NOVC Nova Cannabis Inc

This news release constitutes a "designated news release" for the purposes of the prospectus supplement of Nova Cannabis Inc. dated July 22, 2022, to its short form base shelf prospectus dated June 27, 2022.

EDMONTON, AB, April 3, 2023 /CNW/ - Nova Cannabis Inc. (TSX: NOVC) ("Nova" or the "Company") announced today that the Company and SNDL Inc. (NASDAQ: SNDL) ("SNDL" and together with Nova, the "Parties") have entered into an agreement to amend (the "Amendment") the implementation agreement entered into on December 20, 2022 (as amended, the "Implementation Agreement"). Pursuant to the Implementation Agreement, the Parties have agreed to implement a strategic partnership to create a well-capitalized cannabis retail platform in Canada (the "Transaction"). The Amendment contemplates, among other things: (i) increasing the number of cannabis retail stores Nova will acquire (and that will be subject to the strategic partnership) from 25 to 31 (collectively, the "Acquired Stores", and such added stores being the "Additional Stores"); and (ii) decreasing the number of common shares in the capital of Nova ("Nova Shares") to be surrendered by SNDL for cancellation to approximately 2.01 million from approximately 14.3 million. The Additional Stores consist of prime real estate located primarily in Toronto and Vancouver and currently generate approximately $2.4 million of annualized in-store EBITDA. The 31 Acquired Stores include 12 in Alberta, 11 in Ontario, three in British Columbia, three in Saskatchewan and two in Manitoba. In connection with the Amendment, SNDL has agreed to increase the number of Nova Shares to be distributed pursuant to a capital distribution of Nova Shares owned by SNDL to holders ("SNDL Shareholders") of common shares of SNDL (the "SNDL Share Distribution") by a corresponding amount such that, upon completion of the Transaction, SNDL will hold approximately (and no more than) 19.9% of the issued and outstanding Nova Shares. As a result of SNDL's ownership in the Nova Shares being reduced below 20%, Nova will be permitted to directly own and operate cannabis retail stores in Ontario and British Columbia, in accordance with applicable laws.

"This amendment reflects the strong commitment and shared vision of SNDL and Nova to build a long-lasting and mutually beneficial partnership and further transform the cannabis retail market in Canada," said Anne Fitzgerald, lead independent director of Nova. "Together, we will build on our disruptive cannabis retail platform and deliver exceptional customer experiences by leveraging our unique strengths and expertise. This partnership demonstrates our unwavering commitment to driving growth and value for our stakeholders."

In addition to the foregoing, the Amendment provides for, among other things, an agreement from SNDL not to demand repayment of, or take any action relating to, any amounts drawn by Nova on the existing credit facility between Nova and SNDL prior to June 30, 2023, except in connection with circumstances or the occurrence of one or more events that would reasonably be expected to have, individually or in the aggregate, a material adverse effect on the Company.

The completion of the Transaction will result in, among other things, the following:

• Retail Contribution—SNDL will vend into Nova's cannabis retail business thirty-one (31) existing cannabis retail stores, primarily operating under the "Spiritleaf" and "Superette" banners, located in Alberta, Saskatchewan, Manitoba, British Columbia and Ontario. Nova will also have a right of first refusal on SNDL's Canadian cannabis retail pipeline.
• Corporate Services—The existing management and administrative services agreement between Nova and SNDL will be amended and restated to refresh and maintain the arrangement with SNDL in accordance with applicable law (the "Amended and Restated Management and Administrative Services Agreement"). For the first three years following closing the Transaction, no fee shall be payable by Nova under the Amended and Restated Management and Administrative Services Agreement. Following the three year service fee holiday, Nova will benefit from a low-cost annual fee of $2.0 million thereafter, which is materially lower than the cost of building and operating the infrastructure necessary for Nova to manage those services in-house. Nova incurred $1.25 million in expenses in 2022 related to the existing Management and Administrative Services Agreement.
• Debt Restructuring—A $15.0 million revolving credit facility between Nova and SNDL is to be eliminated by way of capital contribution by SNDL, which is expected to be fully drawn by Nova at the time of closing the Transaction. This will immediately provide Nova with additional liquidity of approximately $3.9 million from drawing the undrawn amount ahead of closing. Further, SNDL will advance a new revolving credit facility of $15.0 million at an interest rate of Canadian prime plus 2.75%, with a $10.0 million accordion feature which becomes available under certain conditions.
• Return of Equity—2,009,622 Nova Shares held by SNDL will be returned to Nova's treasury for cancellation. The parties allocated a value of approximately $1.6 million to the cancellation of Nova Shares with the number of shares calculated based on a price of $0.7966, which was the 5-day volume weighted average price of the Nova Shares on the TSX ending March 23, 2023 (being the date the Parties reached an agreement in principle to amend the Implementation Agreement).
• Increased Liquidity—SNDL plans to further reduce its equity ownership in Nova by completing the SNDL Share Distribution, following which it is anticipated that SNDL and its affiliates will collectively legally and beneficially own and control approximately (and no more than) 19.9% of the issued and outstanding Nova Shares.
• Transfer of Intellectual Property—Nova will transfer its intellectual property related to the "Value Buds" trademarks and the rights therein (the "Nova Transferred Intellectual Property") to SNDL.
• Strategic Partnership Agreement and Store Level License Agreements—Nova and SNDL will enter into a strategic partnership agreement and related store level license agreements for each of the "Value Buds", "Spiritleaf" and "Superette" banners (and such other banners as the Parties may choose to operate cannabis stores under from time to time), pursuant to which the Parties will implement certain strategic operational initiatives, including Nova's utilization of SNDL's cannabis retail banner intellectual property and other intangible property (including the Nova Transferred Intellectual Property) in exchange for payment to SNDL of an annual license fee at a rate of 5.0% to 15.0% of Nova's gross profits from each of its cannabis retail stores, commencing one year after closing the Transaction (the "License Fee Holiday"). No license fees shall be payable by Nova to SNDL in respect of the first three months of operation in respect of any new cannabis store opened by Nova under an SNDL banner after the expiry of the License Fee Holiday.
• Nova Board Nomination Rights—Nova will grant SNDL certain nomination rights to the Nova Board pursuant to an amended and restated investor rights agreement (the "Amended and Restated Investor Rights Agreement"). Pursuant to the Amended and Restated Investor Rights Agreement, SNDL will be entitled to nominate two directors to the Nova Board for so long as both: (i) SNDL's equity ownership in Nova is greater than 5%; and (ii) the strategic partnership with Nova remains in effect; and SNDL will be entitled to nominate one director to the Nova Board for so long as only one of the foregoing conditions is satisfied.

The Nova Board believes the Transaction is in the best interests of Nova and the Nova Shareholders for a number of reasons, including, but not limited to, the following:

• Creates Sustainable Regulated Retail Network in Canada—The Transaction provides a low-cost operating platform for Nova, driven by SNDL's scale across the cannabis retail market. Nova will also be re-acquiring ownership of its thirty (30) Ontario cannabis retail stores.
• Accretive Return of Equity and Bolstered Trading Liquidity—A reduction in Nova Share count alongside enhanced cash flow profile from an increased store footprint supports a re-rate opportunity concurrent with anticipated trading liquidity improvement from SNDL completing the SNDL Share Distribution.
• Balance Sheet Strength to Fund Growth—Nova's financial position will be significantly strengthened on a non-dilutive basis through the elimination of debt and immediate injection of additional liquidity.
• Compliant Retail Structure for Future Scale—With SNDL's target to reduce its ownership of Nova to below 20%, Nova can fully leverage SNDL's extensive retail M&A pipeline with opportunities for direct ownership of retail outlets in Ontario and British Columbia, subject to the non-objection of applicable governmental entities.
• Financial Stability—Upon closing the Transaction, Nova will become a national cannabis retailer with over 120 cannabis stores across Alberta, Saskatchewan, Manitoba, British Columbia and Ontario.
• Significant Shareholder Support—All directors and executive officers of Nova have entered into support agreements with SNDL pursuant to which, among other things, the parties have agreed to vote their Nova Shares (if any) in favour of the Transaction.

Nova's independent directors, after receiving the unanimous recommendation of a special committee comprised solely of independent directors (the "Special Committee"), have unanimously approved the Transaction and unanimously resolved to recommend that the holders of Nova Shares ("Nova Shareholders") vote in favour of the Transaction.

Eight Capital has provided a fairness opinion to the Special Committee that, subject to the assumptions, limitations and qualifications set out in such fairness opinion, the consideration to be received by Nova pursuant to the Transaction is fair, from a financial point of view, to Nova.

The completion of the Transaction is subject to a number of closing conditions, including: (i) the approval of a resolution to approve the Transaction (the "Transaction Resolution") by not less than a simple majority of the votes cast by Nova Shareholders present or represented by proxy at the Meeting (defined below), after excluding the votes required to be excluded in determining minority approval pursuant to Multilateral Instrument 61-101—Protection of Minority Security Holders in Special Transactions ("MI 61-101") (including the votes attaching to Nova Shares held by SNDL and its affiliates) ("Disinterested Shareholder Approval"); (ii) the receipt of all key regulatory approvals, including from applicable provincial cannabis regulators and the Toronto Stock Exchange ("TSX") pursuant to Section 501(c) of the TSX Company Manual, which requires that the Transaction be approved by the Company's board of directors on the recommendation of the independent directors, and that the Transaction Resolution receive Disinterested Shareholder Approval in accordance with the TSX Company Manual; (iii) SNDL or its nominee having completed the acquisition of the Additional Stores; (iv) the parties having completed the transfer to Nova or its nominee of SNDL's option to purchase all of the issued and outstanding securities of Spirit Leaf Ontario Inc. (the "SLO Option"), and the satisfaction of each condition precedent to the exercise of the SLO Option by Nova; (v) SNDL having completed the SNDL Share Distribution in accordance with the terms of the Implementation Agreement and the plan of arrangement previously approved by the SNDL Shareholders; and (vi) there being no applicable law or action in effect, pending or threatened that would prohibit the consummation of the Transaction or make the consummation of the Transaction illegal (collectively, the "Closing Conditions"). The TSX has conditionally approved the Transaction, subject to Disinterested Shareholder Approval of the Transaction Resolution, and satisfaction of other customary conditions

The Company will hold an annual and special meeting of Nova Shareholders on May 5, 2023 (the "Meeting") to consider, among other things, the Transaction Resolution. Further details relating to the Transaction, including the full text of the Transaction Resolution, will be included in the management information circular and proxy statement to be mailed to Nova Shareholders in connection with the Meeting. Subject to the satisfaction or waiver of all of the Closing Conditions, the Transaction is expected to be completed prior to June 30, 2023.

Nova Cannabis Inc. (TSX: NOVC) is one of Canada's largest and fastest-growing cannabis retailers with a goal of disrupting the cannabis retail market by offering a wide range of high-quality cannabis products at every-day best value prices. The Company currently owns and/or operates 91 locations across Alberta, Ontario, and Saskatchewan, primarily under its "Value Buds" banner. Additional information about Nova Cannabis Inc. is available at www.sedar.com and the Company's website at www.novacannabis.ca.

This news release contains statements and information that, to the extent that they are not historical fact, may constitute "forward-looking information" or "forward-looking statements" within the meaning of applicable securities legislation (collectively "forward-looking statements"). Forward-looking statements are typically, but not always, identified by the use of words such as "continue", "anticipate", "will", "expect", "project", "to be", "objective", "should", "plan", "intention", and similar words, including negatives thereof, or other similar expressions concerning matters that are not historical facts. All statements and information other than statements of historical fact contained in this news release are forward-looking statements. These forward-looking statements include statements regarding: the anticipated timing and date of the Meeting; the satisfaction or waiver of all Closing Conditions, including approval of the TSX and applicable provincial regulators, and requisite approval of the Nova Shareholders; the anticipated timing and completion of the Transaction as contemplated by the Implementation Agreement, including the number of Nova Shares to be surrendered by SNDL, the transfer of the SLO Option, the acquisition of the Additional Stores by SNDL or its nominee, the number of Acquired Stores, and the completion of the SNDL Share Distribution; the pro forma ownership of Nova Shares by SNDL; Nova's future ownership and operation of cannabis retail stores in British Columbia and Ontario; additional liquidity under the revolving credit facility; increased trading liquidity in Nova Shares and benefits thereof; and other anticipated benefits, synergies and cost-savings of the Transaction.

Such forward-looking statements are based on various assumptions and factors that may prove to be incorrect, including, but not limited to, factors and assumptions with respect to: the Transaction being completed on the terms and timeline currently anticipated or at all, including the satisfaction of all required closing conditions for the Transaction; completion of the SNDL Share Distribution and the reduction of SNDL's ownership in Nova; all necessary shareholder and regulatory approvals being obtained on the timelines and in the manner currently anticipated or at all; and the receipt by Nova and SNDL of necessary retail cannabis licenses, approvals and authorizations (as applicable) from regulatory authorities, and the timing thereof.

Although the Company believes the expectations reflected in the forward-looking-statements, and the assumptions on which such forward-looking statements are made, are reasonable, there can be no assurance that such expectations and assumptions will prove to be correct. Readers should not place undue reliance on forward-looking-statements included in this news release. Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that may cause actual performance and financial results to differ materially from any estimates, forecasts or projections. These risks and uncertainties include, among other things, the risk that the Transaction is completed as anticipated or at all, including the timing thereof, and if completed, that the benefits thereof will not be as anticipated; the risk that the conditions to closing the Transaction are not satisfied or waived; risks associated with the completion of the SNDL Share Distribution; risks associated with general economic conditions; adverse industry events; future legislative, tax and regulatory developments, including developments that may impact the closing of the Transaction as anticipated or at all; adverse conditions in the retail cannabis industry; risks related to the relationship between Nova and SNDL; the risk that Nova will be unable to execute its strategic plan and growth strategy as planned without significant adverse impacts from various factors beyond its control; dependence on suppliers; potential delays or changes in plans with respect to capital expenditures and the availability of capital on acceptable terms; risks inherent in the retail cannabis industry; competition for, among other things, customers, supply, capital and skilled personnel; changes in labour costs and markets; incorrect assessments of the value of acquisitions, including the Acquired Stores; general economic and political conditions in Canada and globally; industry conditions, including changes in government regulations; fluctuations in foreign exchange or interest rates; unanticipated operating events; changes in tax and other laws that affect Nova and its shareholders; the potential failure of counterparties to honour their contractual obligations; and stock market volatility. Readers are cautioned that this list of risk factors should not be construed as exhaustive.

Additional information regarding risks and uncertainties relating to Nova's business are contained under the heading "Risk Factors" in Nova's management's discussion and analysis for the year ended December 31, 2022, dated March 28, 2023, which is available on SEDAR under the Company's profile at www.sedar.com. The forward-looking statements contained in this news release are made as of the date of this new release. Except as expressly required by applicable securities legislation, Nova does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this news release are expressly qualified by this cautionary statement.

EBITDA is a non-IFRS (defined below) financial measure which Nova uses to evaluate operating performance. EBITDA is not defined by IFRS and, therefore, may not be comparable to similar measures reported by other companies. This non-IFRS financial measure should not be considered in isolation or as an alternative for measures of performance prepared in accordance with International Financial Reporting Standards ("IFRS").

SOURCE Nova Cannabis Inc.