Cannabis Investment Report – December 2017 Overview of Distribution and Regulatory Landscape

CKRELLE I’ L Cc aX P T I ¢ > Cannabis Investment Report | December 2017 and other distribution intermediaries are subject to county, municipal and other local regulations that may restrict or even prohibit distribution activities. The success of any dispensary operator or distribu- tor depends on anticipating and complying with these regulations. Tax Issues Related to Distribution. States and localities that legalize cannabis are focused on the potential to generate tax revenue from the industry. Ambiguous, constantly changing and potentially burdensome taxation rules may make it difficult for dispensary operators or distributors to remain in good standing with licensing, regulatory and tax collection agencies and may negatively impact their financial results. Distribution Outlook We expect dispensaries across the United States to increasingly seek to provide modern retail experi- ences that are supported by e-commerce applications. We also expect that the most well-run dispensa- ries will continue to generate significant cash flow at compelling margins. Dispensaries should be able to gain advantage by producing their own products, by developing strategic or exclusive relationships with specialty producers or by finding ways to generate customer loyalty. However, oversaturation in the number of dispensaries in certain jurisdictions, such as Colorado, has led to a very competi- tive environment, consolidation and moratoriums on issuing new local dispensary licenses by various municipalities. The distribution segment is subject to some of the strictest and most frequently changing regu- lations applicable to the cannabis industry. While distribution opportunities may arise with changes in law, some legislation may cause significant disruption. For example, the number of dispensaries operating in the greater Los Angeles region is expected to decrease significantly in the short term as California’s new cannabis regulatory agency begins its oversight and enforcement efforts in 2018. The distribution services subsegment in the United States is still in its infancy and has experienced a number of growing pains related to a lack of well-established distribution channels. For example, a Nevada law generally requiring dispensaries to use third-party distributors proved troublesome when dispensaries sold out of product within 48 hours after legal recreational cannabis sales commenced in the state. As more distribution channels and points of contact are established, we believe that opportu- nities for third-party distribution services companies will increase. In certain legalized international markets, such as Germany and Uruguay, cannabis products are sold primarily through existing pharmacy networks (Argentina plans to do the same). While cannabis-derived pharmaceuticals may ultimately be distributed the same way in the United States, we believe the future domestic distribution channels of other types of cannabis products will closely resemble those of alcohol and tobacco products. 44 © 2017 Ackrell Capital, LLC | Member FINRA/SIPC HOUSE_OVERSIGHT_024680