Mergers and Acquisitions Intensify Within the Burgeoning Cannabis Industry

FinancialBuzz.com News Commentary

NEW YORK, April 22, 2019 /PRNewswire/ -- Most U.S. cannabis companies are generally small, privately-owned businesses because federal regulations limit their expansion. A few of these limitations even restrict companies from transporting cannabis over state lines, however, some companies have expanded outwards and have begun launching operations in multiple states. While regulations hinder the growth of the industry, the exponential growth the cannabis market so far has exhibited the fact that it is catching the attention of investors, analysts, and even other industries. A handful are looking to integrate cannabis into their business models, while others are just holding a stake within the industry. Moreover, larger cannabis players have begun to buyout other smaller companies within the marketspace, as they are looking to either expand established operations within a region or expand to a new area. In particular, mergers and acquisitions (M&A) are expected to be a large part of a pivotal transition period for the cannabis industry. As M&A begin to ramp up, larger players will see their financials grow, thus accelerating the overall cannabis industry even further. According to data compiled by Mordor Intelligence, the global cannabis market was valued at USD 7.7 Billion in 2016. By 2023, the market is expected to reach USD 65 Billion, registering a CAGR of 37%. Cleanspark, Inc. (OTC: CLSK), Canopy Growth Corporation (NYSE: CGC) (TSX: WEED), Innovative Industrial Properties, Inc. (NYSE: IIPR), Charlottes Web Holdings Inc. (OTC: CWBHF) (CSE: CWEB), CannTrust Holdings Inc. (NYSE: CTST) (TSX: TRST)

Now, pharmaceutical, tobacco, and beverage sectors have all taken interest in the cannabis market. For instance, beverage and tobacco producers are looking to manufacture and commercialize cannabis-infused products for both medical and recreational applications. On the other hand, pharmaceutical companies are looking to leverage cannabis for its therapeutic medical benefits, since many medical institutions believe that cannabis can be an alternative to commonly used traditional drugs such as opioids. PricewaterhouseCoopers said that these companies are seeking economies of scale, expanding their patient base, securing consumer-centric products and brands, entering new markets or acquiring protected distribution channels. "All deals start with strategy. It's critical that the deal strategy aligns with all other levels of a business' strategy—corporate, growth and M&A—to reinforce the overall corporate direction. This allows companies to better source and approach M&A targets to achieve their growth objectives," said PricewaterhouseCoopers, "Planning for successful integration of a target is critical to realize shareholder value. While the task may seem daunting, approaching it in a methodical manner supported by the right people and systems can make it much easier. Ultimately, the rewards for a successful integration can far exceed the costs and risks of deal-making."

Cleanspark, Inc. (OTCQB: CLSK) earlier today announced breaking news that it, "has secured $20m in financing to support various microgrid initiatives for commercial customers. This committed financing will help accelerate the development and deployment of CleanSpark's Distributed Energy Resource (DER) Solutions to commercial customers.

Matthew Schultz, CleanSpark's Chief Executive Officer, said, "This transformative financing sets into motion a game-changing industry model for bringing customized energy solutions to a rapidly growing number of commercial customers providing low upfront costs and provable savings. Our Energy Savings Agreement (ESA) financing model provides a host of different financing options and structures for our clients and investment partners to jointly pursue. Nowhere are the benefits and savings from these solutions more relevant than in the rapidly growing cannabis industry where both energy needs and the need to be intensely competitive are elevated. Given the backlog we are witnessing and the level of interest we are confident in our ability to execute on a wide variety of projects and scale our industry leading software platform."

How do Energy Savings Agreements (ESAs) Work?

Funding Stage

• SPE (Special Purpose Entity) Formed to own the System asset.
• SPE funded by CleanSpark (CLSK) and a Tax Equity Partner (TEP).
• CLSK owns at least 51% of the SPE.
• TEP funds the SPE at a premium due to their ability to rapidly harvest the tax benefit in year one.
• Commercial customer spends $5,000 - $20,000 for a feasibility and engineering study.

Deployment Stage (Option 1)

• Commercial customer purchases the system outright and enjoys 100% of the energy savings.

Deoployment Stage (Option 2)

• CLSK builds, owns, and operates the system/project.
• CLSK award the customers around 10% of the annual energy savings.
• CLSK offers a discounted buyout option (40-60% of original cost) at year 5 or 6.
• After buyout, customer enjoys 100% of the energy savings.

Projects Create Long Term Value

• CLSK can also sell projects to third parties after 12 months of operation.
• Projects are valued on a simple value of discounted future cash flows.
• In most cases, after 12 months of operation, the value of a project will exceed the value that would have been realized had the project been sold to the customer on day one.

Benefits of the CleanSpark ESA

• Minimal upfront costs for commercial customers.
• Conserves capital expenditures for business expansion needs.
• Payments for the system are based on the energy savings that the customer can realize.
• Capital is readily available to fund large scale projects.
• Management and expertise of CleanSpark's software and consulting services provide turn-key solution.

"Our solution is unique, revolutionary and tailor-made to relieve the economic and practical pressures facing today's cannabis growers. We are energized by the backlog," added Schultz. "Whether these projects are sold outright, operated, or held by CleanSpark until a future sale date, the result is the same, i.e. value is created for our stockholders by getting to scale in an industry that is projected to exceed $2b in the not too distant future."

Focus on Cannabis

While the Company is garnering interest across multiple industries and sectors, the cannabis space is of keen interest to us. CleanSpark's microgrid energy solution dramatically decreases the cost of energy associated with producing each pound of final product.

A cannabis business using $90,000 per year in energy has the potential to reduce its operating costs (flowering stage) from $270/lb. to $200/lb., producing a 15% ROI over 10 years.

For an illustration of how CleanSpark helps Cannabis growers optimize their competitive advantage, please visit this link: www.cleanspark.com/cannabis.

"The solar industry proved that long-term financing that generates real cost savings, an environmental benefit, and tangible ROI for both investors and customers can expect to grow to scale on an expedited timeline.", added Schultz. "With this recent capital infusion, CleanSpark intends to continue to blaze trails in the microgrid arena as we deliver strong returns to our customers, investment partners, and shareholders."

About CleanSpark, Inc: CleanSpark provides advanced energy software and control technology that enables a plug-and-play enterprise solution to modern energy challenges. Our services consist of intelligent energy monitoring and controls, microgrid design and engineering, microgrid consulting services, and turn-key microgrid implementation services. CleanSpark's software allows energy users to obtain resiliency and economic optimization. Our software is uniquely capable of enabling a microgrid to be scaled to the user's specific needs and can be widely implemented across commercial, industrial, military, agricultural and municipal, deployment. For more information on CleanSpark, please visit http://www.cleanspark.com

Canopy Growth Corporation (NYSE: CGC) (TSX: WEED) is a world-leading diversified cannabis and hemp company, offering distinct brands and curated cannabis varieties in dried, oil and Softgel capsule forms. Canopy Growth Corporation and Acreage Holdings, Inc. (CSE:ACGR.U) recently announced that they had entered into a definitive arrangement agreement that grants Canopy Growth the right to acquire 100 percent of the shares of Acreage, with a requirement to do so at such time as cannabis production and sale becomes federally legal in the United States, subject to obtaining the requisite prior approval of the shareholders of each of Acreage and Canopy Growth, respectively, as well as the approval of the Supreme Court of British Columbia. Once the Right is exercised, the combined infrastructure, intellectual property, brands and organizational resources are expected to create a global cannabis powerhouse, with an anticipated leadership position in every targeted international market for legal cannabis sales, including the U.S., Canada, and select markets across Latin America, Europe and Asia-Pacific. "Today we announce a complex transaction with a simple objective. Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally-permissible pathway exists," said Bruce Linton, Chairman and Co-Chief Executive Officer, Canopy Growth. "By combining Acreage's management team, licenses and assets with Canopy Growth's intellectual property and brands, there will be tremendous value creation for both companies' shareholders."

Innovative Industrial Properties, Inc. (NYSE: IIPR) is a self-advised Maryland corporation focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities. Innovative Industrial Properties, Inc. recently announced that it closed on the acquisition of a property in Barry, Illinois, which comprises approximately 75,000 sq. ft. of industrial space situated on approximately ten acres. The purchase price for the property was USD 19 Million (excluding transaction costs). Concurrent with the closing of the purchase, IIP entered into a long-term, triple-net lease agreement with a wholly owned subsidiary of Ascend Wellness Holdings, LLC (Ascend), which intends to operate the property as a medical-use cannabis cultivation and processing facility in accordance with Illinois medical-use cannabis regulations. Ascend is expected to complete additional tenant improvements for the building, for which IIP has agreed to provide reimbursement of up to USD 6 Million. Assuming full reimbursement for the tenant improvements, IIP's total investment in the property will be USD 25 Million. As the pioneering real estate investment trust (REIT) for the medical-use cannabis industry, IIP partners with experienced medical-use cannabis operators and serves as a source of capital by acquiring and leasing back their real estate assets, in addition to offering other creative real estate-based capital solutions. "We are very pleased to close on this transaction with Ascend in Illinois, marking our ninth state where we own properties," said Paul Smithers, President and Chief Executive Officer of Innovative Industrial Properties, Inc. "We look forward to supporting Ascend as their long-term real estate partner, as they launch and continue to expand their operations in a number of states to meet the tremendous demand for patient treatment."

Charlottes Web Holdings Inc. (OTCQX: CWBHF) (CSE: CWEB) is the market leader in the production and distribution of innovative hemp-based cannabidiol wellness products. Charlotte's Web Holdings, Inc. recently reported its 2018 harvested hemp results. The Company reported more than a 10 times growth in harvested hemp compared to its 2017 grow season. The high-quality 100% U.S.-grown hemp will be processed through proprietary extraction methods to create whole plant hemp extract that will be used in Charlotte's Web products for sale in 2019 and 2020. "Charlotte's Web is one of only a few hemp CBD producers capable of supplying large volumes of high-quality hemp extract from its own supply chain that can meet significantly increasing market demand," said Hess Moallem, President and Chief Executive Officer of Charlotte's Web. "As the category and brand leader, our goal is to increase our market share and with this bountiful harvest we are able to satisfy our customer demands for 2019 and beyond. This incredible harvest ensures we can continue to produce our high-quality human nutrition products without being subject to constantly fluctuating market prices as is common with third-party sourced raw material. This allows us to have better control and predictability over our cost of goods sold and thereby our gross margins. In addition, these harvest levels will allow us to explore opportunities to supply future partners with our proprietary hemp extracts."

CannTrust Holdings Inc. (NYSE: CTST) (TSX: TRST) is a federally regulated licensed producer of medical and recreational cannabis in Canada.  CannTrust Holdings Inc., one of Canada's leading, most trusted licensed producers of cannabis and the 2018 Canadian Cannabis Awards "Top Licensed Producer of the Year", recently announced that it had obtained the necessary permitting from the Town of Pelham to proceed with its Phase III expansion with the construction process set to commence immediately. The revised Phase III expansion is permitted for a footprint of up to 390,000 sq. ft., compared to the 600,000 sq. ft. in the Company's initial application. However, with enhancements to the Phase III facility above and beyond the specifications initially contemplated, CannTrust maintains its total production capacity forecast of 100,000 kg per year after completion of the Phase III construction. "We are pleased with the outcome of the discussions with the Town of Pelham," said Peter Aceto, Chief Executive Officer of CannTrust. "We believe this decision reflects our view that we are a trusted member of the community and that we are intent on listening to our stakeholders. The demand for our medical and recreational products continues to be well in excess of supply and we are keen to move ahead with the Phase III expansion and meet our capacity targets. We also continue to evaluate several strategic alternatives to meet and increase our initial production capacity goals. We are actively pursuing strategic acquisitions of land and facilities, both inside and outside Ontario and hope to update shareholders with these initiatives in due course. Our active patient count continues to increase, and the recreational market is currently undersupplied. We intend to make every effort to serve these markets with our award-winning products."

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