CANN GROUP LIMITED — Capital/Financing Update 2020

Feb 6, 2020

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ASX ANNOUNCEMENT

7 February 2020

Cleansing Notice under section 708(12C)(e) of the Corporations Act 2001 (C th)

7 February 2020

ASX Market Announcements Office ASX Limited Level 4, North Tower, Rialto 525 Collins Street Melbourne VIC 3000

By electronic lodgement

CLEANSING NOTICE issued under section 708A(12C)(e) of the Corporations Act 2001 (Cth) (as inserted by ASIC Corporations (Sale Offers: Securities Issued on Conversion of Convertible Notes) Instrument 2016/82)

1 Summary

This notice ( Cleansing Notice ) is issued by Cann Group Limited (ASX:CAN) (the Company ) under section 708A(12C)(e) of the Corporations Act 2001 (Cth) ( Corporations Act ) as inserted by ASIC Corporations (Sale Offers: Securities Issued on Conversion of Convertible Notes) Instrument 2016/82.

This Cleansing Notice is important and should be read in its entirety. Neither ASIC nor ASX take responsibility for the contents of this Cleansing Notice.

2 Background

The Company will be issuing 8,000,000 convertible notes ( Convertible Notes ) to six investors ( Noteholders ) at a face value of $1.00 per Convertible Note, in respect of which the Company will receive net funds of $7,560,000 (after costs) in aggregate at the time of issue.

The issue of the Convertible Notes is due to complete on 10 February 2020 and will be done without disclosure under Part 6D.2 of the Corporations Act. Issuing this Cleansing Notice enables the fully paid ordinary shares in the Company ( Shares ), that will be issued on conversion of the Convertible Notes, to be on-sold without further disclosure.

The terms of the Convertible Notes are summarised in section 7 below.

3 Contents of this Cleansing Notice

This Cleansing Notice sets out the following:

• (a) in relation to the Convertible Notes:

• (i) the effect of the issue on the Company;

Cann Group Limited ACN 603 949 739

4 Research Avenue, Bundoora, VIC 3083 Australia Ph: +61 3 9095 7088

• (ii) a summary of the rights and liabilities attaching to the Convertible Notes; and

• (iii) a summary of the rights and liabilities attaching to the Shares that will be issued on the conversion of the Convertible Notes; and

• (b) any information that:

• (i) has been excluded from continuous disclosure notices in accordance with the ASX Listing Rules; and

• (ii) is information that investors and their professional advisors would reasonably require for the purpose of making an informed assessment of:

  • (A) the assets and liabilities, financial position and performance, profits and losses and prospects of the Company; and

  • (B) the rights and liabilities attaching to the Shares; and

• (iii) other information relating to the Company’s status as a disclosing entity.

4 Effect of the issue on the Company

The principal effect of the issue of the Convertible Notes on the Company will be to:

• (a) increase the cash reserves of the Company by $7,560,000;

• (b) increase the indebtedness of the Company by the aggregate face value of the Convertible Notes ($8,000,000) plus all accrued and unpaid interest;

• (c) increase the number of Shares on issue in the Company as a consequence of the issue of Shares on the conversion of the Convertible Notes by up to 13,809,656, with the maximum number of Shares issued on conversion being 9.7% of the Company’s current issued Shares (assuming conversion on the latest date before maturity of the Convertible Note, no interest payments made by the Company and a Conversion Price of $0.70); and

• (d) issue new Options to Noteholders on a one-for-one basis, subject to the terms of the Convertible Notes (as summarised in section 7 below) – the maximum number of Options that may be granted and subsequently the maximum number of Shares issued on exercise of such Options, will be up to 13,809,656.

5 Pro forma statement of financial position after the issue of Convertible Notes

Set out below is a pro forma statement of financial position for the Company, based on the audited consolidated statement of financial position as at 30 June 2019 adjusted to reflect the issue of the Convertible Notes. This has been prepared on the basis of the accounting policies normally adopted by the Company.

The pro forma financial statement is presented in an abbreviated form in so far as it does not include all disclosures required by the Australian Accounting Standards applicable to annual financial statements. The pro forma financial statement is not audited.

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The pro-forma statement does not reflect the proposed issuance of Options, as such terms have not yet been finalised.

6 Potential effect on Company share structure

As at the date of this Cleansing Notice the issued capital of the Company is as follows:

Type of security	Securities prior to issue of Convertible Notes
Fully paid ordinary shares	142,422,063
Performance Rights Class C vesting subject to final commissioning of the first stage of the Company’s Mildura facility	1,000,000

The capital structure of the Company will be affected by the conversion of the Convertible Notes by the Noteholders, which will result in additional Shares being issued and the liability position of the Company decreasing accordingly.

If the Noteholders convert the maximum number of Convertible Notes the number of Shares to be issued will depend on a number of factors, including the calculation of the Conversion Price and the time at which the Convertible Notes are converted (refer to section 7).

If all the Convertible Notes were converted as at the date of this Cleansing Notice, the maximum number of shares that would be issued is 11,428,571 and the maximum number of options that would be issued is 11,428,571. If all the Convertible Notes were converted on the latest possible date before maturity of the Convertible Note, and assuming the Company made no interest payments, and the Conversion Price was $0.70, the maximum number of shares that would be issued is 13,809,656 and the maximum number of options that would be issued is 13,809,656.

As noted above, the actual effect on the Share capital of the Company will differ depending on how many Convertible Notes are converted, and the time at which the Convertible Notes are converted.

The potential effect on the issued ordinary share capital of the Company if all of the Convertible Notes are converted is set out below:

Type of security	Securities on issue after conversion
Shares (prior to conversion)	142,422,063
Maximum number of Shares to be issued assuming conversion of all Convertible Notes at a conversion price of $0.70, on the latest possible date of conversion and no interest payments made by the Company	13,809,656
Total Shares on issue	156,231,719
Performance Rights Class C vesting subject to final commissioning of the first stage of the Company’s Mildura facility	1,000,000
Maximum number of Shares issued assuming all Convertible Notes are	13,809,656

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converted at a conversion price of $0.70 on the latest possible date of conversion, and assuming no interest payments made by the Company, and therefore the maximum number of Options are then issued and exercised
Total securities on issue	171,041,376

7 Rights and liabilities attaching to the Convertible Notes

The following is a broad summary of the rights, privileges and restrictions attaching to the Convertible Notes. The summary is not exhaustive and does not constitute a definitive statement of the rights and liabilities of the Noteholders.

statement of the rights	and liabilities of the Noteholders.
Maturity Date	24 months from the issue date.
Total face value	$8,000,000
Interest	Accrues daily on the value of the Convertible Notes held by each Noteholder at the following rates: (a) 9.5% p.a for any month the Company does not make an interest payment; or (b) 7.5% p.a for any month the Company does make an interest payment.
Security	All Convertible Notes are unsecured.
Maximum number of Shares issued on conversion	Will not exceed 10% of the Company’s current Shares on issue.
Conversion terms	Noteholders may convert either 50% or 100% of Convertible Notes on issue to them: (a) any time before the Maturity Date; (b) if the Company announces it has received a takeover offer; (c) if the Company announces it has entered into a scheme implementation agreement; or (d) if the Company suffers an insolvency event.
Issue of Shares	On Conversion, a Noteholder is entitled to receive the number of Shares calculated in accordance with the following formula: 𝑁 = 𝐵 𝐶 Where: N = the number of Shares to be issued to a Noteholder; B = the value of the Convertible Notes held by the Noteholder, plus any unpaid interest

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	that has accrued on those Convertible Notes; and C= the Conversion Price.
Conversion Price	The Conversion Price means the price per Share that is the lower of: (a) $0.70; or (b) the volume weighted average price of the Issuer’s Ordinary Shares during the 5 trading days following the most recent capital raise of more than $5,000,000 through one or a series of connected capital raisings to any investor or multiple investors (Qualified Capital Raise); or (c) the issue price of a Qualified Capital Raise multiplied by 0.85, (excluding any share issues made pursuant to employee incentive arrangements, bonus issues, pro-rata issues and reorganisations of capital).
Redemption	The Company must redeem all Convertible Notes that have not yet been converted on the Maturity Date. A majority of Noteholders may redeem all Convertible Notes that have not yet been converted if a Redemption Event occurs. A Redemption Event is any of: (a) the Company suffers an insolvency event; (b) a takeover offer for the Company becomes unconditional; (c) a scheme of arrangement in respect of the Company is implemented; (d) the Company materially breaches the terms of the transaction documents for the Convertible Notes; (e) the Company fails to meet its material obligations under any Convertible Note transaction document; (f) the Issuer is removed from the official list of the ASX; or (g) an event of default occurs under the terms of any senior secured facility.
Options	If a Noteholder converts their Convertible Notes in the period from the Issue Date and up to 30 Business Days after an issue of Ordinary Shares by the Issuer to any investor or multiple investors as part of one or a series of connected capital raisings that together raise more than $20,000,000, the Company will issue to each Noteholder one Option per Share.

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	The Option is a right to take up one Ordinary Share in the Company, at a price calculated as the Conversion Price multiplied by 1.35. The Option must be exercised on or before 31 March 2022. The Company and the Noteholders have agreed that an option agreement will be entered into with fulsome terms, as required by the ASX Listing Rules, prior to the issue of the Options.
Noteholders rights	The Convertible Notes will rank pari passu among themselves and with all other unsecured and unsubordinated indebtedness of the Company, except indebtedness preferred solely by law. The Noteholders: (a) are creditors of the Company and do not have rights as a member of the Company; and (b) must receive a copy of every notice convening a meeting of the Company’s shareholders.
Debt and financing restrictions	The Company may not, without approval from the majority of Noteholders, take out further indebtedness or create any security interest over the Company’s assets, subject to certain permitted exceptions. The permitted exceptions include acquiring a senior secured facility for the purpose of funding the production facility in Mildura and certain other indebtedness incurred in the ordinary course, such as trade credit and lease financing. As long as the Convertible Notes are outstanding, the Company will consult with the Noteholders prior to issuing any Shares, equity security or debt securities for the primary purpose of raising capital or entering into debt financing agreements. The Noteholder’s consent is not required for the Company to enter such transactions or agreements, except where Noteholder approval is required for further indebtedness (as described above).
Transferability	Noteholders may assign or transfer their rights under the Note terms to any related bodies corporate with written notice to the Company, or otherwise only with the prior written consent of the Company.
Governing law	Victoria, Australia.

8 Rights and liabilities attaching to Shares issued under the Convertible Notes

The Shares issued to each Noteholder on conversion of the Convertible Notes will rank equally in all respects with the Company’s existing Shares. The rights attaching to Shares, including new Shares issued to each Noteholder on conversion, are set out in the Company’s Constitution, and as regulated by the Corporations Act, the ASX Listing Rules and the general law.

General meetings	Each shareholder has the right to receive notice of and to attend and vote at general meetings of the Company.

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Voting	Each Share has one vote on a poll, and a holder of Shares has one vote on a show of hands.
Dividends	Dividends may be paid to Shareholders as declared by the Board at its discretion.
Rights on winding up	If the Company is wound up, the Shares attract the right to participate equally in the distribution of the surplus assets of the Company.
Transfer of shares	Generally, Shares are freely transferable, subject to formal requirements, the registration of the transfer not resulting in a contravention of or failure to observe the provisions of a law of Australia and the transfer not being in breach of the Corporations Act or the ASX Listing Rules.
Variation of rights	It at any time the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issue of the shares of that class), whether or not the Company is being wound up, may be varied with the consent in writing of the holders of 75% of the issued shares of that class or if authorized by a special resolution passed at a meeting of the holders of the shares of that class.

9 Compliance with continuous disclosure obligations

The Company is a disclosing entity under the Corporations Act and is subject to regular reporting and disclosure obligations. These obligations require the Company to notify ASX of information about specified events and matters as they arise for the purposes of making that information available to the market.

As at the date of this Cleansing Notice, the Company has complied with:

• (a) the provisions of Chapter 2M of the Corporations Act, as they apply to the Company; and

• (b) section 674 of the Corporations Act, as it applies to the Company.

Copies of any documents in relation to the company which are lodged with ASIC may be obtained from, or inspected at, an ASIC office.

The Company will provide a copy of the following to any person on request free of charge:

• (a) the annual financial report most recently lodged with ASIC by the Company;

• (b) any half-year report lodged with ASIC after lodgement of that annual financial report and before lodgement of this Cleansing Notice; and

• (c) any continuous disclosure notices given after the lodgement of that annual financial report and before lodgement of this Cleansing Notice.

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A list of the continuous disclosure documents lodged by the Company with ASX after the lodgement of the 2019 annual financial report and before the lodgement of this Cleansing Notice is set out below:

Date	Announcement
04/10/2019	Appendix 3B
21/10/2019	Appendix 4C – quarterly
29/10/2019	Notice of Annual General Meeting/Proxy Form
07/11/2019	Cann executes national distribution agreement with Symbion
21/11/2019	Staged approach to Mildura facility and bank facility update
22/11/2019	Appendix 3B
26/11/2019	Response to ASX Price Query
29/11/2019	Chairman’s and CEO’s Address to Shareholders
29/11/2019	Annual General Meeting Presentation
29/11/2019	Results of Meeting
09/12/2019	Company Secretary & CFO Appointment/Resignation
16/12/2019	Director Appointment/Resignation
19/12/2019	CAN and IDT announce commercial manufacture
24/12/2019	Appendix 3B
24/12/2019	Notice under section 708A(5)(e) of the Corporations Act
06/01/2020	Pause in Trading
06/01/2020	Trading Halt
07/01/2020	Response to ASX Price Query
07/01/2020	Commercial-scale GMP medicinal cannabis resin extraction
29/01/2020	Market update
29/01/2020	Market update - presentation
31/01/2020	Appendix 4C – quarterly
03/02/2020	Correction of typographical error in Appendix 4C

10 No excluded information

As at the date of this notice, other than as set out in this Cleansing Notice, there is no information that:

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• (a) has been excluded from a continuous disclosure notice in accordance with the listing rules of the prescribed financial market whose operator was given the notice; and

• (b) is information that investors and their professional advisers would reasonably require for the purpose of making an informed assessment of:

• (i) the assets and liabilities, financial position and performance, profits and losses and prospects of the body; and

• (ii) the rights and liabilities attaching to the Convertible Notes or Shares.

ENDS

Signed for and on behalf of Cann Group Limited by:

Geraldine Farrell Company Secretary

Authorised for release by Geraldine Farrell, Company Secretary, Cann Group Limited.

For further information please contact:

Peter Crock Clive Fanning Matthew Wright CEO Head of Investor Relations NWR Communications Cann Group Limited Cann Group Limited +61 451 896 420 +61 3 9095 7088 +61 498 000 762 matt@nwrcommunications.com.au contact@canngrouplimited.com clive.fanning@canngrouplimited.com

About Cann Group

Cann Group Limited (ABN 25 603 949 739) is building a world-class business focused on breeding, cultivating, manufacturing and supplying medicinal cannabis for sale and use within Australia and for approved overseas export markets. The company has established research and cultivation facilities in Melbourne and is developing a state-of-the-art cultivation facility near Mildura, Victoria. Cann Group has executed collaboration agreements that have enabled it to establish a leading position in plant genetics, breeding, extraction, analysis and production techniques required to facilitate the supply of medicinal cannabis for a range of diseases and medical conditions. The Company is commercialising a range of imported and locally sourced and manufactured medicinal cannabis products. Learn more about Cann Group at www.canngrouplimited.com

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