THINK GLOBAL, ACT LOCALA CANNABIS ECONOMIC OVERVIEW

Council of State Governments.Beau Whitney, New Frontier Data

December 7, 2018

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CONTENT

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• Introduction• Global Opportunities• U.S. Updates• Cannabis Issues and Trends• Summary

INTRODUCTION

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ABOUT NEW FRONTIER DATA

• New Frontier Data is an independent, technology-driven analytics company specializing in the cannabis industry. It offers vetted data, actionable business intelligence and risk management solutions for investors, operators, researchers and policymakers.

• New Frontier Data’s reports and data have been cited in over 82 countries around the world to inform industry leaders. Founded in 2014, New Frontier Data is headquartered in Washington, D.C. with additional offices in Denver, CO, London, UK, Bogota, Colombia, and Sydney, Australia.

• New Frontier Data does not take a position on the merits of cannabis legalization. Rather, its mission and mandate are to inform cannabis-related policy and business decisions through rigorous, issue-neutral and comprehensive analysis of the legal cannabis industry worldwide.

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THE GLOBAL CANNABIS MARKET

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LEGAL CANNABIS IS GOING GLOBAL

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NORTH AMERICA: LAYING THE FOUNDATION FOR A GLOBAL INDUSTRY

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• Canada and the U.S. have developed the most advanced regulated markets, serving as a template for the world.

CANADAPopulation: 36.3 millionCannabis Consumers: 4.2 million2018 Legal Market: USD $1.3 billion

U.S.Population: 325.7 millionCannabis Consumers: 22.4 million2018 Legal Market: USD $ 9.8 billion

TOTAL CURRENTLEGAL MARKET

2018-2025

Canada: $36 Billion

US: $136 Billion

Total: $173 Billion

U.S. UPDATE

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© FRONTIER FINANCIAL GROUP, INC • 9

A GROWING MAJORITY NOW SUPPORT FULL LEGALIZATION

With a strong and growing majority now supporting full adult use, there momentum for expanding state legalization and for federal prohibition reform will only grow in the years to come.

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U.S. Support for Cannabis Legalization2010 - 2017

Yes, legal No, illegalSource: Pew Research Center

+20 Pct PtsChange in Support Since

2010

CANNABIS USE IS RISING: AS ACCEPTANCE GROWS, USE IS NORMALIZED

Normalization of cannabis will continue as:• More states legalize• Medical applications of

cannabis are better understood

• Product forms are tailored to reflect unique consumer preferences.

Past-Month Cannabis Use

22.4 millionPast Month Users

(2016)

+7.45 millionChange Since 2009

Lifetime Cannabis Use

114.8 millionPast Year Users

(2016)

+14.6 millionChange 2009

Source: Substance Abuse & Mental Health Administration

UNDERSTANDING THE IMPACT OF CANNABIS LEGALIZATIONBased on research and analysis contained in our reports, below are some of the most salient economic and social topics in jurisdictions that have reformed cannabis their cannabis laws:• Jobs Creation: Cannabis industry’s potential to create multi-sectoral jobs • Tax Revenue: Legal cannabis as a source for tax revenue for national and local governments• Healthcare Savings: Impact of cannabis on patient health and healthcare costs• Energy Consumption: Managing electricity use and driving greater efficiency and sustainability in

production and processing• Potential for Hemp and CBD: Industrial and medical applications for domestic and international markets• Social Impact: Crime and law enforcement implications, and impact on public health

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258,000Number of estimated plant-touching

jobs in the U.S. Cannabis Industry

$26.3 BillionEstimated U.S. annual cannabis sales

by 2025

$1.9 BillionCost of Top 3 U.S. Pain Medications

(OxyContin, Hydrocodone, Fentanyl)

• As global cannabis markets expand, US markets are in flux– New adult use markets are slowly rolling out– Regulatory structures still being deployed. Expect a bumpy ride– More states exploring legalization as a means to address budget issues

• $1.5b combined revenue in OR/WA/CO (01/14 - 12/17)• Recent New Frontier Data report outlined job creation and increased revenues associated

with full legalization – 1.1m jobs, over $100b in federal tax revenue

• Federal illegality versus legal states dynamic still exists– Creating a significant barrier to entry for some normalized businesses such as banks, insurance,

and HR firms • State policy makers struggling with balance between public safety, tax revenues versus

growth of a new industry and illicit conversions• City and Counties are playing a key role in the growth (or barriers) of cannabis opportunities

– Prohibition through legalization– Driving consumers and suppliers back to illicit market

U.S. UPDATE

© FRONTIER FINANCIAL GROUP, INC • 13

SALES IN CURRENT MARKETS ARE GROWING, BUT ARE DWARFED BY THE ILLICIT MARKET

• With the most states only allowing restricted medical use, and other regulatory factors, including high tax rates and regional cannabis business bans limiting consumer participation, there will remain a well-entrenched illicit market for the foreseeable future.

2018Legal: 28%Illicit: 72%

2025Legal: 46%Illicit: 54%

Change in Share of Market

$5 $5 $6 $7 $8 $9 $10 $11 $12 $3 $6 $7 $8 $9 $10 $11 $12 $13 $27

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2017 2018 2019 2020 2021 2022 2023 2024 2025

Billi

ons

Total U.S. Market Cannabis Demand

Legal Med Legal Rec Illicit Total Market (Legal+Illicit)

© FRONTIER FINANCIAL GROUP, INC • 14

Source: Viridian Capital Advisors

OVER $8 BILLION HAS BEEN INVESTED IN CANNABIS IN 2018 ALONE

2018 was already on track to shatter 2017 cannabis investment totals before Constellation Brands made the $4 billion investment into Canopy Growth Corp.

$0.91$1.29

$3.49

$4.30$4.00

$0.0

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$2.0

$3.0

$4.0

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2015 2016 2017 2018 H1 ConstellationInvestment in

Canopy

Billi

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Constellation's Investment in Canopy Growth was Equal to the Total Industry Investment in H1 2018

$8.3 Billion

© FRONTIER FINANCIAL GROUP, INC • 15

YoY Deal Volume Growth

454%

$135

$420

$81 $22 $51

$508

$350

$151 $48 $40

$1,670

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$362

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Cultivation & Retail Biotech/Pharma Investments/M&A Software/Media Consumption Devices

$ M

illio

ns

Top 5 Sector Capital Raises by Year2015-2017

2015 2016 2017Source: Viridian Capital Advisors

CULTIVATION AND RETAIL OPERATIONS HAVE SEEN THE HIGHEST INFLUX OF INVESTMENT

Not only have cultivation and retail seen the largest share of investment in the cannabis, the sector has also seen the highest year-over-year growth as the industry races to build scale and distribution outlets.

LOCAL REGULATORS HAVE SIGNIFICANT IMPACT ON CANNABIS OPERATORS

• 54% of applications submitted to City of Portland, Oregon have not been licensed

• The 372 open applications represents approximately $186 million in investment, and 3,700 jobs making approximately $115 million in wages

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CANNABIS ISSUES, TRENDS AND OBSERVATIONS

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• Banking – Lack of access to capital markets are forcing businesses to go to Canada for funding or are borrowing from friends and families

• Taxes – States need to balance tax policy and revenue generation with converting operators and consumers away from the illicit market. Federal 280e tax policies are taxing cannabis businesses at a higher rate than “normal businesses” impacting profitability and growth

• Economic development options – While adult-use cannabis is in vogue now, cannabis for industrial and lifestyle applications growing quickly

• Consumer trends – Cannabis is turning into a lifestyle product. Baby boomers are one of the fastest growing demographics

• Retail trends – over 50% of market is now oils, edibles, lotions (non Flower)• Industrial Hemp – CBD sales alone with top $1.2B by 2022

CANNABIS INDUSTRY ISSUES AND TRENDS

CANNABIS IS A JOB CREATOR

• 258k “Plant touching” jobs in the legal cannabis industry in 2017• Increasing to in excess of 642k by 2025 within those states where cannabis is currently legal. • Consequently, jobs created would well exceed that total as more states legalize and national

policy shifts from prohibition toward regulated access

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2017 2018 2019 2020 2021 2022 2023 2024 2025

Thou

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sTotal U.S. Jobs Creation - Legal Only, Excl Hemp

(2017 - 2025)

Total Legal jobs U.S. onlySource: New Frontier Data Estimate

TAX REVENUES BY STATE

• A total of $1.5B was been collected in Colorado, Washington and Oregon on cannabis sales from 2014 through 2017

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$116

$180

$234

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$129

$256

$340

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Mill

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Tax Collections by State2014 - 2017

Colorado Washington Oregon

TAX AND PRICE INFLUENCE CONSUMER BEHAVIOR

• Consumers are price sensitive (elasticity > -2.0)

• Tax policy plays a large role in illicit to legal consumer conversions

• When Oregon flower came on line for rec users, Washington saw a steep drop off of demand

• Current tax rates: – WA: 37% state + 9% local– OR: 17% state = 3% local

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HEALTHCARE IMPACT: LEGAL CANNABIS USE FOR PAIN; DISPLACING PRESCRIPTION DRUG SPENDING

• As U.S. spending on pain management continues to rise, patients are increasingly turning to cannabis as an alternative therapy. The use of cannabis to treat pain was affirmed by the U.S. National Academies of Sciences which concluded in 2017 that there is “substantial evidence that cannabis is an effective treatment for chronic pain in adults”.

• In medical cannabis states where pain is a permitted qualifying condition, pain patients make up the vast majority of program participants. Furthermore, government spending on pain related medications was 11% lower in medical cannabis states than in non-legal markets.

22Source: State medical cannabis programs, New Frontier Data modeling, Bradford & Bradford.

93% 89% 88% 86%

64%

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Colorado Oregon Nevada Arizona Hawaii

Chronic Pain Patients as a Percentage of All Patients in Key Medical Cannabis Programs

-11%Reduction in Government

Pain Medication Spending in U.S. Medical Cannabis Markets vs Non-Legal

Markets

$14.28

$14.88

$15.51

$16.16

$13

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U.S. Chronic Pain Prescription Spending(USD Billions 2016- 2019)

13%Growth in Pain Medication

Spending

CRIME: IMPACT ON CANNABIS-RELATED ARRESTS

• As jurisdictions transition from unregulated to legal and regulated cannabis markets, prosecutions for minor cannabis offenses fall dramatically as law-enforcement resources are diverted away from cannabis-related crimes.

• While prohibition enforcement costs decline, some resources must be redirected to regulatory and compliance enforcement for the legal industry.

23Source: Washington DC Metropolitan Police Department

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2010 2011 2012 2013 2014 2015 2016

Cannabis Possession Arrests in Washington DC Per 100,000 Residents(2010 - 2016)

Possession Possession with Intent to Distribute

-96%Decline in Cannabis Possession Arrests

CRIME: IMPACT ON CANNABIS TRAFFICKING

• Cannabis interdictions at the U.S./Mexico border have fallen steeply as American consumers have shown a strong preference forlegal products, including the quality, selection and convenience of the legal, regulated markets over the illicit market’s lower quality products.

• With the U.S./Mexico border being the primary transit route for illicit cannabis, the decline in U.S. demand for imported cannabis will have continue to have displacement effects in Mexico as more states activate legal markets and as more consumers transition fromthe illicit to the legal market.

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U.S. Cannabis Interdictions at the Border(Millions of Pounds, 2011-2017)

-63%Decline since 2011

Source: U.S. Customs & Border Protection

ENERGY CONSUMPTION

• The U.S. cannabis industry consumed an estimated 4.5 million megawatt hours of electricity (the same amount of electricity generated by Hoover Dam in a single year) from both legal and illicit cannabis cultivation in 2018.

• An estimated 1.3 million of those megawatts were from legal cultivation activity.• Opportunities to drive efficiencies and sustainable practices into the cultivation sector are emerging.

25Source: New Frontier Data Estimate

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Millions

Total Estimated Energy Usage for Legal Cultivation in the U.S. (Megawatts)

KEY TAKEAWAYS

• Still a tremendous opportunity in cannabis, the market is consolidating and evolving. Policy makers must keep pace with the indstry.

• Local, state and federal regulators play a major role in shaping the market.

• This is a global industry that is impacted by local issues. Think global, act local

• Data is integral in the success of cannabis businesses.

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CONTACT US

www.NewFrontierData.com@NewFrontierData

Beau R WhitneyVice President and Senior Economist

bwhitney@newfrontierdata.com503-724-3084

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OUR DATA COLLECTION APPROACH

LEGISLATIVEEXECUTIVE JUDICIARY

LEGISLATIVE EXECUTIVE/ADMINISTRATIVE JUDICIARY

PRODUCERSPROCESSORSRETAILERS

BUSINESSES THAT DO NOT TOUCH THE PLANT

GENERAL PUBLICCANNABIS CONSUMERS

DATA COLLECTED ACROSS ALL FIVE DIMENSIONS IS

CRITICAL TO UNDERSTAND AND

EVALUATE THIS NEW SECTOR

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ACQUIRED COMPANIES:

• In 2016- Quoted in 45 countries, media reach of 3.3 billion• In 2017- Over 69 countries, media reach of 5.3 billion• In 2018- Over 82 countries, media reach of over 6 billion.

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