Industry Update

September 4, 2015
Cannabis

INDUSTRY NOTE
JAMES McILREE, CFA , Senior Analyst, 646-465-9034
jmcilree@chardancm.com
Sales and trading 7 a.m. to 7 p.m. ET, (646) 465-9090
Sales and trading 7 p.m. to 7 a.m. ET, (646) 465-9063

Washington State Sales Data. MassRoots User Growth

Retail sales (before the 37% excise tax) of marijuana in Washington State reached $35 million in August, a new record
since legal sales began in July of last year. Sales had dropped in July, the first month after the states change to its
excise tax regime from a 25% excise tax at the grower, processor and retailer level to a 37% excise tax levied solely at
the retail level.
Pretax retail sales for August were $35.0 million versus $31.4 million in July and $33.3 million in June. Excise taxes
due at the retail level were $12.9 million in August, $11.6 million in July and $8.3 million in June, resulting in retail
sales, with the excise tax of $47.9 million in August, $43.1 million in July and $41.7 million in June. The modest
month-to-month increase in July and the rebound in August probably reflects some diminution in the overall growth
rate, but we believe it also reflects a perturbation caused by the tax change.
Total excise taxes, producer, processor and retail, averaged 35% for the first six months of this year. The change in the
excise tax, however, resulted in a 37% excise tax for July and August. It could take another month for prices to fully
adjust, as we believe there is about 45 days of harvested inventory in the state. We estimate prices at the retail level
have been relatively stable since April, but in August prices dropped sharply, probably due in part to the change in the
excise tax regime.
Retailers will also benefit from a change in a recent IRS interpretation of Section 280e of the tax code that holds a
taxpayer who paid the marijuana excise tax should treat the expenditure as a reduction int he amount realized on the
sale of the property. Previously, retailers were not allowed to deduct the excise tax when calculating pretax income.
The change can be significant. For instance, a retailer with $1 million in sales would have reported $1.37 million in
gross sales to the IRS: $1 million from product sales, $370 thousand in excise taxes. To make the math easy, assume
50% cost of sales, and the retailer would pay taxes on $870 thousand of taxable income: $1.37 million in sales less
$500 thousand in cost of goods. Under this new interpretation, the same retailer would have a tax liability on $500
thousand of taxable income. The IRS memo on this interpretation applies only to excise taxes in the state of
Washington but it is likely retailers in Colorado will also seek a similar interpretation regarding the 15% excise tax it
pays on sales of marijuana.
Page three presents graphs on the states sales of marijuana, and extracts for the past twelve months.
Massroots (MSRT $1.44-Buy) users and revenue are tracking as we expected, with the company reporting late last
month it has crossed a 500,000 users and has generated $25 thousand in revenue in its first ten days of revenue
monetization. When we initiated coverage of the stock, the company had just passed 450,000 users and the 50,000
adds per month is what we have modeled. In addition, we have modeled $60 thousand in revenue for this quarter, so
the $25 thousand in the week and a half of August is also consistent with our estimates. Certainly the company is
capable of growing users and revenues simultaneously, but we believe user growth is more important at the current
stage of its development.
Earlier this week, the company announced it has applied for a listing on the NASDAQ Capital Market, which would
increase visibility for the shares.
We continue to recommend purchase of the shares with a $2.50 price target. MassRoots operates the largest social
network for the cannabis community with 500,000 users and is on track to have one million users by early next year.
We think this will expand further as the companys focus on the 8 million daily cannabis users in the US expands to the
23 million monthly users and the 52 million who have used marijuana in the past year. The companys network
provides valuable information to growers, processors and retailers on consumption patterns and product preferences.
This information is now being monetized and we believe MassRoots will introduce more products and services that
build off this platform resulting in strong user, revenue and cash flow growth for many years. We believe the shares
should trade at multiple consistent with social networking apps and cannabis-oriented websites, yielding a price target
of $2 to $3 per share. Risks to achieving our price target include need to raise capital, changes in federal enforcement

Please refer to important disclosure information and Regulation Analyst Certification found on pages 4 - 5 of this report.

Cannabis

Industry Note
September 4, 2015

of marijuana laws and a successful monetization strategy.

Other companies mentioned in report:
MassRoots, Inc. (MSRT - $1.39 - Buy)

Chardan Capital Markets, LLC

Page 2 of 5

Industry Note
September 4, 2015

Cannabis

Washington State Sales Data

Washington State Retail Sales of Marijuana ($ in M)

(excluding retail excise tax)
$40.0
$35.0

$30.0
$25.0
$20.0
$15.0

$10.0
$5.0
$-

Marijuana Sold (lbs)

8,000

7,000
6,000
5,000

4,000
3,000
2,000

1,000
-

Extracts Produced (grams)

500,000
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
-

Source: Washington State Liquor and Cannabis Board

Chardan Capital Markets, LLC

Page 3 of 5

Industry Note
September 4, 2015

Cannabis

Important Research Disclosures

Rating and Price Target History for: MassRoots, Inc. (MSRT) as of 09-02-2015
08/03/15
I:B:$2.5

1.4
1.2
1
0.8
Q2

Q3

Q1
2013

Q2

Q3

Q1

Q2

2014

Q3

Q1

Q2

0.6
Q3

2015

Created by BlueMatrix

Distribution of Ratings/IB Services

Chardan Capital Markets
IB Serv./Past 12 Mos.
Rating
BUY [BUY]
HOLD [NEUTRAL]
SELL [SELL]
NOT RATED [NR]

Count

Percent

Count

Percent

41
12
2
1

73.21
21.43
3.57
1.79

16
2
0
0

39.02
16.67
0.00
0.00

Regulation Analyst Certification ("Reg AC") JAMES McILREE, CFA

ANALYST(s) CERTIFICATION: The analyst(s) responsible for covering the securities in this report certify that the
views expressed in this research report accurately reflect their personal views about Company and its securities. The
analyst(s) responsible for covering the securities in this report certify that no part of their compensation was, is, or will
be directly or indirectly related to the specific recommendation or view contained in this research report.
DISCLOSURES
Within the last twelve months, Chardan Capital Markets has received compensation for investment banking services
from MassRoots, Inc.. This research contains forward looking statements made pursuant to the safe harbor provision
of Private Securities Litigation Act of 1995.
Chardan Capital Markets intends to seek compensation for investment banking services from all companies under
research coverage. Chardan Capital Markets or its officers, employees or affiliates may execute transactions in
securities mentioned in this report that may not be consistent with the reports conclusions.
RATINGS
Buy: Expected to materially outperform sector average over 12 months and indicates total return of at least 10% over
the next 12 months.
Neutral: Returns expected to be in line with sector average over 12 months and indicates total return between
negative 10% and 10% over the next 12 months.
Sell: Returns expected to be materially below sector average over 12 months and indicates total price decline of at
least 10% over the next 12 months.
FORWARD-LOOKING STATEMENTS: This Report contains forward-looking statements, which involve risks and
uncertainties. Actual results may differ significantly from such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in the Risk Factors section in the SEC filings
available in electronic format through SEC Edgar filings at www.SEC.gov on the Internet.
GENERAL: Chardan Capital Markets (Chardan) a FINRA member firm with offices in New York City NY, Palo Alto,
CA and Beijing, China is an investment banking and institutional brokerage firm providing corporate finance, merger
and acquisitions, brokerage, and investment opportunities for institutional, corporate, and private clients. The analyst(s)
are employed by Chardan. Our research professionals provide important input into our investment banking and other
business selection processes. Our proprietary trading and investing businesses may make investment decisions that

Chardan Capital Markets, LLC

Page 4 of 5

Cannabis

Industry Note
September 4, 2015

are inconsistent with the recommendations expressed herein. Chardan may from time to time perform corporate
finance or other services for some companies described herein and may occasionally possess material, nonpublic
information regarding such companies. This information is not used in preparation of the opinions and estimates
herein. While the information contained in this report and the opinions contained herein are based on sources believed
to be reliable, Chardan has not independently verified the facts, assumptions and estimates contained in this report.
Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the
fairness, accuracy, completeness or correctness of the information and opinions contained in this report. The
information contained herein is not a complete analysis of every material fact in respect to any company, industry or
security. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any
jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It
is for the general information of clients of Chardan. It does not take into account the particular investment objectives,
financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material,
clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional
advice. Certain transactions - including those involving futures, options, and other derivatives as well as
non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is
based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not
be relied on as such. The information contained in this report is subject to change without notice and Chardan assumes
no responsibility to update the report. In addition, regulatory, compliance, or other reasons may prevent us from
providing updates.
COMPENSATION OR SECURITIES OWNERSHIP: The analyst(s) responsible for covering the securities in this report
receives compensation based upon, among other factors, the overall profitability of Chardan Capital Markets including
profits derived from investment banking revenue and securities trading and market making revenue. The analyst(s) that
prepared the research report did not receive any compensation from the Company or any other companies mentioned
in this report in connection with the preparation of this report. The analysts responsible for covering the securities in
this report currently do not own common stock in the Company, but in the future may from time to time engage in
transactions with respect to the Company or other companies mentioned in the report. Chardan expects to receive, or
intends to seek, compensation for investment banking services from the Company in the next three months.

Chardan Capital Markets, LLC

Page 5 of 5