The GreenWave Report

Executive Summary

State of the Emerging

Cannabis Industry

Current Trends and Projections

March 2017
 Industry at a Glance
2016 Projected State Counts of
Legal Marijuana Markets (Incl. DC)
28 29

22

17 18
14
12 12

2018 2019 2020 2021

Medical Only Fully Legal

$6.5B $30B
7 27
State Count Today

From 20 jurisdictions in 2016 All jurisdictions by 2021

Adult Use Medical Use

2016 State Market Share U.S. Retail Marijuana Sales Projections

($ Billions)

Other
20%
CA $30.3

MI 39% $24.7

9% $17.9
$15.4
$12.8
WA $7.7
$6.5
12% $4.8
CO
20%
2015 2016 2017 2018 2019 2020 2021 2021
MED
ONLY

~26.3M $3,200 ~30M $1,500

Potential Patients Average Patient Active Users Average Consumer
(Medical) Spend/Year (Recreational) Spend/Year
Source: GreenWave Advisors, LLC Estimates

Copyright 2017 GreenWave Advisors, LLC All Rights Reserved Page 2

Executive Summary

T he cannabis industry made great

strides in 2016 in progressing
legislative reform. Ohio and
Pennsylvania passed legislation to legalize
medical marijuana and voters in 8 other states
(manufacture) marijuana to supply legitimate
researchers in the United States. Heretofore,
research of marijuana and its chemical
constituents has been limited to specimens
supplied by a single source (University of
passed ballot measures (4 medical, 4 adult Mississippi) under contract to the

use) to modify existing marijuana laws. Most National Institute on Drug Abuse.
significantly, California, the nations largest Enabling developments
We recognize, however, that until could provide some
consumer market, will now permit
such time as marijuana is measure of relief in
recreational use in addition to its existing
rescheduled or delisted, banking income tax liabilities and banking.
medical use permissions. Many other states
and tax burdens (operating
have also moved forward in introducing
expenses are not tax deductible for cannabis
legislation to modify existing laws.
businesses) will remain critical concerns for
Donald Trumps election as president has investors. Nonetheless, we see continuing
brought mixed messages to the cannabis developments that could provide some
investment community as his professed measure of relief.
support for states rights and the concept of
1. More cannabis friendly banking under a
medical marijuana provides some
Trump Administration. President Trump has
encouragement, while his interest in federal
expressed intent to deregulate banking and
acquiescence of recreational use remains
lackluster. The appointment of marijuana foe thus the compliance burden of Sarbanes Oxley
Jeff Sessions as Attorney General has raised will likely be minimized if not eliminated. This
genuine concerns and fostered debate as to event could free up banking resources to focus
how policy will play out, although he has on cannabis businesses (one of the main
recently admitted that it will be difficult to reasons many banks have rejected cannabis
implement a national crackdown on businesses is because of the heavy compliance
marijuana. burden).

While the Trump administration ponders its 2. Limited federal income tax relief under
marijuana policy, an overhang will persist that Section 280E as dual markets combine. As
will likely relax capital deployment into the we have indicated in the past, physician
industry. Nevertheless, we remain optimistic participation in state medical marijuana
that the cannabis industry will continue its programs has been lackluster which has
upward trajectory, fueled by overwhelming hampered the growth of medical marijuana
public support and the inherent economic markets. Washington state has moved
benefits in terms of jobs and tax revenues towards consolidating its medical and
(including those derived from exporting recreational markets with a medical friendly
product) that a legally regulated marijuana designation, that requires an in house certified
industry provides. medical marijuana consultant to issue a
recognition card. We believe that allocation
Concurrently with these political
of these related expenses to cost of goods
developments, although the DEA maintained
cannabis as a schedule 1 in its classification, it sold should likely be permissible and provide
adopted a new policy designed to increase some tax relief under section 280E. We would
the number of entities registered under the expect other states to follow this lead.
Controlled Substances Act (CSA) to grow

Copyright 2017 GreenWave Advisors, LLC All Rights Reserved Page 3

 The public markets continue to programs attract higher caliber talent with
mostly consist of penny stocks more funding available.

~40% that trade with erratic liquidity

and with more sensitivity to news Internal controls for tracking and monitoring
2016 flow and hype than to solid product movements by licensed entities is
becoming normative which has facilitated not
U.S. Market fundamental analysis. As the
only an increase in data but also better
industry continues to evolve, we
Share believe that the growth prospects transparency of the reported sales results by
of well established ancillary each jurisdiction. Accordingly we have
businesses will continue to drive continued our research efforts in the collection
investor interest into larger cap and analysis of all available pertinent
information. This has enabled us to provide
Source: GreenWave Advisors, LLC estimates companies. For example, Scotts
Miracle Grow, which has another thorough analysis, state by state, of
significant institutional ownership, surged what we believe are the essential criteria
~50% in 2016. With California fully legal, we requisite for a comprehensive understanding
expect a heightened ramp in technology driven of the market potential for the retail marijuana
start ups to propel the next leg of industry industry.
growth, particularly as many accelerator

Key Findings: We reiterate our industry forecast of $30B by

2016 retail marijuana sales in the U.S. 2021 by which time we expect that all states
approximated $6.5 Billion and up ~35% from will have either a medical only or fully legal
$4.8 Billion in 2015 of which $1.8B was marijuana market. Alternatively, should the
reported from states with recreational use Trump Administration actively challenge
markets and the remaining $4.7 billion is our recreational use yet allow for each state to
best estimate of medical marijuana markets decide on medical marijuana regulation, we
$27 Billion federal
(most of these revenues are from California expect $18 Billion in medicinal marijuana
income tax collections and Michigan which are unregulated). In 2017 sales by 2021, as we would likely observe a
on retail sales under we expect growth of 18% to $7.7 Billion as migration back to a less restrictive medical
section 280E over the new medical use markets come online. market should no alternative exist.
next 5 years.
We note that in 2014 when we initiated our Federal income tax collections over the next
$18 Billion medical coverage of the cannabis industry, we 5 years could amount to $27B under Section
marijuana only market anticipated California in our estimates and 280E of the IRS Tax Code. This is based upon
by 2021, should Trump were the only firm to do so. Additionally, we our anticipated trajectory of retail marijuana
actively challenge highlight that our forecasting methodology sales in the U.S., and assumes tax code 280E
recreational use. has proven effective as results that are remains on the books. In the meantime,
reported and measurable were largely in line should 280E no longer apply, we expect a
with our estimates. Nonetheless, we have more favorable tax rate to attract additional
revised our forecasting methodology to capital which could offset the increased tax
incorporate consumer behavior intelligence revenues from the higher 280E effective tax
(in select markets) provided by Consumer rate. As we have reported in our prior
Research Around Cannabis, a newly research, we expect state tax revenues to be
established market research firm. significant and likely exceed $4 billion by
2021 (on retail marijuana sales alone and does

Copyright 2017 GreenWave Advisors, LLC All Rights Reserved Page 4

not include wholesale and ancillary
businesses). Average Patient Spend/ Month

A continued disruption to medical use sales

where a recreational use marijuana market
exists. We have observed in our prior research
that growth in patient counts is decelerating as
new patient applications and cardholder
renewals are declining in states where
recreational use is available. While we do not
intend to understate the importance or
necessity of medical marijuana as an
Source: GreenWave Advisors, LLC estimates
alternative treatment for many debilitating
health conditions, there presently appears to
participation has been insignificant, as only 4%
be little distinction between the various
of licensed physicians in existing medical
designated medicinal use products and those
marijuana states are registered to recommend
offered in a recreational market. We do,
marijuana to qualified patients thus inhibiting
however, believe that the medicinal use
the full potential of a medical market. Hence,
market will recalibrate when the pipeline of
we believe that it will be increasingly more
new, more targeted medications become
difficult for medical marijuana sales to thrive in
available and as the medical profession gains
a dual market environment (particularly as our
more comfort in pushing a marijuana
findings suggest that average monthly
treatment rather than a patient having to
dispensary revenues are near half that of
pull a recommendation from a doctor. These
recreational retail outlets). It is logical to
may include products available only by
assume that regulatory oversight and
prescription as well as over the counter
enforcement will be less

nutraceuticals. Defining a precise timeframe
redundant, more cost
for these developments is difficult, as
efficient, and less confusing in Significantly we note
legislation will lead to guidance which in turn
a merged platform. We see the beginning of what we
will foster increased entrepreneurial and characterize as a marijuana market
this effort presently in
scientific efforts. With this maturity, we metamorphosis, as states with both
Washington, Oregon and
expect the medicinal use market to surge,
Alaska and expect that
legalized medical and recreational use
particularly as foreign based companies begin to evaluate the practicality
Colorado will soon follow.
leading the way in the research, development, of merged regulatory regimes.
This trend is consistent with
and marketing of ailment specific treatments
our thesis (The GreenWave
enter the U.S. market.
Report October 2014) that initially
The beginning of what we characterize as a bifurcated marijuana markets will merge under
marijuana market metamorphosis, as states a shared regulatory system into substantially
with both legalized medical and recreational larger enterprises.
use begin to evaluate the practicality of
As California continues to evaluate how it will
merged regulatory regimes. Our research
best concurrently regulate a medical and
suggests that the medical communitys
recreational market, we believe that it is

Copyright 2017 GreenWave Advisors, LLC All Rights Reserved Page 5

 possible that lawmakers will consider the explosive growth. Based upon data provided
practicality of consolidating these businesses by Brightfield Group, the infused product
in 2018. A combined California market would market is gaining significant market share,
be significant, not only because of its sheer consistently accounting for approximately 30-
size, but also because it would be the first 50% of revenues in several regions. We would
state to implement regulations for a fully legal expect these businesses to benefit from
market without initial oversight of medical use margin expansion as the price of flower/trim
purchases. This could serve as a catalyst for decreases, assuming the unit costs at the retail
similar actions in Nevada, Massachusetts and level are held constant, along with all other
Maine which are now commencing the exogenous variable inputs.
implementation of their respective
recreational use markets. In addition, we continue to believe that
uniform national testing and operational
The infused product market and lab testing standardization protocols will eventually be
sectors continue to be well positioned for implemented, thus making Lab Testing one of

Source of Funding Invested Capital

Recapitalization
9%
Growth/Expansion IPO Reverse
11% 7% Merger
6%
Merger/Acquisition
16%
Other
14%
Angel
17% Early
stage VC
20%
Source: PitchBook, Inc.

the most attractive sub-sectors within the becomes more favorable. According to data
marijuana eco system. provided by PitchBook, total capital invested
into the cannabis industry since 2012 is
Not surprisingly, we observe a decline in black
~ $1 billion. The average deal size has also
market activity as the availability of legalized
increased from ~$0.5 M in 2012 to $2.2 M in
marijuana expands. Based on wholesale
2016 with ~38% of the aggregate total funded
pricing data from Cannabis Benchmarks, we
by Venture Capital and Angel investors.
estimate that currently, the illicit market in the
U.S. is ~$36 billion which we determine based The average annual revenue per medical
upon a multiplier of reported marijuana dispensary was $2.9MM and $2.1MM for a
confiscations by the U.S. Border Patrol and recreational retail store. Correspondingly, we
quantities of plant eradications initiated by the estimate average spend per month was
DEA. Logically, we believe that legal sales will approximately ~$265 for a medical patient
continue to cannibalize this illicit market. and ~$125 for a recreational user.

Capital flow into the marijuana industry is

steadily increasing as the risk/reward profile
Copyright 2017 GreenWave Advisors, LLC All Rights Reserved Page 6