Presentation to Second International Congress on Controlled - - PowerPoint PPT Presentation

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Presentation to Second International Congress on Controlled Environment Agriculture

Panama City, Panama May 2017

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CONFIDENTIAL

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Urban / Indoor Agriculture Overview

• Urban / indoor agriculture is on trend with was so many dynamics we like to see:
• Local, sustainable, healthy, environmentally-friendly, at times organic / non-GMO
• Local – massively reduces the supply chain

– The average head of lettuce travels 1,200 miles from field to store, and is grown for travel durability rather than

taste

• Sustainable and environmentally-friendly – depending on the model, water usage is a fraction of traditional agriculture and

can take advantage of under-utilized warehouse space in urban areas, etc.

• Healthy – produce is healthy in general, and can be organic and / or non-GMO
• Millennials – plays into Millennials’ preferences (healthy, clean label, less loyal to large CPG companies’ packaged

brands)

• Urban / indoor agriculture also addresses global issues with regards to decreasing safe fresh water, decreasing arable land,

diminishing fossil fuels and increasing associated transport costs, climate change, and burgeoning world populations

• Segment is projected to increase at a CAGR of 24.8% through 2022 (1)

(1) Source: Markets and Markets, Research and Markets

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Early Stage Dynamics, Challenges, and Solutions

• The urban / indoor agriculture industry, while growing rapidly is still very much in its infancy
• While attracting substantial attention, there has not, to-date, been an overabundance of true institutional capital flowing

into the space (at least in the U.S.)

• Given the need for growth capital, and the more so magnified by the capital intensity of the space, where do operators initially

look for capital?

• 1. Personal funds, friends, and family
• 2. Friendly investor

a) High net worth individual b) Former, retired executive in the agriculture, food and beverage, and / or retail space, etc. c) Socially conscious investor (e.g. someone who “wants to make the world a better place”) d) Alternative forms of financing – vendor financing i.

Construction

ii.

Electric utility

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Traction Technology Management Branding

(In Certain Cases)

Ability to Scale

Steps Required to Attract Institutional Capital

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Traction

• Market adoption / validation as demonstrated by:
• Several quarters of rapidly increasing sales
• Expanding customer list
• Average sales per order and increasing frequency of customer orders
• Supply agreements (volume with larger, sophisticated customers)

Traction Technology Management Branding

(In Certain Cases)

Ability to Scale

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Technology

• Technology:
• Differentiation, sustainable competitive advantage, etc.
• Patents, "know how"
• Producing and selling a commoditized product

– Cost will ultimately be a large component of whether you succeed or fail – Access to engineers, quant types - either as employees, or that the company has

access to through a local university, etc.

• Technology and its applications can range from:
• Hardware (equipment) and its configuration

– Lighting – grow lights, grow light reflectors, grow light ballasts – Hydroponic components – pumps and irrigation, meters and solutions, water filters – Climate control sensors – HVAC

• Software
• Automation of planting, pruning, and harvesting
• Species varietals

Traction Technology Management Branding

(In Certain Cases)

Ability to Scale

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Management

• Human capital talent is mission critical
• Great management teams can adapt a business model. Fundamentally, the skill set

needed in the indoor agriculture space is not all that much different than that needed in any other dynamic, evolving business

• Leadership needs to be able to attract and retain personnel, implement processes and

reporting

• Inherently commoditize product
• Need management teams that are able to wring inefficiencies out of a system,

bring costs down, replicate both within a given facility (or factory, or box) and amongst different facilities

ILLUSTRATIVE MANAGEMENT TEAM ROSTER

Chief Executive Officer Chief Financial Officer / Controller Engineer Grower Chief Operating Officer / Day-to-Day Operations (General Manager) Sales Founder / Visionary

Traction Technology Management Branding

(In Certain Cases)

Ability to Scale

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Branding (In Certain Cases)

• Brand drives premium positioning, and every grocer and retailer in the

U.S. is desirous of "premiumizing"

• Margin in the U.S. is made on the periphery of the store – to the extent

grocers can drive margin these areas, in what is overall a very low margin business, any improvement can have at outsized impact

REPRESENTATIVE BRANDED COMMODITIZED PRODUCTS

Traction Technology Management Branding

(In Certain Cases)

Ability to Scale

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Ability to Scale

• The single largest obstacle to any smaller urban / indoor agriculture
• peration
• Urban / indoor agriculture models ultimately come down to unit economic

and portability of the model

• Unit economics:
• Production yields per a given space metric, grow season, and how to

scale (get yields into place, drive cost down, expand market, supply agreements with big players)

• Portability of model:
• Function of grow system and its resultant yields, the processes in

place to ensure consistency, institutionalized / codified standard

• perating procedures (“SOP”) and processes that allow operation

across different geographies, external environments, markets, and labor conditions

• Ability to drive yields, bring costs down, replicate, and expand addressable

market (channels, geographies, supply agreements with large players) will determine ability to scale

• Access to capital

Traction Technology Management Branding

(In Certain Cases)

Ability to Scale

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Pros Cons EQUITY DEBT Market Terms

SENIOR DEBT

• Equity-holders retain the

upside benefits of growth in the business

• Advantageous from a tax

perspective

• May be used to cash out

current equity-holders

• Requires a lien on assets
• Imposes operating covenants
• n the business that can be

restrictive

• May be sensitive to volatility in

market rates

• Approx. LIBOR +250-600 bps
• Approx. 2.0-2.5x EBITDA

JUNIOR DEBT OR COMBINATION

• Equity-holders retain the

upside benefits growth in the business

• Payments can be interest-
• nly, or PIK
• Less restrictive than senior

debt

• May be used to cash out

current equity-holders

• Investors may provide

incremental expertise to support growth

• Debt characteristics but senior

to equity

• Higher cost than senior debt
• Lenders may insist on equity

upside

• May require a second lien on

assets

• Approx. LIBOR + 1200-1400

bps

• Approx. 1.0-1.5x EBITDA (if

applicable)

• Warrants
• Capital injection while current
• wnership maintains majority

control

• Allows for ongoing

involvement and participation

• f key managers
• Limits disruption to employee

culture and customer relationships

• Investors provide incremental

expertise to support future growth

MINORITY RECAPITALIZATION

• Doesn’t provide complete

liquidity

• Introduces additional

stakeholders to decision making processes

• May introduce lender reporting

requirements and lender due diligence

• May increase administrative

burden

• Request for preferred security
• Request for board seat or

visitation rights

MAJORITY RECAPITALIZATION

• Provides significant liquidity

and capital for growth

• Allows for ongoing

involvement and participation

• f key managers
• Investors provide incremental

expertise to support future growth

• Current ownership does not

maintain majority control

• Introduces additional

stakeholders to decision making processes

• May introduce lender reporting

requirements and lender due diligence

• May increase administrative

burden

• Buyer may request a preferred

security

• Portion of proceeds (5%) may

be held in escrow

Financing Growth

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Financing Growth (Continued)

• Construction
• Electric utility
• Supply agreement
• Royalty

NON-TRADITIONAL FINANCING:

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Appendix

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Craig Lawson

Co-Founder & Managing Director San Francisco clawson@mhtpartners.com Office: (415) 446-9435

Speaker

Craig Lawson Managing Director / Co-Founder – MHT Partners

Craig has over 20 years of sell-side and buy-side financial experience, including dedicated public and private company M&A experience spanning buy-side and sell-side transactions, LBOs, going private transactions, joint ventures, cross border transactions, and fairness

• pinions. He brings deep experience with consumer products, business services, and

technology and leads MHT Partners’ Consumer Growth industry practice. Within the Consumer Growth practice, he has a particular focus on the environmental services / sustainability space (including the urban / indoor agriculture space), having closed several deals over the past few years and presently working with several others. Prior to co-founding MHT Partners, Craig served as a senior banker in the San Francisco office of Harris Williams & Co. Additional experience also includes time in the mergers and acquisitions groups at Banc of America Securities, where he was a senior banker, and Bear Stearns, as well as serving as a securities analyst at Fidelity Investments. Craig holds an MBA from The Wharton School at the University of Pennsylvania and graduated cum laude with a BA in Economics and History from Tufts University. He also holds the CFA designation.