Public Entrepreneur Issue 2 • 2019 by Canadian Securities Exchange

THE US CANNABIS ISSUE

ISSUE 2

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Seeking Greener Pastures LEARN HOW CEOS LIKE KIM RIVERS ARE SOWING THE SEEDS OF SUCCESS IN US CANNABIS

FEATURES & INTERVIEWS INCLUDING Trulieve Cannabis

Harvest Health & Recreation Cresco Labs

SLANG Worldwide

Curaleaf Holdings 1933 Industries

Acreage Holdings

2019

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IN THIS ISSUE

JOE LUSARDI

CANNABIS IN THE USA LE T TER FROM THE EDITOR | 0 4 By James Black

FEATURE

PETER MILLER

BILLY LEVY

KIM RIVERS

CH₃

CH₂ 2 | THE US CANNABIS ISSUE

CH₃

JOE CALTABIANO

GLEN LEIBOWITZ

TRULIEVE CANNABIS | 06 After building a successful brand in Florida, Trulieve is ready to become a multistate operator, and prove its business model in other states. CEO Kim Rivers talks about how Trulieve will bring its unique brand experience to customers across the US.

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COMPANY INTERVIEWS

COMPANY PROFILES

H A R V E S T H E A L T H & R E C R E A T I O N | 12 CEO Steve White discusses the acquisition that has helped Harvest Health create the largest commercial cannabis footprint in the US.

CURALEAF HOLDINGS | 22 How this early entrant into the cannabis space has risen to the position of industry leader in less than ten years.

C R E S C O L A B S | 16 Careful planning, execution, and strategic acquisition is propelling Cresco Labs toward 100% market penetration in the US cannabis space. S L A N G W O R L D W I D E | 19 The power of good branding is a foundational element behind SLANG Worldwide’s efﬁcient, scalable, and successful business model.

19 3 3 I N D U S T R I E S | 2 6 As a new era for cannabis dawns, this small but mighty company sets a course toward opportunities in Nevada. ACREAGE HOLDINGS | 30 Acreage Holdings’ acquisition by industry giant Canopy Growth has the potential to fundamentally alter the way cannabis business deals are structured.

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LETTER FROM THE EDITOR Welcome to this special US Cannabis edition of Public Entrepreneur Magazine. While last year’s second issue was a general celebration of all things cannabis in the public markets, in this issue we have honed our sights on the burgeoning US cannabis market. Over the past 12 months, the industry has exploded in the US — specifically in those states that have granted some degree of legalization. What can’t be denied now is the commercial impact that cannabis is having south of the border. Within these pages, you will gain a greater appreciation for how prevalent the cannabis sector has become, especially in states where consumers in large urban centres can now legally purchase and use the product in a variety of different forms. From topicals, flower, sublinguals, oils, and beyond, there is a broad spectrum of product hitting the market in the largest consumer centre in the world. And this is just the early days. Aggressive and ambitious expansion plans are a common theme across these pages, as evidenced by the various strategies that US multi-state operators (MSOs) are applying to get an edge over their competition. Emphasis on brand is another theme that continues to gain prominence as cannabis cultivation continues to commoditize. As many CEOs assert in this issue, the equity built on brand will hinge on consistency, recognition, and most importantly, the quality of the product on store and dispensary shelves. The economic footprint is also massive. From a capital markets perspective, over $2 billion was funneled into US cannabis companies that listed on the Canadian Securities Exchange in 2018. Deployment of this capital has resulted in an upsurge of new job creation, and an opportunity for organizations featured in this issue to have a positive social impact by employing members of communities that have been affected by drug prohibition. Finally, beyond these pages, we would like to invite you to participate in the conversations taking place on Public Entrepreneur’s new podcast #HashtagFinance. This podcast features in-depth discussions with many of the CEOs featured in this issue, providing exclusive insights into their thoughts on the industry. We invite you to listen on Apple Podcasts, Stitcher, Soundcloud, Google Play, and CSE TV on YouTube. Enjoy the issue!

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F E AT U R E

Trulieve Cannabis After proving its business model in Florida, going multistate comes natural By Angela Harmantas

Kim Rivers, Chief Executive Ofﬁcer

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ccording to Trulieve Cannabis (CSE:TRUL) Chief Executive Officer Kim Rivers, cannabis is emotional. “In many contexts, either you or your loved one has felt relief from a medical condition using cannabis,” Rivers says. “It makes it an interesting business space because folks are predisposed to feel something towards what you’re selling. Understanding and embracing that is part of the brand strategy.” Trulieve built its brand selling medicinal cannabis to over 158,000 customers in Florida, the fastest-growing cannabis market in the United States. The company is the dominant player in the state, with a network of 28 retail locations and a statewide delivery program. Now, Rivers and her team are turning their attention to the rest of the US, confident that their vertically integrated business model is repeatable in other states. Founded in 2014, Trulieve was one of the initial applicants and license winners in Florida. According to Rivers, the company’s impetus was to build a “true brand” that could penetrate the Florida market, a 21 million-strong population of socially and economically diverse inhabitants. This diversity makes it an ideal testing ground for franchise-building, which is what Rivers and her team set out to accomplish. According to Rivers, if you build scale, you build a brand. Trulieve’s team did this by creating a “seed-to-sale” operation that produces nearly 35,000

kilograms of private label medical grade cannabis products, representing over 195 SKUs marketed at Trulieve-branded dispensaries. The company went public on the Canadian Securities Exchange in 2018 when it felt that it had become the dominant player in Florida. The decision was also driven by management’s sense that the time had come to move into new markets. “We’re ready to take the show on the road and prove out the next stage of growth by building a true multistate operational footprint,” Rivers says. In the fourth quarter of 2018, Trulieve announced acquisitions in Massachusetts and California, two very different markets. In Massachusetts, where Trulieve acquired Life Essence Inc., the state’s regulatory system is similar to Florida’s, making it a natural fit. Currently, Trulieve is applying for licenses to build and operate three medical dispensaries, three recreational licenses, and permitting for a 140,000 square foot cultivation facility it would like to begin operating in the fourth quarter of 2019. In California, the world’s single largest cannabis market, Trulieve is using a somewhat different approach. Here, the company acquired a controlling interest in Leef Industries LLC, a licensed medical and adult-use dispensary in Palm Springs. Rivers is conscious that saturation of the California cannabis market could pose a challenge for new operators to build up in the state, which is why the team is adopting a more patient approach to grow the brand. The retail location in California will serve as a research base for Trulieve to learn about what people are buying. While having a presence in California will be great for brand recognition,

Rivers is particularly excited about the opportunity to grow in the northeast United States. “Massachusetts is a catalyst win for us because we can build synergies around that hub in the Northeast,” explains Rivers. More recently, Trulieve completed its acquisition of The Healing Corner, a dispensary located in Bristol, Connecticut. The state is an important market for Trulieve, as it is located in the Northeast where the company is focused and is home to more than 34,000 patients and 1,100 consulting physicians. “The Healing Corner also shares our philosophy of growing a business profitably and has generated consistent profits. The acquisition was based on trailing EBITDA and we anticipate it will be accretive.” Building a brand on both coasts is not as simple as having a presence, however. Rivers sees what she calls an “east coast, west coast philosophy” in the

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“

We’re ready to take the show on the road and prove out the next stage of growth by building a true multistate operational footprint. —Kim Rivers

cannabis market that can make expansion even more challenging. “How can we create a company and a consumer experience that bridges this cultural gap?” she asks. “We try to be cognizant that we want to create connectivity to local markets. One way we do this is to invite local providers onto shelves.” According to Rivers, the company could speed up its retail lease in Massachusetts, but the team needs to be confident that they can deliver the Trulieve experience, which hinges on whether they can get the growing facility built in the face of significant supply constraints in the state. It’s one of the lessons that they learned by watching other companies who stumbled in Florida. “Some of our competitors rushed to open retail with only two or three SKUs, and it does irreparable damage to the brand,” Rivers says. For Trulieve, the challenge is to be able to replicate its Florida success in new states with different market dynamics. “When moving into other markets, it’s important to be confident in what differentiates you from your competitors,” Rivers points out. “For us, it’s having pipeline management and the ability to offer superior customer service and competitive pricing.” Trulieve chose early on to set a national pricing strategy that is competitive in mature medical

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markets so that every customer can have a similar, state-agnostic retail experience. “If we want to compete nationally then we have to have prices that can translate,” says Rivers. If early revenues are any indication, the brand strategy is paying off. In May, Trulieve reported revenue of US $44.5 million for the first quarter of 2019, up from $15.2 million during the year-ago quarter. 2018 full year revenues were around $103 million, up almost 420%. Income was also up exponentially from the same period a year earlier, at $43 million compared to $3.8 million. Of course, these reported numbers don’t include any ramp-up in Massachusetts or the recent acquisition in Connecticut, and only a low single-digit percentage from California. In the current business year, Rivers and her team anticipate revenue topping $220 million. There are a few external factors that could influence that revenue figure. Two bills in the US House of Representatives are expected to be tabled this year that could open new financing streams and fast-track the cannabis company’s ability to move operations forward. The STATES Act would allow states to craft their own policies on cannabis. While it wouldn’t legalize the drug nationally, it would largely resolve conflicts between state and federal law. Meanwhile, the Secure and Fair Enforcement Banking Act, or SAFE Act, would allow banks to service cannabis companies that comply with state laws, enabling them to access new streams of capital south of the border. Both bills have a significant amount of bipartisan support, but Rivers and Trulieve are not relying on legislation to take the business to the next level.

“With respect to stability from a banking standpoint, the SAFE Act is not necessary, but is needed,” Rivers explains. “Larger institutions are charging absurd fees, especially for a business like ours that is driven by fundamentals. Typical debt structures are not available in the cannabis industry. If I want to raise debt, I have to talk to a fund that is cannabis-specific.” Unlike other merchandisers, a retail license for a cannabis company is tied to the location specified on the license application. If a landlord raises the rent for that building, for example, the company has very few options to consider if it wants to keep the business open. What both bills signify is that the cannabis mindset in the US is changing from stigmatization to acceptance. A large part of that shift is thanks to the industry itself, and players like Trulieve. In Florida, the company supports the advocate community through sponsorships and outreach efforts. It recently sponsored the “silver tour” in Florida led by cannabis pioneer Robert Platshorn, AKA Bobby Tuna, who spent some 30 years in federal prison on marijuana charges and now travels to senior citizen facilities to educate residents on the benefits of medical cannabis. It all circles back to Rivers’ observation that led to the company’s founding and informs its strategy — that marijuana is emotional, and consumers form an almost personal attachment to brands. For Trulieve, that attachment is the driving force behind its growth and profitability. “We’ve built Trulieve into a customer-first company with a focus on profitable growth,” Rivers concludes. “I believe strongly that you can be successful in this industry and build long-term value for shareholders by being a true operator.”

MORE CONTENT ON THE #HASHTAGFINANCE PODCAST Kim Rivers, Trulieve Cannabis CEO, on Emulating the Whole Foods Retail Model in Cannabis — episode available on blog.thecse.com/pe-podcasts Scan me PUBLIC ENTREPRENEUR ISSUE 2•2019 | 9

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I N T E RV I E W

HARVEST HEALTH & RECREATION Modest initial investment creates the largest commercial cannabis footprint in the United States

By Peter Murray t isn’t often that one looks at a company and it’s as though they have thought of everything, with no obvious gaps to ﬁll, no apparent weaknesses. That’s the impression one gets speaking with Steve White, Chief Executive Ofﬁcer of Harvest Health & Recreation (CSE:HARV). A lawyer before making the leap into running a cannabis company some eight years

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ago, White is adept at navigating challenging regulatory environments, and communicates with the tone of a professional who knows he’s at the top of his game. A commitment from a single investor in early April to fund the company with up to US$500 million is just the latest sign that Harvest has not only a great track record, but also the vision and ability to execute that separates

winners from also-rans in any industry. Public Entrepreneur spoke with White recently about his philosophy on building a successful business in the cannabis sector, and a recent acquisition that will give Harvest the largest presence in the United States cannabis industry. We’ll get into your recently announced acquisition of Verano Holdings with our second question, but so we have some context, tell us how Harvest got started and some of the key milestones in your development to date. And where do you stand now in the industry vis-à-vis other companies with similar business models? We started in Arizona in 2011, so we were really early in the cannabis industry compared to many others in the space today. In terms of key milestones, in 2012 we won two licenses in Arizona. Those were vertically integrated licenses. What’s important here is Arizona became a helpful training ground for us. We had to get good at cultivating, manufacturing and retailing cannabis — seed to sale. It was completely by happenstance that it was a teaching moment for the future of our growth and ability to master the various aspects of the industry. Some of the bigger milestones have to do with expansion, and there have been so many that it is hard to isolate any. But one to note is on July 1 of 2017, we merged with a company called Modern Flower, led by a gentleman named Jason Vedadi. That was a moment that really helped to accelerate our growth as an organization. From there I would have to say the next big milestone was the announcement of our agreement to acquire Verano Holdings, headquartered out of Illinois. That acquisition made us the largest cannabis company in the United States by ability to open revenue-generating facilities, subject to regulatory approval. We’ll have more licenses and licenses to open more facilities than any other cannabis company in the country. That helps to answer your second question, which is what makes us different relative to our peers. Beyond the ability to win licenses organically and make strategic and accretive acquisitions, I would say the second thing is we have been consistently profitable as a

company for many years. The only other multistate operator I knew of that was also consistently profitable happened to be Verano. The Verano transaction brings two very successful companies together to make you one of the biggest multistate operator in the US. Why is Verano such a good strategic ﬁt for Harvest’s existing assets? It was a perfect fit on three fronts. First, the Verano leadership team and their employees are people who are very easy to integrate into Harvest’s culture because they are a lot like us. And I think most importantly, we like them and vice versa. They are just great human beings with mindsets and focuses that are very similar to ours. So, the human capital in that acquisition was really important. Second, the assets that we acquired pair perfectly with what we were hoping to put together in the near future. The acquisition has brought us into Illinois, Nevada and New Jersey in a very meaningful way. That represented our list of markets that we really wanted to enter in the near term. And lastly, they have some great brands that do not overlap with some of the brands we are already producing. For example, in Illinois they represent about a quarter of the wholesale business, and their emphasis is in areas that we don’t have a big emphasis in yet, like edibles. There is a “landgrab” taking place in the US cannabis industry, playing out partly in a large number of acquisitions. Harvest is growing both organically and through acquisitions. What is your competitive edge versus other well-funded companies in the space? First, I would say that we can acquire market access organically, meaning we can win licenses when states issue them. Second, we have found that people we look to acquire are believers in Harvest’s stock. With a lot of these acquisitions, the sellers have to decide whose stock they want to hold, and we have a reputation in the industry that allows us, in some instances, to acquire people for less than what they would charge other potential acquirers. And we have seen that in a couple of instances, so that is very helpful for us.

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It is difficult to say when federal legalization might take place in the US, but what is Harvest’s industry outlook? You must have some vision of the industry of the future as you formulate corporate strategy. Long term, you are going to see a shift away from cultivation. Phase 2 will be about retail, and Phase 3 will be about brand development. We are planning in everything we do to take advantage of, and create, the infrastructure necessary to capitalize on that evolution of the market. It’s really interesting in that each individual market evolves separately. So, while you might have a very mature market like California that is, in our minds, almost purely a brand game, there will be other states that just recently came online, and new states where you can see tremendous returns in cultivation. But those new states will eventually become mature states, and so we gear our business to take advantage of cultivation opportunities when we are early and one of few. But generally speaking, our emphasis is on developing a large wholesale and retail footprint. Harvest recently announced completion of the first tranche of a US$500 million convertible debenture financing. Can you talk about two things: first, the use of proceeds, and second, what convinced the investor to back Harvest to the magnitude, potentially, of half a billion dollars? First, that half a billion dollars is solely dedicated to growth. That is acquisition capital and rocket fuel. It allows us, in conversations with acquisition targets, to use more cash. In times when we don’t think our stock is trading appropriately, we can add

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more cash, so we can keep more of the stock if we think it’s too cheap. The reason that financier was interested in Harvest was because they are a believer in the long-term outlook of the company. They saw that as an easy transaction for them, and one where they did it on terms that they haven’t done for other people previously. On a personal level, you are one of the more experienced executives in the industry, and as Harvest’s leader you are pushing the company to grow faster than everyone else. Talk a bit about your background and how that has positioned you to drive the company’s success. It’s been helpful to be a lawyer in my previous life. The way you plan a case in the law is you evaluate the facts available to you early on, and then you plan a strategy, or a path, to victory. In this case with cannabis, what we were doing is we were evaluating an ever-changing landscape and we were developing a path toward long-term significant profitability. Your biggest obstacles are regulatory in nature, and as a result the ability to navigate regulatory hurdles — laws, in other words — is really helpful, because you can interpret things in a creative way to give you advantages over competitors, when appropriate, and you are looking toward the end goal, which is long-term, sustainable, and significant profitability. Any student of markets will know that inefﬁciency is often a good place to search for opportunity. Given how the federal laws in the US differ with those of the

states, and then from state to state, does this fragmented regulatory environment present opportunity? It presents obstacles, and with any obstacle there is opportunity. It presents obstacles to people who are not well-capitalized and who don’t have the experience to overcome those obstacles. But for those who are determined and well-capitalized, it presents opportunities to reap benefits that are sometimes better than a normal market would yield, particularly in limited-license markets. Is it fair to assume that being one of the more high-proﬁle companies in the cannabis industry, opportunities often ﬁnd their way to you? Unfortunately, we are constantly scanning for them. The great opportunities don’t find you; you have to find the great opportunities. The opportunities that find you are the opportunities that find everybody, and we pride ourselves on finding opportunities that others don’t. And that requires just good old-fashioned hard work and thinking outside the box.

Steve White, Chief Executive Ofﬁcer

Is there anything we have missed — any important points to get across that we have not touched on? One of the things that’s most significant about Harvest is that at the time we went public we had very little access to capital. We developed one of the largest footprints in the country by deploying less than $18 million in total invested capital. So, at that time we were a $1.5 billion company with that small of an investment. We have a history of doing a lot with less, and the lessons we have learned that have allowed us to do that are things we deploy each and every day. A big part of that is a demonstrated ability to execute. Whether that is winning a license or creating a profitable business with very little capital, we have demonstrated time and time again that we are able to do that, and there are not a lot of people who can say the same thing.

Scan me

MORE CONTENT ON THE #HASHTAGFINANCE PODCAST

Steve White, Harvest Health & Recreation CEO, on Retail Innovation and Progressive Hiring Practices in Cannabis – episode available on blog.thecse.com/pe-podcasts

PUBLIC ENTREPRENEUR ISSUE 2•2019 | 15 2•

I N T E RV I E W

Cresco Labs Blockbuster acquisition accelerates advance toward “100% market penetration” By Giles Gwinnett

Charles Bachtell, Chief Executive Ofﬁcer

resco Labs (CSE:CL) is one of the leading cannabis growers and retailers in the US, marketing several well-known brands across multiple states. The Chicago-headquartered company's 2018 results showed increasing production and distribution, along with a near 300% increase in revenue compared to the previous year. In April, Cresco announced plans to acquire California-focused Origin House for CDN$1.1 billion in what would be one of the largest public company acquisitions ever in the US cannabis space. It would come on the heels of last year's acquisition of Florida-focused Vidacann by Cresco for $120 million. Public Entrepreneur caught up with Chief Executive Officer Charles Bachtell recently to get his thoughts on the Origin House transaction and what lies ahead for Cresco and the cannabis sector in general. Cresco has really gone from strength to strength over the past year. Let’s begin by having you tell us about your corporate strategy and what some of your advantages are compared to industry peers. Cresco is one of the larger multistate operators in the US. We participate in all main verticals of the supply and value chain — from cultivation and extraction to the creation of branded products, carrying on into distribution of those branded products to stores we don't own and then also bricks-and-mortar retail. Including pending acquisitions, we're in 11 states and those states are arguably the most strategic footprint. Some of our peers have more states in their portfolio but our 11 states — seven of the 10 most populated states in the US and four that aren't in the top 10 — they all have very key strategic rationale behind them, like Nevada with Las Vegas and Massachusetts with adult use. We focus on the regulated market. We have compliance backgrounds. The founders of this company come from the banking industry and a lot of the lessons we learned on the operations side, the legal side and the compliance side of banking have helped us create an operation in cannabis that is very focused on regulation and doing cannabis the right way. Those are some very strong pillars. It seems that many companies in this industry are pursuing similar goals, but it’s the ones executing consistently on their growth plans that separate themselves. The strategy behind our growth has not been just about trying to make as big a footprint as possible. It was making sure that we were thoughtful in the states we launched in. We pride ourselves on execution and if you're looking for maybe points of distinction

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between us and our peers, because to a certain extent you could say we look alike — we're all trying to create multistate national platforms, we all want to create brands, and now we all have access to capital — I think this is what has always resonated with the investor community. It comes down to three things with Cresco. The strength of management has always been commented on by investors. It is a unique background to have, specifically mortgage banking experience and what it was like to go through the economic downturn and not only survive, but we thrived in our prior lives when regulation came to mortgage banking. Then we've built out the team with some phenomenal professionals with a ton of experience in big international CPG (consumer packaged goods), so the strength of management has always stood out. The level of execution — our ability to win these very competitive, merit-based application processes is second to none. And then the ability to execute on M&A. We call it the 'gets' — we get access to the markets, we get operational, we get products to market and then we get disproportionate market share. In Pennsylvania, for example, we all received licenses on the same day. We were able to go through all the things to operationalize and bring product to market 45 days faster than the second group that came to market, and 70 days faster than the third. We execute at a different level and then we focus on market penetration and market share, which are fundamental ways of evaluating your success. But a lot of our peers were focused on the landgrab aspect and maybe a little less on operations. But we're operations guys. We like the story of highest market share in Illinois, highest market share in Pennsylvania, largest distribution footprint in California. That's how we judge ourselves and we like telling that story. The third point of distinction is our focus on the creation of branded products more so than how many bricks-and-mortar retail stores we own. We like vertical integration. We think it's important in some markets, but our goal is not to own more bricks-and-mortar retail than anyone else. Our goal is to make sure our products are on the shelves of every dispensary in a state and that's a little different from our peers.

Joe Caltabiano, President

Tell me more about the acquisition of Origin House. How did you go about that and what was the rationale for the deal? It came on the heels of another big announcement we made, which was the Florida acquisition. In order to create a national brand, you have to have that strategic geographic footprint. You only want to be in the states that really matter. So, Florida, being the third most populated state in the US, of course really mattered. We were able to check that box and it really is the last of the tier-one states we needed. So, you create the geographic footprint that matters but then you have to get a meaningful position in those markets. Our story is 100% market penetration — getting on the shelves in every dispensary and then having the PUBLIC ENTREPRENEUR ISSUE 2•2019 | 17

most market share of any group. And so that's where Origin House fits into the narrative. We were already in California — we already had operations. We closed that transaction last year and we were starting to produce, but how do we create a meaningful position in the most important, largest cannabis market in the world? That's where Origin House really spoke to us as a transaction. They're the largest distribution company in the largest cannabis market in the world. That in and of itself is a reason to do the deal. The best part about the Origin House acquisition has actually been everything that came after it. They really do distribution because they're fundamentally focused on finding and identifying brands that matter. They wanted to be in the branding space too so that was very aligned with us. And now that we're a publicly traded company, granted this has always been our mindset anyway, who we can and who we can't do business with, we have to ensure that our standards are met when it comes to corporate governance and adherence with strict compliance with state regulations. With Origin House, you had a company that was publicly traded for over two years now and compared to its peers out there they've been held to a higher level, a higher standard of compliance and corporate governance. Then you start looking at the human capital side of the space. They've got a very astute corporate development department over there. Over 20 lawyers and analysts that have been working on cannabis M&A deals for the last couple of years. That was great and then the icing on the cake is their founder and CEO Marc Lustig. His capital markets experience is unique for cannabis. His understanding of the way that capital markets and Canadian capital markets work. The relationships he has, the reputation he has. You start layering all of those assets on top of each other and you can see why it was a very enticing transaction for us to want to complete. Merger activity has really picked up in the US cannabis space. Why is this and do you see the trend continuing? This goes back to the experience we had in mortgage banking. I think any time you have emerging industry meets high regulation you're going to have consolidation. It's going to get to a point where people are going to struggle to reach where they thought they would be able to get. Maybe it’s less realistic — whether timing, whether infrastructure, whatever it is, access to capital that's going to limit them, that's going to create great opportunities for consolidation by the 18 | THE US CANNABIS ISSUE

companies that have built out the infrastructure, that have the experience, that have been able to get out in front. I think that's what you're seeing and are going to continue to see in the cannabis space. Consolidation is a part of this next phase of growth in the industry for a lot of reasons. When you can find some of that bandwidth, when you can find that experience, when you don't have to create it all from scratch, that becomes a faster, less risky way to expand than building from scratch every time. How do you see the US federal landscape for cannabis in terms of legislation changing? I think everybody is more bullish on this than we would have been a year ago. You're seeing the SAFE Act with a lot of support. You're seeing the STATES Act with a lot of support. The feedback and the chatter out of DC seems very positive on both of those fronts. People are handicapping SAFE to potentially be a 2019 passage, but they are also looking at the STATES Act as likely getting figured out before the 2020 election cycle. It's moving in the right direction, I'll tell you that. What are your plans for the rest of 2019 and beyond? We feel like we've created that geographic footprint of substance and now it's making sure we go as deep in those programs as we can. That we do accomplish that market penetration and market share that has become our calling card. I think you'll see us focus on implementation and integration with Origin House and with Florida. And we're opportunistic, so if there's another state that comes up that fits into our thesis and growth strategy, we'll evaluate it. But I think for the next quarter or two, any M&A would be focused on deals that help us go deeper in states that we're already in. Acquiring another operator in a state that we're already in to increase our position in that state is the likely future of M&A for us.

MORE CONTENT ON THE #HASHTAGFINANCE PODCAST Cresco Labs CEO Charles Bachtell and President Joe Caltabiano on the Fundamentals of Becoming a Top 3 MSO – episode available on blog.thecse.com/pe-podcasts Scan me

INTERVIEW

SLANG

Worldwide

BRANDS AT CORE OF EFFICIENT BUSINESS MODEL THAT NATURALLY SCALES WITH CANNABIS INDUSTRY GROWTH By Angela Harmantas The power of a brand is an amazing thing. A good brand touches our heart, gets people to buy more, to pay more, and the best of them can even become everyday words that transcend the boundaries of the company that created them. SLANG Worldwide Inc. (CSE:SLNG) is well aware of this potential and that’s why brands are its thing… lots of brands. Some, such as O.penVAPE, District Edibles, and Firefly rank among the top-performing brands in the entire cannabis industry. Public Entrepreneur spoke recently with Peter Miller, SLANG’s co-founder and Chief Executive Officer, to explore this fascinating side of the cannabis market. From developing strategies to suit specific jurisdictions to the wisdom of pursuing growth through acquisitions, Miller speaks with the experience of an executive who has been there from the beginning, yet in terms of the potential

to take SLANG to new heights is perhaps only just getting started. Give us a brief introduction to SLANG. How did you and your partner build the company into such a force in the cannabis consumer packaged goods space? SLANG Worldwide is a consumer packaged goods company that owns, licenses, and markets 11 cannabis brands serving the flower, concentrates, edibles, and beverage categories. Our portfolio is one of the highest selling of all time, as tracked by a third party, with over $250 million in sales at retail. SLANG is a multistate and multinational operator, with brands and products available in over 2,600 retail stores — one of the largest distribution footprints in the cannabis industry. Our brands are more widely distributed than any portfolio I’m aware of. We source biomass, extract it and

Peter Miller, Co-Founder and Chief Executive Ofﬁcer

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manufacture it into finished goods with our brands and formulations, then wholesale and distribute to retail accounts. That focus has allowed us to scale quickly and grow to where SLANG is today. My co-founder Billy Levy and I previously founded a vertically integrated limited-licenses cannabis business in Canada. We came from the tech world and didn’t have a lot of experience in cannabis, so we spent a lot of time visiting markets that were maturing. We got to watch cannabis retail go from unbranded jars of bud to more sophisticated form factors like edibles and vaporizers, which really excited us. Our licensed producer was sold to Canopy Growth and we thought about where we wanted to be, so we started making investments and formalizing partnerships in the US. SLANG recently launched a CBD-focused health and wellness division. How does this ﬁt within your strategy going forward? Is it better to acquire brands or build them up on your own? SLANG’s goal is to offer cannabis products to a wide variety of consumers. CBD products have proven to be extremely compelling and popular to consumers, but just producing CBD products doesn’t necessarily guarantee success at the cash register. CBD products require a different set of skills and relationships than THC. We identified a powerful opportunity with Greenlane to distribute our products into retail environments that aren’t your core cannabis retail environments. Greenlane is the largest online and smoke shop distributor in the industry. It represents an exciting go-to-market strategy for us. SLANG will continue to round out the products

that we offer within the health and wellness verticals, initially on the inhalable side, and in the near term moving to the edibles side as well. A number of SLANG products are best sellers. How do you develop these brands into winners? What lessons can be learned from your experience? No two markets are the same. Canada has strict rules on promotion and advertising, but brands aren’t built solely through promotion and advertising. Brands benefit most from being trusted by customers, and you establish that trust over time. SLANG products have been leading in the most competitive and oldest legal markets in the US. How do we do that? SLANG establishes trust with our retail customers by consistently delivering them exactly what we say we will, which makes them inclined to continue carrying our products on their shelves. You start developing a subconscious attachment between your brand and the consumer. That’s when you really form that close relationship. SLANG’s head of sales likes to say that the best ability to create a brand is to make it as broadly available as possible. Making our products widely available and then ensuring that our customers are aware of that availability are the keys to developing these brands. When it comes to the question of organic growth versus acquisitions, which approach do you prefer? The US is really a series of markets within a market. Each state is at a different point in its market maturity, so you have to use a tailored approach. In the more mature states like Washington or Colorado, we can

Billy Levy, President and Co-Founder

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look at acquiring brands that are proven winners that have been operating at scale for years in competitive environments. In new markets, it’s difficult to say who’s going to win it all. The deal SLANG announced with Arbor Pacific in Washington and Oregon was a situation where we were picking winners. When we looked at other exciting markets like Florida, which is a limited-license market, it wasn’t as simple as picking a winner, so we decided to grow organically through a partnership with Trulieve, the largest retailer in the state. Trulieve is an example of how we go about buying into a market. Instead of acquiring a Florida operator, we partnered with one who would help us get our brands on the shelf in the near term. SLANG can help drive more customers to their stores to buy our brands, but we could also help support and share our product knowledge with them. We’ve been extracting cannabis for many years and can help them avoid some of the pitfalls of starting an extraction unit. We saw that as the best way to address new markets that are limited license. What do you think makes the most sense for shareholders in the current environment? As this market continues moving toward a consumer packaged goods framework, investors will pay close attention to branded unit sales. It is the most apples-to-apples way to understand the competitive landscape. How are consumers voting with their dollars and whose brands are driving the most sales? Consumers spent $32 million on SLANG branded products in the quarter. Another key metric for investors is branded servings, which measures the number of experiences consumers have with cannabis brands. Quantified by 5mg servings, 52 million SLANG branded servings were purchased by customers in Q1. By branded servings sold, SLANG is one of the largest cannabis companies in the world. How can investors make sense of the frenetic pace of M&A activity that’s going on in the sector right now? There’s always going to be the temptation of the new shiny object and the trend of the moment. I think investors need to look at the kinds of assets people are putting together and support a cohesive thesis and strategy, rather than just looking at revenue figures or exciting markets and thinking it

will be better together. In fact, it’s rarely the case if you look at M&A across other industries historically. It’s easy to get distracted. I think it’s important to make sure that there’s a central mission or strategy around all the M&A. What are a few upcoming catalysts for SLANG shareholders? I’m incredibly encouraged by the macro tailwinds we see in our industry, generally, but as each state-level market matures, we’re seeing validation of the SLANG business model. From the manufacturing process through the marketing of finished goods, SLANG’s business is scalable, capital efficient, and its success is repeatable in new markets. In fact, our business model improves with more competition, meaning the more retailers that open their doors, the more points of sale for our brands. Our business model lends itself to growing with the industry and we’re doing everything possible to grow more quickly than the broader industry. All the catalysts we have a line of sight on right now provide net benefits to our business model and our strategy. Is there anything you’d like to add? SLANG’s business model is simple and focused on sourcing biomass. We’re extracting and formulating it into finished goods and distributing our brands to as many stores as possible. It’s the same business model that has allowed some of the biggest consumer packaged goods companies in the world to scale up operations. A level playing field, in terms of regulation and unit economics, will only highlight our approach and the value of our brand portfolio.

Scan me MORE CONTENT ON THE #HASHTAGFINANCE PODCAST Billy Levy, SLANG Worldwide President, on How Branding and Distribution are the Keys to Deﬁning the Cannabis Opportunity – episode available on blog.thecse.com/pe-podcasts

PUBLIC ENTREPRENEUR ISSUE 2•2019 | 21

PROFILE

CURALEAF HOLDINGS

Vertical integration, national retail reach position this early cannabis entrant as industry leader By Angela Harmantas

oe Lusardi is a self-styled “reluctant pioneer” in cannabis. At the helm of Curaleaf Holdings (CSE:CURA), the largest multistate operator in the United States, Chief Executive Officer Lusardi has overseen the company’s expansion into 15 states and driven blockbuster acquisitions, all while remaining at the forefront of advocacy work toward federal legalization. But when he opened the first vertically integrated cannabis shop in Maine in 2010, the landscape was much less certain.

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“We were out on the risk curve, I’ll just say that,” he jokes during an interview with Public Entrepreneur in early May. Things are much different in 2019. Cannabis is a multibillion-dollar industry and savvy early investors are seeing exponential returns. Canada has legalized cannabis at the federal level and, with two milestone bills being debated in the House of Representatives, signs point to the US eventually following suit. What’s more, public sentiment toward the plant and the substances derived from it is drifting positively.

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“It’s a question of when, not if, legalization will occur.” —Lusardi

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“Every day the public sentiment around cannabis continues to improve,” says Lusardi. “It’s beyond a tipping point.” In an industry where winners and losers are starting to emerge, Massachusetts-based Curaleaf clearly belongs in the former group. Over the last three years, Lusardi and his team have established not only the largest US cannabis company by market capitalization, but also a national brand. Now with two game-changing acquisitions under its belt, Curaleaf is a driving force in the cannabis space. For Lusardi, the goal is to be the biggest cannabis brand in the country. Curaleaf-branded products are currently available in 47 states representing over 600 SKUs. Its product line is comprised of oils, flower, lotions, tinctures and edibles. Last year, the company launched Curaleaf Hemp, offering a range of premium, natural hemp-based products. Curaleaf has a vertically integrated model, meaning it controls the cultivation, manufacturing, processing, distribution and retailing of its products. That model can be challenging for a company no matter its size, but for Curaleaf it means control of product consistency throughout the value chain. “Execution really matters,” says Lusardi. “We have to be a good grower, manufacturer, distributor and retailer, which all contribute to brand identity.” If running a vertically integrated business is challenging, expanding it can be even more so. It should be no surprise that acquisitions are a cornerstone of Curaleaf’s growth strategy. The challenge for one of the biggest cannabis companies in North America is finding those opportunities that make the most strategic sense and creating incremental value for shareholders.

Funding the acquisitions is not a problem. In 2018, when Curaleaf went public on the Canadian Securities Exchange, the company raised US$400 million from investors around the world. Private equity firm BlackRock recently took an US$11 million stake in the company. Revenues during 2018 were approximately US$88 million. The company has nearly doubled its share price since the beginning of the year, giving it added currency to grow the business. When Curaleaf set out to look for acquisitions, they knew that they needed to be in California, the largest market for cannabis in the US. The acquisition of Monterey County-based Eureka Investment Partners fit that requirement immediately. Although small in value — the total deal is worth just under US$31 million — the acquisition of Eureka’s 110,000 square foot greenhouse facility allowed for seamless integration with Curaleaf’s manufacturing facility in the state. Calling the acquisition the “first step in a multistep California strategy,” Lusardi says the deal gives Curaleaf a platform to build more manufacturing and dispensaries on the West Coast. The company plans to launch three dispensaries as part of its retail expansion strategy to eventually cover the state. According to Lusardi, Curaleaf has a full acquisition pipeline and will continue to make deals that strengthen its position as a market leader. The next acquisition came hot on the heels of Eureka and represented a sea change for the company. At the beginning of May, Curaleaf announced it had acquired Cura Partners, makers of the Select brand of oil and CBD products, in a CDN$1.3 billion deal.

Based in Oregon, Select is one of the most well-known cannabis wholesale brands in the US with its products on the shelves of around 900 retailers. For Curaleaf, the deal gives it a stronger foothold on the West Coast as a complement to the company’s dominance in the eastern part of the country. Lusardi calls the acquisition a “perfect fit” for the cannabis leader. “We intend to meaningfully accelerate our topline growth trajectory with the addition of the Select Oil product range,” he stated in a press release about the deal. “In addition, we intend to create significant operational synergies from the integration of Select's wholesale business with our vertically integrated cultivating, processing and retail platform.” Bay Street analysts love the transaction, with Cormark Securities calling it a good fit with nice synergy potential. “We see particular potential in Curaleaf’s ability to introduce the Select brand on the East Coast, while the integration of Select’s wholesale and distribution platform with Curaleaf’s cultivation and processing capacity should drive material cost reductions in Western markets,” Cormark analysts Jesse Pytlak and Sam Fraser noted in a May 2 report. Cormark also raised its price target to CDN$18 a share, from $15, calling Curaleaf a “must-own” US cannabis name. With Curaleaf an established cannabis leader, Lusardi and his team are doubling down on the advocacy and policy work that is a pillar of the company’s ethos. On the policy front, Curaleaf is front and centre advocating for federal legalization of cannabis in the US. Lusardi notes that the majority of Americans are in favour of legalization, citing statistics showing that over 90% of the population supports medical cannabis use and nearly 66% supports recreational use. “Elected leaders can’t avoid the will of the people,” says Lusardi. “It’s a question of when, not if, legalization will occur. Every elected official is trying to formulate a thoughtful position on cannabis because they’re hearing from their constituency that they want legal access to cannabis. The ‘when’ is not clear, but I think you’ll see the House of Representatives take significant initiative this year, which will put pressure on the Senate and the White House to move forward the cannabis agenda.” A key feature of Curaleaf’s corporate strategy is creating opportunities for underrepresented communities to participate in the industry. “Minority groups need to have a seat at the table,” Lusardi says. “We want to make sure that the industry is as diverse as its customer base. It’s something that we think about a lot, and we plan to be a part of that solution.” Curaleaf also launched an initiative this year called the Veterans Cannabis Project, dedicated to improving US military veterans’ quality of life through access to cannabis. These initiatives are part of Curaleaf’s long-term strategy to build a trusted, recognizable brand that consumers can interact with legally. At the moment, the company is comfortable remaining US-focused. Lusardi is optimistic on federal legalization but is building the company and creating value for shareholders regardless of the outcome. “The long-term value in this industry will rest in the brand value and the relationship with your customer,” he says. “We feel we have all the makings of a national brand and we’re going to work hard to nurture that relationship.”

“We want to make sure that the industry is as diverse as its customer base. It’s something that we think about a lot, and we plan to be a part of that solution.” —Lusardi

Joe Lusardi, Chief Executive Ofﬁcer

Scan me MORE CONTENT ON THE #HASHTAGFINANCE PODCAST Joseph Lusardi, Curaleaf Holdings CEO, on How Cannabis is Helping America Recover from the War on Drugs – episode available on blog.thecse.com/pe-podcasts PUBLIC ENTREPRENEUR ISSUE 2•2019 | 25

1933 INDUSTRIES PRIORITIZES SILVER STATE AS NEW ERA DAWNS FOR CANNABIS Brayden Sutton is a refreshing change of pace in the cannabis industry By Katie Lewis

harp. Concise. Thoughtful. And yet, blunt — not in any way that is impolite, but in a way that very simply underscores his bunker of experience in the cannabis industry. As the founder and Chairman of the Board of 1933 Industries (CSE:TGIF), Sutton is helping steer a small but mighty ship that is looking south — to the Silver State, primarily. “Nevada is the place to be,” says Sutton. “It’s one of the most attractive cannabis markets in the US, which provides a solid backdrop for growth.” Nevada is more than a stone’s throw from 1933’s headquarters in Chilliwack, British 26 | THE US CANNABIS ISSUE

Columbia, but it is, undoubtedly, a state like no other. The company also has partnerships in California and Colorado, but it is Nevada where 1933 has been at the heart of growth in the cannabis business for years. As for the name? The “1933” in the company’s moniker is a nod to the year when the prohibition of alcohol ended in the US. “It was the dawn of a new era,” says Sutton. Today, 1933 Industries aims to capitalize on opportunities that have come as a result of the end of cannabis prohibition in Canada and industry legalization in a collection of US states.

PROFILE

PUBLIC ENTREPRENEUR ISSUE 2•2019 | 27

“

“The US has not even begun yet,” says Sutton. “I compare it to what Canada was like in 2012 so there’s an incredible opportunity there. It has years of accelerated growth ahead.” “There’s no roadmap right now,” adds Sutton. “The risks are higher in the US than in Canada, but it brings much higher upside potential.” 1933 Industries certainly seems to have the asset portfolio to make the most of that potential. Licensed medical and adult-use cannabis cultivation and production assets; proprietary hempbased, CBD-infused products; CBD extraction services and a specialized cannabis advisory firm. The company has three subsidiaries: Alternative Medicine Association LC (AMA) and Infused MFG — both located in Nevada — and Spire Global Strategy, located in Vancouver. AMA is a licensed medical and adult-use cannabis cultivation and production facility in Las Vegas that hosts its own line of products, while also manufacturing other companies’ brands. Some of these products include concentrates such as Cake Batter, Crumble and Sugar; a vape pen sold with distillate oil; and several flower strains. “AMA holds the first cultivation license for cannabis in Las Vegas,” says Sutton. “It has over 100 products in 46 states across 700 retail stores.” And that’s a number that’s poised to grow, thanks to 1933’s brand new 67,750 square foot cultivation facility in Las Vegas,

THE US HAS NOT EVEN BEGUN YET. I COMPARE IT TO WHAT CANADA WAS LIKE IN 2012 SO THERE’S AN INCREDIBLE OPPORTUNITY THERE. IT HAS YEARS OF ACCELERATED GROWTH AHEAD. — Sutton 28 | THE US CANNABIS ISSUE

which represents a 10-fold increase from what it previously held. If Nevada is the state to be in, Las Vegas is the city. With more than 42 million visitors each year, it is poised to become one of the world’s largest adult-use cannabis markets. The new facility is a key piece of the puzzle, as it will ensure consistent supply of cannabis flower and input material, meaning increased capacity, production efficiencies and economies of scale, all of which the company believes will improve yields and provide higher margins. The facility is segmented into five different zones, with 15 bloom rooms and four veg rooms. Once at full capacity, it’s anticipated it will produce 700-800 pounds of flower monthly. But that’s not the only piece of the puzzle for 1933 Industries. Subsidiary Infused MFG is a Las Vegas-based manufacturer of hemp- and cannabidiol-based products with a number of proprietary product lines, which include the well-known Canna Hemp, Canna HempX, Canna Hemp Paws and Canna Fused. The consumer packaged goods division experienced over 8,000% growth during its first year and represents the fastest growing segment of the company’s business. Nationally recognized, the Canna Hemp brand resonates with customers seeking the benefits of CBD and hemp and are available in over 700 retail outlets across the US. Adjacent to its cultivation facility, 1933 Industries is progressing with plans to launch one of Nevada’s largest hemp extraction facilities, as it focuses its gaze on the booming cannabidiol, or CBD, industry. The new processing facility will produce extracts for full spectrum oils, distillates and isolates. The lab will also have the flexibility to isolate cannabinoids that are emerging in popularity. 1933 Industries aims to have it up and fully running by the end of the year. The company has invested heavily in research and development, particularly where it comes to the design of its customized equipment, in order to provide maximum capacity and efficiency. “We want to utilize the isolates in the manufacturing of our own consumer branded goods and secure the supply of raw materials,” says Sutton, adding that the move will increase margins and benefit from a recurring revenue stream from sales to other manufacturers. Another subsidiary is Spire Global Strategy, an advisory firm that provides diligence, security, and intelligence services to clients around the world and is headquartered in Vancouver. It gives the company exposure to Canada and addresses the lack of discussion around infiltration of organized crime, diversion of product, internal theft

of product, products making it into stores when they should not be, and other issues. There is a certain coolness factor when it comes to 1933 Industries — from its Instagram page to some of the partnership deals it’s signed to the look and feel of its products. 1933 subsidiary Infused MFG partnered with legendary skateboarder Tony Hawk in April under a two-year licensing agreement with House of Hawk for the launch of several exclusive, co-branded hemp and CBD products. It’s part of a growing trend, aimed to bring awareness of the rise of CBD in the sports world. The company also inked a two-year agreement with OG DNA Genetics to cultivate, manufacture, distribute and sell OG’s branded cannabis. In the cannabis world, think of OG DNA Genetics as the crème de la crème of the cannabis genetics world. Rooted in Los Angeles and founded in Amsterdam, over the last decade the company has built and curated a seasoned genetic library, with operating procedures for genetic selection, breeding, and cultivation. Subsidiary AMA also recently inked a licensing deal with hip-hop artist and actor Kurupt to bring his Gotti's Gold cannabis brand to the Nevada market, the second partnership of its kind. For those unfamiliar, Kurupt is a hip-hop legend and actor who played an instrumental role in the launch of the early careers of some of the most notable names in the genre: 2Pac, Warren G, Dr. Dre and Snoop Dogg. But at the end of the day, on paper, numbers matter, and Sutton is the first to underscore that. In an industry that can be quick to assign eyebrow-raising valuations to companies that have no earnings, no revenue and sometimes little more than a logo and an investment deck, 1933 Industries appears to be a lean machine poised for an exciting year and beyond as it moves towards profitability. The next step? “Block out the noise, build value and continue what we’re doing,” says Sutton. “We have an incredible head start.” 1933 Industries is using a tried and true model for a simple reason: it works. That model is to establish a foothold in several parts of the value chain and replicate it in other jurisdictions. The firm’s strength lies in its diversity of assets, which are focused on some of the most attractive niches of the cannabis industry. “Many have the strategy to get into as many states as they can,” says Sutton. “But some states are superior to others. We’re not interested in a ‘let’s own the world’ strategy. We’re interested in a ‘best-on-balance’ strategy. At this point, Nevada is the place to be, so we’re going to go big there.”

1933 Industries subsidiary Infused MFG has established an Action Sports Division to engage and educate athletes about ways in which CBD can assist with the body’s recovery process. Earlier this year it signed UFC mixed martial arts fighter Sarah Moras to represent Canna Hemp as brand ambassador. Moras shared her thoughts with Public Entrepreneur recently on CBD’s role in the professional sports world, as well as what it takes for athletes to make the most of business opportunities related to their sport. MMA fighters must be very strict not only in their training, but also with diet, supplements and the products they use to help heal and enable the body to bounce back — you need the right blend to facilitate peak performance. Tell us how you incorporate Canna Hemp X into your regimen for training and post-fight recovery. I keep Canna Hemp X products not only at home, but in my gym bag so that it is everywhere I go. I take the Canna Hemp X Endurance Elixir before training and it gives me more energy without the spike and crash like many pre-workouts. My favourite time to use the Canna Hemp X Recovery cream is right before training, when I’m sore and not sure how I’m going to make it through practice. I put a little on and it heats up the spot as I start to work out and it gets rid of the pain. The Recovery Elixir is also great, and I take that before bed to help me sleep without the aches and pains. Can you give us an example of when you’ve used Canna Hemp X and the difference it made for you? The first time I used the Canna Hemp X Recovery cream I had just injured my elbow — it had been hurting for a few weeks. Within days of using the Recovery cream my elbow was 100% better. I’ve used it countless times since then, basically daily, and love, love, love it! As you interact with other fighters and their teams, do CBD products come up in conversation, and what do people say, in general? I talk about CBD constantly. I swear by it. Because I keep Canna Hemp X products in my gym bag, when someone is feeling tired, or injured, I give them some Recovery cream to try or Endurance and I have only heard positive feedback. How has it been working with the 1933 Industries team? Tell us about your involvement with the company and how everyone works together to make sure you get the most out of the relationship. I love 1933 Industries, and everyone I have worked with has just been amazing. Not only are they supportive of me, but their corporate culture is all about health and wellness which I love. I try to stop by the office at least once a week to get feedback and talk to them about ideas for the company, ways to promote the product as well as ways to promote myself, so that I can further promote Canna Hemp X. I can’t wait to work more with everyone and see where this relationship goes. PUBLIC ENTREPRENEUR ISSUE 2•2019 | 29

PROFILE

Acreage Holdings

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lot has been written about the game-changing deal between Canopy Growth and Acreage Holdings (CSE:ACRG.U) announced on April 17 of this year. Much of it is complex. Most observers assume that final consummation of the megadeal is predicated on a single, very specific occurrence: federal legalization of cannabis in the United States. But Acreage Chief Financial Officer Glen Leibowitz and Vice President of Communications Howard Schacter say this actually is not quite the case. One thing for sure, though, is that once the acquisition of Acreage Holdings by industry giant Canopy Growth Corporation is finalized, it has the potential to cause a sea change in the way companies structure business deals in the cannabis space. Here are the facts as they stand today. Canopy and Acreage have entered into an agreement that will grant Canopy the right to acquire 100% of Acreage’s shares at such time that cannabis production and sale becomes federally permissible (remember that term) in the United States. As part of the transaction, Acreage shareholders will receive an aggregate payment of US$300 million, which works out to approximately US$2.51 — $2.63 per share. The payment is to be made immediately following the receipt of approval from shareholders of both Acreage and Canopy, plus the Supreme Court of British Columbia. Later, once the “federally permissible” condition is met, Acreage shareholders would receive 0.5818 of a common share in Canopy for each Acreage share held. Canopy has stated that it intends to waive the requirement when a change in rules policing the New York Stock Exchange and Toronto Stock Exchange would enable the acquisition to occur. To understand how the deal came about, a bit of background is necessary. Acreage’s roots started in 2011 when Chairman and Chief Executive Officer Kevin Murphy, a Wall Street veteran, began making moves in cannabis with a minority investment in Maine. By 2017, the company, at the time called High Street Capital, was rebranded as Acreage Holdings, welcoming former US Speaker of the House John Boehner to its board.

There were several rounds of private raises, including a US$119 million financing that represented the largest in the industry at the time, culminating in a reverse takeover on the Canadian Securities Exchange last year. Today, the multistate operator has a footprint in 20 states, making it one of the largest cannabis companies in the US. Its April 2019 acquisition of Form Factory, a manufacturer and distributor of virtually any type of ingestible cannabis product, propelled Acreage into the big leagues of the mainstream consumer packaged goods industry for cannabis products. With the acquisition under its belt, Acreage hopes to become the first port of call for traditional CPG companies like Kraft and Mars if they decide to enter the cannabis space. In that context, it’s easy to see why Canopy saw Acreage as an ideal partner in its US expansion plans. Canopy’s $5 billion deal with Constellation Brands, which manufactures spirits such as Corona Extra, Modelo Especial, Robert Mondavi, Kim Crawford and SVEDKA Vodka, is a clear sign that global CPG companies are already making moves into cannabis. The Canopy-Acreage deal is about creating a multinational cannabis brand, gaining consumer recognition and customer loyalty in the same way as a company like Constellation has with its product portfolio. According to Leibowitz, Acreage’s main focus prior to combining the entities is to be the number one player in every state and every market that Acreage operates in. Canopy’s intellectual property and flush treasury would certainly make it easier to reach those goals. “We’re seeing the birth of a global cannabis brand, which doesn't exist,” says Leibowitz. “Long term, that consumer loyalty and brand recognition is the value of the deal.” There are clear synergies between Canopy and Acreage, but investors are still trying to wrap their heads around how a multibillion-dollar deal can hinge on US federal permissibility of cannabis. The truth is there are multiple pathways, or “trigger events,” that could see the final combination of the companies take place. “The trigger event would spur Canopy’s obligation to complete the

Glen Leibowitz and Howard Schacter

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acquisition, but they have said they would do it at their discretion if the exchanges indicate that they will approve the deal,” explains Schacter. In terms of permissibility, the STATES Act in its current form would not necessarily constitute a trigger event, according to Acreage. The trigger event is about change to federal law, which could include new law that would make it permissible to cultivate and/or distribute cannabis in the US. That’s not necessarily federal legalization but rather a change in law that speaks to permissibility. That’s not to say that the decision is entirely in Canopy’s hands. If Acreage believes that the trigger event has occurred, it can put the shares to Canopy. “It’s not just an exclusive option for Canopy to pull the trigger,” Leibowitz says. Many investors have also voiced confusion as to the value of the transaction. At the time the deal was signed, it was valued at nearly US$3.4 billion, a 41.7% premium over the 30-day volume weighted average price of Acreage shares. The figure only illustrated the value of the deal if it were to close on the day the announcement was made, says Schacter. “Admittedly, our news release could have been more explicit in that regard,” he acknowledges. “The true value of the deal won't be known until it closes.” A host of factors that affect the share price of either company could change that valuation by the time the deal is finalized, one of the clarifications that Leibowitz wants investors to understand. “There's a lot of confusion around the value that the transaction was agreed to,” he says. “I want to be clear that the shares of Canopy and Acreage do not move in tandem. There could be opportunities where Acreage shares will move up in value and don't necessarily correlate to Canopy’s share price.”

To calculate the implied value, take the Canopy stock price on the closing date and multiply by 0.5818 to reach the ascribed value of the Canopy shares. Add the approximate $2.51 — $2.63 upfront per-share payment to Acreage shareholders, then multiply that by Acreage’s current outstanding fully diluted shares (currently 117 million fully diluted outstanding shares). The result-

“

The combination of the number one player globally with the number one player in the US creates a superpower in this industry. — Leibowitz ing amount will be the implied value of the acquisition. The value has fluctuated since the April announcement in a possible sign that not all investors are keen on the transaction. According to Leibowitz, that is likely a result of the groundbreaking structure of the deal. “A lot of the conversations that we have on the institutional side are people asking about the models we used,” says Leibowitz. “They can model a lot of these transactions pretty easily. The problem is this doesn't have any certainty to it,

so they can't calculate the premium and arbitrage. The result is that institutions will say the risk is too great.” On the retail side, investors have never seen a transaction structured this way before. “It’s a game changing, innovative deal that has taken time to digest in order to effectively understand the value to both companies,” Schacter explains. Once the deal is agreed to by Acreage and Canopy shareholders, Acreage becomes Canopy’s exclusive pipeline in the US, ascribing value to the shareholders of both companies. Whether the trigger is federal legalization, or relaxed restrictions on the New York Stock Exchange, or the passage of a new law, it’s clear that Acreage and Canopy are committed to acting together to create a global cannabis brand. In the meantime, Acreage maintains the flexibility to conduct further acquisitions through the ability to issue 63 million new shares that will be convertible to the more liquid Canopy stock. That amounts to approximately “$1.4 billion of dry powder for M&A activity,” says Leibowitz. Leibowitz says the phones are ringing with calls from companies wanting to be a part of the promise of an AcreageCanopy merger. “The combination of the number one player globally with the number one player in the US creates a superpower in this industry.”

MORE CONTENT ON THE #HASHTAGFINANCE PODCAST

Gary Kaminsky, Director of Legal Compliance at Acreage Holdings, on a Holistic Approach to Compliance for Cannabis Companies – episode available on blog.thecse.com/ pe-podcasts

32 | THE US CANNABIS ISSUE

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