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Executive Summary

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Executive Summary

It is my pleasure to present to you the Executive Summary of Arcviews 5th edition


of The State of Legal Marijuana Markets. This will give you a solid glimpse of what
we elaborate on in much more detail in the full report.

Its hard to imagine a more unique industry than the cannabis industry, or one
that is growing and changing faster.

If you are looking to make decisions regarding your involvement in this nascent,
but fast-maturing industry, you deserve access to the best data and analysis
to plot your course. Arcview has helped people like you navigate this complex
business and political environment since 2010.
Troy Dayton, CEO
The Arcview Group As the leading publisher in researching and understanding the legal sale and
distribution of cannabis, Arcview Market Research brings unparalleled expertise
and insight to the task. In an effort to stay on the cutting edge of data and
analysis we are pleased to partner with BDS Analytics on this edition. We chose
BDS Analytics because they have a comprehensive and meticulous data set
backed up by point-of-sale transaction data.
1
Im also excited to introduce you to Tom Adams, Arcviews new Editor-In-Chief.
Tom Adams created the projections and analysis that pioneers of the home
video revolution and later the broadband internet revolution relied on. He now
brings that tremendous experience and insight to todays business boom.

Tom Adams, As the leading group of high net worth investors in the cannabis industry,
Editor-in-Chief The Arcview Group believes that investment in quality market data and analysis
will pay dividends in a market where mistakes can be costly and where getting
up and staying up to speed quickly is crucial.

I invite you to consider ordering the full 200+ page report that will be released
in a few weeks. If you do, you will also get a robust mid-year update later in the
year. For the cost of an hour or two of a top experts time you can access the
data and analysis that are the result of thousands of hours of painstaking effort.

At Arcview, our mission is to forge a principled and profitable cannabis industry


from the ashes of prohibition. I look forward to working with you to build a new
kind of industry.

Sincerely,
Troy Dayton,
CEO The Arcview Group

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Executive Summary

A Year Of Substantial
Gains Across The Industry
The legal cannabis industry accelerated at
a remarkable pace in 2016. North American
consumers spent $6.7 billion on legal cannabis
products, up 34% from 2015.
Cannabis is now legally sold in state- reduced traditional dried flowers to
of-the-art retail dispensaries with less than 56% of the business.
computer-based inventory and sales More states passed laws to open new
tracking, fully regulated and taxed by markets and expand existing ones in
their state governments just like any 2016 than in any previous year. These
other product category. Entrepreneurs new markets will drive sustained
are modernizing the product just as revenue growth in the years ahead. The
quickly. Many successful brands have legislatures of Pennsylvania and Ohio
launched extracts, edibles, topicals, legalized medical cannabis in those major
and other types of products that are swing states, while voters in California,
3 leading consumers to spend more and, Maine, Nevada, and Massachusetts
in cutting-edge Colorado, they have passed adult-use initiatives and Arkansas,

North American Legal Cannabis Spending 2015-2021

$25 BILLION

$20 BILLION 14.9B

10.7B
$15 BILLION
7.6B

$10 BILLION
4.2B
2.5B
$5 BILLION 1.8B
970M

$0 4.0B 4.9B 5.68B 7.0B 7.0B 7.3B 7.7B

2015 2016 2017 2018 2019 2020 2021

Medical Adult Use

The State of Legal Marijuana Markets | 5th EDITION


Executive Summary

5 -Year Growth in $5-Billion-Plus-Industries

$25 BILLION

$20 BILLION

$15 BILLION

$10 BILLION

$5 BILLION

$0
1 2 3 4 5 6

Basic Cable 86 Home Video 88 Legal Cannabis 16 Broadband Access 02

North Dakota, Florida, and Montana annual growth across the following 4
voters passed medical cannabis laws. five years. Cable television came close,
The blistering 34% compound annual growing 19% annually in the late 1980s
growth rate (CAGR) from 2014 to 2016 as national networks like CNN and HBO
was driven primarily by Colorado and proved to be wildly popular. Broadband
Washington initiating adult-use sales. internet subscription spending grew
This rate of growth will subside
somewhat in 2017 to 22%, as the eight Very few consumer industry categories reach
states that voted to open or expand $5 billion in annual spending and then post
their cannabis markets on Election Day anything like 25% compound annual growth
in November 2016 work to implement
across the following five years.
the new programs. But Arcview
Market Research forecasts growth will
reaccelerate beginning in 2018, as adult- 29% per annum in the early 2000s as
use sales ramp up in Canada, California, it became almost as much of a must-
and Massachusetts along with medical have utility as electricity or television
sales in Florida. That will grow the for the modern home. What became the
$6.7-billion market of 2016 at a robust ubiquitous home video business that
27% CAGR to $22.6 billion in 2021 (see birthed the great Blockbuster success
graph prior page). story only grew at a 12% CAGR after
reaching $5 billion in revenue in 1988
Very few consumer industry categories (see graph, above).
reach $5 billion in annual spending and
then post anything like 25% compound

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Cannabis,
meet capital.
Prohibition is crumbling. Invest in what comes next.

137 $103M+ $2.9M+ 625+


Funded Companies Invested Raised for Legalization Investor Members

Arcview is the #1 source of deal flow in the fastest growing industry. If you qualify as a high net worth
accredited investor or if you are an entrepreneur raising capital, Arcview might be right for you.
Executive Summary

That 20+% annual growth rate is likely Canada and Mexico are included in
to continue for many years past 2021 Arcviews North American market
as more states and countries legalize projections for the first time and
cannabis. Arcview includes 30 states analyzed throughout this 5th Edition
plus Canada with active legal markets of The State of Legal Marijuana Markets.
by 2021 in its model, but in many of The expected roll-out of Canadas
the largest markets, like New York and adult-use market is analyzed in Chapter
Florida, sales are expected to remain 3. The U.S. northern neighbor may be
limited to medical-use. In the 2021-2026 the world leader in moving toward a
period, however, many of these states well-regulated legal cannabis industry.
will build robust legal adult-use markets, Countries around the world are already
and all but a few states will make responding to the state-by-state
medical cannabis available legally. dismantling of prohibition in America
Its also likely that US federal prohibition the chief exporter of the War on Drugs
will be repealed during that period, for decadesby moving to allow
which would fuel explosive growth. medical use (as in Australia, Germany,
and Colombia) or to outright legalization
(as in Uruguay).
6
Gallup Poll: U.S. Support for Legal Marijuana
100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0
1969 1972 1973 1977 1979 1980 1985 1995 2000 2001 2003 2005 2009 2010 2011 2012 2013 2014 2015 2016

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Executive Summary

Robust growth through 2021 and beyond One key reason support for legalization
in the United States is predicted even if is spreading so rapidly is that it is
the US Justice Department opposes the accomplishing a key goal: the illicit
cannabis industry. Chapter 2 provides market is shrinking. The illicit market
a detailed analysis of why that kind of grew steadily throughout the last
reversal in policy is unlikely, but a major 40 years of the War on Drugs to what
one is the popularity of legal cannabis. Arcview estimates was a North American
total of $46.8 billion when adult-use
Polls show that 80% of Americans
sales first began in 2014 in Colorado and
approve of legal access to medical
Washington. Illicit sales are now being
cannabis and 60% approve of full adult-
rolled back at the fastest rates in those
use legalization (see graph, prior page). states with the most mature legal adult-
That level of agreement is rare on any use markets (see graph, below). Most
policy issue and its allowing elected dramatically, what Arcview estimates was
officials across the political spectrum to a $1-billion illicit market in Colorado is now
start to move past the stigma previously less than $500 million, which represents
associated with this issue. just 27% of a $1.8-billion overall market.

7 Illicit Cannabis Trade As Percent of Total Spending

Illegal
States
100%
USA
90% Average

80%

70%

60%

50%

40%

30%

20% 100% 98% 97% 91% 88% 74% 51% 49% 27%

10%

0
Illinois Alaska DC California Washington Oregon Colorado

The State of Legal Marijuana Markets | 5th EDITION


Executive Summary

The Advance of Legal Cannabis

Hawaii

Legal Adult Use Legal Medical Use CBD-Only

The State of Legal Marijuana Markets | 5th EDITION


Executive Summary

Election Results These developments were inconceivable


just a few years ago.
President Donald Trump said in 1991,
You have to legalize drugs to win that The biggest political win of the U.S.
war. He backed away from that position election came in California. California
in his campaign for president but was pioneered the modern cannabis policy
remarkably consistent in his support for reform movement in 1996 when
medical access to cannabis and his belief voters passed Proposition 215, the
that cannabis policy should be up to the Compassionate Care Act. Though voters
states. But once elected he appointed failed to approve adult use in 2010, they
dedicated drug warrior Jeff Sessions for voted overwhelmingly in 2016 to make
Attorney General. Sessions remarked adult use legal in a state that represents
Good people dont smoke marijuana the worlds sixth-largest economy.
at a 2015 Congressional hearing. Nevada also voted to legalize adult use,
though a similar initiative failed narrowly
Despite conflicting signals from the in Arizona. Massachusetts and Maine
new administration, investors and also passed voter-generated initiatives to
entrepreneurs have many other legalize the adult use of cannabis, joining
reasons to be hopeful: District of Columbia voters in showing the
continent-wide breadth of the movement
The newly elected Prime Minister of (see graphic, prior page).
Canada, Justin Trudeau, took office in 10
late 2015 and immediately started the The formalizing of medical-use rules in
formal process of legalizing adult use. Montana, and the approval of medical
cannabis sales in Arkansas, North Dakota,
In the US November elections, voters and Florida (where it garnered 71% of
in eight of the nine states voting on the vote) showed that cannabis policy
cannabis measures approved them, reform is hugely popular, even in red and
bringing to 63% the portion of swing states that voted for Trump. Earlier
Americans living in medical use states in the year, big swing states Ohio and
and 21% those in adult-use states. Pennsylvania saw medical legalization
come to pass via legislative action.
For the first time, the Presidential
nominees of both major U.S. political The two most significant votes may
parties felt free to speak approvingly have come in the smallest jurisdictions:
of the medical use of cannabis and citizens of Denver narrowly approved
the right of states to experiment with on-site usage in licensed clubs, and
different cannabis policies. Pueblo, CO, voters rejected opponents
efforts to pass what was essentially
In December, the Mexican Senate an industry shutdown. In both cases,
voted overwhelmingly (98-7) to send cannabis supporters prevailed against
a medical-use legalization bill to the the early betting. These votes show that
Chamber of Deputies. experience with legalization can lead
voters to pass even more open laws, and
reject efforts to roll it back.

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Executive Summary

On The Federal Front coffee, alcohol, and tobacco. Others


were concerned that rescheduling it to
Retail sales taxes in state-sanctioned Schedule 2, along with cocaine, would
cannabis markets totaled more than lead to the pharmaceuticalization of
$500 million in 2016 in Colorado, the plant, as it would be forced into
Washington, and Oregon alone, and strict Food and Drug Administration
$836 million since adult-use sales testing protocols and distribution rules.
began in 2014. Nearly 1.9 million North In retrospect, it was unrealistic to hope
Americans are legally using cannabis the nations chief drug-law enforcers
to manage conditions as severe as would advance the cause of legalization
polymorphic seizures and as common with either step.
as chronic pain, while millions more are
consuming it legally in adult-use states In August 2016, the DEA reiterated
with little or no negative impact. its Schedule 1 classification, though
it did loosen the rules to allow more
But the effort to repeal cannabis researchers to study the potential
prohibition at the Federal level remains medicinal value of cannabinoids.
complicated. Richard Nixon tried to stem Even that move was apparently too
the rising popularity of cannabis by much for some inside the bureau; in
11 December new rules were announced
equating it to heroin on 1970s Controlled
Substances Act (CSA) Schedule 1 list of clarifying that the agency even considers
drugs that 1) have no medical use, 2) have non-psychoactive cannabidiol (CBD)
high potential for abuse, and 3) are unsafe extracts Schedule 1 controlled substances.
to use even under medical supervision.
Rohrabacher-Farr
The DEAs stance makes the Rohrabacher-
Farr budget amendment protecting medical The DEAs stance makes the Rohrabacher-
Farr budget amendment protecting
marijuana states from federal intervention medical marijuana states from federal
even more important to the industrys intervention even more important to the
suitability for investment. industrys suitability for investment. The
amendment, a piece of legislation first
There was a glimmer of hope in late introduced in 2003 and finally passed
2015 when the Drug Enforcement on December 16, 2014, was renewed in
Administration (DEA) announced it December of 2015 when the US House of
would reconsider its 45-year-long Representatives approved a continuing
classification of cannabis as a Schedule resolution that funds the federal
1 controlled substance. Some advocates government until April 28, 2017 and
were hopeful it would be removed includes the Rohrabacher-Farr language.
from CSA schedules completely, and
become legally considered akin to In August 2016, Rohrabacher-Farr
other mildly psychoactive products like received a favorable ruling by the Ninth

The State of Legal Marijuana Markets | 5th EDITION


Executive Summary

Circuit Court of Appeals in United States marijuana enforcement under the CSA.
v. McIntosh, which further buttresses The Cole Memo guidance applies to
the amendments ability to protect all of the DOJs federal enforcement
people and businesses involved with the activity, including civil enforcement, and
medical marijuana industry from legal criminal investigations and prosecutions,
or criminal actions at the federal level. concerning marijuana in all states.
But, as a budget amendment, lawmakers
must approve the language every
year. By the summer of 2017, Congress Sessions, while speaking vehemently against
will begin wrestling with the new cannabis legalization, has indicated that he
appropriations bill, possibly reopening thinks the Cole Memorandum is largely sound
the Rohrabacher-Farr amendment and that he is not planning a large scale
discussion and considering expanding
crackdown.
the protections to cover adult-use states.

Attorney General Jeff Sessions, while The Cole Memo essentially provides
speaking vehemently against cannabis a series of guiding principles that
legalization, has indicated that he thinks businesses must address to avoid federal
the Cole Memorandum is largely sound intervention. If businesses follow the
and that he is not planning a large scale laws of the state, do not divert product 12
crackdown. out of state, keep product out of the
hands of children, do not support
But he hinted that he may be much more cartels, and do not launder monies,
stringent about the guidelines set out then the federal government will take
in the Cole Memo and possibly make a hands-off approach to cannabis
the guidelines more strict. He has also
law enforcement. With more states
reiterated many times that anybody
expanding their medical programs into
selling or possessing cannabis is violating
adult use, the question remains whether
federal law.
the DOJ will continue to be tolerant as
the cannabis industry continues to grow.
The Cole Memorandum

The other key federal protection the During his January testimony, Sessions
industry has from the full implications told Sen. Patrick Leahy (D-VT) that while
of the CSA, which makes it illegal under he, wont commit to never enforcing
federal law to manufacture, distribute federal law, enforcing federal law in
or dispense marijuana, is the Cole regards to cannabis nationwide is a
Memorandum. On August 29, 2013, US problem of resources for the federal
Department of Justice (DOJ) Deputy government. He also told Sen. Mike Lee
Attorney General James M. Cole issued (R-UT) that, its not the Attorney Generals
a memorandum to all United States job to decide what laws to enforce, and
Attorneys providing updated guidance suggested if Congress wants marijuana to
to federal prosecutors concerning be legal, it should vote to make it so.

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Executive Summary

Banking Issues The Tax Issue

Beyond the threat of prosecution and Internal Revenue Service (IRS) rule 280E
asset forfeiture, the chief federal-level seriously impacts profitability and cash
issue faced by cannabis businesses is lack flow for cannabis businesses. The IRS
of access to the banking system. While it wrote 280E into the tax code to punish
is not actually illegal for banks to provide drug traffickers. The rule prohibits taking
services to cannabis businesses, the expenses associated with selling illicit
regulatory burden for banks seeking to substances (read: operating expenses)
support cannabis businesses is so onerous as deductions on federal income tax
and costly that the major players do not statements. As a result, many cannabis
see a workable business model and so businesses pay effective tax rates of up
have shunned the cannabis industry. to 70%, while most other businesses pay
rates closer to 30%.
In some states, this void in banking
services is being filled by community More than two-thirds of Americans now live
banks and credit unions. Some of these in jurisdictions that have legalized either the
smaller financial institutions, however, medical or adult use of marijuana. Its time
are unable to process the volume of cash for the federal government to catch up,
deposits that larger cannabis businesses said Blumenauer
make on a regular basis. In response, a 14
variety of tech start-ups are developing
In April 2015, two Democratic members
ways to make it less burdensome for banks
of Congress from Oregon, Rep. Earl
to embrace cannabis business clients. This
Blumenauer and Sen. Ron Wyden,
cobbled-together approach of using cash,
introduced the Small Business Tax Equity
small banks, and technology work-arounds Act of 2015, which has bipartisan co-
is inadequate for a swiftly-growing, multi- sponsors in both houses of Congress. The
billion-dollar industry. bill would remove the burdens of 280E
from legal cannabis businesses.
Fortunately, the industrys banking More than two-thirds of Americans
situation is improving. Just two years now live in jurisdictions that have
ago, the US Department of the Treasury legalized either the medical or adult
permitted banks to work with cannabis use of marijuana. Its time for the
businesses, provided they follow a series federal government to catch up, said
of guidelines. In 2014, only 51 banks Blumenauer. In March, Americans for Tax
and credit unions worked with cannabis Reforms Grover Norquist indicated that
companies; that number vaulted to 301 he was hopeful that the tax issues facing
in 2016. Thats an improvement, but it the cannabis industry could be fixed in
represents less than 3% of the nations the upcoming Congressional overhaul of
11,954 banks and credit unions. the tax code.

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Executive Summary

In the States
Despite mixed signals from Washington, The medical industry can be a
D.C., the cannabis legalization experiment tremendous asset to a state wanting
pushed forward in the states. In the to expand into the adult-use space.
rapidly growing cannabis industry of Colorado did it right, by offering the first
2016, investors, regulators, and businesses adult-sales licenses to medical operators
hoped to glean important information who have the knowledge and experience
from the first-movers. Other states are to ensure a successful adult-use roll out.
using Colorado, Washington, and Oregon
as models as they expand into the Seed-to-sale tracking data is required to
medical or adult-use space. Key lessons regulate this industry and avoid federal
have been learned from the roll-out in
intervention. However, actionable data on
each state:
consumer preferences is the next green
rush in auxiliary cannabis businesses as
None of the direst warnings from opponents consumers explore new cannabis options
of legalization have come to pass. like consumables, topicals, and tinctures.

Excessively high taxes drive a wedge After realizing that protectionist, resident-
between the regulated market price and only licensing policies were limiting
15
the illicit one. If a neighboring state has a the growth of the industry, Oregon
better tax rate, consumers will take their opened the cannabis market to outside
business across the border. Keeping taxes investment. Colorado and Washington
low helps consumers move from the illicit are now playing catch-up. Standardized
market to the regulated one. Washington testing is essential to ensuring public
made this mistake, and Oregon came safety as well as consistency and quality.
close; other adult-use states can learn Oregon was the first to move in this
from those mistakes. Keeping taxes direction, but testing requirements
between 10% and 15% seems to generate that went into effect October 1 without
the highest tax revenue. adequate lead time were among the
regulator-inflicted wounds Oregon
Regulations and compliance costs can
delivered to the industry in 2016.
crush an industry before it gets out of
the gate. Implementing regulations that
Each of the three major adult-use states
are too onerous can inhibit the growth
of legal markets. Oregons retailers and have had their regulatory successes,
growers were crushed twice in 2016 due but missed the mark on certain issues
to over-regulation and scores of companies which hampered the development of the
went out of business as a result. Regulators business. Unintended consequences have
must balance protecting public safety been rife, but their experiments have
against the economic development, jobs, created a body of work from which others
and tax revenue from this lucrative may learn. Many of these lessons are
start-up industry. analyzed in the report that follows.

The State of Legal Marijuana Markets | 5th EDITION


Executive Summary

In Society Yet Facebook and other social media


sites responded to the continued federal
The conflict between law and attitudes prohibition by removing the pages
regarding cannabis can be seen across of cannabis businesses around the
society. Outgoing Attorney General of country from their services early in 2016.
the United States Loretta Lynch admitted Retailers were severed from important
connections with online communities.
last year that marijuana is not a gateway
These challenges grew more pressing
drug that leads to abuse of harder drugs
throughout 2016, as some of the largest
like heroin. Instead she suggested that
social media companies increased
the family medicine cabinet is the
the pace of account deactivations for
gateway through which youth often
cannabis firms.
discover opioids.

According to two major public health California accounted for 27% of the 2016
agencies in separate studies published legal market in North America, Colorado
last year, none of the direst warnings
represented 20% and Washington
from opponents of legalization have
come to pass. The annual Survey on Drug represented 11%.
Use and Health from the Department of
Health and Human Services Substance
In early 2016, Marijuana Business Daily
Abuse and Mental Health Services 16
reported that at least 100 Facebook
Administration (SAMHSA) shows that
accounts had been shuttered during the
even as reported adult use rose in
previous month alone. The same story
Colorado in the first two years of legal elicited a rare email response from a
sales, teen use of cannabis declined. Facebook spokesperson who said that the
company forbids content that promotes
Additionally, a study was accepted the sale of marijuana regardless of state
in November for publication by the or country. This includes marijuana
American Public Health Association dispensaries. Marijuana-related content
showing that Both MMLs (medical that does not promote the sale of
marijuana laws) and dispensaries were cannabis is permitted.
associated with reductions in traffic
fatalities, especially among those aged Cannabis firms can petition social media
25 to 44 years. Also in November, the companies, particularly Facebook and
journal of the American Association for Instagram, to reinstate their accounts, and
the Advancement of Science published sometimes they succeed. But the process
a study finding that the annual rate can be unwieldy and time-consuming,
of deaths due to overdose on opioid and the outcome is uncertain.
painkillers was nearly 25% lower in states
that permitted medical marijuana, and Because cities and states across the
that the effect had grown stronger in nation with legal cannabis regulatory
the five years after states approved regimes implement different rules about
medical marijuana. how (and whether) cannabis firms can

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Executive Summary

advertise their businesses, the loss of The implication is that population does
social media access is another hurdle not necessarily correlate with the size
cannabis firms face as they develop their and scope of the opportunity in these
brands and try to engage consumers. early years. Eventually, the population of
the states will determine which cannabis
In response, entrepreneurs have created markets are the largest, but for the next five
social media platforms dedicated entirely years (barring a significant shake-up in the
to cannabis, including MassRoots, legalization timeline) the leading markets
TokeWith, HighThere, and more. These have already emerged. California, Colorado,
sites give cannabis companies safe Canada, Washington, and Michigan remain
places to build brands, but they lack the on track to lead in sales volume.
commercial power and reach of Facebook
and Instagram, which boast more than BDS Analytics retail tracking data allows
1 billion and 500 million active users, a deeper dive into three of the most
respectively. MassRoots, the largest of the important markets: Colorado, Washington
cannabis social media networks has just and Oregon. Analysis of the retail channel
900,000 users. shows strong opportunities for both
existing and new businesses in each
state. In 2016, cannabis sales averaged
In the Retail Market
$1.98 million per retail location in
Colorados adult-use market and $896,000
17 North American consumers spent
per location in the medical channel.
$6.7 billion on legal cannabis products
In Washington state where medical
in 2016, up 34% from $5.0 billion in
dispensaries were shut down in favor of
2015. The growth continues a robust
the adult-use market, the 357 remaining
pattern that Arcview estimates will lead
retailers averaged $1.55 million in sales
to a $22.6-bilion market in 2021 at a
per location. Oregons 350 retail outlets
27% compound annual growth rate.
selling cannabis to adult shoppers
While Canada is included in Arcviews
generated $238 million in sales or nearly
market view for the first time, the $672,000 per location, and Oregons
United States represented 87% of legal 381 medical dispensaries experienced
spending in 2016. California accounted average sales per location of $294,000
for 27% of the 2016 legal market in North over the same period (see table. page 18).
America, Colorado represented 20% and While Oregon, Washington and Colorado
Washington represented 11%. are relatively small states in terms of total
population, an existing tourism market
Of the top 10 markets, three already and their first-mover status in the adult-
have adult use sales (Oregon, Washington, use market will help them maintain their
and Colorado), three have just won leadership in terms of market size and
legalization elections (California, investment opportunities.
Massachusetts and Nevada), and four
more (Michigan, Arizona and Canada) In addition to tracking the state of the
are expected to have implemented legal market, and to better assess the
adult-use programs in the next five years. full potential of that market, Arcview

The State of Legal Marijuana Markets | 5th EDITION


Executive Summary

developed state-by-state estimates for investment opportunities throughout


the biggest component of consumer history. In contrast to comparable
spending on cannabis: illicit sales. markets which quickly grew from zero
This component of todays market is to tens of billions of dollars, such as
important to investors because it helps organic foods, home video, cell phone,
to quantify the opportunity for legal or the internet, the cannabis industry
cannabis sales. Including the illicit doesnt need to create demand for a new
market, consumer spending on cannabis product or innovation - it just needs to
in North America amounted to an move demand for an already widely-
estimated $56.1 billion in 2016, 88% of popular product into legal channels.
it outside legal channels.
According to Arcviews estimate for
This enormous amount of illicit 2016, based on the 2015 SAMHSA annual
consumer spending sets cannabis apart survey, 8.8% of Americans are using
from most other major consumer-market cannabis on a monthly basis. However,

Colorado: Category Share by Quarter

100% 18
4% 4% 3% 3% 4% 4% 5%
90%
12% 12% 12% 12% 13% 14% 14%
80%

70% 15% 17% 19% 22% 23% 22% 22%

60%

50%

40%

30%
65% 64% 63% 60% 57% 56% 56%

20%

10%

0
2015 2015 2015 2015 2016 2016 2016
Q1 Q2 Q3 Q4 Q1 Q2 Q3

Flower Concentrates Edibles Pre-Rolled Topicals All Others

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Executive Summary

Average Sales per Dispensary

State Sales* Dispensaries Average Sales per Dispensary

Colorado (Adult) $834 M 420 $1.98 Million

Colorado (Medical) $440 M 491 $896 Thounsand

Washington $554 M 357 $1.55 Million

Oregon (Adult) $238 M 350 $672 Thousand

Oregon (Medical) $112 M 381 $294 Thousand

* Rolling 12 Months ending 11/16

legitimization of existing demand for methods of consumption outpaced


smokable flower is just the beginning traditional flower sales. In Q1 2014 when
for the legal cannabis market. The early adult-use launched in Colorado, over 70%
19 sales results from the first adult-use of sales came from dried flower; in Q3
markets in Colorado, Washington and 2016, that was down to 56%. In contrast,
Oregon point to a significant, untapped concentrate sales were $20 million in
market opportunity for alternative Q1 2014, or 13% of sales. By Q3 of 2016
methods of consumption. they had quadrupled to $80 million and
22% of sales. Edibles (including candy,
Adult-use legalization and the beverages, tinctures, and all food) more
normalization of cannabis consumption than tripled during the same period,
is prompting development of a variety of from $17m to $53m, moving from 11%
different ingestion methods, which are to 14% of sales. Vape pens and vape
broadening the appeal of cannabis. products, candy, and other portable and
A closer examination of sales trends in the convenient methods of consumption
bellweather state of Colorado provides are especially popular with Colorado
insight into the future opportunity of consumers (see graph, prior page).
these alternative cannabis products.
Similar trends occurred in Washington
According to BDS Analytics retail sales State. By Q3 2016, 21% of Washington
tracking data for 2014-2016, Colorados cannabis sales were concentrates, 9%
retail sales in adult-use and medical were edibles, and 10% were pre-rolled
dispensaries grew from $675 milion in marijuana cigarettes, with dried flower
2014, to over $1.3 million in 2016. While accounting for only 59%. In Oregon
all categories of cannabis products where concentrates and edibles were
enjoyed healthy growth, alternative only allowed for the first time in the

The State of Legal Marijuana Markets | 5th EDITION


Executive Summary

adult-use channel in July 2016, the means that by Q3 2016 over 40% of all
transformation in category happened products sold, representing over
almost overnight. Concentrates quickly $150 million, were branded. Thats a
picked up 19% of the market, while pre- 260% increase from only 27% of sales
rolls took 8% and edibles 7%. ($42 million) just 2 years earlier.

In addition to new types of products, With concentrates occupying the #2


the mainstreaming of the industry is share position, and growing faster than
also bringing brand marketing to the any other major consumption method,
business. According to BDS Analytics entrepreneurs see it as an attractive area
tracking, almost all edibles, concentrates, for additional investment. In the first nine
and topicals sold in Colorado are months of 2015, 465 brands had some
branded, while very little flower is form of concentrate sales in Colorado,
branded (other than by the retailer). Oregon, or Washington; in 2016, that
This rapid growth and category evolution number jumped to over 975. There is

BDS Cannabis Average and Volume


20
450.00

400.00

350.00

300.00

250.00

200.00

150.00

100.00

50.00

Dec. 31 Jan. 31 Feb. 28 Mar. 31 Apr. 30 May. 31 Jun. 30 Jul. 31 Aug. 31 Sep. 30 Oct. 31 Nov. 30 Dec. 31 Jan. 31 Feb. 28 Mar. 31 Apr. 30 May. 31 Jun. 30 Jul. 31 Aug. 31 Sep. 30 Oct. 31 Nov. 30
2014 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015

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Executive Summary

much volatility in these early markets as The shares of 33 representative


players jockey for marketshare. Of 2016s companies from all industry sectors
top 10 concentrates brands, only five in the BDS Analytics Stock Average
were in the top 10 in 2015. The largest eventually posted a 195% gain for
brand in concentrates maintained its the full year.
position from 2014 - 2016; but while its
sales rose 84% percent in 2016, it gave The rally marked a substantial
up some marketshare as new entrants turnaround for public cannabis equities
crowded the field. Other top ten brands from the boom-bust cycle of 2014. In
grew dramatically faster with the second retrospect, the 2014-2015 era had one
largest growing 400% and the eighth upside for the industry: it divided the
and ninth growing at over 1,000%. pack of hundreds of stocks that soared
with adult-use legalizaton in Colorado
and Washington in early 2014 into 1)
At the end of 2016 the prospects
the companies that lacked substance
for increasing private and public and 2) the real cannabis companies
investment in 2017 were very strong with business models, revenue or the
prospect of it, and audited financials.
Anticipating the conversion of the Those were the beneficiaries of the
flower business into legal channels and latest electoraly-inspired rally.
21 the expansion of the market through
new product types, the Arcview Private equity investors were more
forecast model projects $22.6 billion reserved in 2016 as they waited for
in legal consumer spending in 2021. November election results. A record
The legal market could be subtantially amount of capital$41 million
bigger, and the illicit component through the Arcview Group network
smaller, if 1) the federal government alone (see graph below)was put to
ends prohibition, 2) more states work in 2015 in companies founded in
legalize either medical or adult use, or the wake of Colorado and Washingtons
3) regulators cooperate as outlined in 2014 roll-out of adult-use retail.
strengthening the competitive position
of the legal market. In the 2015-2016 period, public and
private companies completed a total
In the Capital Markets of $2 billion in capital raises according
to Viridian Capital Advisors. At the end
Legalization momentum in 2016 of 2016 the prospects for increasing
carried over into the capital markets private and public investment in
for cannabis companies. As advocates 2017 were very strong, supported by
qualified an unprecendented nine steady progress in generating revenue
state ballot initiatives, trading in public by many pioneering companies,
cannabis companies shares heated up. plus the prospects opened up by
Prices soared starting in September as the progress toward nationwide
the polling numbers improved. legalization. While uncertainty about

The State of Legal Marijuana Markets | 5th EDITION


Executive Summary

the Trump Administration has hurt report on cannabis in 2015, it was very
public stocks, and institutional players narrowly focused on the opportunity
may hang back, the administration is for life science tool (LST) makers to sell
unlikely to have much impact on the equipment to state-mandated testing
projected growth of the market. This facilities. On September 12, 2016, Cowen
could be a time-limited opportunity & Company published The Cannabis
for other investors to get good Compendium, the first comprehensive
deals on companies while perceived analysis by a Wall St. firm, in which 10
uncertainty has reduced valuations.
analysts across consumer, regulatory,
and health care sectors analyzed the
Unprecedented interest from Wall St.
potential of companies in the event of
was seen in 2016. Although Merrill
full federal legalization.
Lynch published the first research

Cumulative Arcview Capital Raises


NUMBER OF COMPANIES
$100 Million 140

22
$90 Million 130

$80 Million 120

$70 Million 100

$60 Million 80

$50 Million 60

$40 Million 40

$30 Million 20

0 0
2013 2014 2015 2016
Deal Value Number of Companies Note: Total investments made by Arcview investor members
into companies that came through Arcview (cumulative.)

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Executive Summary

In May 2016 NASDAQ rejected MassRoots effort to become


the first exchange-traded company involved principally in
cannabis, but by the end of the year that barrier had fallen.
Innovative Industrial Properties announced November 17 that
the New York Stock Exchange had agreed to list its shares.

In May 2016 NASDAQ rejected MassRoots Large, diverse, multi-national corporations


effort to become the first exchange-traded that deliver products and services into
company involved principally in cannabis, many different vertical markets also
but by the end of the year that barrier had targeted cannabis in 2016. In January,
fallen. Innovative Industrial Properties Phillip Morris announced an investment
announced November 17 that the New in Syqe Medical, an Isreali start-up
York Stock Exchange had agreed to list its developing inhaler technology. In June,
shares. The company acquires specialized Microsoft Corporation announced a
real estate assets used by state-licensed partnership to support the development
cultivators for growing medical-use of start-up Kind Financials seed-to-sale
cannabis. Canadas Toronto Stock Exchange tracking software with Azure, the Microsoft
23 went a step further, agreeing in July to list Government cloud. Kind will be competing
Canopy Growth Corp., one of that nations with several other software companies
licensed vertically integrated suppliers to for coveted deals to provide states with
medical cannabis consumers, making it the cannabis tracking for compliance and
first plant-touching cannabis company to taxation purposes. And Scotts Miracle-
be traded on a major exchange anywhere in Gro, with $3 billion in revenue, announced
the world. multiple deals tied to its plan to invest
$400 million in gardening supply
Pharmaceutical companies with cannabis- companies with a cannabis focus.
based products also provide an opportunity
for investment in medical cannabis, with In Chapter 5 of this 5th Annual The State of
the major exchanges remaining agnostic Legal Marijuana Markets report, investors
on the source of the compounds they are will find a guide to key public and private
testing and marketing. Hence UK-based companies in eight business-model-based
GW Pharmaceuticals was able to raise $290 categories. Though many continue to
million from the July sale of American struggle with the challenges inherent in
Depository Shares through an A-list group being pioneers in a new product category,
of investment banks (Cowen and Company many benefited in 2016 as marginal
as lead manager, Piper Jaffray as manager, operators fell away, and the survivors
and Morgan Stanley, Bank of America, saw their growth prospects expanded
Merrill Lynch, and Goldman, Sachs & Co. dramatically by an electorate that now seems
acting as joint book-running managers). intent on legitimizing the cannabis market.

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