Raising Private Equity Capital for Expansion, Insurance and Business Mergers/Acquisitions

Introduction
The Future of Cannabis & Hemp
Erik Allison, AIF®
Managing Partner
Skytree Capital Partners
(702) 215-9434
erik@skytreepartners.com
www.skytreepartners.com

BREAKING NEWS
U.S. House of Representatives Passes SAFE Banking Act!
On Wednesday September 25th the U.S. House of Representatives approved the SAFE
Banking Act (H.R. 1595) in a 321-103 floor vote.
Wednesday’s vote was historic, as the SAFE Banking Act is the first standalone cannabis bill to
ever receive a full vote in Congress. This legislation would prevent federal financial regulators
from punishing financial institutions that provide services to state-legal cannabis businesses.
NEXT STEPS…
The next step is for the Senate to consider its version of the SAFE Banking Act later this year.
Should it pass, the two bills would need to be reconciled. Upon both bodies of Congress passing
the SAFE Banking Act, it would be submitted for Presidential approval.
For the industry, this represents a major inflection point and hopefully bodes well for further
rationalization of federal cannabis policies, including research, taxation, access for veterans and
other issues that would still fall short of legalization.

Prohibition is crumbling.
Opportunity exists. Invest in
what comes next.
Skytree Capital Partners is an experienced private equity firm with a
proven track record of identifying unique opportunities, creating
significant returns, and providing liquidity for our investors in the
emerging cannabis industry.

Discussion Overview
Raising Capital Mergers & Acquisitions Insurance

The Cannabis Illusion
What investors see
What investors don’t see
Investors are unable to easily
access the best deal ﬂow and
industry insight necessary for
proper investment selection
Lack of Deal FlowComplex Regulations
Due diligence is unconventional,
time consuming and requires
specialty industry knowledge to
properly interpret value
Onerous Due Diligence
Many businesses struggle to
secure banking relationships
which can put a strain on
operational execution
Limited Banking
Identifying sophisticated
management teams that can
operate in a legal & compliant
environment is challenging
Unproven Management
In order to scale, businesses
require large amounts of capital
and must navigate different
regulations from state to state
Capital Scarcity
The industry is still largely
undercapitalized and operators are
faced with challenging regulatory
landscapes and framework
Challenges Remain
Sky High Profits

8
The legal cannabis industry is one of the fastest growing industries in America with a compound
annual growth rate of 33%. The industry’s continued expansion is matched by equally strong
growth in popular support for cannabis legalization nationally with 94% of Americans in support
of legalization for medical use and 64% in support of legalization of cannabis for adult use.
Undeniable & Rare Opportunity
The Future of Cannabis Investing
Adult Use Medical Use No Legislation Total Capital Raised
2017 2018
$13.8B
$3.5B
Investment activity in the cannabis industry has been
increasing for several years but 2018 shattered all previous
records, as global financing in marijuana-related businesses
exceeded $13.8 billion USD.
15+
Legal Global
Cannabis Economies
$55B+
Projected Sales
(North America)
94%
Support for
Medical Cannabis
Sources: Marijuana Factbook 2018, poll.qu.edu, Barclays Equity Research, ArcView Market Research Note: All values in USD, Source: Viridian Capital Advisors

Raising Capital
Capital Raised by Week

Raising Capital
Capital Raised by Sector

Raising Capital
Cannabis and hemp companies are traditionally raising capital from:
• High Net-Worth Individuals
• Private Equity & Venture Capital Firms
• Family Ofﬁces
• Investment Banks
• Friends & Family
• CPG Companies & Wall Street (coming soon)
The capital being raised typically comes in the form of:
Equity
Common Equity Preferred Equity
Debt
Convertible Note Debt Financing
and/or

Raising Capital
When raising capital from investors, whether from individuals or private equity, it is important to
be prepared and have a data room with all pertinent information available. Below are a few
examples of typical information investors will want to see in the data room:
• Company Investment Deck
• Executive Management Team Bios
• Business Plan
• Financials (projected pro forma, balance sheet, cash ﬂow statement, use of funds, etc…)
• Entity Documents (articles of organization, operating agreement, cap table, org chart, etc…)
• Subscription Documents (including term sheet)
• State and/or Local Licenses
• Compliance, Security, and SOP’s
• Insurance Coverages
• Real Estate Matters (leases, title, renderings, equipment list, ﬂoor plans, etc…)
• PR & Marketing
• IP, Brands & Products
• Purchase Orders & Material Contracts
• Partnerships
• Exit Strategy

Raising Capital
Cannabis is a dynamic industry - the landscape seems to change daily. For instance, late last
year hemp was a controlled substance on the federal level. Today, it’s a fully legal, mainstream
agricultural product.

Management Team
Constant evolution makes it diﬃcult for traditional investors to underwrite a certain business
model because the only guarantee is the industry will morph sooner rather than later. That’s
why smart investors take a long look at a company’s leadership team.

Compliance
Savvy investors must ensure that a company knows how to stay in compliance in every state
where cannabis is legal. This can be diﬃcult to assess because it’s not something investors
traditionally had to judge.

Brand Identity
Many companies try to tackle too many objectives and often fall short of successfully executing
on the objectives they originally set out to accomplish. Investors appreciate ambitious but also
realistic attainable business milestones.

Raising Capital
Cannabis is a dynamic industry - the landscape seems to change daily. For instance, late last year
hemp was a controlled substance on the federal level. Today, it’s a fully legal, mainstream
agricultural product.

Use of Funds & Cash Burn
Investors want to understand the use of funds to evaluate how their investment dollars will be
utilized and more importantly, does the company have enough capital to see operations through to
profitability. Projecting expenses and capital expenditures is critical to executing on a company’s
business plan.

Investment Structuring
Investment structuring can be important to enhance value, including preferred equity and short-term
high interest debt. Warrants, options and liquidation preferences will typically be included where
appropriate. Investors like flexibility so be prepared to negotiate and get creative with structuring.

Exit Strategy
Having a clear and well-defined exit strategy or strategies is important for investors to evaluate and
understand how and when they may expect to realize return of their investment capital. In a fast
moving industry, definitively identifying an exact exit can be difficult. More and more, exits are
occurring in the form of an acquisition.

Big Alcohol & Tobacco Invest in Cannabis
The Future of Cannabis Investing
The cannabis industry is one of the fastest-growing sectors in the world, and a
number of alcohol and tobacco giants are choosing to invest in legal cannabis rather
than get pushed aside by potential competition, and for good reason. Overall, data
shows that sales of alcohol were, on average, 15% lower in states with legalized
cannabis. Big alcohol, tobacco and other beverage giants like Coca-Cola have
taken notice of the massive growth potential that exists and are rushing to claim their
stake in the multi-billion dollar U.S. and international cannabis markets.
16
*University of Connecticut, Georgia State University, University
of Chicago Booth School of Business, The Nielsen Company
Molson Coors is betting on cannabis by starting
a joint venture with Hydropothecary Corp. to
develop non-alcoholic, cannabis-infused
beverages for the Canadian market. The
partnership will be structured as a standalone
company with Molson Coors holding a 57.5%
stake in the company. Molson and
Hydropothecary expect beverage and infused
product sales to begin in 2019.
Constellation Brands has been a strong partner
for Canopy Growth shareholders so far, as the
company’s stock price has more than tripled
since their first agreement in October 2017,
when the beverage company took a 9.9% stake
in Canopy Growth. Constellation is now
doubling down with an additional $4 billion
investment to establish transformative global
position and alignment.
Tobacco giant Altria is investing $1.8 billion in
Canadian cannabis company Cronos Group
which shows it is serious about entering a new
growth area as sales of traditional cigarettes
slow. The investment will give Altria a 45%
stake in the company, with an option to increase
its stake to 55% over the next five years.
Cronos will use the investment to expand its
distribution and infrastructure around the world.
On July 30, Heineken launched Hi-Fi Hops, a
cannabis-only beverage in a handful of
dispensaries in California under its Lagunitas
brand. The beverage is designed to taste like
beer but does not contain alcohol and is
currently available in two varieties. Lagunitas’
new cannabis drink is the latest wave of a larger
move by established companies diving into the
cannabis industry.

Mergers & Acquisitions
M&A Activity by Week

M&A Activity by Sector

Notable M&A Activity
The cannabis industry is experiencing a string of mega-deals, including Harvest Health &
Recreation’s $850M acquisition of Verano Holdings and Cresco’s agreement to acquire Origin
House for $1.1B CAD.
$150M

Acquisition
• 2 cultivation

• 1 processing

• 4 dispensaries
$282.5M

Acquisition
• 3 cultivation

• 2 processing

• 6 dispensaries
$949M

Acquisition
• processing

• brands
$682M

Acquisition
• 8 cultivation

• 8 processing

• 18 dispensaries
$3.4B
Acquisition
• 14 cultivation

• 10 processing

• 88 dispensaries

Cannabis companies are issuing equity, debt, and warrants for acquisitions at a rapid pace right
now, moves that require answers to key questions for keen owners & investors.
• Do the deals provide management an opportunity to create or destroy shareholder value?
• Are the deals accretive or dilutive to your ownership stake?
• Is there a viable business unit integration strategy in place post acquisition?
• Does the newly merged company have enough capital to support the expansion?
• Will the acquisition trigger a DOJ Hart-Scott-Rodino (HSR) antitrust review?
Those questions can be difficult to answer when there are scant traditional financial metric
details such as EBITDA, EPS, or free cash flow to analyze.
Two quick methods to get your arms around deal economics with just some basic financial
information:
• Return on capital (ROC)
• EBITDA per share

When considering a merger or acquisition it is critical that you don’t go at it alone. Leverage the
expertise of third-party professionals to assist with analyzing any transaction. Make sure you
understand deal terms, blind spots, potential risks, ﬁnancial arrangements, and the regulatory
nuances both on the state and local level.
Consult with trusted industry professionals:
Law Firms Accountants Industry Consultants Lobbyists
Insurance
Professionals

Insurance
Cannabis and hemp businesses need insurance like any other industry and in many cases, state
and local regulations require minimum insurance coverages in order to obtain and/or retain
licenses. Investors will often times ask about insurance coverages in place, particularly for
things like property, crop coverage, product liability and directors and ofﬁcers.
Below are the most common coverages cannabis and hemp companies obtain to protect their
businesses:
General Liability
Property
Workers Compensation
Directors & Ofﬁcers
Crop CoverageProduct Liability
Auto/Cargo Kidnap & RansomExcess Liability
Surety Bonds
Most states require these
minimum coverages
Cyber Liability

Insurance
HOT TOPIC #1 - VAPES
Vaping both cannabis and tobacco products has been a hot topic in recent weeks. Off the heals
of news that more than 8 deaths related to vaping have been reported. This week MA
announced a four month moratorium on cannabis vape products with several other states
considering similar action.
What you need to know…
• Insurance coverage is available
• Covers vapes and all vape accessories
• Defense coverage can be included as well
• Better vape products are coming to market
• Third-party testing is essential
Policies include coverage for defense costs so if you are involved in a lawsuit, even if you are not
at fault, coverage is available so you don’t have to come out of pocket to ﬁght a frivolous law suit.

Insurance
HOT TOPIC #2 - DIRECTORS & OFFICERS
With so many companies raising capital privately and publicly, management liability is essential
to any comprehensive risk management strategy.
D&O insurance covers defense costs and damages (awards and settlements) from wrongful
acts, allegations, and lawsuits brought against your company’s board members and/or officers.
It’s a type of insurance that was designed for the purpose of protecting your company directors
(both current and past) from lawsuits and litigation. In the cannabis industry, many companies
are capitalized by angel investors, PE/VC funds, and family offices.
Investors are attracted to companies with D&O policies due to the quickly shifting legal
landscape and the protection that such a policy offers them and their assets. This shows a
business is buttoned up and ready to scale.
This coverage is specifically important when:
• Evaluating a merger or acquisition
• Raising capital and/or if you have lots of investors
• Considering a public listing and/or before going public

Insurance
ADDITIONAL INSURANCE FAQ’S
• Premium is typically based on square footage and revenue
• Coverage can be obtained in all 50 states and internationally
• Insurance carriers audit their customers
• Premiums can be ﬁnanced with 25% down followed by 9 equal installments
• Coverage renews every year for most policies
• Very few markets are available
• Traditional carriers are still skeptical and are not providing coverage
WHAT TO BE CAREFUL OF…
• Pay close attention to the policy exclusions
• Traditional brokers and agents are inexperienced due to lack of industry knowledge
• Providing false statements when attempting to obtain insurance
• Don’t let your insurance lapse
• Over insuring your operations
• Don’t take workers compensation lightly

Contact Information
Erik Allison, AIF®
Managing Partner
Skytree Capital Partners
(702) 215-9434
erik@skytreepartners.com
www.skytreepartners.com
THANK YOU!

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