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California Cannabis Market Research

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California cannabis market may grow at a compounded annual rate of 18.5% to $5.6 billion by 2020. California’s cannabis industry reported $2,692 million in retail sales via nearly 2,800 dispensaries in 2016, that is 10% more than all other medical cannabis states combined as of 2016.
https://cannabusinessplans.com/california-cannabis-market/

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California Cannabis Market Research

  1. 1. Market Research & Analysis California Cannabis Market
  2. 2. TABLE OF CONTENTS HISTORY 3 MARKET SITUATION 4 PRICES 7 LEGALIZATION 9 LICENSING 9 TYPES OF LICENSES 10 TAXES 15 TARGET CUSTOMERS 16 COMPETITION 17
  3. 3. HISTORY Long before the passage of Proposition 215 in 1996, California was known around the world as a leading producer of cannabis. As the first state in the country to allow for medical use, the state of California also cracked the monolithic war on drugs and set in motion a nationwide wave of reform.  For nearly 20 years the medical cannabis industry grew in the state with few rules. Tax payment and regulatory compliance were not the norms, and public safety impacts became increasingly severe.  By the end of 2014 the problems had boiled over and the stage was set for the passage of the Medical Marijuana Regulation and Safety Act (MMRSA) in 2015. This act established a framework for licensing cannabis.  In June of 2016 the State legislature amended the MMRSA with the passage of the Medical Cannabis Regulation and Safety Act (MCRSA). This legislation included groundbreaking environmental policies that will ensure cannabis is the most sustainable crop grown in California.  In November of 2016 the voters passed Proposition 64, the Adult Use of Marijuana Act AUMA. Though largely modeled on the MMRSA, the adult use law differed from the medical regulations.  In 2017 Governor Jerry Brown released the proposed budget in January and set out to unify the two laws. After more than 6 months of focused work from the governor’s administration, the state legislature and stakeholders, SB 94—the Medical and Adult Use Cannabis Regulation and Safety Act (MAUCRSA) was passed.  On June 27, 2017 Governor Brown signed the Medical and Adult Use Cannabis Regulation and Safety Act and—with a quick stroke of the pen—fundamentally changed the business of cannabis in California.  This law will be the foundation of regulated cannabis in California. Cal Growers was honored to be included in the process and provide this report as a starting point for understanding this new law.
  4. 4. MARKET SITUATION  California accounted for 27 % of the 2016 legal cannabis market in North America. (State of Legal Marijuana Markets report, Arcview Group)  The analysis estimates that as of last November, aggregate annual sales of medical cannabis sales reached $2 billion per year (about 26 percent of total marijuana sales), sales in the illegal market were $5.7 billion (74 percent) and total cannabis sales were $7.7 billion. • $ 5.8 billion legal market (projection for 2021) - Arcview Group • 27 % of the 2016 legal cannabis market in North America • Key Drivers: climate, traditions, size of market, legalization 100 98 97 91 88 74 51 49 27 0 10 20 30 40 50 60 70 80 90 100 Illicit Cannabis Trade as Percent of Total Spending
  5. 5. Source: State of Legal Marijuana Markets report, Arcview Group MARKET PROJECTIONS  According to a study by the University of California Agricultural Issues Center (UCAIC), California’s recreational cannabis market could be worth more than $5 billion; however, the benchmark will only be achieved once cannabis consumers fully embrace the state’s legal market.  The $2 billion legal marijuana sales are expected to grow more than 25 percent annually to hit $5.8 billion by 2021. (Arcview Group)  According to the UCAIC, about 29 percent of cannabis consumers may, at first, stay in the illicit market to avoid the costs of new regulations, which will add 15 percent to retail values.  While recreational cannabis market is expected to grow, medical cannabis sales are expected to decline down to $600 million as people migrate toward the adult-use market to avoid medical cannabis ID fees.  After the state adopts regulations, legal recreational use will make up 61.5 percent of the overall market, illegally purchased marijuana will make up about 29.5 percent of the market and legal medical marijuana use will be about 9 percent of the overall market, the analysis estimated. 0.4% 22% 32% 27% 4% 1% 14% Percentage of Total State Menu Items by Product Category Clone Concentrate Edible Flower Seeds PreRoll Other
  6. 6.  With the transition to a regulated medical marijuana market and the start of recreational cannabis sales on the horizon, there will likely be plenty of turmoil for the foreseeable future. Many existing MMJ companies might not be able to qualify for licenses, and even those that do will face huge hurdles adapting to a regulated system. Businesses vying for recreational licenses also likely will see a volatile climate, and delays are possible.  CANNABIS BUSINESS OPPORTUNITY OVERLOOK:  California is poised to reclaim its title as the marijuana capital of the world, which it lost when Colorado and Washington state legalized recreational cannabis. The business opportunities are simply enormous on both the medical and recreational sides of the industry, as well as for both plant- touching and ancillary companies. California's status as a technology, innovation and finance hub will help the market grow quickly. Even though sales on the recreational side won't begin until 2018, scores of entrepreneurs and companies will start preparing to enter the market in 2017.  The voter-approved taxed and regulated model is estimated to bring in $1 billion in tax revenues and more than 1,200 jobs will be created for testing and handling cannabis under the new regime. 61.50% 29.50% 9% Marijuana Market Distribution - Projections 2018-2021 Legal Recreational Use Illegally purchased marijuana Legal medical marijuana
  7. 7. PRICES  Though California’s medical marijuana market is largely unregulated, cannabis businesses have been operating in the state for many years. This level of competition has kept marijuana prices low, though this will almost certainly change once statewide regulatory reforms are rolled out in 2018. Up to this point, many businesses have been able to conduct operations without the need to pay for expensive licenses or to maintain compliance with strict and costly regulations.  Prior to market maturation, it is likely that cannabis prices will increase in the near term. The mandate to employ a distributor for testing, as well as labeling and ultimate transportation to retailers, combined with stringent environmental and water regulations unique to the Golden State, will drive up costs for cultivators and prop up wholesale prices. State and local taxes, licensing fees, insurance, formal payroll, and other customary business expenses – which California operators have largely avoided to this point - will further increase operational costs.  On a longer term, as California implements a legal, regulated system, a percentage of the state’s massive gray and black market production will be redirected to the legal market as existing operators come into compliance. Additionally, newly licensed grow sites and facilities of all types will come online during the first few years after legalization, expanding the already voluminous production taking place in California. Consequently, it seems inevitable that the supply of legal cannabis will increase and prices will ultimately decline.
  8. 8. WHOLESALE PRICES California’s Spot Index saw its second consecutive week of modestly-rising rates, ticking upward by 1% this week to settle at $1,590 per pound. (Cannabis benchmarks weekly report -- August 18, 2017) RETAIL RPICES California retail marijuana prices vary by city, strain, season and other variables. The average retail state prices for August were $14 per gram and $301 per ounce. That’s up from $13 per gram and $245 per ounce in July. Overall, marijuana prices in the state of California are up slightly since the beginning of the year. In January, the average price of a gram of cannabis in Los Angeles amounted for $10. (marijuanarates.com, www.priceofweed.com, forbes.com) Average California Marijuana Prices – August 2017 Area Gram Ounce City Average $14 $301 Los Angeles $14 $277 San Francisco $15 $277 San Diego $14 $350 1520 1566 1199 1719 1679 1557 2045 1918 1803 1727 1748 1555 0 500 1000 1500 2000 2500 Q1 2016 Q2 2016 Q3 2016 California Wholesale Sopt Prices by Grow Type Outdoor Greenhouse Indoor CA Spot Index
  9. 9. REGULATORY FRAME LEGALIZATION The history of California cannabis legalization has started 20 years ago with the Compassionate Use Act from 1996, authorizing the use of medical marijuana. Since 1996, the following major cannabis legislation took effect:  1996: The Compassionate Use Act authorized the use of medical marijuana.  2003: The Medical Marijuana Program Act (MMPA) established guidelines for its lawful cultivation, use, and distribution.  2015: The Medical Marijuana Regulation and Safety Act (MMRSA) established a regulatory structure for medical marijuana businesses (Assembly Bills 243 and 266, and Senate Bill 643).  2016: The Medical Cannabis Regulation and Safety Act (MCRSA), SB 837, AB 21, AB 2516, and AB 2679 expanded on the MMRSA  November 9, 2016: The Adult Use of Marijuana Act (AUMA), Proposition 64, passed, allowing for recreational marijuana use and sale  June 27, 2017: The Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) consolidated elements of the MCRSA and the AUMA LICENSING Last year the state legislature passed breakthrough legislation consisting of three bills: AB 243, AB 266, and SB 643. Collectively known by many as "the act" these three bills provide a comprehensive regulatory framework for licensing commercial cannabis in California. The State of California will begin issuing close to 20 different licenses for commercial cannabis activity on January 1, 2018. The regulations that licensees
  10. 10. must comply with are being promulgated by three different agencies. This rule- making process will take up significant time in 2017. Where to apply? There are three different state agencies that are tasked with issuing licenses to cannabis businesses and several more agencies that will assist in the process.  Cultivation, processing and nurseries will be regulated by the Department of Food and Agriculture  Packaging, extraction and infusion will be regulated by the Department of Public Health  Testing, Distribution, Transportation, and Retail will be regulated by the Department of Consumer Affairs: Bureau of Medical Cannabis Regulation Applications may be available as early as October. Licenses will not be available before January 1, 2018. TYPES OF LICENSES Medical Cannabis Cultivation Licenses The California Department of Food and Agriculture (CDFA) is authorized to issue the following 11 Types of Medical Cannabis Cultivation Licenses: Type 1 – Specialty Outdoor For outdoor cultivation that uses no artificial lighting for a 5,000-square-foot or smaller total canopy size on one premises, or for up to 50 mature plants on noncontiguous plots. Type 1A – Specialty Indoor For indoor cultivation that exclusively uses artificial lighting for 501 to 5,000 square feet of total canopy size on one premises.
  11. 11. Type 1B – Specialty Mixed-Light For cultivation that uses a combination of natural and supplemental artificial lighting at a maximum threshold (which will be determined by the licensing authority) for 2,501 to 5,000 square feet of total canopy size on one premises. Type 1C – Specialty Cottage For cultivation that uses a combination of natural and supplemental artificial light at a maximum threshold (which will be determined by the licensing authority) on one premises for: • 2,500 square feet or less of total canopy size for mixed-light cultivation • up to 25 mature plants for outdoor cultivation, or • 500 square feet or less of total canopy size for indoor cultivation Type 2 – Small Outdoor For outdoor cultivation that uses no artificial lighting for 5,001 to 10,000 square feet of total canopy size on one premises. Type 2A – Small Indoor For indoor cultivation that exclusively uses artificial lighting for 5,001 to 10,000 square feet of total canopy size on one premises. Type 2B – Small Mixed-Light For cultivation that uses a combination of natural and supplemental artificial lighting at a maximum threshold (which will be determined by the licensing authority) for 5,001 to 10,000 square feet of total canopy size on one premises. Type 3 – Outdoor For outdoor cultivation that uses no artificial lighting for 10,001 square feet to up to 1 acre of total canopy size on one premises. Note: CDFA will limit the total number of Type 3 licenses allowed
  12. 12. Type 3A – Indoor For indoor cultivation that exclusively uses artificial lighting for 10,001 to 22,000 square feet of total canopy size on one premises. Type 3B – Mixed-Light For cultivation that uses a combination of natural and supplemental artificial lighting at a maximum threshold (which will be determined by the licensing authority) for 10,001 to 22,000 square feet of total canopy size on one premises. Type 4 – Nursery For cultivation of medical cannabis solely as a nursery (examples of typical nursery activities include cloning and seed propagation) Note: Type 4 licensees may transport live plants if they also hold a Type 12 transporter license. Adult-Use Cannabis Cultivation Licenses The California Department of Food and Agriculture (CDFA) is authorized to issue the following 13 Types of Adult-Use Cannabis Cultivation Licenses: Type 1 – Small Specialty Outdoor Type 1A – Small Specialty Indoor Type 1B – Small Specialty Mixed-Light Type 2 – Small Outdoor Type 2A – Small Indoor Type 2B – Small Mixed-Light Type 3 – Medium Outdoor Type 3A – Medium Indoor Type 3B – Medium Mixed-Light Type 4 – Nursery Type 5 – Large Outdoor
  13. 13. For outdoor cultivation that uses no artificial lighting for more than 1 acre of total canopy size on one premises. Note: CDFA will not issue any Type 5 licenses prior to January 1, 2023 Type 5A – Large Indoor For indoor cultivation that exclusively uses artificial lighting for more than 22,000 square feet of total canopy size on one premises. Note: CDFA will not issue any Type 5 licenses prior to January 1, 2023 Type 5B – Large Mixed-Light For cultivation using a combination of natural and supplemental artificial lighting at a maximum threshold (which will be determined by the licensing authority) for more than 22,000 square feet of total canopy size on one premises. Note: CDFA will not issue any Type 5 licenses prior to January 1, 2023 Manufacturing licenses Manufacturing licenses are separated into two categories based upon the type of solvent used. Like Type 3 licenses, the Department of Public Health (DPH) will limit the number of licenses for manufacturers who use volatile solvents (Type 7). Type 6 - Manufacturer 1 Manufacturing using non-volatile solvents. Type 7 - Manufacturer 2 Manufacturing using volatile solvents. Testing Licenses Type 8 – Testing Testing licenses are designated Type 8. The DPH is responsible for ensuring that all cannabis is tested prior to delivery to dispensaries or other businesses, and will specify how such testing will be conducted. Type 8 license holders must test for THC, cannabinoids, contaminants, microbiological impurities, among other compounds listed in Business & Professions Code § 19344.
  14. 14. Dispensary licenses: Type 10 – Dispensary - general Type 10A – Dispensary - no more than three retail sites Distribution licenses Type 11 - Distribution Distribution licenses are designated Type 11. All cultivation (Types 1-4) and manufacturing licensees (Types 6-7) are required to send their products to a Type 11 licensee where their cannabis products will be inspected for quality assurance before the products pass to the next stage of manufacturing or retail. Type 11 licensees must also send the cannabis products to a Type 8 laboratory for batch testing and certification. Transportation licenses Type 12 – Transportation (not required under Prop 64) Transportation licenses are designated Type 12. Only Type 12 license holders can transport cannabis or cannabis products between licensees, such as cultivators and retail outlets. Type 13 - Micro-business
  15. 15. TAXES On November 8, 2016, California voters approved Proposition 64, Control, Regulate and Tax Adult Use of Marijuana Act, which provides:  Effective November 9, 2016, certain sales of medical marijuana are exempt from sales and use tax. (see the Dispensaries tab, under the heading, Proposition 64 Exempts Certain Medical Marijuana Sales)  Effective January 1, 2018, a 15 percent excise tax is imposed upon purchasers of all marijuana and marijuana products. Additionally, a tax on cultivators of marijuana is imposed as follows:  $9.25 per dry-weight ounce of marijuana flowers  $2.75 per dry-weight ounce of marijuana leaves
  16. 16. TARGET CUSTOMERS The market potential for cannabis products in California is estimated between 15 million and 21 million adults over 21 years of age. While 39% of Californians already use cannabis, another 44% are non-users interested in trying it now that it’s recreationally legal. • 83% of California residents are willing to try or use Cannabis • Consumers’ top health issues that medical marijuana can alleviate include Pain (58%), Stress (54%) and Insomnia (49%) • Cannabis brand awareness remains very low (49% didn’t know any brands) • Most consumers are interested in edible (62%) and topical products (44%), though heavy users (use daily or almost every day) still prefer smoking (75%) • The large majority of target customers use or plan to use medical marijuana, while a smaller group will use cannabis recreationally Sources: Enlucem, Arcview Group
  17. 17. COMPETITION The California cannabis market, which is the biggest in the U.S., has nearly 2,800 dispensaries (HDL companies, Marijuana Business Factbook, 2016). That is 10% more dispensaries than all other MMJ states combined. Harborside is the state’s and one of the nation’s largest dispensaries. The state is home to some of the strongest and most well-known brands of cannabis products. The market is currently dominated by the following brands by category (New Cannabis Ventures, October 2016): Edibles 7.22% 7.15% 5.41% 3.20% 3.00% 2.74% 2.57% 2.27% 1.83% 1.37% Kiva Cheeba Chews Korova Bhang Venice Cookie Company Edipure Kushy Punch Trikom Treats Liquid Gold TKO Edibles California Edibles Share
  18. 18. Concentrates The California concentrates market continues to be a crowded and competitive venue, with 428 actively distributed brands identified in September 2016. Others Our analysis of other subcategories shows the continued pattern of one or two dominant brands per field. Pure Ratios (12.85%) continues to be ranked as the state’s largest maker of transdermal patches, Tetra Labs (16.93%) leads capsule manufacturers, Emu 420 (16.00%) dominates the topical category, and Presidential Rx (29.68%) is the state’s top-ranked maker of pre-rolls. 2.58% 1.34% 1.01% 1% 0.77% 0.71% Moxie Seeds & Extracts West Coast Cure Gold Coast Extracts Alpine Delta 9 Pop Naturals California Concentrates Share

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