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Marijuana Business Daily – Marijuana Business Factbook 2016

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Marijuana Business Factbook 2016- 5 Key Takeaways wrote:

5 Key Takeaways

This report is meant to serve as a detailed point of reference with specific data points and
figures. However, there are larger trends and themes that emerge after sifting through the full
data set of survey responses and performing the research for this book. Below is an overview of
these key takeaways:

#1 The investing floodgates are breaking

Fundraising has traditionally been extremely difficult for cannabis companies given the
immense risks involved in the industry and the stigma attached to marijuana. The situation has
improved markedly in recent years, however, and the dam finally appears to have burst in 2015.
More outside capital than ever is now flowing to both plant-touching and ancillary businesses.
The portion of new companies backed primarily with founders’ own savings and debt is at its
lowest point ever, 72%, while nearly half of investors in privately held companies plan to invest at least $10 million each in 2016.

The landscape is highly competitive, and investors still have their pick of the litter. But by
several indicators, the fundraising environment has improved for both cannabis companies and
investors.

#2 Shakeouts are starting to play out in certain states and sectors

As unbelievable as it may sound given how young the industry is overall, certain sectors in
some states are already showing signs of approaching saturation, and winners and losers are
being defined. Outdoor cultivators in particular are facing some major challenges, as only 57% of
those businesses report operating at break-even or better, compared to over 80% of growers who
cultivate indoors, in greenhouses or use a combination of methods.

Elsewhere, headline-grabbing, multi-state expansions by some of the industry’s largest infused
product makers have set the stage for the emergence of leading brands that can easily gobble
up market share in new states. Twenty-four percent of infused product manufacturers already
operate in at least two states. These companies will likely be the winners when the inevitable
waves of consolidation eventually arrive. In other markets, fierce competition is squeezing
margins and driving many businesses into loss territory, while the inevitable adoption of
technology and the high cost of compliance have simply proven too much for some businesses to
bear.

To be sure, the industry is still filled with many opportunities. But in some of the more mature
markets, many businesses have burned big and bright, only to have already faded away.

#3 Demand for concentrates and edibles is reaching fever pitch

Infused products haven’t surpassed flower/dried herb in terms of sales yet from a national
perspective, but they are becoming a bigger piece of the pie. At the same time, some individual
retailers have already seen concentrates and edibles sales eclipse flower/dried herb revenue. On
average, these products represent about 30% of total sales at present, and in some states they are
posting large month-over-month increases.

It remains to be seen what portion of total sales these products will ultimately represent, but
they are a critical part of the product mix for cannabis retailers, especially in recreational markets.
By the same token, retailers in states that prohibit some or all of these types of products will most
certainly be at a disadvantage as legalization spreads and introduces more consumers to these
forms of cannabis.

#4 The costs to win licenses and establish operations continue to increase

Gone are the days when plant-touching businesses could easily set up operations for $25,000
or less. As legalization spreads to more states, the cost and complexity of doing business is
increasing rapidly and doesn’t show signs of letting up for now. Median total startup costs have
risen for every sector in recent years, particularly on a square footage basis for retailers and
wholesale cultivators.

In addition to a tendency for new states to levy increasingly large fees for operational licenses,
fierce competition to win permits has also necessitated the involvement of consultants, lawyers
and other expensive experts for a business to even have a shot at succeeding. But winning a
license is only the first hurdle, as state regulatory requirements and restrictive local ordinances
often result in large investments in land, commercial real estate, renovations, security/surveillance
and other items before the business can even serve its first patient/customer. Add it all up, and
you have startup costs that can easily stretch into the seven figures. Cannabis is and will continue
to be one of the most highly regulated industries in the world, and the price to play is hefty.

#5 Existing medical/recreational states continue to tweak their programs,
creating uncertainty for businesses and the industry as a whole

Whether it’s temporary regulations, tweaks to the tax structure, new rules, changes to
production caps/limits, or local bans and moratoriums, operational businesses in established
markets still face a high degree of volatility and uncertainty.

The reasons for these circumstances are largely a reflection of rapidly maturing markets that
state and local governments are constantly trying to catch up with. In other cases, it’s due to some
states opting to treat medical/recreational marijuana as a “pilot” program or test case that needs to
be rolled out in a slow and controlled manner. The net result is that in many states, a clear picture
of what a fully functioning cannabis market looks like has not yet been able to emerge. On a

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