Cannabis Investment Report | December 2017

> = Po cor > Qa LA Cannabis Investment Report | December 2017 Production Outlook Due to U.S. federal and international legal restrictions on cannabis commerce, producers currently must invest significant capital in potentially redundant facilities located in separate jurisdictions, and many large agricultural producers and equipment suppliers that could effectively compete in the can- nabis industry are reluctant to enter the market. In the near term, we expect that cultivators will con- tinue to raise capital for facilities across multiple jurisdictions, and well-managed and well-financed cultivators will differentiate themselves by creating consistent, high-quality strains, developing strong distribution relationships, vertically integrating other supply-chain functions and offering branded products and competitive pricing. We also expect production services companies will benefit from increasing demand for specialized extraction and manufacturing services that cultivators and other production intermediaries cannot efficiently perform themselves, and providers of testing services will benefit from increasingly robust testing and safety regulations. In the long run, we expect more per- missive domestic and foreign laws will result in increased competition from large enterprises that are able to realize economies of scale or have operations in regions best suited for efficient, sustainable production. = Distribution We divide the distribution segment of the cannabis industry into three subsegments: dispensaries, e-commerce and distribution services. Dispensaries are retail outlets where consumers purchase can- nabis products for medical or recreational purposes. E-commerce includes digital applications used to enhance the cannabis shopping experience. Distribution services include wholesale and related trans- portation and logistics services. Participants in the distribution segment generally “touch the plant” and therefore must comply with state and local regulations—which often require licenses or permits— and must accept legal risks related to federal cannabis restrictions. Dispensaries Cannabis dispensaries are “point of sale” retail establishments where consumers may purchase medical or recreational cannabis products. Cannabis dispensaries are the face of the cannabis industry in many communities and, consequently, they occupy one of the most heavily regulated and scrutinized posi- tions in the cannabis supply chain. Dispensaries in established state-legal markets provide consumers with a typical retail shopping experience. Dispensaries typically range in size from 1,000 to 10,000 square feet of retail space. A dis- pensary may offer between 10 to 50 strains of cannabis flower and a variety of concentrates, edibles, topicals and accessories. Inventory is either acquired from cultivators and other wholesale product suppliers, or cultivated and produced internally. Products may be illustrated in menus or displayed on shelves and may also be available for customers to touch, smell or otherwise examine. Trained customer service staff, often known as “budtenders,” are typically available to educate customers about product offerings. 40 © 2017 Ackrell Capital, LLC | Member FINRA/SIPC HOUSE_OVERSIGHT_024676