ACKRELL CAPITAL Cannabis Investment Report | December 2017 and other distribution intermediaries are subject to county, municipal and other local regulations that may restrict or even prohibit distribution activities. The success of any dispensary operator or distribu- tor depends on anticipating and complying with these regulations. Tax Issues Related to Distribution. States and localities that legalize cannabis are focused on the potential to generate tax revenue from the industry. Ambiguous, constantly changing and potentially burdensome taxation rules may make it difficult for dispensary operators or distributors to remain in good standing with licensing, regulatory and tax collection agencies and may negatively impact their financial results. Distribution Outlook We expect dispensaries across the United States to increasingly seek to provide modern retail experi- ences that are supported by e-commerce applications. We also expect that the most well-run dispensa- ries will continue to generate significant cash flow at compelling margins. Dispensaries should be able to gain advantage by producing their own products, by developing strategic or exclusive relationships with specialty producers or by finding ways to generate customer loyalty. However, oversaturation in the number of dispensaries in certain jurisdictions, such as Colorado, has led to a very competi- tive environment, consolidation and moratoriums on issuing new local dispensary licenses by various municipalities. The distribution segment is subject to some of the strictest and most frequently changing regu- lations applicable to the cannabis industry. While distribution opportunities may arise with changes in law, some legislation may cause significant disruption. For example, the number of dispensaries operating in the greater Los Angeles region is expected to decrease significantly in the short term as California’s new cannabis regulatory agency begins its oversight and enforcement efforts in 2