Cansortium Inc

Good afternoon, ladies and gentlemen, and welcome to Consortium's corporate update call. Joining us today is the company's CEO, Robert Beasley. At this time, all participants are in listen-only mode. After the company's prepared remarks, the management team will conduct a question and answer session, and the conference call participants will be given instructions at that time. As a reminder, this conference call is being recorded and will be available for replay in the investor section of the company's website at www.getfluent.com. Please note that certain subjects discussed in this call, including answers the company may provide to questions, may include content that is overlooking in nature and therefore subject to risks and uncertainties and other factors which could cause actual future results or performance to differ materially from any implied expectations. Such risks surrounding forward-looking statements are all outlined in detail within the company's regulatory filings, which can be found on CDAR.com. The company does not undertake to update or revise any forward-looking statements except to the extent required by the applicable securities law in Canada. In addition, during this call, the company may refer to supplemental non-IFRS accounting measures, including adjusted EBITDA, which do not have any standardized meaning prescribed by IFRS. As a final reminder on today's call, unless otherwise indicated, all dollar amounts are expressed in U.S. dollars. I would now like to turn the call over to Mr. Robert Beasley, the company's CEO. Sir, please go ahead.

Thank you, and good morning, everyone. On behalf of both Consortium and RIV Capital, I am excited to discuss our announced business combinations. The plan to bring together these two companies with core strengths and key growth states is expected to position us to drive near-term synergies, capitalize on opportunities for long-term value creation, while continuing to provide high-quality service to customers who call Florida and New York home with a fluent brand experience. Upon consummation of the transaction, we believe the combined company will be able to leverage balance sheet liquidity and the ability to opportunistically allocate capital to growth incentives and building upon strength of our existing operating platform, in addition to a pathway for Consortium to lead New York's emerging adult use market. As a combined company, we will continue to focus on growth and profitability while relying on our established core principles in cultivation, operating efficiencies, inventory optimization in order to deliver strong cash flow for the shareholders. We view joining forces with RIV Capital as a natural progression in the expansion of Consortium. With an intentional pathway into the New York cannabis market, Consortium is expected to hold the distinction of operating in four of the five highest population states in the U.S. Additionally, the resources and market expertise that are expected to be leveraged from RIV Capital and Hawthorne will help position Consortium to capitalize on the inevitable regulatory changes expected in the U.S. cannabis industry. We're also excited to have the support of Hawthorne and Scott's Miracle-Gro as key stakeholders in the combined company. and look forward to working with them to add value to the enterprise, particularly through their R&D expertise. I would like to cover a few key metrics for the combined company once the transaction is completed. A 2023 pro forma revenue of $105 million, 2023 consortium adjusted EBITDA of $27 million, total cash and equivalents of $74 million as of March 31st with a cash position net debt of $5 million, We will have 42 pro forma license and operational dispensaries. We will have five operational cultivation facilities with three more under construction. And we anticipate to achieve a combined cost synergies of 5 to 10 million annually. And the total steady state addressable market of the client company's footprint will be 13 billion, not including our Texas market. The closing of the transaction is subject to shareholder and court approvals. as well as the receipt of all regulatory approvals and the satisfaction of certain other closing conditions customary to transactions of this nature. In addition, we have also entered into two separate agreements that will consummate in connection with the closing of the transaction. I'd like to give you a little bit more detail on these two topics. One is the Hawthorne Note Exchange, and the other is the Smith Transaction. Starting with the Hawthorne Note Exchange, we expect the existing promissory notes to Hawthorne to exchange and close the day prior to the transaction via an annual and general special meeting of the shareholders. The shareholders will be asked to create a new class of nonvoting exchangeable shares. These exchangeable shares will not carry voting rights, rights to receive dividends, or other rights upon the dissolution of consortium, but will be convertible into consortium shares on a one-for-one basis. In this manner, the debt represented by the Hawthorne note will be converted into exchangeable shares and then into consortium shares. The Smith transaction, as to the existing initial floor share agreement with Mr. Smith, the executive chair of consortium, under that agreement, a certain number of shares held by Mr. Smith and certain affiliates were subject to a floor price of 40 cents if the shares were sold at a price below $0.40. In exchange for terminating this agreement and eliminating the floor price on these shares, Consortium will issue to the Smith Group a 15% secured subordinate convertible note in an aggregate principal sum of $6.5 million, payable three years from the date of issuance. The Smith convertible note will be secured by a junior lien on the assets of Consortium and its subsidiaries. The Smith Convertible Note will be convertible at the discretion of the Smith Group into shares at a price of $0.21 per consortium share. We expect this transaction to close in the fourth quarter of this year. Following the closing of the transaction, the pro forma ownership of the combined company is expected to be 51.25% held by the former consortium shareholders. and 48.75% held by the former RIV shareholders on a fully diluted basis. We couldn't be more excited about the next stage of growth here at Consortium. I would like to personally thank the team at Consortium and the agents and the attorneys and everyone for all the work that has led us up to this point. And we look forward to working with Riv Capital team to continue to grow business in the years ahead. This concludes the prepared remarks. Operator, you can now open the line for questions.

Thank you. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. We will pause a moment as callers join the queue. The first question comes from Pablo with . Please go ahead.

Thank you. Robert, just to be clear, in terms of the Hawthorne side of the equation, they are going to convert into new exchangeable shares, but then when can they convert to consortium shares? They have to wait for federal permissibility, right? Or can they convert right away? That's the first question. Thanks.

On the business day immediately prior to the closing date of the transaction, Hawthorne will exchange its existing unsecured convertible notes into the aggregate principal amount of $175 million into the non-voting exchangeable shares. And then those exchangeable shares will convert into consortium shares.

Okay, so you don't have to wait. Like I'm thinking of this S&DL structure or the Canopy growth structure with Canopy USA. they have to wait for federal permissibility. In your case, it sounds like you don't have to wait for that.

That is correct.

Okay. And then the next question, in terms of the cash that's on the balance sheet of Hawthorne, do you have access to any of that once the transaction closes? Or that's, again, a separate structure?

We do not have access to the cash that's on the balance sheet of Hawthorne. We have access to the cash that's on the balance sheet of RIV, and that's the cash amount that we've noted here, which was noted as a combined amount of $74 million as of March 31, 2024. At the time of signing the transaction, which is today, some of that cash, the amount of approximately a little less than $10 million, will be loaned to consortium for the interim period as a bridge loan. The concept of that is to go ahead and get that cash to us so that we can deploy the portions of that cash needed into Florida to start ramping up. The amount was determined based on the construction budgets and other capital needs of consortium to start the lift in Florida. Otherwise, we'll have full access to the remaining cash estimated to be around net 65 at the date of closing, which of course will be in Q4.

Understood. Thank you. And one last one, if I may. I mean, obviously, you know, you have one of the most attractive footprints in Florida. You were one of the few remaining independent operators in the state. So you probably had a lot of suitors. I mean, maybe just big picture, can you explain why was this the best, the right choice for you? Thank you.

Yeah, so it's a, the pathway of our progress has been interesting. You know, this company came from its ashes, if you would, back in 2020. And we've been on a very stellar rise, as you've seen and noted, through our each quarter performance. In the beginning, it was the best option for consortium through its board direction and to me to get the company in a position to sell. And we did so. We continued to improve the company over the pathway of the last two or three years, with the I being in the first two years of being a good, attractive purchase as a Florida license holder. Fortunately or unfortunately, depending on how you want to view it from today, none of those transactions worked out. We entered into several transactions where we would be acquired by one entity after another, and they failed for various reasons. Some reasons had nothing to do with us, and rather the stock price of the acquirer failed and so forth and so on. Ultimately, what happened over this pathway of improvement is we became more efficient. We became a market leader in Florida. We went from number 14 to number 6. Our revenues continued to increase dramatically. And just through the good work of our team, we became an efficient, known operator that actually knew how to run a cannabis company in a vertically integrated state. The market then changed for us. We went from being a target of acquisition to being a little bit too large for most to acquire to now being the target to be approached by those operators who just need the operational help. I had said some time ago, and I repeated it almost every call, we have a very specific list, a criteria list that we designed for what a target would look like for us. That list included a complimentary geographic footprint. It included a company which needed operational assistance, which we could provide, and a company that did not have a tremendous amount of debt. The RIV company fits that mold perfectly. We love the fact that it was a compliment to Florida because we share a population between Florida and New York. And so it just fit. And we've looked at multiple, multiple transactions that didn't go very far because, quite frankly, we stuck to those criteria that we identified in the very beginning, and this one fit the criteria. We're interested in growth, but only the right growth that meets our very specific criteria, and this one did.

Thank you. Congratulations again. Thank you.

Thank you, sir.

Once again, if you have a question, please press star, then one.

Since there are no more questions in the queue, this concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.