HOUSE_OVERSIGHT_024740.jpg

A >On bt ~] ELL L PITAL Cannabis Investment Report | December 2017 routine approval procedures for drugs with extracts of high-THC cannabis varieties; and (6) canna- bis parts and derivatives will be removed from the CSA schedules (either incrementally, starting with CBD, or all at once) and will be fully legal for medical and recreational purposes. (We expand on these predicted developments in Chapter IV, U.S. Legal Landscape.) We believe that federal legalization will trigger rapid growth in the U.S. market, propelled by interstate commerce, access to the federal bank- ing system and acceleration of the cannabis-derived pharmaceuticals market. A change in the federal status of cannabis in the United States will not only drive U.S. market growth, but should provide a significant catalyst to the market worldwide. Increasing Awareness of the Medical Efficacy of Cannabis. In aggregate, across all U.S. state laws, cannabis is legally recognized as a form of therapy or medicine for more than 50 medical conditions. In addition, at least 20 countries have medical laws that facilitate patient access to cannabis or concen- trates for treating specified medical conditions. We believe that countries and U.S. states will continue to adopt and enhance legal frameworks for the medicinal use of cannabis products. In addition, we believe that many more cannabis consumers will emerge as research on cannabis increasingly demon- strates its medical efficacy and as more therapeutic products are developed and brought to market. Increasing Recreational Legalization. Most laws facilitating access to cannabis, both in U.S. states and abroad, are medical laws. However, Uruguay and eight U.S. states have enacted recreational laws permitting the commercial production and sale of cannabis to adults for recreational and other uses (and Canada is widely expected to do so in mid-2018). In the handful of jurisdictions that started with medical laws and later adopted recreational laws—particularly in Colorado, Washington and Oregon—adoption of recreational laws has led to significant growth in overall market size and a rapid increase in the percentage of the market represented by recreational consumers. We expect 2018 will be a watershed year for the recreational market, with the implementation of California’s new recreational law and the expected approval and implementation of Canada’s recreational law. If these laws stimulate demand, as expected, and are otherwise viewed as successful, we expect more U.S. states and additional countries to follow suit with similar laws. Broadening Range of Cannabis Consumer Products. Product innovation and advancements in can- nabis varieties, concentrates, infused products, vaporizing technology and cannabis-derived pharma- ceutical products will drive consumer adoption and spending. Cannabis consumer product companies will seek to differentiate their products through marketing, distribution, packaging, selection, quality and pricing. We believe that product differentiation and availability will be more prevalent in legal cannabis markets and will drive consumer transition from illegal to legal markets. Declining Prices in U.S. State-Legal Cannabis Markets. The supply of cannabis has increased con- siderably with expanded state legalization in the United States. This increase has started to dampen retail and wholesale prices in various markets. As prices decline, we are starting to see closer price par- ity between state-legal and illegal markets (in the United States, cannabis is generally priced lower in illegal markets than in state-legal markets). Lower retail prices in state-legal markets should accelerate consumer transition from illegal to state-legal markets and drive increased overall penetration rates. However, state and local taxes will continue to impact pricing for cannabis products in state-legal can- nabis markets. 104 © 2017 Ackrell Capital, LLC | Member FINRA/SIPC HOUSE_OVERSIGHT_024740