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Viridian Cannabis Deal Tracker Q&A, August 10, 2017

This is the second Viridian Cannabis Deal Tracker Q&A, a new weekly feature for the American Cannabis Report where we discuss Viridian Capital Advisors' weekly Cannabis Deal Tracker and ask clarifying questions to a member of the firm. (To get the Cannabis Deal Tracker delivered to you each week, sign up here).

Again this week, we chat with Harrison Phillips, a Viridian Vice President in charge of data collection and analysis projects. American Cannabis Report (ACR): Congratulations are in order - we see that Viridian has hired Rachel Simmons as Associate Director of Global Communications, and added experienced investment banker and fund manager Mark Gelnaw to your Advisory Board. Would you say these are votes of confidence in both the cannabis market and the company?

Harrison Phillips, Viridian: We are excited to have both Mark and Rachel with us at Viridian and believe their involvement does reflect wide-spread interest in both Viridian and the cannabis industry as a whole. We have seen people of all ages, backgrounds, and professions getting involved in one way or another in the cannabis industry and expect this to continue as the legal markets develop and the social stigma abates.

ACR: In your Weekly Cannabis Deal Tracker, the American Cannabis Report sees a bump in capital raises over the last month or so, to almost $1.6B YTD as of Week 31, and a bump in announcements. Has Viridian noticed deal pipeline volume increasing, and what might be causing it now?

Phillips: We have seen an increase in capital raising activity by cannabis companies since the third quarter of 2016. This was originally driven by the anticipation of the new legal cannabis markets that could have been established in the November 2016 election in the U.S. and the deployment of capital by investors looking to profit from favorable voting results. After the elections, in which 8 of 9 ballot initiatives for cannabis passed, a greater influx of capital into the industry began and has largely continued to date in 2017 as investors and operators are looking to best position themselves to take advantage of the new markets that are opening. Furthermore, Canadian licensed producers have significantly increased their capital raising activities, primarily to scale up capacity in anticipation of the markedly greater demand expected when the adult-use market in Canada launches in July 2018.

ACR: The Deal Tracker shows a public company being acquired by a private investor. Is Viridian noticing an increasing sophistication in deal structures this year?

Phillips: This transaction represented a reverse takeover whereby a private company acquired a public company to become publicly traded without undertaking the traditional going-public process (i.e. IPO). We have seen a slight increase in the sophistication of deal structures, particularly regarding cross-border funding and royalty arrangements. The variability in laws between legal cannabis markets, between states and between countries, sometimes necessitates the implementation of creative investment structures. Royalty arrangements have increased in the past year as well as companies borrow deal structures similar to those of other industries, namely mining, whereby rights to future output are exchanged for upfront investment.

ACR: We noticed that American Green is deploying capital into real estate - specifically the company is buying a whole California town called Nipton. Can you give other recent examples of out-of-the-box investment strategies in the cannabis space?

Phillips: Most of the investment strategies we have seen are quite traditional – operators deploying capital to generate returns. While there has been variability in the strategies undertaken, almost all of the deals we have tracked are attempts to increase or acquire market share, develop synergies or economies of scale, or purchase or invest in assets that will bring additional value to the firms.

ACR: Again this week, we see a decrease in capital raises over the same period in 2016, and an increase in M&A activity. Is this a sign of consolidation in the industry, or have these trend lines shown a lot of movement throughout 2017?

Phillips: While there were fewer capital raises closed this week in 2017 (2) compared to the same week in 2016 (5), there was significantly more capital raised ($14.5 million USD vs. $6.7 million USD). This reflects several trends we have identified in cannabis capital raises, specifically increases in both total capital raised and the average capital raised per deal.

We have also seen an increase in M&A activity since the third quarter of 2016. This increase is due to several factors, primarily the launch of new markets in the U.S. following the November 2016 elections, the anticipated launch of an adult-use market in Canada, consolidation in more mature markets such as Colorado and Oregon, and a rise in cross-border transactions by multi-state and international operators looking to enter into new markets.

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