Presentation to Second International Congress on Controlled - PowerPoint PPT Presentation

Presentation to Second International Congress on Controlled Environment Agriculture Panama City, Panama May 2017 1

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) 2 2 (1) Source: Markets and Markets, Research and Markets CONFIDENTIAL

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 3 3 CONFIDENTIAL

Steps Required to Attract Institutional Capital Branding Traction Technology Management Ability to Scale (In Certain Cases) 4 4 CONFIDENTIAL

Traction Branding Traction Technology Management Ability to Scale (In Certain Cases) • 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) 5 5 CONFIDENTIAL

Technology Branding Traction Technology Management Ability to Scale (In Certain Cases) • 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 6 6 CONFIDENTIAL

Management Branding Traction Technology Management Ability to Scale (In Certain Cases) • ILLUSTRATIVE MANAGEMENT TEAM ROSTER Human capital talent is mission critical • Founder / Visionary 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 Chief Executive Officer • Leadership needs to be able to attract and retain personnel, implement processes and Chief Operating Officer / Day-to-Day reporting Operations (General Manager) • Inherently commoditize product Chief Financial Officer / Controller • 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 Engineer amongst different facilities Grower Sales 7 7 CONFIDENTIAL

Branding (In Certain Cases) Branding Traction Technology Management Ability to Scale (In Certain Cases) • REPRESENTATIVE BRANDED COMMODITIZED PRODUCTS 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 8 8 CONFIDENTIAL

Ability to Scale Branding Traction Technology Management Ability to Scale (In Certain Cases) • The single largest obstacle to any smaller urban / indoor agriculture operation • 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 operating 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 9 9 CONFIDENTIAL

Financing Growth EQUITY DEBT MAJORITY MINORITY JUNIOR DEBT OR SENIOR DEBT RECAPITALIZATION RECAPITALIZATION COMBINATION • • • • Provides significant liquidity Capital injection while current Equity-holders retain the Equity-holders retain the and capital for growth ownership maintains majority upside benefits of growth in upside benefits growth in the • Allows for ongoing control the business business • • • involvement and participation Allows for ongoing Advantageous from a tax Payments can be interest- of key managers involvement and participation perspective only, or PIK Pros • • • Investors provide incremental of key managers May be used to cash out Less restrictive than senior • expertise to support future Limits disruption to employee current equity-holders debt • growth culture and customer May be used to cash out relationships current equity-holders • • Investors provide incremental Investors may provide expertise to support future incremental expertise to growth support growth • • • • Doesn’t provide complete Current ownership does not Requires a lien on assets Debt characteristics but senior • maintain majority control liquidity Imposes operating covenants to equity • • • Introduces additional Introduces additional on the business that can be Higher cost than senior debt • stakeholders to decision stakeholders to decision restrictive Lenders may insist on equity • Cons making processes making processes May be sensitive to volatility in upside • • • May introduce lender reporting May introduce lender reporting market rates May require a second lien on requirements and lender due requirements and lender due assets diligence diligence • • May increase administrative May increase administrative burden burden • • • • Approx. LIBOR +250-600 bps Approx. LIBOR + 1200-1400 Buyer may request a preferred Request for preferred security • • Market Approx. 2.0-2.5x EBITDA bps security Request for board seat or • • Portion of proceeds (5%) may visitation rights Approx. 1.0-1.5x EBITDA (if Terms be held in escrow applicable) • Warrants 10 10 10 CONFIDENTIAL

Financing Growth (Continued) NON-TRADITIONAL FINANCING: • Construction • Electric utility • Supply agreement • Royalty 11 11 CONFIDENTIAL

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