ACKRELL 2018 CANNABIS C A P I T A L INVESTMENT REPORT

ACKRELL 2018 CANNABIS C A P I T A L INVESTMENT REPORT 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, Consurner, Technology, Digital and Other Emerging Growth Industries Ackrell Capital is based in San Francisco, Get. Ackrell Capital isa member of FINRA and SIPC. GLOBAL CANNABIS CONSUMERS • 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 polsession 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 asa 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 Januar)/ 2018—a watershed moment for the industry. • The illegal cannabis market in the United States is estimated to be more than 545 billion annually. (We estimate that the 2017 U.S. state-legal cannabis market was 58.0 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 5100 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. lit report has been comSed for /ild matirnd panposes or*, and is not a res earchreport. rW repote nol and shou'd nol be consvued os on otte, sa sel secuntieS ora solcitohon ot dl orter lo bry sec anes. the nformanan n W. repol t ol o gened nottre. and Ilt report shou'd rot be cornlrued. reled opal or acled apen os irneslynenf. legal. medcd. health or !as adric e Ac kte0 Gagla' has mode investment, in ond ccfiducled nvestment ()ankra servKes ter compdmes menhoned in Un repot, and may do so in the !ukse. Reader ~Id be affere mat nobel Capild may have a conto ol interest glot c oud &led the °bloc hvity ot th.5 report. nobelt Capita,. Ilt sa member Ot FLARA Ond SIPC. ø 2017 ACktel Capita]. LIC. EFTA00797069 REPORT HIGHLIGHTS Select Countries with Legalized Cannabis Access (January 2018, '1,44110 - Recreational Law. - Medical L. - StatelProWnce Conflict with Federal L. Tenstle arrent, has a .0.1 lax. Assumes Canada enacts a pop. .reational law in mid-2018. 046 U.S. State Cannabis Laws (January 2018) unit-,,, rrRecreational Law - Medical L. CBD/Limbd L. c. Member EFTA00797070 Progression of U.S. State Cannabis Laws 2008 ail It %, -mmiar 2004 2012 Ail ¶1 41114rIC 2014 e trig' 111 - Recreatimal Law CBDILImitad Law Me— Law EFTA00797071 U.S. Legalized Cannabis Market 5140.(00 $120.000 6100.030 $80.000 vo $60.000 $40000 $20,000 so Path to Federal Legalization FDA Approves Cannabis•Derived Pharmaceuticals More Stales Adopt Medical Cannabis Laws More States Adopt Recreational Laws FDA Routinely Approves CBD FDA Routinely Approves THC Drugs Federal Government Legalizes Cannabis 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 IILegalized Cannabis Market Size 2027 2028 2029 2030 Consumers 70 M 60 M 50 M SO M 30M 20 M 10M OM SlaWl1SU30 p laqUiliN Source: Ackrell Capital. Assumes cannabis \hill be legalized federally by 2027. Cannabis may never be legalized federally in the United States. Cannabis Industry Segments Production Cultivation Production Equipment and Supplies Production and Testing Services Distribution Dispensaries E-Commerce Distribution Services Business Solutions Business Software Business Services Digital Media Online Content and Networking Online Directories Consumer Products Flower In Involves 'touching the plant' Concentrates _al Infused Products Vaporizers and Accessories Pharmaceuticals El Does not involve "touching the plant' 0 2017 Ackrell Capital, LLC I Member FINRA/SIPC EFTA00797072 ACKRELL CAPITA L Cannabis Investment Report I 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, com- panies in the industry raised large amounts of capital and their stock prices performed well, and the legal- ization 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 legalization: "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 Fiel4 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 recre- ational laws to eight) and an additional four states legalized medical cannabis. Cannabis use is now state- legal 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 com- menced. 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 oppor- tunities and challenges facing the industry, and we are happy to provide our insights. Sincerely, The Ackrell Capital Cannabis Team 0 2017 Ackrell Capital LLC I Member FINRA/ SIPC EFTA00797073 ACKRELL Cannabis Investment Report I December 2017 Table of Contents CHAPTERI Executive Summary 1 Global Cannabis Consumers ■ To Watch in 2018 0 Investment Outlook CHAPTER II Cannabis Science 101 15 The Cannabis Plant • The Human Endocannabinoid System Cannabinoids ■ Terpenes • Cannabis Formulations CHAPTER III Cannabis Industry Segmentation 31 2 Production u Distribution • Consumer Products • Business Solutions • Digital Media CHAPTER IV U.S. Legal Landscape 61 • U.S. State Law U.S. Federal Law • The Path to Federal Legalization CHAPTER V Global Cannabis Regulation 91 • Global Cannabis Legalization Momentum • United Nations Conventions • Global Legal Developments Global Outlook CHAPTER Vi U.S. and International Cannabis Market Estimates 103 • Global Market Overview • U.S. State-Legal Cannabis Market • U.S. Legalized Cannabis Market Forecast • International Legal Cannabis Market Forecast CHAPTER VII Capital Markets for Cannabis Companies 117 47i Capital Markets Overview n Public Capital Markets • Public Capital Markets: United States Public Capital Markets: Canada • Private Capital Markets I 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 3) 2017 Ackrell Capital. LLC I Member FINRA/ SIPC EFTA00797074 ACKRELL CAPITAL CHAPTER Executive Summary 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, con- sumed 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 con- sumer 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 pen- etration 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 0 2017 Ackrell Capital LLC I Member FINRA/ SIPC 1 EFTA00797075 ACKRELL CAPITAL Cannabis Investment Report I 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 thera- peutic applications. At least 20 countries now have medical laws that facilitate patient access to can- nabis or cannabis concentrates for treating specified medical conditions. Notable countries with such medical laws include Australia, Canada, Colombia and Gcrmany; 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 coun- tries 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 Le! alized Cannabis Access Janua 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 o 2017 Ackrell Capital, LLC I Member FINRA/SIPC EFTA00797076 ACKRELL CAPITAL 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 character- ized by conflict between federal prohibition and the steady advance of state legalization. Accord- ing 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 gov- ernment 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 condi- tions—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 4a% 0 2017 Ackrell Capital LLC I Member FINRA/ SIPC 3 EFTA00797077 ACKRELL CAPITAL Cannabis Investment Report I December 201 7 The U.S cannabis industry has proven adept at navigating this federal-state conflict, and is experi- encing 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 sig- nificantly, 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 51.96 Oregon Washington $470M $929M California $3.26 Colon& $1.56 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 busi- ness transactions conducted by cannabis companies —and their banks, for those who can access bank- ing 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. Enforce- ment 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 report- ing policies that create room for banks to service the cannabis industry. Federal budget legislation 4 o 2017 Ackrell Capital, LLC I Member FINRA/SIPC EFTA00797078 ACKRELL CAPITAL 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 indus- try—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 Rohrabacher- Blumenauer Amendment Agricultural Act of 2014 Controlled Substances Act DRUG AND FOOD REGULATION Food. Drug, and Cosmetic Act 0 Justice Department Cole Memo Federal Laws and Policies Impacting the Cannabis Industry INTELLECTUAL PROPERTY Bank Secrecy Act and Financial Transaction Laws Treasury Department FinCEN Memo BANKING AND FINANCE Securities Law Bankruptcy Law Internal Revenue Code (0 2017 Ackrell Capital LLC I Member FINRA/ SIPC 5 EFTA00797079 ACKRELL CAPITAL Cannabis Investment Report I 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 mar- ket 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 recre- ational 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 Path to Federal Legalization 1. The U.S. Food and Drug Administration 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. 6. Cannabis parts and derivatives will be removed from the CSA schedules and will be fully legal for medical and recreational purposes. (6) at any time by passing legislation that removes 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 rake up to 10 years or more before the federal legalization process reaches development (6) and cannabis becomes fully legal under federal law. For our market estimates, we assume (i) devel- opment (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 sys- tem and acceleration of the cannabis-derived pharmaceuticals market. A change in the federal status of cannabis in the United States will not only drive U.S. market growth, but should provide a significant catalyst to the market worldwide. 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 1.) 2017 Ackrell Capital, LLC I Member FINRA/SIPC EFTA00797080 ACKRELL CAPITAL. CHAPTER I Executive Summary U.S. Legalized Cannabis Market S140.000 $szo.000 sloo.000 sao.000 E 550.000 540.030 520000 Path to Federal Legalization FDA Approves Can nabis•Derived Pharmaceuticals More Stales Adopt Medical Cannabis Laws More States Adopt Recreational Laws FDA Routinely Approves CBD FDA Routinely Approves THC Drugs Federal Government Legalizes Cannabis 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 ILegalized Cannabis Market Size Consumers 70M 60M 50M z 40M F a 30M 20M 10M OM Source: Ackrell Capital. Assumes cannabis w7 be legalized federally by 2027. Cannabis may never be legalized federally in the United States. 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. Cal- ifornia 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 tran- sition 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 rec- reational laws—Colorado, Oregon and Washington —the 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. To Watch in 2018 • Increasing Recreational Legalization • Cannabis Consumer Experience goeslitainstream" • 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 7+2017 Ackrell Capital LLC I Member FINRA/ SIPC 7 EFTA00797081 ACKRELL CAPITAL Cannabis Investment Report I 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 can- nabis 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 pur- chase 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 concen- trates, infused products and topicals. Products coming to market increasingly address the attributes demanded by the modem 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 c' 2017 Ackrell Capital LLC I Member FINRA/ SIPC EFTA00797082 ACKRELL CAPITAL CHAPTER I Executive Summary "Mainstream" Consumer Experience V 2017 Ackrell Capital LLC I Member FINRA/ SIPC 9 EFTA00797083 ACKRELL CAPITAL Cannabis Investment Report I 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 Epidio- lex, 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 legaliza- tion. 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 Julie Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Source: BDS Analyfics 10 2017 Ackrell Capital, LLC I Member FINRA/ SIPC EFTA00797084 ACKRELL CAPITAL 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 out- put 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. Canna- bis 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 finan- cial 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 alter- native products and services. The California State Treasurer's Cannabis Banking Working Group—a panel convened by Califor- nia 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 approxi- mately 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 institu- tions making SAR filings indicates that cannabis businesses increasingly are accessing the federal bank- ing system despite federal law. © 2017 Ackrell Capital LLC I Member FINRA/ SIPC 11 EFTA00797085 ACKRELL CAPITAL Cannabis Investment Report I December 2017 Depository Institutions Making Marijuana•Related SAR Filings 350 XO 250 200 150 100 50 0 022014 04 2014 02 2015 042015 022016 Q42016 Q22017 Banks mmi Credt Unions Source: Financial Crimes Enfatemeot 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 insti- tutions 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 12 o 2017 Ackrell Capital LLC I Member FINRA/ SIFC EFTA00797086 ACKRELL CAPITAL 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—alcohol, pharmaceutical, tobacco and consumer products—will enter the cannabis industry through minority investment, by acquisition or otherwise. We have already seen examples: Constella- tion 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 seek- ing 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. ■ Investment Outlook Hundreds, if not thousands, of cannabis-related companies are seeking to raise capital—thus pre- senting 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 pub- licly 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 0 2017 Ackrell Capital LLC I Member FINRA/ SIPC 13 EFTA00797087 Dispensaries ACKRELL CAPITAL Cannabis Investment Report I December 2017 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 con- tent. 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 Indust S !ments Production Production Equipment and Supplies rProduction and Testing Services Distribution &Commerce Distribution Services Business Solutions Business Software Business Services Digital Media Online Content and Networking Online Directories Consumer Products Flower IsConcentrates invcives 'touching the plants Infused Products Vaporizers and Accessories Pharmaceuticals 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 fur 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 I.) 2017 Ackrell Capital LLC I Member FINRA/ SIPC EFTA00797088 ACKRELL CAPITAL CHAPTER II Cannabis Science 101 ■ 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.' 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 rud- eralis plants are shaggy and the shortest of all three species. The following pictures depict the Cannabis sativa, Cannabis indica and Cannabis rztderalis plants and their leaves. Cannabis Sativa Plant Cannabis Indica Plant Cannabis Ruderalis Plant I 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 co reflect their geographic origins. This report takes no position on these botanical debates; it merely adopts one set of commonly used nomenclature. 0 2017 Ackrell Capital LLC I Member FINRA/ SIPC 15 EFTA00797089 ACKREI. 1, Cannabis Investment Report I December 2017 Cannabis Sativa Leaf Cannabis Indica Leaf Cannabis Ruderalis Leaf Many hybrid varieties ofcannabis—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 con- sumed, 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 respon- sible 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 "serpents," 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 serpents are found in the "trichomes" on the flowers of unpollinated female cannabis plants. Trichomes are crystalline or hairlike components that secrete cannabinoids, serpents 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 anat- omy of a cannabis plant, and the images to the right show a female cannabis plant flower and a close-up view of trichomes. 16 2017 Ackrell Capital, LLC I Member FINRA/ SIPC EFTA00797090 ACKRELL CAPITAL Stem fan leaves MALE FLOWERS Cannabis Plant Anatomy CHAPTER II Cannabis Science 101 TRICIIOMES FEMALE FLOWERS Cannabis Flower Trichomes 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 194Os, 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 196Os, 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 cannabinoi