the terms of issue.


[1] Indicative based on net asset value at 31 March 2019 of 39 cents and 20-day VWAP of 24.6 cents

[2] Assumes the share price and NAV equally increase by 35%.

MMJ Group Holdings Limited