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MJBizCon 2018 Investor Highlights

November 19, 2018

by Mike Branom, Director ​of Communications and Government Relations, Agate Biosciences

Intro:

At the recent MJBizCon, held in Las Vegas, Agate Biosciences learned about the latest developments in the cannabis industry, sitting in on presentations and panels from experts in branding, social media, cultivation, and more.


With the industry’s rapid expansion both in America and worldwide, big-money investors are starting to pay serious attention to opportunities in the field. One panel discussion – Private Equity Investing: Latest Trends in Cannabis – featured representatives from three investment firms, sharing where they thought the industry might be headed as well as giving advice to business owners who are hoping to land some of these investment dollars.


Speaker  Bios:

  • Jon Trauben, Partner, Altitude Investment Management
    • Jon is an active participant in the cannabis industry as an investor, mentor and board member. He has 25 years of experience in commercial real estate, capital markets and finance. Jon has held senior positions on Wall Street at Barclays, Credit Suisse, Cantor Fitzgerald and Hunt Companies, where he was a business leader, lender, trader and investor. Altitude Investment Partners is a U.S.-based, global venture capital fund that invests in a range of early-stage to growth companies supporting the fast-growing legal cannabis industry.
  • Al Foreman, Partner, Tuatara Capital
    • Al’s role at marijuana-focused Tuatara is to develop the New York-based private equity firm’s macro-investment strategy as well as oversight of portfolio investments. Tuatara is best known for raising $93 million for cannabis investments in 2016, at the time the biggest funding for the industry. Al has accumulated 20-plus years of experience in private equity, corporate finance and financial technology. Before joining Tuatara, he was a managing director at Highbridge Principal Strategies, a $35 billion investment management firm, and in New York-based J.P. Morgan’s Financial Sponsors Group.
  • Scott Sozio, Co-founder & Managing Director, Hypur Ventures
    • Scott is the CEO of MTech Acquisition Corp., a company focused on acquiring a cannabis-related business. He co-founded Hypur Ventures, a venture capital fund dedicated to investing in businesses ancillary to the cannabis industry. Previously, Scott led multiple timeshare companies and was vice president of a distressed debt-focused hedge fund. He also worked as an analyst at CIBC World Markets.


Recap:

The three investors generally find the cannabis industry to be notable for its massive growth, its large presence of Canadian investment, and for how markets – in individual states, not contiguous – quickly are advancing from “emerging” to “mature.” The money for investing may appear to be everywhere, they said, but the opportunities for investors to make money are not. (Foreman said Tuatara Capital, over the last four years, has studied nearly 1,500 cannabis companies for potential investment – yet put money into only eight.) Trauben said he focuses on brands, compliance, agriculture technology, and vertically-integrated operators in limited-license states. Foreman, on the other hand, said he prefers to work backwards, looking at the three (or four) end markets: recreational use, health/wellness and pharma (the latter of which could be its own category), and industrial hemp.


Many attendees appeared to be bucking for funding, so their questions pertained to how a company can maximize its chances of being on the receiving end of investment dollars. The three men said they wanted realistic expectations from their potential partners as much as they want to see revenue production. Sozio said he looks for organization and a simple capital structure. Another positive are open systems, in which a company’s product or service can interface immediately with others. Red flags include pie-in-the-sky forecasts (such as a pound of cannabis wholesaling for $3,000), management with too many balls in the air or the inability to succinctly describe what their companies do, and visions of grandeur.


A management team, they agreed, can make or break an investment – and, they also concurred, management is the most difficult part of a company on which to perform due diligence. Some companies’ leaders find themselves uncomfortable with the intimacy (“like a marriage”) necessary for the relationship to work out. The men also told the attendees to look for an investment partner who understands the cannabis industry rarely moves in straight lines. Said Trauben, “You should ask, ‘Who can help me grow?’”

When asked about how a company’s value is determined as part of the run-up to investing, the men admitted “it’s more art than science,” also warning that stock price has little correlation with actual value. Trauben gave the example of publicly-traded Canopy Growth, the Canadian medical-marijuana company with the industry’s largest market capitalization: Shares of Canopy currently are trading on the NYSE at about $33, but he said the firm perhaps may be worth 10 times that price. Foreman also noted there is a difference in “share price” vs. “investor price,” because investors are far more involved in a company’s operations than passive shareholders. Foreman added once the industry’s metrics normalize, then investment firms would rely on tried and true tools for assessments.


The panelists then answered questions from attendees:


Are testing labs worthwhile investments?

Trauben said labs are a “necessary cog in the machine” but to have a shot at success he believes they must be located near a high concentration of cultivators and manufacturers. He also called labs “hyperlocal,” noting they don’t operate across states.

Are your investments small or large enough to take control of the company/companies?

Trauben said his firm’s investments bought them permission to “advise and consent” rather than management rights. But Foreman said two of Tuatara Capital’s eight cannabis investments did give the investors control of the company, with an outright purchase of state-licensed medical cannabis cultivator Connecticut Pharmaceutical Solutions Inc.


Are there investment opportunities in Latin America?

Trauben said he has seen coming across his desk lots of international deals, from South America to Africa and India. But he is leery of investing in countries where the governments have outsized control over the market, as corruption could suddenly cripple a successful business. Foreman also noted the limits on the cannabis industry’s potential for imports/exports, as counties where it is legal most likely will be consuming products cultivated and manufactured locally.


Do you prefer investing in a start-up or a company with traction?

Trauben flatly stated, “You can’t due diligence a business plan.”


Where do you see the industry headed over the next five years?

With Senate Majority Leader Mitch McConnell vowing to put industrial hemp legalization in the 2018 Farm Bill, Sozio said he was curious to see how much will be planted next year and how that crop will be used.


Is Oklahoma ripe for investment?

Sozio warned of the danger of sinking money into an environment with no restrictions on licenses while Trauben voiced concern over the state’s limited market potential: “It’s better to have a smaller piece of a bigger pie.”

Green Sweep

November 9, 2018

by Mike Branom, Director ​of Communications and Government Relations, Agate Biosciences

Billed as the most consequential Election Day for the cannabis industry, now Nov. 6, 2018 can proudly wear another superlative: It was the industry’s greatest Election Day.


Consider:

  • Democrats had a very good showing, taking control of the U.S. House and minimizing losses in the Senate while gaining seven governorships and more than 370 state legislative seats. One of those incoming governors, J.B. Pritzker of Illinois, already is talking about legalization in the Land of Lincoln.
  • Losing their jobs were staunch cannabis foes Rep. Pete Sessions (R-TX) and Attorney General Jeff Sessions, the latter being fired by President Trump the day after the election.
  • Cannabis measures passed in three of four states: Michigan (full legalization), and Missouri and Utah (medical). Although it’s disappointing North Dakota’s legalization efforts failed, if you had to lose somewhere, the Peace Garden State was the place to do so because of its small population (755,000 – a touch larger than California’s San Joaquin County).
  • In Wisconsin, not only did advisory questions on cannabis in 16 counties and two cities pass with overwhelming margins, but they drew enough liberal voters to the polls to help defeat GOP incumbent Gov. Scott Walker and the challenger for Democrat Tammy Baldwin’s Senate seat.

But it was here in California where cannabis took the biggest step forward. Or perhaps it was 67 steps toward progress, as that’s the number of jurisdictions, out of 78, where voters made their pro-marijuana sentiments known via ballot measures supporting the industry in some form or another. It wasn’t a green sweep, but certainly close to it.


The voters saying yes to cannabis weren’t just the so-called coastal elites, either. Of the 25 California counties won by Trump in the 2016 presidential election, seven had marijuana on the ballot on Tuesday – and five gave the thumbs-up, with only Kern and Plumas counties declining. (It should be noted Plumas voters saved the county the headache of trying to ensure businesses aren’t playing accounting tricks, as the measure would have only taxed profits rather than gross receipts like literally all other jurisdictions.)


Also, the margins by which these measures passed are stunning. For example, look at San Luis Obispo County, where four cities asked citizens whether they want to levy taxes on the industry. Paso Robles’ ballot measure posted the lowest approval rate with “only” 68 percent of voters giving their OK. Meanwhile, both Atascadero and Morro Bay hit 73 percent approval, while San Luis Obispo reached an eye-popping 80 percent!


Considering voters in many jurisdictions also were choosing mayors, councilmembers, and supervisors, these elected officials would be fools to ignore how marijuana’s winning margins far outdid their own. If their eyes are on another term, better give the people what they want – and they want cannabis.


Of course, with the sheer numbers of jurisdictions and measures, in some places a deeper dive is needed to learn the whole story.

  • Simi Valley, the notoriously conservative Ventura County city, said yes to taxes by a margin of 66-34. Great for the industry, right? Not really, as an advisory question asking whether to allow cannabis businesses was shot down, 47-53. Apparently, Simi Valley citizens only passed the taxes in case the state bigfoots municipalities by declaring they will let such commercial enterprises operate. Then again, voters there also were questioned whether cannabis should be shunted to the city’s “Sexually Oriented Business Overlay Zone” – and they said no, 45-55.
  • San Joaquin County and the city of Tracy there declined to pass tax measures – but both drew more than 60 percent support. It seems the ballot language was drafted so the measures couldn’t be approved with less than two-thirds of the vote.
  • In the San Diego County city of Vista, citizen activists fought City Hall – and won. Voters there approved a petition-backed measure allowing retail sales of medicinal cannabis by up to 11 retailers while shooting down a competing measure, sponsored by the City Council, that would’ve authorized only three delivery-only retailers of medical marijuana.
  • The city of Los Angeles saw the failure of a ballot measure important to the cannabis industry, although the measure mentioned nothing about cannabis. Rather, it would’ve amended the City Charter to the establishment of a municipal bank – which was expected to be a safe harbor for marijuana money, as federal rules preclude existing financial institutions from accepting business from those engaged in commercial cannabis activity.
  • The Ventura County town of Fillmore voted no to its cannabis ballot measure by a slim margin, but, like Los Angeles, it wasn’t about taxes. Instead, this agricultural community was asked to allow the indoor commercial-scale cultivation of medical cannabis.


There is no way to look at the results and reach any opinion other than this is great news for cannabis. California’s market has been stuck in neutral for too long, as foot-dragging jurisdictions decided against allowing any commercial activity. But of the jurisdictions where marijuana was voted upon, voters in more than 85 percent of those cities and counties said, loudly, “YES” to cannabis.


What should happen over the next months are elected officials in these places finally allowing these businesses to open their doors. Of course, that can’t take place until the bureaucracies render judgments on what can be allowed to open and where, and how prospective owners must apply for these licenses. This will not be a short process, and it’s a fair estimate that few localities will have anything operating until deep into 2019.


But delayed is not denied. And no longer can California’s cities and counties cross their fingers and hope no one notices they’re slow-walking, if not stymieing entirely, the will of voters who approved adult-use recreational two years ago. Rather, now they’ll have to answer to an electorate who just made clear that they meant what they said in passing Proposition 64.


It’s taken a long time, too long, but finally the California market is about to open. And that’s why Election Day 2018 will be forever remembered as when the potential became kinetic – because Californians from Oregon to Mexico announced to all it was time to move forward.

Pot Goes to the Polls

November 6, 2018

by Mike Branom, Director ​of Communications and Government Relations, Agate Biosciences

It’s not an exaggeration to say the cannabis industry has never seen an election as consequential as the 2018 midterms. Consider:

  • If the Democrats capture Congress, or at least the House as expected, taking office in the majority party will be many newly-elected lawmakers who campaigned on full legalization.
  • In four states with a combined population approaching 20 million are ballot measures to approve medical marijuana (Missouri and Utah) or recreational use (Michigan and North Dakota).
  • Florida alone has more than 20 million residents, and the Democratic candidate for governor – who has led in almost every poll – is vowing to legalize cannabis in the Sunshine State.
  • More than half the citizens in the nation’s 20th-most populous state, Wisconsin, will be considering advisory measures on cannabis – and having those on the ballot may bring out to the polls younger and more liberal voters, which could doom the anti-cannabis incumbent Republican governor.

And these are just the high-profile races. Away from the public’s attention, candidates who are openly and proudly pro-legalization are running for seats in 50 state legislatures plus the countless county boards, city councils, and other governing institutions in America.

On Election Night, Agate Biosciences will be tracking cannabis-related results from around the country, and we invite you to follow us on Twitter for real-time results and analysis.


But this piece is focused on California – so we want to dive deeper into the 94 ballot measures going before voters in 78 jurisdictions of the Golden State.


The current state of the cannabis industry in California is best described by such words as stuck, mired, static, and bogged down. And this in a place where cannabis is an integral part of the economy, not to mention culture.


Although state voters approved recreational adult-use cannabis in 2016 and legalization took effect on the first day of this year, across much of the state – urban and rural alike – the industry, through little fault of its own, simply hasn’t developed to expectations. Only 15 percent of California’s population of nearly 40 million can receive a lawful delivery of cannabis, says Jackie McGowan, Director of Licensing and Business Development with K Street Consulting in Sacramento, just as commercial cannabis activity is limited to one-third of the state’s municipalities. As a result, tax revenue collected is far below forecasts.


Pundits are seizing on that last point to bash, with little good faith exhibited, how Californians run things. It’s a lazy narrative: People still buy weed off the black market because California set taxes too high on cannabis, which is just what you’d expect from those leftists on the Left Coast. Har har har! But this explanation doesn’t hold true. Rather, it’s because you can’t collect taxes from businesses that don’t exist. Again, two-thirds of the state’s 482 incorporated cities and towns do not allow/regulate commercial activity.


This is no way to grow a legitimate industry.


There’s little point in digging for common motivation among these foot-dragging jurisdictions. Some conservative enclaves oppose cannabis as a general principle of the culture war, while other cities and counties are afraid of sullying their quaint downtown or angering the wineries or want to allow it but can’t reach a political consensus on what should be permitted and how it should be taxed. And more than a few are waiting to see how everyone else fares before themselves acting.


But on Tuesday, Nov. 6, voters in 10 counties and 68 cities can prod these localities out of their bureaucratic inertia. Almost all the cannabis-related ballot measures would mean taxes on commercial activity – and a hard and fast rule of politics is nobody approves a new tax and doesn’t expect it to be collected.


These cities and counties vary greatly in population, location, and political leanings. But from Del Norte County to the Imperial County cities of Calexico and Imperial, the proposed tax mechanisms are similar: levies on gross receipts, with some businesses, cultivators mostly, paying taxes on their square footage. (By the way, woe be to Plumas County due to its failure to learn from Hollywood studios’ accounting trickery, deciding to tax profits rather than general revenues.)


However, a vast range in tax rates is evident, even in jurisdictions close to each other. For example, Imperial’s taxes would be up to $10 per canopy square foot for cultivation, with 6 percent of gross receipts for retail cannabis operation and 4 percent for all other cannabis businesses – but 15 miles away, Calexico wants to levy up to $25 per square foot of space used plus 15 percent of gross sales receipts. These disparities will be noticed by entrepreneurs, of course.


Opposition to these measures has been local, as could be expected, with no singular voice in California speaking out. The arguments made against cannabis are the usual, with pleas to Think of the Children and law enforcement grumping about threats to public safety, as well as rationales reflecting our times, like worries of undocumented cannabis workers – a hypothetical put forth either out of thinly-veiled racism or fear of sweeps by immigration officials.


Now to the big question: Will voters come out in favor of cannabis? There’s no polling specific to these measures, as conducting surveys at the level of counties and municipalities is difficult and expensive. But national polling shows full legalization continues to gain support, reaching supermajority status (66 percent) in Gallup’s latest survey. And to think just a decade ago, support had yet to crack 50 percent.


Perhaps the best clues of what might happen this Election Day can be found in what happened on the last Election Day: June 5, when California held its primaries. On ballots in 17 jurisdictions then were 19 cannabis-related measures – and 15 favoring the industry passed, an approval rate approaching 80 percent. While past performance is no guarantee of future results, that bodes well.


Backing up a bit, many reasons explain why the ballot measures now being decided were put before the electorate. In some cases, politicians are punting to their constituents, asking them whether they truly want this stuff around, no matter by what healthy margin they might have approved Proposition 64. Meanwhile, a few motivated citizens forced the issue, either through successful petition drives or the threat of such. But, really, the motives don’t matter – because everywhere voters get to decide represents a battle won by cannabis.


If you are fortunate enough to have the opportunity to make your voice heard at the ballot box on Tuesday, please speak up for cannabis. This industry cannot succeed unless we act to make it succeed – and that starts with your vote.

Success Is a Science

October 1,  2018

by Dr. Jacklyn R. Green, Chief Executive Officer, Agate Biosciences

Success Is A Science


"Success is a science; if you have the conditions, you get the result. "  When Oscar Wilde wrote that quote, about 140 years ago, he could not imagine the world of the 20th Century - the 1900's.  He had no idea of the structure of the atom leading to the development of the atom bomb, no penicillin to cure deadly infections, and no concept of men actually visiting and returning from the moon to help us understand our place in the Universe.  Even without that - he knew -- he understood that science and thinking as a scientist (and engineer) leads to success.  Although his definition of success does not account for the randomness in the world, such as the crazy individual who acts out or a hurricane that emerges from the tropical Atlantic to devastate lives and livelihoods, he understood that preparation, set-up, and creating the right winning environment were essential to success.  That was true then, and it is true today.  That principle guides our work: we prepare; we check, we plan, and we create the winning environment - the conditions - to allow us to succeed.  When it comes to Commercial Cannabis Applications we create the conditions for success before we ever start writing. We start with the State (or city) Call for Applications:  we "shred" the documents to find out all of the requirements; we revisit the laws and regulations; we prepare an analysis of the Strengths, Weaknesses, Opportunities, and Threats; we identify Win Themes and Death Threats; we prepare a thorough Risk Assessment; we create storyboards, key graphics, and the compelling storyline for each client,  tailored individually, and with great care. That is "creating the conditions for success."  We do this every day, systematically, to maximize the win rate for our clients.  There may be random factors that we cannot control, but like Oscar Wilde, we believe Success is a Science and when we create the right conditions for winning - we will win.