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Material Change Report - January 26, 2024

FORM 51-102F3
MATERIAL CHANGE REPORT

Item 1. Name and Address of the Company

Diamond Estates Wines & Spirits Inc. (the “Company”)
1067 Niagara Stone Road
Niagara-on-the-Lake, ON
L0S 1J0

Item 2. Date of Material Change

January 17, 2024

Item 3. News Release

A news release setting out information concerning the material change described in this report was disseminated through the facilities of Business Wire on January 17, 2024, a copy of which was filed on SEDAR+ (the “News Release”).

Item 4. Summary of Material Change

On January 17, 2024, the Company announced the replacement of $4.884 million aggregate principal amount of 10.0% unsecured convertible debentures of the Company (the “2022 Debentures”) with new debentures (the “2023 Replacement Debentures”) maturing on November 9, 2024. The 2022 Debentures were issued in connection with the previously announced non-brokered private placement of debentures of the Company for gross proceeds of $4.884 million which closed on November 9, 2022. The 2022 Debentures carried interest from the date of issue at 10.0% per annum, calculated monthly, in arrears, and matured on November 9, 2023. The 2022 Debentures were convertible at the holder’s option into common shares of the Company (“Common Shares”) from the date of issuance at a conversion price of $0.80.

The material terms of the 2023 Replacement Debentures, including their principal amounts, are the same as the 2022 Debentures, other than (i) the conversion price, which is now $0.30, and (ii) the maturity date, which is now November 9, 2024. The interests payable on the 2022 Debentures have not been rolled into the principal amount of the 2023 Replacement Debentures and will remain outstanding, payable and convertible pursuant to the terms of the 2023 Replacement Debentures, and interests will continue to accrue on the 2023 Replacement Debentures in accordance with their terms.

Insiders of the Company subscribed for an aggregate of $3,350,000 in principal amount of 2022 Debentures, which included $2,850,000 aggregate principal amount to 3346625 Canada Inc. (“Lassonde Holding”), and $500,000 aggregate principal amount to Lassonde Industries Inc. (“Lassonde Industries” and together with Lassonde Holding, “Lassonde Group”), a joint actor of Lassonde Holding. The issuance of the 2023 Replacement Debentures to such insiders (the “Insider Issuance”) may be considered related party transactions within the meaning of TSXV Policy 5.9 and Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (“MI 61-101”). As the Company’s securities are listed on the TSXV, the Insider Issuance is exempt from the formal valuation requirements of MI 61-101. All of the Company’s directors, including all of the Company’s “independent directors” (as determined in accordance with Part 7 of MI 61-101), have unanimously determined that the Insider Issuance is advisable and in the best interests of the Company, that the terms of the Insider Issuance are reasonable in the circumstances of the Company and that the Insider Issuance should be exempt from the minority shareholder approval requirements of MI 61-101 pursuant to the “financial hardship” exemption provided under Section 5.7(1)(e) of MI 61-101, as the Company is in a situation of serious financial difficulty, the Insider Issuance is designed to improve the financial position of the Company and the circumstances described in Section 5.5(f) of MI 61-101 are not applicable. Management notes that while the Company recently closed a non-brokered private placement on November 14, 2023, the net proceeds of that transaction were pre-allocated to reducing accounts payable, the repayment of debt, and associated transaction costs.

On January 17, 2024, the Company also announced that it reached an agreement to sell its Queenston Mile Vineyard with a closing date of February 15, 2024. The Company agreed to a purchase price of approximately $4.4 million for the real estate, chattels, equipment and inventory. The purchase price includes a $500,000 vendor take-back mortgage and an agreement to acquire approximately $400,000 of finished goods inventory on a cost plus basis.

Related Party Transaction

Pursuant to MI 61-101, the Company is required to include the following in this Material Change Report:

(a) A description of the transaction and its material terms 

A description of the previously announced non-brokered private placement, the 2022 Debentures, and the 2023 Replacement Debentures, and material terms thereof, can be found above, and in the News Release. The Company issued 2023 Replacement Debentures in the aggregate principal amount of $3,350,000 to insiders of the Company.

(b) The purpose and business reasons for the transaction

No new funds were received by the Company in relation to the issuance of the 2023 Replacement Debentures, which was undertaken to assist the Company with the execution of its strategic plan.

In relation to the sale of the Queenston Mile Vineyard, and as part of the Company’s debt reduction strategy, the Company will use the proceeds of the sale to reduce working capital and long-term debt.

(c) the anticipated effect of the transaction on the Company’s business and affairs

The Company does not anticipate any material effect on its business and affairs as a result of the Insider Issuance.

(d) a description of (i) the interest in the transaction of every interested party and of the related parties and associated entities of the interested parties, and (ii) the anticipated effect of the transaction on the percentage of securities of the Company, or of an affiliated entity of the Company, beneficially owned or controlled by each person referred to in subparagraph (i) for which there would be a material change in that percentage

Prior to the Insider Issuance, Lassonde Industries held 25,346,506 Common Shares, representing approximately 52.94% of the issued and outstanding Common Shares, 1,123,958 warrants convertible into 1,123,958 Common Shares, $500,000 in principal amount of 2022 Debentures, 80,000 options, exercisable for 80,000 Common Shares and 277,338 deferred share units, which may be settled, at the discretion of the Company, for up to 277,338 Common Shares. Following the Insider Issuance, if Lassonde Industries was to convert all of its 2023 Replacement Debentures (exclusive of accrued interest, including interest on the 2022 Debentures), it would own, directly or indirectly, 27,013,172 Common Shares, representing approximately 54.53% of the issued and outstanding Common Shares (based on the current number of issued and outstanding Common Shares, assuming no additional issuance or conversion).

Prior to the Insider Issuance, Lassonde Holding held 617,824 Common Shares, representing approximately 1.29% of the issued and outstanding Common Shares, $2,850,000 in principal amount of 2022 Debentures and 250,000 warrants convertible into 250,000 Common Shares. Following the Insider Issuance, if Lassonde Holding was to convert all of the 2023 Replacement Debentures (exclusive of accrued interest, including interest on the 2022 Debentures), it would own, directly or indirectly, 10,117,824 Common Shares, representing approximately 17.63% of the issued and outstanding Common Shares (based on the current number of issued and outstanding Common Shares, assuming no additional issuance or conversion).

(e) a discussion of the review and approval process adopted by the board of directors and the special committee, if any, of the Company for the transaction, including a discussion of any materially contrary views or abstention by a director and any material disagreement between the board and the special committee

The issuance of the 2023 Replacement Debentures was unanimously approved by the board of directors of the Company, with the Lassonde Group’s nominees abstaining from approving the Insider Issuance, without the establishment of a special committee. No materially contrary views were expressed.

(f) a summary, in accordance with section 6.5 of MI 61-101, of the formal valuation, if any, obtained for the transaction, unless the formal valuation is included in its entirety in the material change report or will be included in its entirety in another disclosure document for the transaction

Not applicable.

(g) disclosure, in accordance with section 6.8 of MI 61-101, of every prior valuation in respect of the Company that relates to the subject matter of or is otherwise relevant to the transaction (i) that has been made in the 24 months before the date of this Material Change Report, and (ii) the existence of which is known, after reasonable inquiry, to the Company or to any director or senior officer of the Company

Not applicable.

(h) the general nature and material terms of any agreement entered into by the Company, or a related party of the Company, with an interested party or a joint actor with an interested party, in connection with the transaction

Subscribers, including Lassonde Holding and Lassonde Industries, were issued certificates by the Company evidencing the 2023 Replacement Debentures and their terms and conditions as outlined herein.

(i) disclosure of the formal valuation and minority approval exemptions, if any, on which the Company is relying under sections 5.5 and 5.7 of MI 61-101, respectively, and the facts supporting reliance on the exemptions.

The Company has relied on the Exemption from Formal Valuation Requirement under section 5.5(b) of MI 61-101, as the Company’s securities are listed on the TSXV Venture Exchange, and on the Exemption from Minority Approval Requirement under section 5.7(1)(e) of MI 61-101, as the Company is in a situation of serious financial difficulty.

This Material Change Report is being filed less than 21 days before the closing of the Insider Issuance as the full details of any insider participation were only confirmed upon closing.

Item 5.1 Full Description of Material Change

Please refer to News Release.

Item 5.2 Disclosure for Restructuring Transactions

Not applicable.

Item 6. Reliance on subsection 7.1(2) of National Instrument 51-102

Not applicable.

Item 7. Omitted Information

Not applicable.

Item 8. Executive Officer

Ryan Conte, Chief Financial Officer, Email: rconte@diamondwines.com

Item 9. Date of Report

January 26, 2024

Diamond Estates Wines & Spirits LTD

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