Weekly Feature: Q&A with Viridian Capital Advisors, August 2, 2017

As a new weekly feature for the American Cannabis Report, we will be reviewing Viridian Capital Advisors' weekly Cannabis Deal Tracker and holding a Q&A session with a member of the firm. (To get the Cannabis Deal Tracker delivered to you each week,

sign up here).

This week, we chat with Harrison Phillips, a Viridian Vice President in charge of data collection and analysis projects.

American Cannabis Report (ACR): Welcome, Harrison and thanks for talking with us about the Viridian Cannabis Deal Tracker for the week ending July 28th. Tell us a bit about what Viridian is working on right now?

Phillips: At Viridian, we continue to focus on finding the best-managed cannabis companies to partner with in key sectors of the cannabis industry that we feel are best positioned for sustainable growth.

ACR: Your Week 30 data shows nearly $1.4 Billion in investment capital has been raised YTD. If you annualize that number, it suggests about $2B raised by year-end. Would that be a new record for the industry?

Phillips: We have seen a clear acceleration in the pace of capital raises by cannabis-related businesses since the third quarter of 2016. This ramp up was primarily due to anticipation surrounding the November 2016 elections in the U.S. during which nine states voted on cannabis legalization for medical or adult-use purposes, as well as the Canadian government’s continued push towards a national, federally-legal, adult-use marketplace. This acceleration is evidenced by the fact that we tracked more capital raised by cannabis-related companies in the first half of 2017 than we did for the entirety of 2016. Assuming this trend continues through the end of 2017, a new record will be set for capital raises by cannabis-related companies in a single calendar year.

ACR: In your view, which is your most compelling data set in this week’s tracker for those interested in investing in the cannabis industry? Where’s the momentum going?

Phillips: We at Viridian have seen an increased participation by institutional investors in capital raises by Canadian companies, particularly publicly traded licensed producers. Additionally, we have seen increased cross-border activity, both in investments and M&A, both between states in the U.S. and internationally. These deals tend to involve multi-state operators in the U.S. that are looking to branch out into new markets as well as international operators, typically Canadian licensed producers, investing in or acquiring firms in other markets, including Australia, Europe, and the U.S. Furthermore, we are seeing more sophisticated and mature companies entering the public markets. This is in contrast to a few years ago when many relatively young and immature companies reached to the public markets for access to capital and valuation.

ACR: According to your data, what are the top 3 states for cannabis industry financing activity?

Phillips: While we do not publicly disclose state-specific data as part of our Viridian Cannabis Deal Tracker newsletter, we have seen in the market increased interest towards several states, specifically those that approved adult-use cannabis in the November 2016 U.S. elections. California is attracting significant interest by investors and operators alike as it is estimated that it currently is and will continue to be the largest cannabis marketplace in the United States. Nevada is also generating substantial interest, not because the local Nevada market is expansive, but rather because over 40,000,000 people visit Nevada annually, many of whom are expected to become consumers of cannabis under Nevada’s recently-passed adult-use legislation. Massachusetts is another state grabbing attention as it is the first major adult-use market on the East Coast with an appreciable population base and a considerable number of students, many of whom are expected to consume cannabis under the state’s adult-use laws.

ACR: Industry sector question: This week’s numbers suggest that Cultivation and Retail cannabis businesses have seen the lion’s share of both capital raised and merger/acquisition activity. Any thoughts on what’s causing this focus, and what sector do you think is the next one to catch fire?

Phillips: The cultivation and retail sector has attracted the most capital and been involved in the most M&A activity for several reasons. For one, the cultivation and retail of cannabis has been almost exclusively a black-market activity for decades, so significant amounts of capital need to be raised to establish legal businesses to capture the demand of medical and adult-use consumers as new, regulated cannabis markets come online. Furthermore, these operations tend to be quite capital intensive as they almost always involve the acquisition and development of highly-specialized real estate with numerous tenant improvements. Additionally, the continued commoditization of cannabis, particularly the raw flower, has put downward pressure on prices and margins, so cultivators are investing heavily and pursuing consolidation strategies to increase capacity and achieve economies of scale. Cultivation and retail companies are also executing M&A strategies to expand market share in both existing and newly-established cannabis markets as well as to acquire companies that have value-add technologies or provide synergies to improve their competitive positioning.

ACR: High level question: the cannabis industry’s financial opportunity has been compared to cable TV’s explosive growth in the 1990’s (19% compound annual growth) and broadband internet (29%) in the 2000’s. Would you say the industry is still on track to reach those levels?

Phillips: According to Marijuana Business Daily’s Marijuana Business Factbook 2017, the U.S. cannabis industry’s retail sales have risen from an estimated $1.6 billion in 2013 to $4.3 billion in 2016, a 39.0% compound annual growth rate (CAGR). These sales figures are expected to rise to approximately $14.5 billion by 2021, representing a 31.7% CAGR from 2013 and a 27.5% CAGR from 2016, outpacing the cited growth figures for both cable TV and broadband internet.