2018 CANNABIS
INVESTMENT REPORT
GLOBAL CANNABIS CONSUMERS
Contents
Foreword
I Executive Summary
II Cannabis Science 101
III Cannabis Industry Segmentation
IV U.S. Legal Landscape
V Global Cannabis Regulation
VI U.S. and International Cannabis Market Estimates
VII Capital Markets for Cannabis Companies
VIII Top 100 Private Cannabis Companies 2018
IX Cannabis Industry Risk Factors
X Glossary of Terms
Disclosures, Disclaimers, Sources and Use
Ackrell Capital Cannabis Team
Inside Back Cover: The Green Field 2018
About Ackrell Capital
Founded in 2003, Ackrell Capital is a leading
independent investment bank focused on
emerging growth companies. Ackrell Capital’s
expertise includes:
Private Equity
Mergers and Acquisitions
Private Placements
Corporate Development
Cannabis, Consumer, Technology, Digital
and Other Emerging Growth Industries
The United Nations recently estimated that more than 180 million people
globally between the ages of 15 and 64, or more than 4% of this age group,
consume cannabis annually.
At least 20 countries have implemented medical cannabis laws, including
Australia, Canada, Colombia and Germany; countries without such laws
include China, Japan, Russia and the United States.
Although federally illegal in the United States, 46 states and the District of
Columbia have passed at least one law that permits the manufacture,
distribution, dispensing or possession of cannabis. While most of these laws
are medical cannabis laws, 8 states have enacted recreational laws.
Across all medical cannabis laws in the United States, cannabis is legally
recognized as a form of therapy or medicine for more than 50 qualifying
conditions, including Alzheimer’s disease, anorexia, arthritis, cancer, chronic
pain, epilepsy and post-traumatic stress disorder.
California is poised to become the largest recreational cannabis market
in the world with the implementation of its recreational law in January
2018—a watershed moment for the industry.
The illegal cannabis market in the United States is estimated to be more
than $45 billion annually. (We estimate that the 2017 U.S. state-legal
cannabis market was $8.0 billion.) If federal legalization occurs, we believe
that the legal market could be more than two times the size of the current
illegal market, ultimately exceeding $100 billion annually.
The cannabis industry provides a broad range of investment opportunities
in both the public and private markets for sophisticated investors who are
willing to take significant risks.
Ackrell Capital is based in San Francisco, CA.
Ackrell Capital is a member of
FINRA and SIPC.
This report has been compiled for informational purposes only, and is not a research report. This report is not and should not
be construed as an offer to sell securities or a solicitation of an offer to buy securities. The information in this report is of a
general nature, and this report should not be construed, relied upon or acted upon as investment, legal, medical, health or
tax advice. Ackrell Capital has made investments in and conducted investment banking services for companies mentioned
in this report, and may do so in the future. Readers should be aware that Ackrell Capital may have a conflict of interest that
could affect the objectivity of this report. Ackrell Capital, LLC is a member of FINRA and SIPC. © 2017 Ackrell Capital, LLC.
REPORT HIGHLIGHTS
Select Countries with Legalized Cannabis Access (January 2018)
Recreational Law*
Medical Law
State/Province Conflict
with Federal Law
*Canada currently has a medical law. Assumes Canada enacts a proposed recreational law in mid-2018.
U.S. State Cannabis Laws (January 2018)
Recreational Law
Medical Law
CBD/Limited Law
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC
Progression of U.S. State Cannabis Laws
1996
2004
2008
2012
2014
TODAY
Recreational Law Medical Law CBD/Limited Law
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC
U.S. Legalized Cannabis Market
$140,000
Path to Federal Legalization
70 M
($ millions)
$120,000
$100,000
$80,000
$60,000
$40,000
FDA Approves Cannabis-Derived Pharmaceuticals
More States Adopt Medical Cannabis Laws
More States Adopt Recreational Laws
FDA Routinely Approves CBD Drugs
FDA Routinely Approves THC Drugs
Federal Government Legalizes Cannabis
60 M
50 M
40 M
30 M
20 M
Number of Consumers
$20,000
10 M
$0
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
0 M
Legalized Cannabis Market Size
Consumers
Source:�Ackrell Capital. Assumes cannabis will be legalized federally by 2027. Cannabis may never be legalized federally in the United States.
Cannabis Industry Segments
Production
Business Solutions
Cultivation
Production
Equipment and
Supplies
Production and
Testing Services
Business
Software
Business
Services
Distribution
Digital Media
Dispensaries
E-Commerce
Distribution
Services
Online Content
and Networking
Online
Directories
Consumer Products
Vaporizers and
Flower Concentrates Infused Products Pharmaceuticals
Accessories
Involves “touching the plant”
Does not involve “touching the plant”
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC
Cannabis Investment Report | December 28, 2017
Foreword
Ackrell Capital is pleased to present our 2018 Cannabis Investment Report. Much has happened in the
nearly two years since we published our inaugural report: the cannabis industry grew significantly, companies
in the industry raised large amounts of capital and their stock prices performed well, and the legalization
movement continued worldwide as more countries and U.S. states implemented a framework for
legal cannabis access. There was also a presidential election in the United States; its ultimate impact on
the cannabis industry remains uncertain. What did not happen since we launched our inaugural report?
Federal legali zation: “marijuana” continues to be classified as a Schedule I controlled substance under the
Controlled Substances Act in the United States.
In this new edition, we introduce an outlook on global cannabis markets, analyze capital markets for
cannabis companies and present updated market estimates. We also expand on the first edition by providing
more in-depth analyses of the various market segments within—and analyzing the legal issues pertinent
to—the cannabis industry. The Top 100 Private Cannabis Companies list has been updated and our industry
landscape, The Green Field, has been updated and expanded to include more than 500 companies.
Cannabis legalization has accelerated domestically and internationally. In the 2016 U.S. elections, four
states, including California, legalized recreational cannabis (bringing the total number of states with recreational
laws to eight) and an additional four states legalized medical cannabis. Cannabis use is now statelegal
in some form in 46 states.
In January 2018, California will implement its recreational law, making it the largest market globally
for the recreational use of cannabis. Similarly, Canada is expected to pass its recreational law in mid-2018.
And in 2017, Germany became the most populous country in the world to pass a medical cannabis law.
Cannabis has mass consumer appeal around the world. (According to the United Nations, more than
180 million people per year use cannabis and it is the most-consumed drug worldwide). While it is clear
that there is significant demand for cannabis, less clear is how quickly illegal markets will transition to
legal markets, as well as the extent to which legalization may increase overall demand.
We continue to believe that it is a question of when—not if—the U.S. federal prohibition on cannabis
will end. We believe that a path toward federal legalization exists and we believe this process has commenced.
According to Gallup, 64% of Americans today believe that cannabis use should be legal.
Who is the cannabis consumer? It is the 80-year-old cancer patient ingesting cannabis to treat side
effects of chemotherapy. It is the 12-year-old child using cannabis extracts on a doctor’s recommendation
to reduce epileptic seizures. It is the 30-something mother or father seeking to relax after a full day. It is
a group of 20-year-olds on a Friday night heading to a concert. It is the millions of people suffering from
anxiety and depression. It is the millions of people treating chronic pain and nausea. It is the millions of
people using cannabis recreationally.
Our team has met with more than 1,000 companies in the cannabis industry. We understand the opportunities
and challenges facing the industry, and we are happy to provide our insights.
Sincerely,
The Ackrell Capital Cannabis Team
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC
Cannabis Investment Report | December 2017
n Table of Contents
CHAPTER I Executive Summary .......................................................... 1
n Global Cannabis Consumers n To Watch in 2018 n Investment Outlook
CHAPTER II Cannabis Science 101........................................................ 15
n The Cannabis Plant n The Human Endocannabinoid System
n Cannabinoids n Terpenes n Cannabis Formulations
CHAPTER III Cannabis Industry Segmentation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
n Production n Distribution n Consumer Products
n Business Solutions n Digital Media
CHAPTER IV U.S. Legal Landscape ........................................................ 61
n U.S. State Law n U.S. Federal Law n The Path to Federal Legalization
CHAPTER V Global Cannabis Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
n Global Cannabis Legalization Momentum n United Nations Conventions
n Global Legal Developments n Global Outlook
CHAPTER VI U.S. and International Cannabis Market Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
n Global Market Overview n U.S. State-Legal Cannabis Market
n U.S. Legalized Cannabis Market Forecast
n International Legal Cannabis Market Forecast
CHAPTER VII Capital Markets for Cannabis Companies ....................................117
n Capital Markets Overview n Public Capital Markets
n Public Capital Markets: United States n Public Capital Markets: Canada
n Private Capital Markets n Final Thoughts
CHAPTER VIII Top 100 Private Cannabis Companies 2018 ..................................137
CHAPTER IX Cannabis Industry Risk Factors .............................................165
CHAPTER X Glossary of Terms ..........................................................169
Disclosures, Disclaimers, Sources and Use ...................................175
Ackrell Capital Cannabis Team ..............................................176
FRONT COVER
Report Highlights
BACK COVER The Green Field 2018
ii © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER I
Executive Summary
n Global Cannabis Consumers
Cannabis has mass consumer appeal around the world. Millions of people use cannabis recreationally.
Millions more use it medicinally. In aggregate, across all state medical cannabis laws in the United States,
cannabis is legally recognized as a form of therapy or medicine for more than 50 medical conditions,
including Alzheimer’s disease, anorexia, arthritis, cancer, chronic pain, epilepsy and post-traumatic
stress disorder. Similar to the alcohol and pharmaceutical markets, we believe that the total addressable
consumer market for cannabis consists of a significant portion of the global adult population.
Cannabis is the most widely cultivated, produced, trafficked and consumed drug worldwide,
according to the United Nations Office on Drugs and Crime (UNODC). In 2003, the UNODC
estimated that the global illegal cannabis market was $113 billion, with 160 million consumers. The
UNODC continues to estimate the number of cannabis users worldwide and recently estimated that
183 million people globally between the ages of 15 and 64, or more than 4% of this age group, consumed
cannabis in 2015.
In 2010, the RAND Corporation (RAND) estimated that the U.S. illegal cannabis market was
$40 billion. Adjusting this estimate solely for inflation and population growth, the U.S. illegal market
would now be approximately $48 billion.
Both the UNODC and RAND acknowledge the challenges inherent in studying an illegal consumer
market, and both allow significant room for error in their estimates. However approximate,
their estimates make clear that there is significant global demand for cannabis. Less clear is how quickly
illegal markets will transition to legal markets, as well as the extent to which legalization may increase
overall demand.
We believe that the growth of the global legal cannabis industry will be driven by increasing penetration
in largely untapped “mainstream” consumer markets, and that the legal industry could grow
to more than two times the estimated size of the current illegal market. We believe that cannabis will
eventually become federally legal in the United States, for recreational enjoyment by adults and for use
in a broad range of safe drugs and therapeutic products. After U.S. federal legalization, we believe that
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 1
Cannabis Investment Report | December 2017
the U.S. market will exceed $100 billion annually, with more than 50 million consumers. Globally, we
estimate that the legal cannabis market has the potential to reach $500 billion annually, approaching
one billion consumers.
The Global Legal Cannabis Market
Cannabis legalization is gaining momentum around the world. This momentum is driven primarily by
the increasing recognition that cannabis may have a range of legitimate medicinal benefits and therapeutic
applications. At least 20 countries now have medical laws that facilitate patient access to cannabis
or cannabis concentrates for treating specified medical conditions. Notable countries with such
medical laws include Australia, Canada, Colombia and Germany; countries without such laws include
China, Japan, Russia and the United States. (Contrary to U.S. federal law, 29 states, encompassing
62% of the U.S. population, permit the production and possession of cannabis or concentrates for use
in treating a broad range of qualifying medical conditions.) While the merits of medical cannabis are
currently driving legalization, we believe that—like Uruguay and numerous U.S. states—other countries
will ultimately enact legislation permitting the production, sale and use of recreational cannabis.
(Canada is widely expected to do so in mid-2018.)
The following world map illustrates select countries that (i) have enacted medical laws that facilitate
patient access to cannabis or concentrates for treating specified medical conditions, (ii) have enacted
recreational laws that permit the commercial production and sale of cannabis to adults for recreational
and other uses, or (iii) include a state or province that has a cannabis law or policy in conflict with
federal law.
Select Countries with Legalized Cannabis Access (January 2018)
Recreational Law*
Medical Law
State/Province Conflict
with Federal Law
*Canada currently has a medical law. Assumes Canada enacts a proposed recreational law in mid-2018.
2 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER I
Executive Summary
The U.S. State-Legal Cannabis Market
The legal landscape for the cannabis industry in the United States continues to be characterized
by conflict between federal prohibition and the steady advance of state legalization. According
to federal policy, Americans can access tobacco, alcohol and prescription drug products that
kill thousands each year, but they cannot access cannabis because it is a dangerous drug with no
currently accepted medical application in the United States (notwithstanding the federal government
holds a U.S. patent for methods of treating diseases with cannabinoids). Meanwhile,
46 U.S. states have enacted at least one law that permits the manufacturing, distribution, dispensing or
possession of cannabis or concentrates. These laws fall into three general categories:
• 29 U.S. states (and the District of Columbia) have enacted medical cannabis laws that permit
the production and possession of cannabis or concentrates for use in treating a broad range of
qualifying medical conditions.
• 19 U.S. states have enacted narrow CBD/limited laws that permit possession of small amounts
of low-THC/high-CBD cannabis concentrates for use in treating a few serious medical conditions—in
particular, severe forms of childhood epilepsy.
• 8 U.S. states have enacted recreational laws that permit the commercial production and sale of
cannabis to adults for recreational and other uses.
The following map of the United States shows states with medical cannabis laws, CBD/limited laws
or recreational laws (a state with more than one of these laws is represented on the map by its most
permissive law).
U.S. State Cannabis Laws (January 2018)
Recreational Law
Medical Cannabis Law
CBD/Limited Law
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 3
Cannabis Investment Report | December 2017
The U.S cannabis industry has proven adept at navigating this federal-state conflict, and is experiencing
rapid growth despite it. We estimate that the 2017 U.S. state-legal cannabis market was $8.0
billion, with more than four million consumers. While the overall state-legal market has grown significantly,
the addressable market has been constrained due to the lack of access to purely recreational
consumers and the sometimes-narrow scope of medical conditions that qualify a patient for access to
medical cannabis. The breakdown of this market estimate by state is shown in the following chart.
2017 U.S. State-Legal Cannabis Market Estimate
Other States
$1.9 B
$8.0B
California
$3.2 B
Colorado
$1.5 B
Oregon
$470 M
Washington
$929 M
Source: Ackrell Capital
U.S. Federal Law
Current federal law effectively prohibits all cannabis use and all commercial cannabis activity in the
United States. Producing, selling and possessing cannabis are federal crimes. No cannabis-derived drug
has ever been federally approved for use in treating any medical condition. Otherwise legitimate business
transactions conducted by cannabis companies —and their banks, for those who can access banking
services—are legally suspect. Certain intellectual property and bankruptcy protections critical to
many U.S. businesses are not available to cannabis companies. Cannabis companies pay federal income
tax at effective rates significantly higher than other businesses.
Despite official prohibition, however, federal policies and laws recently passed by Congress have
carved out a limited space in which the state-legal cannabis industry has managed to thrive. Enforcement
policies published by the U.S. Department of Justice have unofficially invited cannabis business
to proceed if certain conditions are respected. The U.S. Department of the Treasury established reporting
policies that create room for banks to service the cannabis industry. Federal budget legislation
4 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER I
Executive Summary
has prevented allocated funds from being used to prosecute conduct that complies with state medical
cannabis laws. And recent developments indicate the federal government may be pursuing policies and
practices that create space for cannabis research and approval of cannabis-derived drugs.
The following chart shows three general areas of federal law that impact the cannabis industry—food
and drug regulation, banking and finance, and intellectual property—as well as specific
laws and federal policies related to each area. (We expand on these laws, regulations and policies in
Chapter IV, U.S. Legal Landscape.)
Federal Laws and Policies Impacting the Cannabis Industry
Controlled
Substances
Act
Justice
Department
Cole Memo
Bank Secrecy Act
and Financial
Transaction
Laws
Rohrabacher-
Blumenauer
Amendment
Treasury
Department
FinCEN Memo
Agricultural
Act
of 2014
DRUG
AND FOOD
REGULATION
Federal Laws
and Policies
Impacting the
Cannabis
Industry
BANKING
AND
FINANCE
Securities
Law
Bankruptcy
Law
Food, Drug,
and
Cosmetic Act
INTELLECTUAL
PROPERTY
Internal
Revenue
Code
© 2017 Ackrell Capital, LLC
Patent
Act
Plant
Variety
Protection
Act
Trademark
Act
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 5
Cannabis Investment Report | December 2017
The Path to Federal Legalization
We believe that the variable which will most impact the future size of the U.S. legal cannabis market
is the federal legalization process. How and when federal legalization occurs will impact other
primary drivers of the market, including the number of eligible consumers, penetration rates and
consumer spending. We predict six developments relating to federal legalization: (1) the U.S. Food
and Drug Administration (FDA) will begin approving individual pharmaceutical-grade drugs derived
from cannabis; (2) more states will adopt medical cannabis laws; (3) more states will adopt recreational
laws; (4) the FDA will adopt routine approval procedures for drugs with extracts of low-THC/
high-CBD cannabis varieties; (5) the FDA will adopt routine approval procedures for drugs with
extracts of high-THC cannabis varieties; and (6) cannabis 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 do not predict that these developments necessarily will occur in the order presented. We do
expect some of them to develop in parallel, and none of them depends fundamentally on any other.
For example, Congress could cause development (6) at any time by passing legislation that removes
Path to Federal Legalization
1. The U.S. Food and Drug Administration will
begin approving individual pharmaceuticalgrade
drugs derived from cannabis.
2. More states will adopt medical cannabis
laws.
3. More states will adopt recreational laws.
4. The FDA will adopt routine approval
procedures for drugs with extracts of
low-THC/high-CBD cannabis varieties.
5. The FDA will adopt routine approval
procedures for drugs with extracts of
high-THC cannabis varieties.
6. Cannabis parts and derivatives will be
removed from the CSA schedules and will
be fully legal for medical and recreational
purposes.
cannabis from the CSA schedules and establishes
a national framework for recreational and medical
cannabis regulation. Developments (1) through (3)
largely reflect incremental developments within
the existing legal environment. We do not expect
developments (4), (5) or (6) to occur during the
current presidential term, but we believe that there
is a reasonable chance development (4) could begin
within the next five years and development (5)
could occur within two years thereafter. In total, we
believe it could take up to 10 years or more before
the federal legalization process reaches development
(6) and can nabis becomes fully legal under federal
law. For our market estimates, we assume (i) development
(4) begins in 2023, (ii) development (5)
follows two years thereafter and (iii) development
(6) occurs by 2027 and cannabis becomes fully
legal in the United States.
We believe that federal legalization will trigger
rapid growth in the U.S. market, propelled by interstate commerce, access to the federal banking system
and acceleration of the cannabis-derived pharma ceuticals 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.
The following graph illustrates the timeline of our predicted developments and the estimated
impact on the U.S. legalized cannabis market. As discussed on page 175, readers are cautioned to not
place undue reliance on our predictions or estimates. Almost certainly, our predictions and estimates
will prove inaccurate in some respects.
6 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER I
Executive Summary
U.S. Legalized Cannabis Market
$140,000
Path to Federal Legalization
70 M
($ millions)
$120,000
$100,000
$80,000
$60,000
$40,000
FDA Approves Cannabis-Derived Pharmaceuticals
More States Adopt Medical Cannabis Laws
More States Adopt Recreational Laws
FDA Routinely Approves CBD Drugs
FDA Routinely Approves THC Drugs
Federal Government Legalizes Cannabis
60 M
50 M
40 M
30 M
20 M
Number of Consumers
$20,000
10 M
$0
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
0 M
Legalized Cannabis Market Size
Consumers
Source:�Ackrell Capital. Assumes cannabis will be legalized federally by 2027. Cannabis may never be legalized federally in the United States.
n To Watch in 2018
We believe that the following events will impact the legalized
cannabis industry in 2018.
Increasing Recreational Legalization
We expect 2018 will be a watershed year for recreational
markets, both in the United States and internationally. California
will begin implementing its new recreational law in
January 2018, and Canada’s proposed recreational law is
widely expected to be approved in some form by mid-2018.
California, which has a population of 38 million people
and receives 250 million visitors annually, is poised to transition
from the world’s largest medical cannabis market to
the largest recreational market with the implementation of
its recreational law in January 2018.
In each of the three largest U.S. states to implement recreational
laws—Colorado, Oregon and Washington—the
To Watch in 2018
• Increasing Recreational
Legalization
• Cannabis Consumer Experience
goes “Mainstream”
• FDA Approval of Cannabis-
Derived Pharmaceuticals
• Commoditization of
Cannabis Flower
• Access to Banking Services for
U.S. Cannabis Companies
• Increasing Strategic Investor
Activity; Continuing Funding
Gap
size of the legalized cannabis market expanded significantly, doubling the size of the overall market in
each of these states in the first full calendar year after implementation. The world has yet to experience
a legalized recreational cannabis market in a jurisdiction as large as California, and how the supply
chain, consumer response and regulatory framework will coalesce in such a market remains to be seen.
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 7
Cannabis Investment Report | December 2017
Nonetheless, we believe that California’s state-legal market may double from an estimated $3.2 billion
in 2017 to approximately $6.5 billion in 2018.
Canada has assumed the role of a global leader of cannabis legalization. Although Canada’s legal
cannabis market is presently limited to medical cannabis, it is currently the largest federally legal cannabis
market in the world, estimated at $1.5 billion in 2017. In April 2017, a proposed recreational
law was introduced in the Canadian parliament; the proposed Cannabis Act would allow adults to purchase
cannabis from federally licensed producers and to possess and share cannabis with other adults.
The Cannabis Act is widely expected to be approved in some form by the Canadian parliament by mid-
2018. If approved, Canada would be the largest country in the world to legalize recreational cannabis
on a national level, and we believe that the implementation of the Cannabis Act would significantly
expand the size of Canada’s overall market. Canada has demonstrated that by providing a national
legal framework for cannabis, companies operating legally within the industry have had a clear “first to
market” advantage, allowing them to raise significant amounts of capital and to pursue domestic and
international expansion opportunities.
If these recreational 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. In the United States,
legislatures in eight states (Arizona, Delaware, Florida, Michigan, New Jersey, Ohio, Rhode Island and
Vermont) are expected to introduce ballot measures or explore regulatory frameworks for recreational
cannabis in 2018.
Cannabis Consumer Experience Goes “Mainstream”
Cannabis consumer product companies and retailers are rapidly evolving to meet the needs of the
“mainstream” cannabis consumer. Cannabis consumers are no longer limited to smoking flower with
joints, pipes or bongs, but have their choice of an increasing variety of products, including concentrates,
infused products and topicals. Products coming to market increasingly address the attributes
demanded by the modern consumer—greater discretion, ease of use, product safety and accurate
dosing. To attract more mainstream customers, companies have responded to these demands with
increasingly sophisticated packaging and advertising.
Where a consumer purchases a product can be as important as the product itself. In the United
States, cannabis dispensaries play a critical role by providing consumers with access to a wide variety
of products and “high-touch” education and sales services. Merchandising and branding have become
more prominent as dispensaries increasingly seek to provide consumers with an experience similar to
other mainstream retail shopping experiences. In 2018, we see an opportunity for cannabis dispensaries
to drive consumer penetration and mainstream acceptance of cannabis by establishing storefronts in
malls and other high-profile retail locations.
In 2018, we believe that product innovation and advancements in cannabis varieties, concentrates,
infused products, vaporizing technology and cannabis-derived pharmaceutical products will drive
consumer adoption and spending. However, because numerous product categories have low barriers
to entry, we expect a significant influx of cannabis brands that will aggressively compete for limited
display space in dispensaries. We also believe product differentiation and availability will be more
prevalent in legalized cannabis markets and will drive consumer transition from illegal to legal markets.
8 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER I
Executive Summary
“Mainstream” Consumer Experience
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 9
Cannabis Investment Report | December 2017
FDA Approval of Cannabis-Derived Pharmaceuticals
The FDA’s first-ever approval of a cannabis-derived pharmaceutical may occur in 2018. The FDA
has previously approved several drugs with chemically synthesized cannabinoids or cannabinoid-like
compounds, but has never approved a drug derived from the cannabis plant. In October 2017,
U.K.-based GW Pharmaceuticals submitted a New Drug Application (NDA) to the FDA for Epidiolex,
an oral formulation of cannabis-derived cannabidiol, or CBD, intended to treat severe forms of
childhood epilepsy. (GW Pharmaceuticals also manufactures Sativex, a mouth spray used for treatment
of spasticity caused by multiple sclerosis; it includes THC and CBD derived from cannabis. Sativex
was first approved for use in the United Kingdom in 2010, and has been approved for use in at least
30 countries, but not in the United States.) If the FDA approves Epidiolex, such a precedent could
be followed by similar approvals in the United States for other cannabis-derived drugs and result in a
significant increase in the medical use of cannabis by consumers.
Commoditization of Cannabis Flower
The supply of cannabis in the United States has increased considerably with expanded state legalization.
This increase has started to dampen retail and wholesale prices in various markets. While retail
prices vary across the country, an examination of the price per gram of cannabis flower, or “bud,” in
the three largest states to implement recreational laws—Colorado, Oregon and Washington—reveals
a downward trend. The following graph shows the average price per gram of cannabis flower in these
three states since the beginning of 2016.
Consumer Pricing Trends: Cannabis Flower Price per Gram
$8.00
$7.50
$7.00
$6.50
$6.00
$5.50
$5.00
Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17
Source: BDS Analytics
10 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER I
Executive Summary
As prices decline, we are starting to see closer price parity between state-legal and illegal markets
(in the United States, cannabis is generally priced lower in illegal markets than in state-legal markets).
We believe that lower retail prices in state-legal markets will 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 cannabis markets, which will impede
the transition to legal markets.
In international markets, cannabis cultivators in South America, particularly in Colombia and
Uruguay, are expected to proceed with large-scale operations in 2018, with the anticipated supply of
cannabis entering the market in late 2018 or early 2019. These operations are designed to produce output
that exceeds local demand, and South American countries are expected to export products to other
legal markets, such as Canada and Germany. As legal markets increasingly import cannabis products,
we anticipate downward-pricing pressure for cannabis in both the wholesale and retail markets. Cannabis
cultivators in domestic markets that permit imports may be challenged by large, low-cost cannabis
producers in South America and elsewhere. While these dynamics are expected to impact international
cannabis markets, they should not materially affect prices in the United States until the importation of
cannabis products becomes legal under federal law.
Access to Banking Services for U.S. Cannabis Companies
Because most cannabis-related businesses in the United States violate federal law, most domestic financial
institutions do not provide services to participants in the cannabis industry. Companies in the
cannabis industry may not be able to open or maintain bank accounts or access other products and
services—such as credit facilities, payment processing and insurance coverage—typically provided by
traditional financial institutions. A lack of access to banking and other traditional financial products
and services continues to impede the growth of the industry; it increases the time, effort and expense
related to ongoing operations and increases risks associated with cash transactions and the use of alternative
products and services.
The California State Treasurer’s Cannabis Banking Working Group—a panel convened by California
State Treasurer John Chiang that includes representatives from the cannabis industry and financial
institutions, and government tax collection, law enforcement and regulatory agencies—issued a report
in November 2017 on the cannabis industry’s banking challenges. In the report, the State Treasurer’s
Office stated that the cannabis industry’s lack of access to banking services is one of the biggest threats
to the success of the state’s recreational cannabis law, which is scheduled for implementation starting
in January 2018.
The U.S. Bank Secrecy Act (BSA) requires financial institutions to file “suspicious activity reports”
(SARs) with the Financial Crimes Enforcement Network (FinCEN) regarding customers engaged in
“marijuana-related business.” From February 2014 through June 2017, FinCEN received a total of
33,692 marijuana-related SAR filings from a total of 390 banks and credit unions (out of approximately
11,500 depository institutions). The following graph based on FinCEN data shows the number
of banks and credit unions making such filings. While the percentage of the total number of depository
institutions serving the cannabis industry remains small, the growing number of depository institutions
making SAR filings indicates that cannabis businesses increasingly are accessing the federal banking
system despite federal law.
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Depository Institutions Making Marijuana-Related SAR Filings
350
300
250
200
150
100
50
0
Q2 2014 Q4 2014 Q2 2015 Q4 2015 Q2 2016 Q4 2016 Q2 2017
Banks
Credit Unions
Source: Financial Crimes Enforcement Network
FinCEN has published guidance outlining how financial institutions can, consistent with their BSA
obligations, provide services to marijuana-related businesses. However, this guidance does not provide
financial institutions with a legal defense for any violation of federal law. Consequently, financial institutions
willing to serve the cannabis industry tend to be smaller institutions, such as credit unions and
state-chartered banks. “Big” banks generally do not serve, or are not willing to state publicly that they
serve, the cannabis industry. For example, according to American Banker, a spokeswoman for Wells
Fargo Bank recently said the bank’s policy worldwide is to not bank marijuana businesses.
However, as cannabis-related companies increasingly participate in the formal U.S. economy, the
notion of what constitutes a “marijuana-related business” is being blurred, and banks are finding it
more difficult to institute and follow their own policies. For example, it may be straightforward for a
bank to identify and refuse to transact with a cannabis cultivator, but the bank may be unsure whether
it can provide services to (or whether it is providing services to) the cultivator’s accountant, landlord or
investors. For example, Constellation Brands, Inc. (NYSE: STZ), a large beverage company, recently
invested approximately $190 million in Canopy Growth Corporation (TSX: WEED), a Canadian
cannabis company. According to public filings, Constellation Brands has credit agreements with a
number of large financial institutions, including Bank of America, Bank of the West, Fifth Third Bank,
Goldman Sachs Bank, JPMorgan Chase Bank, PNC Bank, SunTrust Bank and Wells Fargo Bank. How
these institutions respond to the investment by Constellation Brands and other similar transactions
may indicate how large financial institutions will interact with the industry in the foreseeable future.
In the current environment, we believe more financial institutions will start to provide some level of
service to the cannabis industry. We also agree with the view of the California State Treasurer’s Office,
as expressed in the working group’s report, that it is only a matter of time until cannabis businesses
have normal access to banking services. However, if the U.S. federal government were to change its
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CHAPTER I
Executive Summary
current practice and aggressively enforce existing federal cannabis laws, including penalizing financial
institutions for serving the cannabis industry, it would have a dampening effect on the industry both
in the United States and abroad.
Increasing Strategic Investor Activity; Continuing Funding Gap
We share the belief held by many that, ultimately, established companies from analogous indus -
tries—alco hol, pharmaceutical, tobacco and consumer products—will enter the cannabis industry
through minority investment, by acquisition or otherwise. We have already seen examples: Constellation
Brands’ investment in Canopy Growth referenced above and the more than $400 million spent by
The Scotts Miracle-Gro Company (NYSE: SMG) to acquire soil, fertilizer, hydroponic equipment and
lighting companies that supply the cannabis industry. These types of transactions help validate investor
enthusiasm for and valuations in the cannabis industry, and we expect similar transactions to occur
with increasing frequency during 2018 and beyond.
Retail investors and an increasing number of family office and strategic investors are providing most
of the investment capital to the cannabis industry. Cannabis-related companies raised more than $2.0
billion in the public and private markets in 2017, but many of the financings were small—less than $5
million. We expect that many institutional investors (most notably, the traditional venture capital and
private equity communities) will not invest in the industry until it matures and the legal environment
becomes more favorable.
Without institutional support for the cannabis industry, a funding gap exists—companies are seeking
more capital than investors are willing or able to provide. We believe that this is especially true in
the private markets, where many companies struggle to raise necessary financing. Although capital may
be available for select issuers in both public and private markets, we believe that without participation
from institutional investors, the cannabis industry will continue to face a significant funding gap for
the foreseeable future.
n Investment Outlook
Hundreds, if not thousands, of cannabis-related companies are seeking to raise capital—thus presenting
investment opportunities for sophisticated investors who want to participate in the cannabis
industry. Investors have their choice of investing in the more than 300 publicly traded cannabis-related
companies, or in the significant number of private companies raising capital. Investors may also choose
among stock markets (both within the United States and internationally), type of security (equity
versus debt) and type of company (companies across all segments of the industry are raising capital).
Most of the cannabis-related companies raising capital—even publicly traded companies—are in
early stages of development, have de minimis revenue and are not profitable. More than 85% of publicly
traded cannabis-related companies have annual revenue less than $5 million, and less than 5%
have annual revenue greater than $25 million.
To help investors better evaluate investment opportunities in the cannabis industry, we currently
define five primary segments: production, distribution, consumer products, business solutions and
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digital media. We further divide each segment into multiple subsegments. Each segment has unique
opportunities and risks. For example, companies that possess, manufacture or distribute cannabis
(commonly known as “touching the plant”) face risks related to violating federal law—and state-law
compliance obligations— not generally faced by providers of business software or digital media content.
Many businesses operate in multiple segments, and we expect industry leaders to emerge in each
segment. The five primary segments and their subsegments are illustrated in the following chart.
Cannabis Industry Segments
Production
Business Solutions
Cultivation
Production
Equipment and
Supplies
Production and
Testing Services
Business
Software
Business
Services
Distribution
Digital Media
Dispensaries
E-Commerce
Distribution
Services
Online Content
and Networking
Online
Directories
Consumer Products
Vaporizers and
Flower Concentrates Infused Products Pharmaceuticals
Accessories
Involves “touching the plant”
Does not involve “touching the plant”
In our view, valuations and stock price fluctuations in the cannabis industry continue to be driven
more by expectations for the cannabis industry in general than by individual company fundamentals.
Today, in the public markets for cannabis-related companies, trading volumes are too low, trading
prices are too volatile and operating histories are too limited to place any reliance on current valuation
levels. We believe that this dynamic will continue until cannabis-related companies have matured and
start to realize meaningful revenue, profitability and other financial metrics that will allow investors to
evaluate companies within the industry by more traditional methodology.
It is still too early to know how the cannabis industry or its sectors will be valued in the future. It
may come to pass that companies in the cannabis industry are valued comparably to public companies
in industries with similar characteristics, such as the alcohol, tobacco, pharmaceutical and consumer
products industries, especially as companies from those industries look to enter the cannabis industry,
through acquisition or by other means. What is clear now, however, is that investors will continue
to have a range of investment opportunities from which to choose in this rapidly growing, dynamic
industry.
14 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER II
Cannabis Science 101
n The Cannabis Plant
Cannabis is a genus of flowering plant indigenous to Eurasia. For millennia, humans have consumed
cannabis for therapeutic, medicinal, social or spiritual purposes and have used the seeds and fibrous
stalks of the cannabis plant to produce goods such as rope, paper, clothing and soap.
There are at least three principal cannabis species: Cannabis sativa, Cannabis indica and Cannabis
ruderalis. 1 These three species can be distinguished by their plant structures and leaves. Sativa plants are
generally tall, thin and wispy; indica plants tend to be shorter and bushier than sativa plants; and ruderalis
plants are shaggy and the shortest of all three species. The following pictures depict the Cannabis
sativa, Cannabis indica and Cannabis ruderalis plants and their leaves.
Cannabis Sativa Plant Cannabis Indica Plant Cannabis Ruderalis Plant
1
Botanists disagree about whether sativa, indica and ruderalis are distinct species or are instead distinct subspecies of a single plant
species. Some botanists propose renaming these three species to reflect their geographic origins. This report takes no position on
these botanical debates; it merely adopts one set of commonly used nomenclature.
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Cannabis Sativa Leaf Cannabis Indica Leaf Cannabis Ruderalis Leaf
Many hybrid varieties of cannabis—sometimes referred to as strains—have developed from these three
species, both through selective breeding and in the wild. Most cannabis varieties grown today are hybrids
that exhibit features of two or more of these principal species. Cannabis varieties consumed for physio -
logical effects generally are hybrids of sativa and indica that produce relatively large and dense flowers.
Certain cannabis varieties—known as hemp—that are grown to produce industrial goods generally
are sativa-dominant varieties or hybrids of sativa and ruderalis that produce relatively small and sparse
flowers.
Cannabis yields more than 100 different compounds known as “cannabinoids,” which, when consumed,
act on cannabinoid receptors in cells in the human nervous and immune systems. The primary
cannabinoid in most cannabis is tetrahydrocannabinol, or THC, the psychoactive compound responsible
for the “high” or euphoric feeling commonly associated with cannabis consumption. The next
most abundant cannabinoid is cannabidiol, or CBD, which produces a physical effect without the
psychoactive effects associated with THC.
Cannabis also includes a variety of compounds known as “terpenes,” which are understood to
interact with cannabinoids to produce some of the physiological effects sought by cannabis consumers.
Terpenes are present in cannabis and many other types of plants and are responsible for a plant’s aroma
and flavor. Examples of terpenes found in cannabis include limonene, which is known for its citrus
smell and is also present in citrus fruit rinds, and pinene, which is known for its pine and fir aromas
and is also found in pine resin.
The highest concentrations of cannabinoids and terpenes are found in the “trichomes” on the
flowers of unpollinated female cannabis plants. Trichomes are crystalline or hairlike components that
secrete cannabinoids, terpenes and other compounds; they generally occur all over the cannabis plant
but are found in highest concentration on the flower. The following illustration shows the basic anatomy
of a cannabis plant, and the images to the right show a female cannabis plant flower and a close-up
view of trichomes.
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CHAPTER II Cannabis Science 101
Cannabis Flower
Trichomes
Cannabis Plant Anatomy
Cannabis can be consumed in a variety of ways that introduce its active compounds into the body:
smoking cannabis flower or its extracts, vaporizing cannabis flower or its extracts, ingesting cannabis
extracts or food products prepared with cannabis and topical application of cannabis products. Human
consumption of cannabinoids and terpenes is widely believed to have numerous medicinal benefits and
therapeutic applications. Depending on the types and relative concentrations of the cannabinoids and
terpenes consumed, these benefits may include pain relief, reduction of inflammation, and promotion
of an energetic, uplifting mood or a calm, relaxed mood.
Although humans have used cannabis therapeutically for thousands of years, only recently have
scientists begun to research and understand at the chemical and biological levels how cannabis works
with the human body. In the 1940s, the American organic chemist Roger Adams performed numerous
studies on cannabis and identified and isolated the cannabinoids THC, CBD and cannabinol, or
CBN. In the 1960s, a team of scientists led by Raphael Mechoulam at the Weizmann Institute of
Science in Israel more completely determined the chemical composition of THC, CBD and certain
other cannabinoids. This research on cannabinoids ultimately led to the discovery that the human
body naturally produces its own cannabinoids and uses them to regulate homeostasis (a process by
which biological systems tend to maintain internal stability, or balance).
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n The Human Endocannabinoid System
The human endocannabinoid system consists of nervous and immune system receptors involved in
regulating health and physiological functions. There are two types of endocannabinoid receptors, CB1
and CB2 receptors, which are located in the brain and in other organs, tissues and glands throughout
the human body. The human body actively regulates variables related to appetite, immune response,
memory, mood, pain, sleep and other functions by naturally creating compounds known as “endocannabinoids”
and delivering them to these receptors. The following illustration depicts the human
endocannabinoid system and the location of CB1 and CB2 receptors.
Human Endocannabinoid System
CB1 Receptors
CB2 Receptors
Immune Cells
CB1
Brain
Lungs
Vascular system
Muscles
Gastrointestinal tract
Reproductive organs
CB2
Spleen
Bones
Skin
Glial cells
CB1 and CB2
Immune system
Liver
Bone marrow
Pancreas
Brain stem
The physiological effects of cannabis consumption are believed to be primarily the result of THC,
CBD and other cannabinoids bonding with the body’s endocannabinoid receptors and the consequent
impact on functions regulated by the endocannabinoid system. As scientists gain a deeper understanding
of the human endocannabinoid system, they are beginning to explore the application of cannabinoids
to a broad range of medical conditions and ailments. Although medical research on cannabinoids
is nascent, cannabis is currently being used to manage many conditions, including anxiety, depression,
inflammation, insomnia, nausea, neural disorders and pain.
CB1 and CB2 Receptors
CB1 and CB2 endocannabinoid receptors, which are found on cell surfaces throughout the body, are
believed to be more numerous than any other cellular receptor signaling system in the human body.
The CB1 receptors are located primarily in the brain, central nervous system and other tissues; these
receptors play a modulatory role in memory, mood, sleep, appetite and pain sensation. The CB2 recep-
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CHAPTER II Cannabis Science 101
tors are located primarily in peripheral organs associated with the immune system, with the greatest
concentration in the spleen, and are responsible for managing inflammation and autoimmune function.
Many tissues contain both CB1 and CB2 receptors, with each receptor type linked to a different
physiological function.
Human Endocannabinoids
Endocannabinoids are the cannabinoids created naturally by the human body for delivery to CB1 and
CB2 receptors. In contrast with cannabinoids introduced through cannabis consumption, endocannabinoids
are broken down quickly by the body and cause effects with shorter durations. One wellstudied
endocannabinoid is anandamide (AEA). AEA is associated with the maintenance of mood,
and AEA deficiency is understood to be anxiogenic (anxiety-inducing). Maintaining appropriate AEA
levels within the human body is believed to reduce pain and inflammation, counter the proliferation
of cancer cells, relieve anxiety and promote adult neurogenesis (a process whereby nerve cells are generated
from neural stem cells). Like THC, AEA has a small molecular structure that binds to CB1 receptors.
AEA is currently being studied for its effects on angiogenesis (the process of developing new blood
vessels), anxiety, cancer and memory consolidation. AEA is also present outside the human body; for
example, it is a natural component of chocolate.
Endocannabinoid Systems in Animals
Nonhuman mammals, including dogs, cats and horses, have been shown to have endocannabinoid
systems that are similar to their human counterparts: these systems employ CB1 and CB2 receptors
and function through the natural production of endocannabinoids. This implies that the endocannabinoid
system is not a recent evolutionary development, but rather an ancient physiological feature of
mammals in general. The cannabinoids found in cannabis, particularly CBD, have been shown to have
a range of therapeutic applications for certain animals, including antibacterial and anti-inflammatory
properties, appetite and bone-growth stimulation, and pain relief. The following chart depicts the
canine endocannabinoid system and CB1 and CB2 receptors.
Canine Endocannabinoid System
CB1
CB2
CB1 and CB2
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n Cannabinoids
Cannabinoids are compounds present in the cannabis plant that act on human cannabinoid receptors
in cells in the nervous and immune systems. Scientists have identified more than 100 cannabinoids in
the cannabis plant. Generally, the most abundant cannabinoid is THC, a psychoactive compound that
causes a euphoric “high,” and the second most abundant cannabinoid is cannabidiol, or CBD, which
produces a relaxing physical effect without a psychoactive effect. Consuming cannabinoids has been
shown to have numerous medicinal benefits and therapeutic applications. The following table lists
20 common conditions for which medical cannabis use has been legalized under U.S. state laws and
identifies 8 cannabinoids that are used or being studied to treat these conditions. A brief description of
these cannabinoids follows the table.
Common Qualifying Medical Conditions and Potentially Therapeutic Cannabinoids
THC CBD CBC CBG CBGA CBN THCA CBDA
Alzheimer's disease � �
Amyotrophic lateral sclerosis (ALS) � � �
Anorexia
�
Arthritis � �
Cachexia � �
Cancer � � � � � �
Chronic pain � � � � � �
Crohn's disease
�
Epilepsy
�
Glaucoma � � �
Hepatitis C � �
HIV/AIDS � �
Inflammation � � � � � �
Migraine � �
Multiple sclerosis
�
Nausea � � �
Nervous system degeneration �
Parkinson's disease
�
Post-traumatic stress disorder (PTSD) � �
Spasms � � � �
THC Tetrahydrocannabinol: THC refers to delta-9-tetrahydrocannabinol and certain chemical
variants, including delta-8-tetrahydrocannabinol. THC is the most abundant cannabinoid in cannabis
and is understood to be the psychoactive compound in cannabis primarily responsible for the euphoric
feeling of being “high.” Both recreational and medicinal users often seek the psychoactive effects of
THC and may prefer certain cannabis products based solely on the quality and level of THC. THC
is believed to have wide-ranging medicinal benefits: analgesic, antianxiety, antibacterial, anticancer,
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CHAPTER II Cannabis Science 101
antidepressant, antiemetic, anti-inflammatory, antinausea and antispasmodic. It also is believed to have
therapeutic applications, such as appetite stimulation, bronchodilation, neuroprotection and pain relief.
CBD Cannabidiol: CBD is considered to be the second most abundant cannabinoid in cannabis.
It is nonpsychoactive and is believed to counteract the psychoactive effects of THC. CBD also is
believed to have wide-ranging medicinal benefits: analgesic, antianxiety, antibacterial, anticancer, anticonvulsant,
antidepressant, antiemetic, anti-inflammatory, anti-insomnia, anti-ischemic, antipsychotic
and antispasmodic. In addition, CBD is believed to have therapeutic applications, including appetite
stimulation, bone-growth stimulation, immunosuppression and neuroprotection. CBD can be derived
from many cannabis strains, including low-THC strains ordinarily grown to produce industrial hemp
products.
CBC Cannabichromene: CBC is thought to be the third most abundant cannabinoid in cannabis
and is nonpsychoactive. Like THC and CBD, CBC is believed to have several medicinal benefits,
including analgesic, antibacterial, anticancer, antidepressant, antifungal, anti-inflammatory and
anti-insomnia. CBC is also used as a therapeutic bone-growth stimulant. Ongoing research seeks to
determine the role of CBC in reducing gastrointestinal inflammation. CBC may also have applications
in pain management—in addition to binding to the CB1 and CB2 endocannabinoid receptors, it has
been shown to interact with certain pain receptors.
CBG Cannabigerol: CBG is nonpsychoactive and is believed to have several medicinal benefits—
analgesic, antibacterial, anticancer, antidepressant and antifungal—as well as a therapeutic application
for bone-growth stimulation. CBG is present primarily during the early stages of the cannabis plant’s
growth cycle; only small amounts can be extracted from the plant during its flowering stage (although
strains of cannabis have recently been bred to have high levels of CBG). CBG is believed to partially
counteract the psychoactive effects of THC and to decrease anxiety and muscle tension.
CBGA Cannabigerolic Acid: CBGA is a nonpsychoactive precursor to all other cannabinoids,
including THC, CBD, CBC and CBG. Much of a cannabis plant’s CBGA ultimately transforms into
other cannabinoids through the chemical process of decarboxylation. CBGA is used for analgesic and
anti-inflammatory applications. Certain cannabis strains cultivated to produce industrial hemp products
are believed to contain high levels of CBG relative to other strains.
CBN Cannabinol: CBN has been shown to produce some psychoactive effects and is believed to
have several medicinal benefits, such as analgesic, antibacterial, anticonvulsive, anti-inflammatory and
anti-insomnia. Unlike many other cannabinoids, CBN is not derived directly from CBGA decarboxylation;
instead, it results from THC degradation. The CBN level of a cannabis plant is sometimes used
as a measure of the plant’s overall quality for consumption.
THCA Delta-9-Tetrahydrocannabinolic Acid: THCA is found abundantly in raw cannabis flower
and is the precursor to THC. THCA is nonpsychoactive and is believed to have several medicinal
benefits, including anticancer, anti-inflammatory and antispasmodic. THCA decarboxylates into THC
through drying or application of intense heat, such as the heat applied during smoking or vaporizing
the cannabis plant.
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CBDA Cannabidiolic Acid: CBDA, the precursor to CBD, is nonpsychoactive and is believed to
have several medicinal benefits— anticancer, antiemetic and anti-inflammatory—as well as therapeutic
applications. Generally, CBDA is present in the cannabis plant in low levels, although recently some
strains have been grown with CBDA levels comparable to typical THC levels. Like THCA, CBDA
decarboxylates into other compounds when heated. (An explanation of decarboxylation follows.)
Cannabinoid Composition Levels
As a general rule, THC and CBD are the most prevalent cannabinoids found in many strains of the
cannabis plant, with other cannabinoids appearing in relatively minuscule amounts. (One exception
to this rule is the low-THC strains grown to produce industrial hemp.) THC-dominant strains historically
have been the most popular with cannabis consumers, but CBD-dominant strains and strains
with high levels of other cannabinoids are believed to have medicinal benefits and hold promise for
therapeutic applications.
Cannabinoid Creation: Decarboxylation
All cannabinoids present in cannabis begin as cannabigerolic acid, or CBGA. CBGA is ultimately
transformed into various other cannabinoids through decarboxylation, a process by which a compound’s
chemical structure changes due to light, heat, alkaline conditions or other chemical forces. The
two main catalysts for decarboxylation of CBGA and other cannabinoids are heat and time (the aging
process). The following chart depicts the process of cannabinoid decarboxylation.
Cannabinoid Decarboxylation Process
RAW
CBGA
THCA
CBCA
CBDA
THCVA
CBCVA
CBDVA
HEATED
THC CBC CBD CBG
THCV
CBCV
CBDV
CBGV
AGED
CBNA
8 - THC CBN CBL CBLA
Source: Elemental Wellness
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CHAPTER II Cannabis Science 101
As examples of the decarboxylation process, consider the changes to THCA that result from heat
and aging. If the nonpsychoactive THCA naturally present in raw cannabis is heated, it quickly decarboxylates
into psychoactive THC; this is what commonly occurs when cannabis flower is smoked or
vaporized for its psychoactive effect. THCA may also be stored and aged to produce CBN.
Cannabinoid Boiling Points
Cannabinoids boil at temperatures lower than the temperature at which cannabis flower burns. Based
on this property, vaporizers have been developed to heat cannabis flower to a point at which its active
compounds boil and can be inhaled as vapor but at which point the flower does not combust and create
smoke. The approximate temperatures at which select cannabinoids boil and cannabis flower combusts
are shown in the following table.
Compound Boiling and
Flower Combustion Temperatures
Compound/Flower
THCA
CBDA
THC
CBD
CBN
Flower
Temperature (°F)
220
250
315
355
365
450
Smoking cannabis flower remains the most popular form of cannabis consumption, even though
it is believed to destroy as much as 30% of the active cannabinoids and is less efficient than merely
heating the desired compounds to their boiling points. Vaporizers are becoming increasingly sophisticated,
and those that can maintain temperatures which target the activation of specific cannabinoids
are becoming popular.
n Terpenes
Terpenes are a class of organic compounds present in cannabis and
many other plants; they are responsible for a plant’s aroma and flavor.
The strong odors produced by terpenes are believed to be part of the
natural defense of many plants. Cannabis contains more than 100 different
terpenes, which are believed to interact with cannabinoids in a
way that contributes to the medicinal benefits and therapeutic applications
of cannabis. Like cannabinoids, terpenes are present in highest
concentration in the flowers of cannabis plants. (Terpenoids are certain
chemical variants of terpenes, and this report uses the general term
“terpene” to refer to both terpenes and terpenoids.)
Terpenes are believed to interact in various ways with the human
physiology: by acting on receptors and neurotransmitters, combining
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Cannabis Investment Report | December 2017
or dissolving with fats, inhibiting serotonin uptake and increasing dopamine activity in the brain. Scientists
have yet to develop an extensive and detailed understanding of the mechanisms and effects of
many terpenes. However, consumption of certain cannabis strains with particular terpene profiles and
corresponding aromas are generally associated with certain experiences. For example, cannabis strains
that smell of musk or clove (indicating the presence of myrcene) tend to cause sedative and relaxing
effects, strains with a piney scent (indicating the presence of pinene) are used to promote focus and
memory retention, and strains with a lemony scent (indicating the presence of limonene) are consumed
for mood uplift.
The following table identifies eight terpenes found in cannabis and lists the medicinal benefits and
therapeutic applications commonly associated with each.
Potential Medicinal Benefits and Therapeutic Applications of Notable Terpenes
Antianxiety
Antibacterial
Anticancer
Anticonvulsive
Antidepressant
Antifungal
Anti-inflammatory
Anti-insomnia
Anti-ischemic
Antiseptic
Antitumor
Appetite suppressant
Bronchodilator
Camphene
�
�
�
�
Caryophyllene Humulene Limonene Linalool Myrcene Pinene Terpinolene
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
��
�
�
�
�
�
Camphene: Camphene smells strongly of damp woodlands and fir needles and is believed to have
several medicinal benefits , such as antibacterial, antifungal and anti-inflammatory, and a therapeutic
application as a bronchodilator. Some studies have shown that camphene could be used to combat
heart disease as an alternative to other pharmaceutically based therapies with harsh side effects. Camphene
is a minor component of many essential oils and is used as a food additive.
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CHAPTER II Cannabis Science 101
Caryophyllene: Caryophyllene is known for its peppery, woody and spicy smell. It is believed to have
several medicinal benefits, such as antibacterial, anticancer, antifungal and anti-ischemic, and a therapeutic
application as a bronchodilator. Caryophyllene is found in many plants, including Thai basil,
cloves, cinnamon leaves and black pepper.
Humulene: Humulene is well known for giving beer its hoppy aroma and is believed to have several
medicinal benefits: antibacterial, anti-inflammatory and antitumor. Humulene is used to aid weight
loss by acting as an anorectic (appetite suppressant). It is also found in hops and coriander.
Limonene: Limonene is recognized for its citrusy smell. Its medicinal benefits are believed to include
antianxiety, antibacterial, anticancer, anticonvulsive, antidepressant and antifungal. Limonene present
in cannabis quickly enters the bloodstream upon inhalation, which may facilitate the quick absorption
of other terpenes and thus contribute to an uplifting experience. Limonene is also present in citrus fruit
rinds, rosemary, juniper, peppermint and pine needle oils, and its strong smell serves as a natural insect
repellent.
Linalool: Linalool has floral and lavender aromas. It is believed to have medicinal benefits that
include antibacterial, antidepressant, antifungal and anti-insomnia. Linalool may also counteract anxiety
induced by THC consumption. Some research suggests that linalool may boost the immune system,
reduce lung inflammation and restore cognitive and emotional function (potentially making it
useful in the treatment of Alzheimer’s disease). Linalool is found naturally in hundreds of plants and is
a common ingredient in bath products.
Myrcene: Myrcene is generally the most abundant terpene found in cannabis and is known for its
musky and earthy herbal smell, comparable to the smell of cloves. Myrcene is believed to have several
medicinal benefits, including antibacterial, anticancer, antifungal, anti-inflammatory and antiseptic.
Myrcene is understood to enable and hasten the psychoactive effect of THC by lowering resistance
posed by the blood-brain barrier and increasing the THC saturation capacity of the CB1 receptors.
Consuming cannabis with high levels of myrcene may contribute to sedative and relaxing effects suitable
for the treatment of insomnia and pain. Myrcene is present in hops, citrus fruits, bay leaves, eucalyptus,
wild thyme, lemongrass and many other plants.
Pinene: Pinene is known for its pine and fir aromas and is believed to have medicinal benefits, such
as antibacterial, antifungal and anti-inflammatory, and a therapeutic application as a broncho dilator.
Pinene has shown potential to function as an anticancer agent and is believed to counter some of the
psychoactive effects of THC. Pinene is present in conifers, pine resin and citrus fruits and is one of the
terpenes most prevalent in nature.
Terpinolene: Terpinolene has a piney aroma and subtle herbal and sweet floral scents similar to
citrus fruits. Terpinolene is believed to have medicinal benefits, including antibacterial, antifungal,
anti-insomnia and antiseptic. It is also thought to be a central nervous system depressant and is used
to induce sleep or reduce psychological distress. Terpinolene is found in sage and rosemary and is used
in soaps and perfumes.
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Cannabis Plant Terpene Profile
Myrcene is the most abundant terpene found in many cannabis strains, and other terpenes are generally
present in lesser, varying amounts. The following chart shows the terpene levels (percentage by
weight) found in the flower of a typical strain of cannabis.
Typical Cannabis Flower Terpene Levels (Percentage by Weight)
0.3%
0.3%
0.3%
0.6%
0.3%
0.3%
0.9%
0.3%
Camphene
Linalool
Caryophyllene
Myrcene
Humulene
Pinene
Limonene
Terpinolene
n Cannabis Formulations
The “Entourage Effect”
The cannabis industry is currently focused on identifying and producing customized formulations of
cannabinoids and terpenes that may effectively target specific health conditions or otherwise cause an
intended, desirable effect on users. Cannabis strains with specific THC to CBD ratios are currently
the predominant focus for therapeutic applications. THC to CBD ratios in strains popular for treating
certain medical conditions generally range from 100:1 through 1:100, as illustrated by the following
chart.
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CHAPTER II Cannabis Science 101
THC and CBD Formulation Spectrum
THC Dominant Balanced CBD Dominant
THC:CBD
25:1 to 100:1
THC:CBD
10:1 to 25:1
THC:CBD
5:1 to 10:1
THC:CBD
4:1
THC:CBD
1:4
THC:CBD
1:5 to 1:10
THC:CBD
1:10 to 1:25
THC:CBD
1:25 to 1:100
THC Level
CBD Level
• Alzheimer’s disease
• Anorexia
• Appetite stimulant
• Chronic pain
• Amyotrophic lateral
sclerosis (ALS)
• Cachexia
• Cancer
• Glaucoma
• Hepatitis C
• HIV/AIDS
• Migraine
• Multiple sclerosis
• Nausea
• Spasms
• Anxiety
• Epilepsy
• Depression
• Inflammation
• Nervous system degeneration
• Parkinson’s disease
• Post-traumatic stress disorder
(PTSD)
1:100
The “entourage effect” refers to the overall user experience produced by the interactions among all
active compounds in the cannabis plant. The various cannabinoids and terpenes in a particular cannabis
plant are believed to work synergistically with each other and with the human endocannabinoid
system to create an effect very different from the effect any one compound would create. This phenomenon
may partially explain why different cannabis strains are used to treat diverse medical conditions.
There are several generally accepted examples of the entourage effect. CBD is believed to regulate
the psychoactive effects of THC and reduce short-term memory loss, sleepiness and paranoia that may
be caused by THC. Myrcene is understood to enable and hasten the psychoactive effect of THC by
lowering resistance posed by the blood-brain barrier and increasing the THC saturation capacity of the
CB1 receptors. Other terpenes have been shown to block endocannabinoid receptors in the brain while
promoting bonding by endocannabinoid receptors located elsewhere in the body.
Many cannabinoid and terpene formulations developed for therapeutic applications are created
by combining extracts from multiple cannabis strains, a process known as “Frankensteining.” Some
believe Frankenstein formulations are less effective than formulations developed from a single strain
because the natural balance of compounds in a single strain translates to a naturally balanced effect on
the human body.
An understanding of entourage effects and how to effectively combine cannabinoids and terpenes
is believed to be critical to the development of targeted cannabis therapies. Examples of cannabis-based
therapies being developed with specific cannabinoid-terpene profiles include acne medication containing
CBD and limonene, linalool and pinene; antiseptic agents containing CBG and pinene; treatments
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for social anxiety disorders containing CBD, limonene and linalool; and sleeping medicines combining
CBD, THC, caryophyllene, linalool and myrcene.
Genetics and Propagation
Selective breeding and other botanical techniques are being used to develop cannabis varieties with
desired profiles of compounds, and scientists are developing tools to synthesize isolated cannabinoids
in laboratory settings in order to study cannabis at the genetic level. For example, the first mapping
of a cannabis genome was completed in 2011 by a team of Canadian botanists, led by Jon Page from
the National Research Council Canada and Timothy Hughes from the University of Toronto, who
sequenced 30,000 genes in a sativa variety named “Purple Kush.”
Cannabis Genome
Genetic copies, or “clones,” of cannabis plants are generally produced using two methods, “clone
clipping” and micropropagation, or “tissue culture.” Clone clipping involves cutting a growing
tip from a cannabis plant that is several inches long and inserting the cut tip into a grow -
ing medium, where it then grows into a new plant. Tissue culture involves taking a small tissue sample
(which may even be a single cell) from a plant and growing it temporarily in a sterile nutri ent solution
before transferring it to a permanent growing medium. Controlling cannabis plant genomes is
expected to be an important intellectual property issue in the cannabis industry (at least one U.S. patent
has been issued for a strain of cannabis).
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Cannabis Plant Tissue Cultures
Synthetic cannabinoids and terpenes can be manufactured by modifying plant-based compounds
or through tools of synthetic biology and biocatalysis. For example, a synthetic version of THC
known as dronabinol is the active compound in the pharmaceutical product Marinol, which was
approved by the FDA in 1985 for use in treatment of nausea and vomiting associated with cancer
chemotherapy. Methods for biosynthetic production of cannabinoids have been patented in the United
States. Some medical practitioners and cannabis users have found synthetic compounds to be less effective
than plant-based cannabinoids and have attributed this reduced efficacy to the lack of an entourage
effect.
Dosage, Safety and Side Effects
Cannabis dosing schedules provided by doctors and producers generally lack scientific rigor and,
although industry participants strive to create a reliable dosing framework, users generally determine
dosage through self-titration and trial and error. (This method of dosing does not always lead to the
desired effect, but it is generally agreed that there is a low risk of death from an overdose of cannabis.)
Product packaging commonly indicates that a 10-mg serving of cannabinoids represents one dose,
and servings of 2 mg to 5 mg are commonly characterized as “microdoses.” Examples of representative
dosage amounts used to treat some common medical conditions are presented in the following table.
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Representative Dosage Amounts
Desired Effect or Ailment
“High”
Anxiety, depression, spasms
Cancer
Chronic pain
Epileptic seizures
Glaucoma
Increased appetite
Multiple sclerosis
Schizophrenia
Sleep disorders
Dosage
10 mg THC
25 mg CBD
25 mg CBD
2.5–20 mg THC
200–300 mg CBD
20–40 mg CBD
2.5 mg THC
2.5–120 mg THC
40–1,280 mg CBD
40–160 mg CBD
Dosage Ratio
(THC:CBD)
10:1 to 100:1
1:10
1:1
10:1
1:5
1:2 to 1:4
5:1
1:1
1:4 to 1:128
1:4 to 1:16
Neither the potential medicinal benefits and therapeutic applications of cannabis consumption nor
the negative side effects of cannabis use have been thoroughly researched by medical science. Shortterm
negative side effects are believed by some to include sensory distortion, panic, anxiety, poor coordination
of movement, reduced reaction time, lethargy or drowsiness, depression and elevated heart
rate. Longer-term effects may include suppression of the immune system, growth disorders, destruction
of lung fibers, brain lesions, reduced sexual capacity, difficulties with concentration, reduced ability
to learn and retain information, and personality and mood changes. There is also an ongoing debate
about whether cannabis consumption may lead to the abuse of more harmful substances (the so-called
“gateway drug” debate).
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CHAPTER III
Cannabis Industry Segmentation
The nascent cannabis industry is often viewed by investors and others as a single, homogeneous industry,
in much the same way the “technology” industry was viewed in the early 1990s. As the technology
industry became more important to the global economy and was better understood by the investment
community, however, investment banks and other industry analysts tracked an increasing number of
discrete yet related industry segments. In the cannabis industry we are seeing a similar trend, which we
expect to continue as the industry evolves.
To help investors better evaluate investment opportunities in the cannabis industry, we currently
define five primary segments: production, distribution, consumer products, business solutions and
digital media. We further divide each segment into multiple subsegments. Each segment has unique
opportunities and risks. For example, companies that possess, manufacture or distribute cannabis
(commonly known as “touching the plant”) face risks related to violating federal law—and state-law
compliance obligations— not generally faced by providers of business software or digital media content.
Many businesses operate in multiple segments, and we expect industry leaders to emerge in each
segment. The five primary segments and their subsegments are illustrated in the following chart.
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Cannabis Industry Segments
Production
Business Solutions
Cultivation
Production
Equipment and
Supplies
Production and
Testing Services
Business
Software
Business
Services
Distribution
Digital Media
Dispensaries
E-Commerce
Distribution
Services
Online Content
and Networking
Online
Directories
Consumer Products
Vaporizers and
Flower Concentrates Infused Products Pharmaceuticals
Accessories
Involves “touching the plant”
Does not involve “touching the plant”
n Production
We divide the production segment of the cannabis industry into three subsegments: cultivation, production
equipment and supplies, and production and testing services. Cultivation involves operating
grow facilities, propagating cannabis strains, and harvesting and curing cannabis flower. Production
equipment and supplies include the physical components used in production, such as extraction
equipment, testing equipment, lighting, irrigation systems and plant nutrients. Production and testing
services include services that support production, such as extraction or packaging, as well as testing services
related to product safety, composition and quality control. Each of these production subsegments
is described in more detail in the following discussion.
Cultivation
The principal function of a cannabis cultivator is to produce cannabis plants and flowers with the
aromas, flavors, active compounds and overall quality demanded by consumers and production intermediaries.
A cultivator can access hundreds of existing cannabis strains by purchasing seeds or clones
from commercial seed banks or nurseries, or developing unique strains through selective breeding. A
cultivator seeks to optimize the quality and quantity of a plant’s yield by managing cultivation input
variables such as light, air, nutrition, and drying and curing times.
Cannabis Cultivation Process
Ordinarily, a period of three to ten months is required to grow and prepare cannabis flower for consumption.
The cultivation process generally can be organized into six phases: seed selection, seedling,
vegetative, flowering, harvesting and curing. Each of these phases is summarized in the following table.
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Cultivation Process Overview: Seed to Bud
Time
Start
Seed Selection
Selecting a seed is the first step of the cultivation process. A cultivator can
choose from more than 1,500 unique seed varieties, each of which has the
capacity to produce a cannabis strain with a particular cannabinoid and
terpene profile and other unique characteristics.
1–4
Weeks
Seedling
The seedling stage is the period during which the seed sprouts and the
plant stem starts to grow. During this stage, cultivators manage growth to
avoid long stems that may lack the strength to support further vegetation.
3–8
Weeks
Vegetative
The vegetative stage is characterized by the plant’s rapid growth and revelation
of sexual characteristics. During this stage, cultivators remove male
plants and control growth inputs, such as light and nutrients, to maximize
the plant’s yield of unpollinated female flower (which generally contains
the highest concentration of active compounds).
6–16
Weeks
Flowering
The flowering phase comprises the growth and maturation of the cannabis
flower and the trichomes on the flower. Trichomes are hairlike components
that secrete cannabinoids, terpenes and other compounds. Trichomes generally
occur all over the surface of the plant, but are found in highest concentration
on the flowers of unpollinated female plants.
2–4
Weeks
Harvesting
Harvesting involves clipping the leafstalks (on which the flowers grow)
from the main plant stem, drying the leafstalks and flowers, and trimming
the dried flowers. Cultivators harvest at a time calculated to maximize
flower yield and optimize cannabinoid and terpene content.
2–8
Weeks
3–10
Months
Curing
The curing phase is a period of controlled fermentation of the dry cannabis
flower. The conditions under which fermentation occurs, as well as the
duration of the fermentation process, further affect the cannabis flower’s
aroma, taste and cannabinoid composition.
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Cultivation Facilities
There are three general types of cannabis cultivation facilities: outdoor facilities, where cannabis is
grown under natural sunlight and widely exposed to the elements; greenhouse facilities, where cannabis
is grown under filtered sunlight and environmental conditions are partially controlled; and indoor
facilities, where cannabis is grown under electrical lighting and environmental conditions are tightly
controlled. Some facilities combine features of these general types. For example, some greenhouses rely
primarily on filtered sunlight but also employ supplementary electrical lighting to influence the plant
flowering cycle. Each type of facility is suitable for certain purposes.
Growing indoors under electrical lighting is the most expensive way to grow cannabis, but typically
yields the highest quality cannabis by providing for maximum control over variables such as
light, air, nutrition, and exposure to contaminants and pests. Electrical lighting products for indoor
cultivation include traditional and compact fluorescent lamps, high-intensity discharge (HID) lamps
and light-emitting diode (LED) lamps. Adequate carbon dioxide levels can be maintained indoors with
either bottled CO 2 or CO 2 generators. Common indoor growth mediums include soil, hydroponic
systems (wherein nutrients are added to sand, gravel or liquid growth medium) and aeroponic systems
(wherein roots hang suspended in a nutritional aerosol solution). Indoor cultivation facilities are prevalent
in Canada and certain parts of the United States where climatic conditions are not favorable to
outdoor cannabis cultivation.
Indoor Grow Rooms
Aeroponic Systems
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Cannabis Industry Segmentation
Compared to indoor cultivation facilities that use electrical lighting, greenhouse and outdoor facilities
are generally less expensive to operate and more appropriate for large-scale projects, but provide less
control over growing conditions. The use of natural sunlight provides substantial savings on lighting
equipment and energy costs, but may limit the number of grow cycles per year. Outdoor and greenhouse
environments are more exposed to environmental risks that may negatively affect crops, such as
pests, contaminants and adverse weather. Outdoor and greenhouse cultivation facilities are prevalent in
Oregon, California and certain Latin American countries, which have climates conducive to outdoor
growing.
Outdoor Greenhouses
The Business of Cannabis Cultivation
Cultivation businesses must navigate a host of operational challenges, including state and local licensing
requirements, facility design and construction, research and acquisition of cannabis strains, intellectual
property protection, cultivation process engineering, supply-chain management, yield optimization,
facility management and security. Many cultivation businesses retain outside consultants to advise
on one or more of these issues, although some businesses manage their entire cultivation operations
internally. A cultivator may wholesale cannabis flower and other plant material to cannabis concentrate
manufacturers or retail dispensaries, or it may be part of a vertically integrated production and retail
business that sells its flower and other internally manufactured products through its own dispensaries.
Certain U.S. laws, foreign laws and international treaties currently restrict interstate and some
international movement of cannabis products. A cultivation business that wishes to scale its operations
into a new jurisdiction often must invest significant capital in a new cultivation facility located within
the new jurisdiction. As laws change to allow more interstate and international transportation of cannabis
products, cultivators who are operating redundant facilities or expensive indoor facilities will face
increased margin pressure. As the cannabis industry matures and becomes more commodi tized, we
expect the most successful cultivators will be those with strong consumer brands or scalable low-cost
operations in regions where the climate is conducive to agricultural production.
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Production Equipment and Supplies
Production equipment and supplies include the physical components used in cannabis production.
Many industry participants in this subsegment provide products to a broad range of fully legal industries
and do not “touch the plant”; therefore, these participants typically do not require special cannabisrelated
licenses and generally avoid legal risks related to violations of federal law.
Some components of cannabis production are similar or identical to components used in other
agricultural industries (such as irrigation systems), and some are specialized for application to the
cannabis industry (such as extraction machines). Components supplied for many indoor and greenhouse
cultivation facilities include electrical lighting equipment, air filtration and circulation systems,
irrigation systems, nutrient management systems, drying and curing equipment, and computercontrolled
automation and monitoring systems. Specialty cannabis equipment companies now provide
“all-in-one” automated indoor cultivation systems that can be used for in-home cultivation or scaled
for commercial purposes.
Extraction System
Cultivation System
Production and Testing Services
Production services include cannabis extraction and product manufacturing services provided primarily
on a business-to-business basis to cultivators, consumer product companies and retail dispensaries.
Extraction companies invest in specialized equipment that transforms cannabis flower into concentrates
intended for wholesale. Product manufacturing services companies process cannabis flower or
concentrates, or provide packaging and wholesale services.
Testing services include scientific testing of cannabis products and reporting of information about
product quality, safety and composition. Cannabis products are tested at multiple stages of production
for genetic information and strain verification, cannabinoid and terpene composition and
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Cannabis Industry Segmentation
potency, moisture content and the presence of contaminants, such as residual solvents, heavy metals,
mycotoxins, microorganisms and pesticides. Testing, labeling and certification requirements vary
widely across jurisdictions, but increasingly are being required by state law and demanded by supplychain
intermediaries and consumers. Uniform standards for testing and reporting are expected to
emerge as scientific understanding of cannabis increases and as industry consensus about cannabisrelated
health and safety concerns develops.
Providers of extraction, manufacturing and testing services generally must obtain state and local
cannabis licenses and are exposed to risks related to federal legal violations.
Composition and Potency
Laboratories ordinarily test cannabis for the specific amounts of 10 to 15 cannabinoids and more than
30 terpenes. Cultivators and production intermediaries rely on these test results to identify and track
cannabis varieties and to monitor the quality and consistency of production methods. Retailers and
consumers use test results information to assist in purchasing decisions. Almost all consumer products
now include labeling that, at a minimum, indicates the amounts of THC and CBD.
Pesticides
Controlling and disclosing the presence of pesticides in cannabis products is increasingly becoming
a focus of regulators and producers. Even cannabis grown under organic conditions can be exposed
to pesticides inadvertently, so many states now require all cannabis products to be tested by a statelicensed
laboratory for pesticides. Pesticides can be especially problematic in cannabis concentrates;
studies have shown extraction processes may concentrate pesticides at a rate higher than cannabinoids
and terpenes.
Microbiological Organisms
Certain molds, other fungi and bacteria found in and on the cannabis plant can damage the plant
or certain cannabis products and can be harmful if consumed by humans. Mold is a problem most
commonly found in indoor growing environments and during the cannabis drying and curing process.
Organisms found in cannabis and identified by testing includes aspergillus, salmonella, pseudomonas
and E.coli.
Residual Solvents
Most extraction processes use solvents to extract the active compounds from cannabis plant material.
Commonly used solvents include butane, carbon dioxide, ethanol or propane. Residual solvents are
those trace amounts of solvents that remain in a cannabis concentrate after the extraction process.
Some residual solvents can be harmful if consumed by humans in sufficient amounts, and others
should not be consumed in any amount.
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Sample Laboratory Test Results
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CHAPTER III
Cannabis Industry Segmentation
Production Opportunities
We believe opportunities in this segment include:
Specialized Production Services. Production services companies that invest in the necessary equipment
and facilities should see strong demand for high-margin specialized services from cultivators
and other production intermediaries. We expect opportunities will expand for companies that provide
extraction services (particularly those who professionally manage hazardous processes such as hydrocarbon
extraction) or develop proprietary infused-product manufacturing processes.
Energy-efficient, Integrated Cultivation Components. We anticipate continued design and construction
of sophisticated indoor cultivation facilities, which should present a significant opportunity
for suppliers of advanced cultivation components that improve yield and reduce energy costs. We
believe companies that provide all-in-one integrated systems for automation, monitoring and control
of the production process are more likely to succeed than companies that merely offer a single-point
solution.
Branded Laboratory Test Certification. Given the importance of product testing, we believe that
leading providers of high-quality testing services have an opportunity to establish an industry recognized
“certification,” and that such a certification may become a key factor in influencing consumer
confidence and demand.
Efficiencies in Cannabis Cultivation. We believe that certain segments of the market will become
increasingly commoditized and that cultivators with low production costs and high yields will have
significant competitive advantage. Cultivators with operations in regions conducive to low-cost natural
production should benefit as laws are changed to facilitate interstate and international cannabis
commerce.
Production Challenges
Challenges in this segment include:
Scaling Cultivation Operations. Current laws typically force cultivators to build, and obtain licenses
for, potentially redundant, capital-intensive cultivation facilities in each jurisdiction they serve. The
capital requirements and uncertainty around licensing present serious challenges to cultivators seeking
to scale their operations.
Downward-pricing Pressure on Cannabis Flower. Cannabis wholesale prices are declining as largescale
cultivators begin to commoditize cannabis flower. Small and inefficient cultivators (including
high-cost indoor producers) may struggle to produce cannabis at effective margins as cannabis cultivation
migrates to global regions with conditions that support low-cost, sustainable production.
Lack of Standardized Testing. Currently, it may be difficult or impossible to reliably compare test
results between providers of testing services because the cannabis industry has not yet developed uniform
testing standards. Until the industry adopts uniform standards that address testing procedures
and reporting for a broad variety of flower, concentrates and infused products, providers of testing
services may struggle to develop an industry-wide brand and reputation for quality.
Access to Capital. Participants in this segment generally engage in capital-intensive operations.
In particular, cultivation, contract manufacturing and testing facilities require significant capital
investment. Emerging companies in this segment may struggle to raise sufficient capital to compete
effectively.
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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 cannabis
industry are reluctant to enter the market. In the near term, we expect that cultivators will continue
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 permissive
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.
n 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 cannabis
products for medical or recreational purposes. E-commerce includes digital applications used to
enhance the cannabis shopping experience. Distribution services include wholesale and related transportation
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 positions
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 dispensary
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.
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Cannabis Industry Segmentation
Dispensary Exterior Views
Dispensary Interior Views
Customer Interactions
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Because dispensaries “touch the plant,” they must usually obtain a state license. Obtaining a state
dispensary license generally involves a multi-month application process that requires the applicant to
demonstrate compliance with complex license criteria and local regulations, such as producing their
own products (or being prohibited from doing so), locating their dispensary outside a city’s ordinary
retail or commercial zones, operating as a nonprofit cooperative or collective, tracking cannabis products
from “seed to sale,” and collecting taxes on behalf of the state. Dispensaries must also comply
with applicable regulations related to product testing, packaging and labeling, security, and health and
sanitary conditions.
An extensive network of dispensaries across jurisdictions will facilitate the growth of the cannabis
industry and its ability to attract new consumers. Currently, states with the most extensive networks