COMMITTED TO THE CANNABIS CULTIVATION MARKET

Nexus Greenhouse Systems is proud to be the exclusive sponsor of this “State of the Industry” report, based on pioneering research on the cannabis cultivation market. Never before has this market segment been explored in such depth, and we are pleased to have made this research possible.

Since its beginning in 1967, Nexus has served and supported growers with innovative greenhouse and growing system designs. With our headquarters in Colorado, Nexus has been at the forefront of hybrid greenhouse designs. These designs are being developed by listening and working with cultivators from all over the country.

Educating our customers is a priority for us, whether by sharing our own expertise, built over half a century, or partnering on important educational efforts such as this landmark research project from Cannabis Business Times. Nexus believes the entire industry benefits when growers have the information to make the best decisions for their businesses.

We know the cannabis industry is battling high energy demands and the related costs. The good news is that Cannabis Business Times’ research shows businesses are getting smarter, utilizing significant cost- and energy-saving strategies such as automation technology and greenhouse cultivation.

In fact, as you’ll see in this report, 34% of respondents in the study say they grow at least in part in greenhouses. This is a tremendous increase from 5% a few years ago, showing that the use of hybrid, high-technology cultivation facilities are becoming an integral part of efficient growing practices. These facilities are secure and private with metal sidewalls and greenhouse roof coverings. By using natural light, energy usage can be up to 75% less in a greenhouse compared to an indoor grow. With greenhouse equipment technology, the grower has the ability to manage temperatures and humidity levels, exclude harmful insects, provide precise irrigation and fertilization levels, and engage in light deprivation to increase crop yields.

Nick Hice, of medical and recreational dispensary and cultivator Denver Relief, summed up greenhouses quite well: “Artificial lights are not ever going to be able to out-power the sun in the sunny months of the year. And the sun moves across the sky, which is good for the plants because it allows them to share the sunlight to a certain extent, and it allows us to grow bigger plants in a greenhouse since there is better light penetration.”

Greenhouse technology will have a positive impact as this industry matures. Nexus will continue to support educational efforts for our customers and the industry at large, and we look forward to building true partnerships with you and other cannabis cultivators, and helping you and the industry thrive.

— Greg Ellis, Director of Sales, Western States, Nexus Greenhouse Systems

Legal cannabis sales reached $5.4 billion in 2015,

a figure that represented a 73% jump over 2014. Sales are expected to grow 25% this year to $6.7 billion, according to industry investment and research firm ArcView — although that number seems conservative considering four or five states are likely to pass adult-use legislation this year. And many of us have seen the estimates that the industry could, in just a few years (if all states legalized), surpass the revenue generated by the NFL — with sales of $35 billion to $40 billion. This industry is not small potatoes.

Such eye-opening predictions aside, and despite the fact that California legalized medical marijuana 20 years ago, the industry, really, is in its infancy. Even California is facing a regulated market for the first time, and growers in The Golden State will be adapting and learning like everyone else.

The industry also still faces major challenges with the Federal Government. So, while growers are operating fully legal businesses in their respective states, the Fed’s illegal label on the plant causes many to continue to look over their shoulders, remain in the shadows and even use aliases when discussing their businesses in public or with the press.

Those challenges, combined with a lack of focus on cannabis producers, have left data wanting on this industry segment — the roots, so to speak, of the market.

Cannabis Business Times set out to remedy that by conducting research on cannabis cultivators, examining important trends, their facility choices and size, plans for growth, revenue generation, energy spending and more.

In this special “State of the Industry” report, we present to you the results of this important research project, managed by Readex Research, an independent third party and leader in market research. Here’s what we found.

What types of cannabis plants does your operation grow?*

Small Businesses, Big Plans

Due to the recent expansion of the cannabis market,

with many new states legalizing medical marijuana programs, and four states now legalizing and regulating cannabis for adult use, it’s not all that surprising that many of the industry’s businesses are young. Based on the research findings, 60% of state-legal cultivation businesses have been in business less than three years.

Many cultivation businesses are also fairly small — according to Cannabis Business Times’ research, 58% of cannabis businesses have a crop size of less than 10,000 square feet, with 15 employees on average. This finding likely can be attributed not only to a significant number of young businesses still in startup stages, but also to the number of small, often family-owned farms in California. Scientific American estimated that The Golden State has as many as 50,000 small cannabis farms, with 4,000 in Humboldt County alone. Many in the industry say that California actually comprises 80% of the overall cannabis market, which may be true, but we haven’t been able to verify it with the data in this report.

Just 10% of cannabis crops are 50,000 square feet or larger, and the average size of today’s cannabis farm is 18,000 square feet — less than half an acre.

Regardless of size, however, cannabis cultivation businesses are growing — and by a fairly hefty amount. Whether they are adding space to meet current market demand or in anticipation of increasing market size due to new medical and recreational markets, nearly three-fourths (71%) are planning to expand their grow operation within the next two years.

And not only that, but their expansion plans are, by and large, sizable. Twenty percent of cultivators plan to add 25,000 square feet or more to their grow space — with nearly 10% of those looking to add 80,000 square feet or more in the next two years.

Which of the following does your operation plan to purchase for cannabis cultivation in the next two years?

WHERE ARE YOU GROWING? (It’s not where you might think)

Common estimates in the industry suggest that outdoor grows comprise just 5% of the market today. Why such a small percentage for an agricultural crop? As many of you may already know, a lot of states and municipalities don’t allow outdoor grows. Washington, one of the top 10 most eco-friendly states (ranked by sustainability website TriplePundit), originally banned outdoor grows, but later reversed that regulation. But even within what somewhat ironically is nicknamed The Evergreen State, some counties are fighting that decision, as well as opposing greenhouse growing. As one participant in CBT’s research commented, “Mason County is outlawing outdoor and soft-sided greenhouse growing from fear of something, but I'm not sure what.”

In what will be seen as good news for many environmentally conscious growers, however, the outdoor cultivation market may be quite a bit larger than we thought. CBT’s research suggests that nearly 40% of respondents have outdoor grow components to their businesses.

Another commonly cited estimate is that about 20% of growers grow in greenhouses; but CBT’s research suggests that number is higher as well. More than a third of all cultivation businesses researched have a greenhouse as part of their grow.

Still, in a tightly regulated industry where the laws and security requirements largely dictate the prevalence of indoor cultivation sites, it’s not all-too-surprising that most growers (80%) grow at least part of their crop indoors.

When you look at those who grow exclusively indoors, however, that number is cut nearly in half (44%).

And that leads us to one of the most significant trends the research shows: cultivation in more than one type of “facility.” Forty percent of growers indicated that their cultivation is done in some combination of indoor, outdoor and greenhouse growing environments.

It may not be easy being green, but growers are trying

It’s no secret that the industry is under the public eye (and the eye of many within the industry) for its energy consumption. “In 2014, Denver’s energy demand rose from 86 million kWh annually to over 148 million kWh, primarily due to the 362 cannabis grow houses established since 2012,” wrote Kathleen Hokanson and Wil Wicke of Koan Energy Consultants in the article “20 Ways to Cut Energy Use” in the November 2015 issue of Cannabis Business Times. In that same article, the well-known report “Energy Up in Smoke: The Carbon Footprint of Indoor Cannabis Production,” by Dr. Evan Mills, was cited, stating that indoor cultivators in the United States represent 1% of all energy consumed annually. In California, that number is 3%.

Those numbers are almost unbelievable. But they are apparently not lost on cultivators. Greenhouse cultivation is on the uptick, and then some. Of the growers who don’t currently grow in a greenhouse, 41% say they will add greenhouse facilities to their grow in the next 2 years.

Also, those who grow in greenhouses plan to increase their greenhouse production space. About a quarter of growers say 75% or more of their production area is in a greenhouse today. CBT’s research shows this will jump to 35% (who will grow 75% or more in a greenhouse in the next two years).

In addition, the ability to grow multiple crop cycles year-round — without the related energy consumption incurred with 100% artificial lighting of an indoor grow — appeals to many growers.

“Greenhouses are far more environmentally appropriate because of the huge wattage to produce indoors,” commented a participant in CBT’s research. “There are some stunning figures of total electrical energy percentage used in this state [Washington] that is attributable to indoor cannabis growing. … A light-deprivation greenhouse obviates a huge chunk of that lighting need and still produces good product with 5 crops per year,” he said.

Most greenhouse growers use some supplemental, artificial light, especially in regions where sunlight wanes during certain months or is inconsistent, but supplemental lighting incurs but a fraction of the energy use and cost of an indoor grow. Greenhouse growing also is gaining popularity for its ability to diffuse sunlight, to help ensure even light distribution to all parts of the plants. Hybrid greenhouses offer insulated walls and use less supplemental light, which means being even more ‘green.’

For some, the desire to curb energy use is driven by environmental concerns; for others, the concern is financial. For many, it’s both. But the bottom line is that energy consumption impacts the bottom line significantly, more than any other grow factor. The bulk of growers (41%) spent between $25,000 and $75,000 on energy in 2015, according to CBT’s research. (See the chart on p. S11.) Considering the number of smaller grows in the business, those numbers are substantial. A quarter of cultivation businesses spent more than $75,000 on energy last year, with the largest grow operations spending $1 million or more.

Is It Getting Hot in Here? Not If Technology Can Help It

As cultivators aim to reduce cost of goods sold, a necessity in increasingly competitive markets, such as California and Washington state, automation has become key, especially when it comes to heat and humidity, both of which ranked, for many growers, among the top three factors impacting yield. More than two-thirds (68%) of cultivators report using technology to automate temperature control, whether for indoor or greenhouse cultivation. More than half utilize humidity-control technology.

For which systems does your operation utilize automation technology in its cannabis cultivation?*

Organic Cannabis: Practicing What You Preach

If we’ve heard it once, we’ve heard it a million times: Growing organic cannabis is the only way to grow. Of course, it’s technically not, but anecdotally, it’s been a common theme among many successful cultivators. CBT’s research shows that growers are, in fact, making organic growing a priority. More than half (54%) of cultivators say they grow either organically in soil or organically with hydroponics.

While cannabis remains federally illegal, it can’t be “certified organic,” but growers are obviously not deterred, believing that organic cultivation not only impacts product quality, but also product safety and consumer purchasing decisions.

While organic cultivation isn’t entirely based on pesticide use, or the lack thereof, for consumers, an “organic” or equivalent label (a couple similar certifications have popped up in the industry) may just put their minds at ease, considering the any-number-is-too-many pesticide-related product recalls, most notably in Denver. (That is not to suggest that Denver growers are more inclined to use illegal pesticides, but rather the city’s attention to the matter.) And many growers place a high priority on being able to, at least in concept, if not officially, call their crops “organic,” refusing to put anything that might be harmful on their plants.

Green Rush? Not So Much

Another trend prevalent in the grower market is the consensus that the perception of the “green rush,” where you simply invest in a cannabis business, plop in some plants and start raking in the dough, is just not reality. It’s more a business of blood, sweat and tears … or nutrients, sweat and fears (compliance).

The costs to set up a full-scale cannabis operation are significant (often millions of dollars). The challenges abound (compliance, banking, security/safety and theft, pests, staffing, etc.). And competition is stiff, especially in markets such as Washington state, where supply outpaces demand. Oh, and there’s that teensy-weensy little thing called the Federal Government, which still considers cannabis illegal as a Schedule I drug. Not to mention the knowledge and skill required to maintain a successful cultivation operation.

According to CBT’s research, almost half of cultivators generated less than $250,000 in their most recently completed fiscal year. A green rush? Possibly not so much (depending on their costs of goods sold, of course).

On the flip side, nearly a quarter (24%) of growers report making $1 million or more in the past fiscal year.

An Industry Poised for more growth

This year is going to be a pivotal one for the industry, with:

• a measure to legalize and regulate marijuana like alcohol on the ballot in Nevada,
• two states (Arizona and Michigan) currently collecting signatures to get on this year’s ballot,
• ballot initiatives underway in California and Massachusetts, the latter of which also has a legislature-driven bill on the table, as does Vermont, and
• other states, such as Ohio and New Jersey, working on legalization efforts — Ohio through a second try at passing a ballot measure, and New Jersey through the state legislature (more on that to come soon).

While many thought Maine was a shoo-in for legalization, one initiative in the state failed in mid-March to collect the number of qualifying signatures it needed to get its measure on the 2016 ballot (though, at press time, backers of the initiative had filed a lawsuit saying the disqualification of 17,000 signatures should be reversed). Some remain optimistic the state still will be among those moving to end prohibition this year, as other initiatives are in the works as well. Medical programs also are expanding.

If even a handful of states pass legalization efforts this year, the growth in the already-growing market will be significant. Many cultivators are watching closely, with new launches or cross-state expansion plans at the ready.

As more states legalize cannabis, growers have a greater chance than ever to make an impact in the industry.

Note: Data in this report is based on research conducted during January and February 2016 of 100 cannabis cultivators based in 17 states.

“It made me cough a lot.”

Democratic presidential hopeful Bernie Sanders, speaking at a Michigan rally on the two times in his life he tried marijuana. At press time, all presidential candidates support states making their own policies, though only Clinton and Sanders have proposed drug schedule reclassification or removal, respectively, for marijuana.
Source: The Guardian

“The federal government is way, way behind in realizing that there are some medical possibilities with cannabis.”

Utah Rep. Brad Daw, (R-Orem), floor sponsor of SCR011, a bill that asks the federal government to reclassify marijuana to a less-regulated class to allow for additional medical research. The bill passed the Utah House unanimously Mar. 2, and will go to Utah Governor Gary Herbert for action. Source: Deseret News

“We’re sending them emails; we’re going to give them a doover. But there’s going to be a point where you’ll have to pay.”

director of the Alaska Alcohol and Marijuana Control Office, on the problems in applications for the state’s new commercial marijuana program. More than half of the 68 applications submitted on the first day had major errors, and could have to pay for re-application. Source: Juneau Empire

“He viewed the herb as something spiritual that could awaken our well-being, deepen our reflection, connect us to nature and liberate our creativity.”

Cedella Marley, daughter of musician Bob Marley, on the production of Marley Natural, a global cannabis brand created by the Marley family estate. The brand will also include cannabis- and hemp-infused topicals.

"If cannabis is implemented and [the NFL] can lead the science on this, they can resolve this brain injury situation in a big way."

Kyle Turley, former NFL player and the Gridiron Cannabis Coalition, which includes other retired players speaking out on the potential for cannabis to help athletes cope with encephalopathy pain and even possibly slow disease progression.

Alan Brochstein, CFA, is a marijuana industry expert based in Houston, Texas. He runs 420 Investor an online community and newsletter, and has his ear to the ground when it comes to our rapidly evolving industry and the big players who have emerged on the stage. 420 Investor (420Investor.com) is the first and largest due-diligence platform focused on publicly traded stocks in the cannabis industry. Brochstein also provides profiles of investors and promising companies at New Cannabis Ventures — his latest project.

Prior to focusing on his own ventures, he spent nearly 20 years working as a portfolio manager for investment firms on Wall Street, and was a writer for Seeking Alpha — covering stock market insights and financial analysis — to which he contributed more than 600 articles since 2007.

To put it simply, Brochstein is a bit of a financial genius, and he knows everyone who is anyone in the cannabis industry. So when he talks, I listen. And just last week, I was lucky enough to land an interview with the fundamental analysis guru himself. Here’s what he had to say:

"I am very positive on Canada, and nobody’s really tracking it, so I wanted to create an index and a model portfolio for the Canadian stocks." — Alan Brochstein

Scott Lowry: What were the key factors that led you to develop 420 Investor?

Alan Brochstein: I wasn’t just writing for Seeking Alpha. I was an independent analyst … working with several different investment firms, and I was also working with an investment/research company. So Seeking Alpha was just a small part of what I was doing, just to be clear. But, I was getting a pretty big following because nobody, at the time, was really focused on the cannabis space.

SL: Yeah, I noticed.

AB: I actually came into the whole cannabis thing a little canna-ignorant. I started to get up to speed on two different fronts. One, probably most important to my followers, was, understanding that these penny stocks were total scams for the most part, and, two, really learning from the ground up about the medicinal power of cannabis.

I was already on board from a personal freedom standpoint, but it got me really charged up over the implications of the future for this industry. I would also like to add that the social justice issue also really concerned me.

So, really, over the last three years since I jumped into this, I have learned a lot. I’m not an activist, per se, but I am a huge advocate, and before I was just a pacifist. Now I am an advocate for both social justice and the medicinal reasons [for marijuana reform], as well as personal liberty. Basically, I have a lot of reasons to support cannabis. And then, on top of that, I’ve really gained a huge appreciation for the economic power of not only cannabis, but hemp as well.

SL: Alan, you are my new best friend. So, in an earlier interview for CASHINBIS.COM, you stated, “The green rush is a triple win, with benefits for society, entrepreneurs and consumers.” So that goes right in line with your previous comments today, actually. Care to expand?

AB: Yeah, I use that line for a lot of things in life. You always want multiple parties to benefit from change.

… Between medical patients and recreational consumers, there’s this whole argument about the recreational thing. I personally don’t use the word “recreational” that much because to me, quite frankly, it seems that a lot of people are self-medicating, and you can label it whatever, but it’s still self-medicating.

SL: The industry has had some unscrupulous characters on the stage. There was a lot of press about a year and a half ago on GrowLife — which was the industry darling two years ago and poised for astronomical growth — and then the SEC ended up suspending them after their stock was, again, dumped on the market at its peak. (I had my you-know-what handed to me.) Do you think GrowLife will ever recover now that they have Marco Hegyi (ex senior director of global product management for Yahoo) on board as president?

AB: No, unfortunately, I don’t. They have terrible financial problems, and, yeah, it’s a regret to me. I’m sad at what happened to them, but I kind of gave up on them a year ago due to insurmountable challenges they face. It’s hard enough being a penny stock. It’s worse being one that’s on the Grey Sheets market. I still don’t really understand why they were suspended.

SL: So while we are on the subject of pump and dumps, what can an investor, especially one of your followers, look for as key signals or indicators that a company might be unscrupulous or be heading for a pump-and-dump scenario?

AB: The very first thing is: Did they file with the SEC (Securities and Exchange Commission)? Unfortunately, filing with the SEC doesn’t say that they’re not a pump-and-dump; but if they don’t [file with the SEC], I can almost assure you that they have a license to outright lie, so that’s the first thing they should look for.

The second thing is how they promote their messaging. There are a lot of people out there who are very loud, and [yet] they say nothing. That’s a big red flag. Always out talking, and there’s really nothing substantial to what they’re saying. I could go on for hours on this subject. I could write a book on it. But, for the purpose of this interview, I think those two things are really key.

You want to see that they’re actually doing something. There are so many people out there just trying to take advantage of the interest in the area. …

SL: Playing on the social megatrends and the hype, huh? That is great advice.

AB: Let me give you a third one. Always do three’s.

The third one would be to look into the background of the person. Do they have cannabis industry experience? [They] don’t have to, but do they? Have they done anything successful in their life? Is this just a person out of the blue? A lot of times with these penny stocks, these people are losers, and they are just trying to do something because they’ve never done anything. Do you really want to bet on someone who has never really done anything? The other thing is to go to their website. Call their office. If nobody picks up the phone or if it’s not easy to communicate with them, or if their website doesn’t have detailed information about them, it’s most likely not legitimate.

SL: Tell me about some of the other projects you are involved in, namely the 420 Investor Canadian Cannabis Index.

AB: As far as the Index, one of the big positives in the cannabis sector has been what’s going on in Canada. The public markets in Canada ended up having a good year last year because of the fourth quarter of the elections. [Justin Trudeau, who ran his campaign mainly on the legalization of recreational marijuana, was elected.] So there’s a lot of optimism about legalization there.

My interest there and my positive view doesn’t even really require legalization for rec. I think that the new government, especially now, is going to be strengthened. Health Canada was against [medical marijuana], so it’s kind of an awkward situation. And you know how difficult it is to navigate the rules. The goal posts get moved. The rules aren’t clear. It’s hard for those that have licenses.

So I am very positive on Canada, and nobody’s really tracking it, so I wanted to create an index and a model portfolio for the Canadian stocks. So that’s really what it’s all about.

SL: On that note, in your most recent Seeking Alpha article, you stated that you believe Canada would be a global leader in the industry, especially considering it is going to be the first G7 country to legalize recreational cannabis — some of your reasoning being that Canada has full access to banking and upcoming insurance coverage, which I think are two huge drivers of growth in the industry. What are your thoughts on that?

AB: When you look at the United States, … almost every challenge comes down to the fact that it’s not federally legal. So having it federally legal in Canada really makes things easier. It’s not perfect, because there are still provincial issues, and there still are some banking issues, but nothing like what’s going on in the U.S.

A lot of pharmaceuticals are covered at least in part by insurance — which is obviously not the case for medical cannabis — so the playing field needs to be leveled. And in Canada, it’s coming, but it hasn’t happened yet. One place where it is happening is with Veterans and the first responders. Some of them get free cannabis basically up to a certain limit, but for now it’s a big limit at a big price.

But I think there was a young guy who was able to get insurance to cover [medical marijuana].

SL: Yes, Johnathan Zaid. A University of Waterloo student. I just did a story partially on him in CBT’s January/February issue. He has an illness called constant headache syndrome, and he was able to convince Sun Life (his health insurance company) to cover the price of his cannabis, as well as a vaporizer.

AB: So the point is that Canada has a better chance of moving in that direction. While it’s federally illegal in the U.S., it ain’t happenin’.

SL: What are some of the drivers, and/or signals/indicators that are the deciding factor for your entry and exit points of a particular stock?

AB: That’s a hard one. I mean, look, most of these stocks are scams. There’s only a few I really like, and it’s really tough, honestly. It’s not really investable in the public markets, so I think people really need to focus on when the company can generate positive cash flow. I think that’s an essential element that’s lacking.

Unfortunately, that’s the biggest problem, because these companies talk about this and ... talk about that. But as they burn money, they have to raise capital.

And the big takeaway here is that they’re spending less time running and growing their business than they are fundraising — talking to investors, begging people for money, which is not a good use of time.

So that’s one of the reasons why my focus has really shifted to Canada. I see the light. It’s not at the end of the tunnel. It’s really close in terms of some of these companies being able to move toward cash flow profitability, and that’s what’s going to make the investment work, in my opinion.

About the Author: Scott Lowry resides in Oakland, Mich., with his wife, five children and their dog, Nora. He is a licensed medical grower and caregiver, and has focused on organic cannabis cultivation for the last 8 years. He also is founder and COO of a large-scale Canadian cannabis production company out of Tecumseh, Ontario, called Global Organiks, which is currently in the application process for becoming a Licensed Producer under Canada’s Medical Marijuana Program. In addition, Lowry is the founder and CEO of GO Engineering, an agribusiness technology engineering company, which creates products for the indoor cannabis cultivation industry. It is safe to say he has a healthy obsession for science, business and all things agriculture.

One of the biggest issues facing legal cannabis producers is banking. In addition to posing challenges with paying bills, taxes and payroll, among others, professional growers run into even more trouble when trying to find the money to expand or develop. For many, that lack of funding is an unbreakable barrier to a launch or expansion to serve a larger market. Doing research to find the right match for a loan or investment can be tough, with demand out-pacing supply, and when some funding companies have disappeared as quickly as they appeared.

But options do exist. Here are a few capital providers on the market that may offer financial solutions that meet your needs, whether through more traditional loans or straight-out investments, as well as some sound advice to heed while seeking a funding source.

ONE

Lender: Dynamic Alternative Finance

Loan rates: Capital loans: +15% Real estate: 7.9%

Website: www.dynaltfinance.com

Scott Jordan, director of business development at Dynamic Alternative Finance (DAF), says two types of people exist in the funding world: Those with a checkbook, and those who find the funding requests to take to the check writer.

As the director of DAF, Jordan falls into the second group, connecting cannabis business owners with available financial support. He works with businesses to get the details of what they need, then presents those details to potential lenders.

“The check writer usually doesn’t have feet on the street,” says Jordan. “He needs someone like myself to find and originate those deals, package them up, help collect the documents and do the rest of the things needed to close and fund the loan.”

One benefit to working with someone like Jordan is that the funding is treated similar to a bank loan, which means it doesn’t require giving up and diluting equity to make big financial decisions.

Jordan connects businesses with financing for equipment, working capital and real estate mortgages. For a working capital loan, currently the rate will land in the mid-teens and move up from there, depending on the risk profile, with a one- to two-year term. For equipment financing, the rates look similar, but the term will run a little longer, from two to four years. Real estate changes the game a little more, since there’s a tangible asset involved and a longer repayment term; interest rates start at about 7.9 percent.

Rates for loans to cannabis growers are higher than non-cannabis businesses, but those rates will improve over time as more lending sources get into the marketplace and cannabis business owners have more time demonstrating profitability and low default rates, says Jordan.

“Have up-to-date, consolidated financials for all your entities,” he says. “I’m looking for good credit and a good reason to use the funds. If you need the capital to be able to build out your grow because you’re selling all that you can, great news.” Taking on the challenge of expanding or buying a competitor isn’t as attractive for Jordan because of the extra risk involved.

Having a bank account also can make a difference, as can having your financials reviewed by a CPA. “I’d say [CPA-audited or reviewed financials are] the exception rather than the rule,” says Jordan, “but that really makes everyone much more comfortable with the quality of the numbers being reported and outlining the risks of the company.”

TWO

Financier: CannaWorld

Rates: Vary, sometimes convertible into equity

Website: www.calcappartners.com

CannaWorld is a holding company formed by California Capital Partners (CalCap) that operates as a merchant bank (which differs from a merchant services company that supports credit cards). A merchant bank provides capital through share ownership (often referred to as creative equity financing) rather than loans.

CalCap offers three general lines of business: private equity, investment banking and consulting services. As CalCap’s vehicle into the cannabis industry, CannaWorld has a particular interest in building and supporting the infrastructure in the cannabis industry (such as oversight of the supply chain, quality assurance of products and how money is handled). All of these are intended to facilitate growth of the industry, says Mark Burton, director.

CannaWorld offers resources to companies to help build that infrastructure through investors, private lenders and human capital. Once he determines a company’s needs and whether a loan or investment fits best, he sends the information to investors/lenders. After making that first connection, he’ll consult with both parties through a few meetings to iron out details and so both parties have had a chance to fully understand what they’re getting into.

Rates for private loans will be a little higher than might be seen through a bank, and in some cases it could be amendable or convertible debt that could turn into equity. CannaWorld also works with royalties investments, where capital is provided in exchange for a percentage of future revenues over a period of 10 to 20 years. The advantage of working with a royalties-based option is avoiding giving up equity.

For straight investments, rates are going to have to beat other options for investors especially given the industry’s inherent risk, says Burton, and might fall somewhere between 8 percent and 12 percent. But being aggressive with a quick return on a loan doesn’t always sit well, either. He likes to see terms of 36 to 60 months, and that can be a little more attractive with some convertible or amendable debt, he says.

The important point for Burton is that the company doesn’t give up equity immediately for capital. It can be appealing to the startup to open up for quick investment, but the valuation of the company isn’t going to catch an investor’s eye. If it does, the investor will own most of the company, and the founder will find himself working as an employee with little equity to show for his efforts. After a few years of building a company and a strong infrastructure, that changes.

THREE

Investor: Lizada Capital

Rates: Vary, usually convertible into equity

Website: www.lizadacapital.com

Steven Trenk, managing member at Lizada Capital, began to explore the cannabis industry when his son graduated law school and got involved in municipal land use issues in the medical marijuana movement in Arizona.

Trenk worked with the ArcView Group to seek out for investment both people and businesses with successful experience and the motivation to reach their objectives, he says.

“I’ve been investing in private companies for 30 years, so my strategy generally starts with management,” he says.

His focus is on startup and growth opportunities, since the industry, as a whole, is still in its early stages. He’s gotten involved in a few of the companies he invests in, but once he’s satisfied with the company’s plans, he prefers to get out of the way.

His terms usually run between 3 and 10 years, with an eye to a more long-term investment. Although he has invested in debt transactions at fixed rates, in almost every case the debt is convertible into equity.

Trenk is always more apt to invest in a company that’s brought to him through an organization like the ArcView Group, since, he says, “I’m not the first one to look at them and I have other investors to help vet them.” He also keeps an eye on accelerator programs like CanopyBoulder. “Deals that have come through that process have a great deal more appeal than a guy working out of his basement. Those organizations make it so much easier to gain credibility and attract capital.”

FOUR

Investor: CannaFundr

Rates: Vary, include equity options

Website: www.cannafundr.com

CannaFundr CEO and founder Randy Shipley comes from a background of angel and venture capital investing. When Colorado legalized recreational marijuana, he worked with social networking software to build a way for cannabis professionals looking for funding to connect with investors online, in a manner similar to crowdfunding.

“[CannaFundr] allows entrepreneurs and investors to connect with each other, with co-founders, with mentors,” says Shipley.

A business owner creates a profile on the site and details the type of funding she is seeking. Then, CannaFundr creates an LLC to manage investment in the company. An attorney works with the business owner to make sure all the necessary compliance securities offerings are taken care of “because there’s enough issues potentially with marijuana without doing an illegal securities offering as well,” he says. The attorney also verifies that a particular investor is from the appropriate state.

CannaFundr then operates like a fund administrator for the LLC and gets paid a portion of the investors’ profits. Particular rates and terms will change with what the cannabis professional is asking for. The fund is required to have a $2,000-per-year dividend to cover tax filings and registration for the fund.

Because the money is handled through an LLC, the company owner treats it as a single investor, even if there are 20 investors in the fund. Any payments go to the LLC itself, rather than the business owner having to manage multiple investors.

But no matter how many there are, the investors are still on the lookout to make their investment back, says Shipley. “You might say to the fund, ‘Here’s how I’ll pay you back,’ and sometimes it’s just equity.”

But “what everybody looks for, the first thing, is [whether] there [is] a viable need for the business,” he says. “And then, … do they really have the experience [and team] to execute?”

FIVE

Lender: Platinum Finance Center

Loan rates: Term: 5%-7%, Revenue: 18%-35%

Website: www.platinumfinancecenter.com

Though it’s tough for legal cannabis growers and producers to establish a bank account, it’s a requirement for business to Allan Stevens, owner of Platinum Finance Center (PFC). Stevens offers term and revenue loans for expansion and other growth, but can only do so when there is already a bank involved, he says.

He works with an international bank to provide merchant accounts (which allow businesses to accept payments via credit and debit cards) to those businesses with bank accounts. Even where cannabis is legal, banks have to pay compliance fees to continue to do business. Cannabis businesses should expect to feel some of that pressure as well, he says. “The dispensary or grower or delivery service, they have to adhere to the compliance rules and fees also. What I’ve been hearing is ‘I don’t want to pay any fees.’ Well, you’re in a high-risk business.”

The upside for building that background when looking for funding is that it establishes the company as a legitimate business later on as more and more of the country legalizes cannabis on some level, Stevens says.

“What they’re going to be looking for is proof that you are a legitimate business, that it’s not drug cartels running these dispensaries. How do you prove that? You have banking. You have a merchant account. You’ve established a loan. You are a regular business, and they can see it. There’s a paper trail,” he notes.

For term loans, PFC rates run about 5 percent to 7 percent because they mimic a Small Business Administration loan, depending on credit score. PFC’s business revenue loans provide capital based on the company’s actual revenues and FICO score. For example, if the business is doing $50,000 each month in revenue, it probably qualifies for a loan between $30,000-$60,000, says Stevens. The rates can run anywhere between 18 percent to 35 percent, depending on the FICO score.

SIX

Investor: Mentor Capital

Rates: Potential company interest

Website: www.mentorcapital.com

Another way to get funding is to be involved with an incubator, like Mentor Capital. Chet Billingsley, CEO, works with cannabis businesses and investors to grow public-ready companies.

Billingsley studied cancer treatments in his graduate work at MIT, invested in companies working in cancer therapies and was a registered investment advisor with the SEC. He’s worked with developing companies between Silicon Valley and San Diego for the past 30 years.

His work brought him in contact with medical cannabis, and he saw how it improved patients’ quality of life, he says, but “it seemed that … a lot of it was newcomers to formal business structures. ... It’s not a criticism, just a natural evolution,” he says. He started building an incubator for cannabis companies not only to provide funding, but also to teach owners the basics of operating a business in the public market.

The incubator works by creating a new legal entity that’s able to be separately financed as a standalone company. The cannabis company then sells the unambiguously legal assets to the standalone company, and those assets are leased back to the cannabis company. The lease proceeds and assets are governed by the incubator, and liquidity is provided back to investors through Mentor Capital. After a year, they can cash out using a valuation formula targeted to roughly equal the value that would be given to a division of companies like Pfizer, Anheuser-Busch and Philip Morris.

Spinning off the new company is the final step in the process, which creates a new, standalone public cannabis company — similar to the results of a reverse merger where syndicators typically charge 25 percent of the company value to complete the going-public transaction, says Billingsley. In contrast, in its introductory transactions, Mentor Capital doesn’t charge a percentage on spinning off a cannabis company beyond recovering direct costs. Over time, the incubator will be able to sustain itself through investment returns from multiple companies brought up through the program, after providing liquidity and making cash investments averaging about 15 percent in equity.

One advantage to working with an incubator is being able to focus on building the company, rather than spending time looking for funding, or even acquisitions and sales. There’s also the added education of business basics from growing inside a larger entity. Companies working with Mentor Capital don’t have to go public, but when they’re finished, they should be well-prepared to economically do so via spin-off if they wish, says Billingsley.

Though Mentor Capital does tend to invest in the companies in the incubator, they currently don’t do traditional loans or funding outside of its portfolio, says Billingsley.

“We’re only going to provide equity funding to people we’re already working with and well-understand,” he says.

SEVEN

Investor: Green Growth Investments

Rates: Potential company equity

Website: www.greengrowthinvestments.com

Jonathan Cantril, managing director at Green Growth Investments, is looking for companies with a strategy in mind. The private investment group invests in 23 states nationally, but is focused in states such as Arizona and Nevada because they have the lowest number of licenses per capita, which gives them a better chance to be influential in the market.

“We’ll find a successful operator, see what they have and where their vision is,” says Cantril. “If we have some kind of synergy, we’ll influx that corporation with funding and negotiate equity.”

Cantril works with companies that are fully integrated, from cultivation through retail. They approach every case separately, so the amount of both the investment and the equity changes based on what the cannabis company seeks. Green Growth entertains deals from $100,000 to $20 million, though their typical investments start between $1 million and $15 million, he says.

With the investment, Green Growth performs due diligence on the company to see where they can save money with renewable energy and lower manufacturing costs for cultivation clients. They also serve as the funds’ coordinator for the investment, so cannabis companies have to know who their vendors are and what they’re getting for money they spend.

Along with that, Green Growth provides backup on regulatory and compliance issues in 23 states, and Cantril and his team work to stay ahead of the laws.

“I’m looking for an entrepreneur who has taken some risk and is willing to make an investment, whether that’s in time, lifestyle or money. I don’t want to be the only one at risk.” — Steven Trenk, Lizada Capital

When a prospective client or company approaches Green Growth, Green Growth wants to know basics of the corporation seeking capital, how long the company has been in business, how many partners the owners have had, equity breakdown and whether the client is seeking a loan. But the company should also be ready to show its assets and its ability to return on an investment. Depending on the deal or project, they like to work side by side with the clients to achieve the best results for their capital.

It’s just as important to have a new approach to the industry, however, especially leaning toward the market for CBD or CBD-infused products, Cantril says. “If … they want to expand, or if they have an innovative product, that would catch our eyes,” he notes.

EIGHT

Investment Facilitator: The ArcView Group

Rates: Varies with investors

Website: www.arcviewgroup.com

Although The ArcView Group won’t begin direct investing in companies until May, its more than 500 members have invested in more than 100 cannabis companies, according to Troy Dayton, CEO. ArcView Group has a network of more than 500 accredited investors, each having at least $1 million in net assets or who have made $2 million a year for the last two years. They pay a membership fee to be a part of the organization, and the ArcView Group puts cannabis entrepreneurs with business plans in front of them.

Every week, a subset of ArcView’s investor members hears pitches from three to five companies in a webinar. Each of those companies has gotten some time with a full-time mentor, Francis Priznar, in advance.

“Francis spends a couple hours with them to make sure they’re putting their best foot forward, and gives them help and advice,” says Dayton. “That’s valuable work, and the companies just love it.”

Once in front of the investors, they pitch the business, get rated and get immediate feedback on the pitch, says Dayton, or even find a champion or investor right in the webinar audience. If they’re chosen by the selection committee to go to the next round, there’s another round of preparation with ArcView Group mentors. Then it’s time for the big stage at the ArcView Investor Forums, held four to five times each year.

The key is having a well-constructed plan, says Dayton.

“We’re not the place to go if you don’t have a really well-put together business plan, and good pro forma financials, or are not already incorporated,” says Dayton. “You’ve got to have all those pieces in place if you’re going to compete at ArcView.” (The group does have opportunities for earlier-stage businesses to develop those plans and pieces through the CanopyBoulder accelerator program, though.)

Companies hit the stage at the Investor Forums looking for investments anywhere from $150,000 to $20 million, says Dayton.

“It’s a really highly concentrated group of people [at the Investor Forum events]. Whoever’s standing next to you at any given moment is someone you should probably know.”

NINE

Investor: Poseidon Asset Management

Loan Rates: 18%-25%

Investments: Potential company equity

Website: www.poseidonassetmanagement.com

Loans are an option for established operators looking for growth capital with Poseidon Asset Management, says Morgan Paxhia, director, but they’re not open to just anyone.

“When we’re doing [loans], it’s with people we know, people we trust, who have an operating history,” he says, though most states haven’t been a part of the industry long enough for entrepreneurs to build that kind of foundation yet. Poseidon offers short-term loans at current market rates ranging from 18 percent to 20 percent.

When loans aren’t an option, Paxhia commonly turns to a convertible note, essentially short-term financing that can be changed into future equity in the company. Using a convertible note is an established tool to raising capital for early-stage companies with low cash flow, says Paxhia. Working with a convertible note also doesn’t set a hard valuation for the company at an early development stage.

More recently, Poseidon also has been using a Simple Agreement for Future Equity (SAFE) which is similar to a convertible note, but strips out the debt component. Instead, the SAFE gives Poseidon the future option to purchase equity in the company at a predetermined valuation cap or discounted rate. A SAFE fits a little bit better with companies that have done their initial angel or seed round of investments, but need a little more traction before their first significant round of venture capital.

Entrepreneurs should be ready to show their financials and prepared to answer probing questions about the company, says Paxhia. They’re looking for people with a strong vision, but not too large of an ego to avoid an honest, open dialogue about the company and its finances.

“We want to see entrepreneurs who are serious about the business and have taken the time to do their prep work,” says Paxhia. That also means staying professional even in your opening email to Poseidon. “Someone writing ‘gonna’ or using a smiley face is the quickest way for me to hit the delete button.”