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Cubicfarm Systems Corp
Symbol CUB
Shares Issued 84,179,714
Close 2019-12-11 C$ 0.38
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Cubicfarm to acquire HydroGreen for 11 million shares

2019-12-11 19:38 ET - News Release

Mr. Dave Dinesen reports

CUBICFARM SYSTEMS CORP. ANNOUNCES STRATEGIC ACQUISITION OF HYDROGREEN, INC.

Cubicfarm Systems Corp. has entered into a binding purchase agreement, effective Dec. 10, 2019, to acquire HydroGreen Inc., an arm's-length private company headquartered in South Dakota.

HydroGreen is a manufacturer of fully automated hydroponic growing systems that produce live, green animal feed, prioritizing animal health and performance. HydroGreen's unique process sprouts grains, such as barley and wheat, in a controlled environment with minimal use of land, labour and water. Its system performs all growing functions, including seeding, watering, lighting, harvesting and reseeding -- all with the push of a button -- to deliver animal feed without the typical investment in fertilizer, chemicals, fuel, field equipment and transportation.

Overview of acquisition

The acquisition will be completed by way of a reverse triangular merger of CubicFeed Systems U.S. Corp., a wholly owned subsidiary of the company, and HydroGreen, resulting in HydroGreen being renamed "of CubicFeed Systems U.S. Corp." and becoming an indirect and wholly owned subsidiary of the company. The new Cubicfarms subsidiary will operate the existing business of HydroGreen moving forward.

Under the terms of the merger agreement, holders of HydroGreen shares will be entitled to receive an aggregate of 11 million common shares of Cubicfarms, subject to adjustment related to working capital. Of the consideration shares, 10 million will be issued on closing of the acquisition with the remaining one million shares being issued on the six-month anniversary of closing, subject to any set-off relating to indemnification. None of the current shareholders of HydroGreen will hold more than 5 per cent of the common shares of the company pursuant to the acquisition.

The implied value of the Cubicfarms common stock issued to HydroGreen is $1.50 per share. Following closing, principals of HydroGreen holding in excess of 80 per cent of the consideration shares will enter into a pooling agreement with respect to their consideration shares. Under the terms of the pooling agreement, 25 per cent of their consideration shares will be released on the closing of the acquisition, and an additional 25 per cent will be released on each of the dates which are six months, 12 months and 18 months following closing of the acquisition.

In 2018, HydroGreen recorded unaudited sales revenues of approximately $1.2-million (U.S.) and an unaudited gross profit of approximately $700,000 (U.S.).

The acquisition will require the approval of HydroGreen shareholders at a special meeting expected to take place in late December. To become effective, the acquisition must be approved at the HydroGreen meeting by HydroGreen shareholders holding greater than 50 per cent of the HydroGreen shares entitled to vote at the HydroGreen meeting. HydroGreen shareholders holding approximately 75 per cent of the issued and outstanding HydroGreen shares have entered into voting and support agreements with Cubicfarms in support of the acquisition. The board of directors of HydroGreen has unanimously approved the acquisition and will recommend that HydroGreen shareholders vote for the acquisition. The merger agreement includes representations, warranties and covenants typical of a transaction of this nature, including with respect to non-solicitation.

In addition to approval of HydroGreen shareholders, the acquisition is subject to approval of the TSX Venture Exchange and other customary closing conditions. It is not anticipated that the acquisition will be classified as a reviewable transaction under TSX Venture Exchange policies.

The acquisition is expected to close in December, 2019, following the HydroGreen meeting.

Economic, environmental and nutritional benefits of hydroponic animal feed

The HydroGreen system provides local, on-demand availability of fresh green feed 365 days a year, unaffected by drought, snow or rain. Hydroponic feed that is fed directly to livestock results in significant reduction of feed waste since the entire root mass is consumed with the grass.

In addition to savings from reduced labour and water, the system's vertically stacked surfaces allow for high yields in a very small area, increasing farmers' independence by growing food for their livestock without the need for cultivated land.

When wheat grass and barley are sprouted, they release many vitamins and minerals, as well as convert hard-to-digest starches into easily digestible proteins. Sprouting results in increased enzyme levels in the ration, which aids digestion and absorption of nutrients; increased levels of vitamins; increased mineral bioavailability; and increased fatty acids (quality energy) and amino acids (quality protein). These nutrients are critical to animal health, growth, milk production and reproduction.

Sales and marketing strategy for the HydroGreen system

Cubicfarms has signed an authorized reseller agreement with Artex Feed Solutions. Artex Feed Solutions is a joint venture company, which is 25 per cent owned by Cubicfarms and 75 per cent owned by Artex Barn Solutions, a leader in agricultural supplies for over 40 years. Artex Barn Solutions was founded by John de Jonge -- also a board member of Cubicfarms -- who purchased Artex Barn and expanded it into a global provider of cattle-handling equipment, ventilation and cow cooling. He has deep expertise in establishing and scaling up multiple manufacturing facilities in China and North America.

Artex and Mr. de Jonge plan to market the HydroGreen system to their existing dealership network in the United States and Canada, and to qualified leads in China, Indonesia and the Middle East -- areas with substantial market potential due to changing food consumption patterns and supportive government policies toward agricultural technology.

Internationally, Artex dealers will target existing agriculture animal producers, looking to enhance profitability and environmental sustainability, early-stage farmers with minimal capital and land constraints, small- to medium-size farms seeking feed alternatives to benefit their operations, and urban farmers without access to land.

The arrangement with Artex Feed Solutions may be considered a related-party transaction subject to TSX Venture Exchange Policy 5.9 and Multilateral Instrument 61-101. The company will be exempt from the need to obtain minority shareholder approval and a formal valuation as required by MI 61-101 as the company is listed on the TSX Venture Exchange and the fair market value of the transaction with Artex is far below 25 per cent of the company's market capitalization.

While remaining on Cubicfarms' board of directors, Mr. de Jonge will transition from his current role as the company's chief design and installation officer to chief executive officer of Cubicfarms subsidiary CubicFeed Systems, effective immediately. Rodrigo Santana, Cubicfarms' chief operating officer, will assume oversight of machine design and installations, supported by a management team with significant field expertise.

Dave Dinesen, chief executive officer of Cubicfarms, commented: "This landmark transaction with HydroGreen is a catalyst for continued growth at Cubicfarms. Having already established a robust sales pipeline for our fresh produce vertical, this acquisition will enable us to capitalize on technology and automation synergies with HydroGreen to capture the animal feed space, which we believe could be a larger market than fresh produce. Approximately two-thirds of the world's agricultural land is used for grazing and animal feed production. HydroGreen's land-on-a-stand system helps reduce the vast amounts of land required to grow feed.

"While the Cubicfarms system is ideal for growing fresh produce, the advancements made in the HydroGreen system in the areas of harvesting, reseeding and self-cleaning make it particularly well suited for the production of animal feed. This transaction positions us to be a leading ag-tech company, providing controlled-environment growing systems in four diversified verticals: fresh produce, animal feed, hemp/cannabis and nutraceutical ingredients."

Dihl Grohs, chief executive officer of HydroGreen, commented: "I am incredibly proud of HydroGreen's growth trajectory since our first system prototype was built in 2014 in Sioux Falls, S.D., then progressively refined to achieve today's 98-per-cent reliability rating and the system's ability to monitor and correct issues in advance.

"The technology is poised for large-scale commercialization, and this merger represents an ideal next step to bring HydroGreen systems to international markets. I am confident that Cubicfarms' global leadership in automated vertical-farming solutions, combined with the go-to-market ability of Artex Feed, will result in significant uptake of our systems as farmers learn how this technology enhances the productivity of their operations."

Mr. de Jonge, president of Artex Feed Solutions, and chief executive officer of CubicFeed Systems, commented: "As a lifelong dairy industry participant, I believe the animal feed market is ripe for disruption, urgently requiring predictable, year-round production of nutritious feed while minimizing the inputs of land, labour and water. I am excited to lead the expansion of Cubicfarms' animal feed business by leveraging Artex's broad network of dealers in 40 countries to bring the HydroGreen solution to market."

About Cubicfarm Systems Corp.

Cubicfarm Systems is an ag-tech company, commercializing large-scale, vertical farming solutions for global industrial markets. Founded in 2015, the company's mission is to provide industries around the world with efficient growing systems capable of producing predictable crop yields. Cubicfarms offers turnkey, commercial-scale, hydroponic, automated vertical farm growing systems that can grow predictably and sustainably for 12 months of the year virtually anywhere on earth. Cubicfarms enables its customers in the fresh produce, animal feed, nutraceutical and hemp/cannabis industries to grow locally and to provide their markets with safe, sustainable, secure and fresh ingredients that are consistent in colour, size, taste and nutrition, and allows for a longer shelf life.

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