Concerned Australis Shareholders Oppose Non-Arm's Length Passport Acquisition

TORONTO, June 26, 2020 /CNW/ - Roger Sykes, a shareholder of Australis Capital Inc. ("Australis" or the "Company") (CSE: AUSA) announced today that he has released an open letter to the Company's shareholders in response to the Company's proposed acquisition of Passport Technologies Inc. ("Passport") (the "Passport Acquisition"). 

The full content of the letter disclosed below will help shareholders understand that the current leadership of the Company is broken and not acting in the best interests of all shareholders.  Mr Sykes confirms that he is aware that other shareholders share his concerns regarding Australis and that other shareholders also agree that management and the Board are not acting in shareholders' best interests but are entrenching their own interests at shareholders' expense.

Fellow Shareholders of Australis Capital Inc.:

On June 25, 2020, Australis issued a press release announcing that the Company has entered into an agreement to acquire Passport Technologies Inc. and intends to conduct a private placement of units of the Company, further diluting the Company's shareholders at a time when the Company's shares are trading at a price that is less than 10% of their price at the time of listing on the Canadian Securities Exchange. On June 24, 2020, Australis also announced that it transferred to Passport 1,802,542 common shares of Australis as part of the consideration for certain services and rights under an agreement with Passport, in addition to the consideration that had already been paid in respect of a licensing agreement with Passport. These actions continue the trend of Australis entering into related party transactions with Passport while deviating from the Company's core cannabis business.

Over the past several months, there have been developments which have made it clear that Australis' out-of-touch Board and management do not have the desire to execute on the Company's founding vision to build and operate an industry-leading North American cannabis platform. Instead, it appears as though the Board would rather pursue a related party transaction in a non-cannabis business vertical - the merits of which have not been properly described to shareholders. Given the litany of issues surrounding the Passport Acquisition and the poor judgment exhibited by management and the Board, I am emphatically opposed to the proposed transaction.  

Concerns Regarding the Passport Acquisition

I believe that shareholders need to be made aware of the facts regarding the oppressive conduct and poor governance conducted by Australis in regard to the Passport Acquisition. When presented with the facts, the issues with the transaction are obvious:

• The structure of the Passport Acquisition appears to be deeply flawed. I encourage shareholders to ask the following questions:
• Why are shareholders paying at least CAD $31.4 million to acquire a company owned by our CEO? Clearly the transaction will create personal value for Scott Dowty, but there is no evidence that it will create value for all shareholders.
• 51% of Passport is indirectly owned by Scott Dowty, Australis' current CEO. Pursuant to the terms of the transaction announced on June 25, 2020, Australis will pay a minimum of CAD $31.4 million (including CAD $9.6 million of cash) and more than CAD $4.0 million of contingent consideration for a company that has not publicly disclosed the value of its assets or the amount of revenue it generated in the last 12 months. Furthermore, no disclosure has been made as to how the purchase price was determined. Effectively, Australis is asking shareholders to pay at least CAD $31.4 million for assets of unknown value. This translates into Mr. Dowty standing to gain at least 51% or almost $16 million in value through his indirect ownership of Passport.
• What happened to the Green Therapeutics transaction and why is a key cannabis asset being sold?
• As part of the consideration for the Passport Acquisition, Australis is assigning to Passport real property assets valued at CAD $4.6 million that were acquired by Australis with a view towards constructing a state-of-the-art 55,000 sq. ft. cannabis cultivation facility in North Las Vegas that, by management's own account, has the potential to generate approximately USD $10-12 million of EBITDA in its first full year of operations.¹ By disposing of this property, management is abandoning this project without providing proper disclosure or rationale to shareholders. Moreover, selling the property for CAD $4.6 million is not a proper valuation for this asset nor is it the best use for the asset as it will punish shareholders who will be missing out on a potentially massive opportunity to capitalize on the Nevada cannabis market, which boasts some of the highest wholesale prices for cannabis in North America where flower is currently selling for between USD $5.33 - $7.91/gram.²
• Even if the transaction fails, Mr. Dowty will benefit as a result of an extremely high break fee and if the transaction succeeds, he stands to gain nearly $16 million.
• The break fee associated with the Passport Acquisition is exorbitant, at 8% of the value of the transaction. In contrast, break fees of 3%-5% are customary for transactions of this nature, if included at all. Clearly, Mr. Dowty is creating a win–win situation for himself in that Australis will still pay USD $2.5 million to Passport (a company in which he holds a 51% interest) even if the Passport Acquisition is not approved by shareholders. Moreover, I understand that management has previously received negative feedback and concerns from certain shareholders regarding the Passport Acquisition. Agreeing to pay such an egregious break fee to a related party despite being aware of significant shareholder opposition and overall risk to the transaction is a prime example of the self-serving actions and poor governance practices exhibited by Mr. Dowty and the incumbent leadership team.
• Australis' press release announcing the Passport Acquisition did not articulate the benefits of the transaction to shareholders other than Mr. Dowty. This transaction appears to be another example of a series of poorly executed and poorly communicated transactions aimed at enriching Mr. Dowty at the expense of shareholders while transitioning Australis into a Fintech company and away from its roots as a US cannabis company.

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¹ Source: https://ausa-corp.com/news/australis-capital-acquires-high-profile-brands-and-related-assets-from-green-therapeutics-a-nevada-based-cannabis-cultivation-and-production-company/

² Source: https://mjbizdaily.com/wholesale-marijuana-prices-for-flower-dip-in-nevada/

I am aware that other shareholders share my concerns with respect to the proposed transaction between Australis and Passport Technologies Inc. I encourage Australis' Board to pursue opportunities available to the Company to acquire well positioned cannabis assets at highly attractive valuations, as this strategy aligns with Australis' original investor proposition to create a US cannabis industry leader. According to the Company's latest financial statements, Australis currently holds over CAD $19 million in cash and I believe it is time to put that money to work in pursuit of the Company's founding vision to build and operate an industry-leading North American cannabis platform.

My informed, unyielding view is that under no circumstances should Australis be engaging in any material transactions at this time, including any transactions that could adversely impact shareholders, the Company's balance sheet, and/or the Company's ability to effectively progress its plant-touching cannabis operations.

After reading this letter, I hope that my fellow shareholders are no longer misled by the current ineffective management and Board.

Yours Truly,

Roger Sykes

SOURCE Roger Sykes, Concerned Shareholder of Australis Capital Inc.

For further information, please contact Mr. Sykes' shareholder communications advisor: Laurel Hill Advisory Group, Toll Free: 1-877-452-7184, International: [phone] outside Canada and the US, By Email: [email protected]