Medical Marijuana Industry

Transcription

1 INITIATING COVERAGE July 25, 2016 Medical Marijuana Industry Jason Zandberg, CFA We are initiating coverage of four stocks in the medical marijuana (MMJ) sector. With several near-term catalysts, we believe investors should build positions in the quality licensed producers. Since its inception in 2013, the Marijuana for Medical Purposes Regulation (MMPR) system has increased patient count to 53,649 and increased monthly sales of marijuana by 208% in the last 12 months to 1,153kg in March Health Canada expects the total patients enrolled in the MMJ program will reach 400,000 by 2024 a CAGR of 30.3%. We believe this figure could be 650,000 based on established patient counts in the US. Based on the February 24, 2016 decision by a Federal Court judge, the Federal government has until August 24, 2016 to amend the MMPR program to address a patient s ability to grow their own marijuana plants. We also anticipate some structural changes to the MMJ program to improve the accessibility of the product. We speculate that an amendment to the distribution system could also incorporate a new point of access through Canadian pharmacies. Based on the Canadian Federal government s announced plans of proposed legislation for recreational marijuana in the spring of 2017 we believe the timeline for recreational marijuana sales will commence in mid We estimate that the total marijuana market in Canada will be $4.6B in the first year after recreational use is permitted. We expect this market to grow at 10% annually in the first five years to reach $7.4B. As a comparison, Canadians spent $9.1B on beer in 2013 and $21.4B on overall alcohol sales (source: Statistics Canada). We believe early recipients of Health Canada cultivation and sale licenses have been able to ramp up commercial volume production and have a significant competitive advantage over those seeking or just recently awarded licenses. As such, we recommend four licensed producers (LPs) which we expect to benefit from the current growth of medical marijuana in Canada as well as the potential for an impending recreational market. We are initiating coverage with a BUY rating (SPECULATIVE risk rating) of Aphria Inc. (V-APH, target: $3.00), Canopy Growth Corp (V-CGC, target $4.25), Mettrum Health Inc. (V-MT, target: $3.50) and OrganiGram Holdings Inc. (V-OGI, target: $2.25). Devin Schilling, BBA dschilling@pifinancial.com Company Forecasts Aphria Inc. (V-APH) RATING: BUY TARGET: $3.00 ($000 except per share figures) FY16a FY17e FY18e FY19e Revenue 8,434 17,884 37,084 91,533 EBITDA 573 4,457 13,506 32,717 Net Income (Loss) 398 2,148 7,590 15,069 EPS Canopy Growth Corp. (V-CGC) RATING: BUY TARGET: $4.25 ($000 except per share figures) FY16a FY17e FY18e FY19e Revenue 12,699 34,622 71, ,252 EBITDA (217) ,753 64,654 Net Income (Loss) (3,496) (6,996) 5,666 43,867 EPS (0.05) (0.07) Mettrum Health Corp. (V-MT) RATING: BUY TARGET: $3.50 ($000 except per share figures) FY16a FY17e FY18e FY19e Revenue 7,692 23,326 39,619 85,594 EBITDA (5,395) 202 7,923 21,272 Net Income (Loss) (7,299) (2,552) 4,449 12,430 EPS (0.22) (0.06) OrganiGram Holdings Inc. (V-OGI) RATING: BUY TARGET: $2.25 ($000 except per share figures) FY16e FY17e FY18e FY19e Revenue 6,417 13,881 34,010 74,115 EBITDA 1,451 4,217 11,348 22,988 Net Income (Loss) 143 2,139 7,640 14,287 EPS A Disclosure fact sheet is available on Pages of this report.

2 Medical Marijuana Industry July 25, 2016 Table of Contents Industry Overview... 3 Aphria Inc. (V-APH) Canopy Growth Corp. (V-CGC) Mettrum Health Inc. (V-MT) OrganiGram Holdings Inc. (V-OGI) Appendix 1 Medical Marijuana Patients (US) Appendix 2 Key Risks Disclosure Fact Sheet INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

3 Medical Marijuana Industry July 25, 2016 Medical Marijuana Industry Today, medical marijuana is legal in Canada although the rules governing the cultivation and sales are in flux. Cannabis dispensaries have popped up in almost every major Canadian city despite the fact that this method of distribution is illegal based on current legislation. Some municipalities have chosen to turn a blind eye (i.e. Vancouver) while other cities have tried to clamp down on the more aggressive dispensaries through periodic raids (i.e. Toronto). The only legal method of buying medical marijuana today is by getting a recommendation from a recognized physician in Canada and purchasing from a licensed producer who fulfills the order through Canada Post or courier. Over the last few years, Health Canada has awarded commercial growing licenses to businesses that have invested millions to meet stringent standards including high level security systems, sophisticated vaults and rigorous quality assurance protocols. Furthermore, each producer is subject to Health Canada audits on a regular basis. The initial and ongoing costs are significant yet they face relatively unchecked competition through dispensaries that have no such standards or inspections. The present day situation needs fixing and we anticipate the current Federal Liberal government will sort out the rules with upcoming regulations. Short history on the development of the medical marijuana in Canada The breakthrough case for medical use of marijuana came in 1997 when an Ontario judge ruled that people must be able to access necessary medical treatment without fear of arrest. That particular case involved a Toronto man, Terrance Parker, who had been charged with pot possession which he used to control his epileptic seizures. As a result of this case, Parker was exempt from further prosecution for either possession or cultivation of marijuana. This case set in motion new regulations that would ensure that people who needed marijuana for medical purposes could legally possess it and furthermore, were allowed to grow it themselves to ensure the quality and lower the cost of the necessary medicine. The Federal government created the Medical Marijuana Access Regulations (MMAR) which defined the guidelines for individuals to grow marijuana or purchase it from Health Canada. MMAR regime This regulation was established in 2001 but changed slightly through the years. Originally, patients were allowed to grow their own marijuana or buy from Prairie Plant Systems (PPS), a designated commercial grower for Health Canada. The original regulation was challenged and revised so patients could 1) buy seeds from PPS instead of dried bud, and 2) patients could designate someone else to grow on their behalf known as a designated grower. This system addressed a need for medical marijuana but still needed further refinement. The problems with this version of the MMAR system was that PPS only grew one strain of marijuana which many users felt was insufficient for their needs. Also, the designated growers system was abused which created significant numbers of legal grow operations which were selling the product on the street. MMPR regime The Marijuana for Medical Purposes Regulations (MMPR) program began in 2013 where largescale producers were given licenses to grow the product. The MMAR program along with its designated grower system was abolished. Any patient that needed medical marijuana had to purchase product from a Health Canada approved commercial grower. This change meant patients were no longer able to grow their own marijuana plants. Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 3

4 Medical Marijuana Industry July 25, 2016 Another change to the program was allowing doctors to prescribe MMJ as opposed to Health Canada. This change theoretically increases the access for patients but in reality the medical profession has been slow to recommend marijuana to patients. Today, about 5,000 doctors have recommended marijuana to their patients which represent only 7% of practicing doctors in Canada. CanniMed, which was a subsidiary of Prairie Plant Systems, was given the first license under the new program but almost three years later there are a total of 33 licenses that have been awarded. The program has been successful in enrolling patients MMPR patients have increased to 53,649 in just a few short years. Figure 1 illustrates the growth in patients as reported by Health Canada. Figure 1 Patients enrolled in the MMPR System in Canada Source: Health Canada Court challenges When Health Canada changed systems from MMAR to the MMPR in 2013, a group led by Nanaimo-based Neil Allard challenged the new regulations which restricted patients from growing their own plants. Allard s group fought the new regulations stating that the inability to grow personally violated their charter rights. The trial lasted three years and in February 2016, a federal court judge ruled in favour of the challenge stating that indeed the MMPR system infringed on charter rights. The judge suspended his declaration for six months giving the federal government six months to come up with new rules. Amendments to MMPR program coming soon That deadline for a new or parallel system is August 24, 2016 when it is expected that the Federal Liberals will announced a revision to the current system. In the interim, the approximately 28,000 people with proper licenses under the old MMAR program are allowed to grow. The key issue with the judge s verdict is that medical marijuana users must be allowed to grow their own supply. We believe that the new rules will probably include between 6-12 plants per patient and that each patient who grows their own supply must be registered with Health Canada and / or the local police authority. We believe there is a possibility for other changes to the MMPR system that may benefit LPs. The judge stressed accessibility for patients outside of growing their own plants. We believe this may mean increasing the current distribution system beyond the current direct mail order system. We feel that the current pharmacy network in Canada may be added to the distribution network. Pharmacies have made positive public statements regarding this market and we believe the 4 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

5 Medical Marijuana Industry July 25, 2016 pharmacy environment is properly set up to handle the product (vaults on site) and has a gatekeeper (the pharmacists). While we believe that an organization like Shoppers Drug Mart will embrace the MMJ product, we feel that most pharmacies will only sell cannabis oil rather than dried bud. Current System Patients Today there are 53,649 patients registered across Canada as of March 2016 (latest published Health Canada figures). Based on data from the US where the medical marijuana sector has had more time to establish, there are 1.2M registered medical marijuana patients in 24 states where medical marijuana is legal. Based on the population of those states, this equates to 0.8% of the population. The concentration of patients vary greatly from state to state as California has a reported base of 1.9% of the population whereas Delaware only reports 0.01% of its population as registered medical marijuana patients (see Appendix 1 for the full list of states and registered patient populations). The states that have the highest levels of medical marijuana users are actually in states that have adopted a recreational framework. States like Oregon, Washington and Colorado have 1.8% to 1.9% of its population registered as medical patients. We believe Canada s potential market size will be similar to these states especially given the upcoming recreational framework. Applying a similar adoption rate in Canada would equate to 650,000 patients more than 12 times the 53,649 that are registered today. Health Canada projections call for 400,000 MMJ patients by The process for becoming an official patient is through a recommendation by a recognized practicing physician in Canada. Approximately 5,000 doctors (7% of the physician population) have written a recommendation for MMJ since the MMPR program began. There are no official guidelines for what marijuana can be used to treat but the most common ailments are: Arthritis - an auto-immune disease where the immune system will start fighting against the joints. Arthritis can cause severe joint and muscle pain in the hands and less commonly in other areas throughout the body. Medical marijuana contains natural analgesics as well as anti-inflammatory compounds, providing tremendous pain relief from joint, muscle, and bone pain as well as working to lessen inflammation. Glaucoma - a disease that can cause damage to the optic nerve, the cable that sends visual information from the eye to the brain. Optic nerve damage as a result of glaucoma can cause slight vision loss or even blindness. Medical marijuana helps to fight glaucoma by lowering eye pressure which helps to relieve pressure surrounding the optic nerve cable. The less pressure surrounding the optic nerve, the lower the chance of damage resulting in vision loss. Appetite Loss, Nausea and Vomiting - plenty of cancer patients undergo chemotherapy which causes a lot of nausea, vomiting, and loss of appetite that can last for weeks after a single treatment. Some cancer patients (around 40%) undergoing chemotherapy find the standard treatment for vomiting prevention to be entirely insufficient. When marijuana is smoked and entered through the lungs, cannabinoids attach to various cannabinoid receptors in the brain including the hypothalamus, thus stimulating appetite. Multiple Sclerosis - an unpredictable disabling disease that attacks the central nervous system which includes the brain, spinal cord and optic nerves. Symptoms of MS are completely random varying from person to person and may include severe shaking, stuttering, spasticity, loss of vision, inability to communicate and sudden twitches and jerks. A growing amount of recent data suggests that cannabis marijuana can alleviate and reduce symptoms like muscle spasticity and general pain in patients with MS. Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 5

6 Medical Marijuana Industry July 25, 2016 Pain management research suggests that cannabis can help manage chronic pain, especially nerve-related pain. Marijuana has therapeutic properties not replicated by other available medications - and side effects of cannabis are typically less severe than ones associated with common prescription medications. (Source: Cannabis-med.org) According to a survey by a group led by Dr. Marcel O. Bonn-Miller, a US based research health science specialist, 37.8% of marijuana patients stated that they used the product to reduce chronic pain, followed by 24.9% who used MMJ for insomnia. Figure 2 illustrates the 10 most common reasons given for MMJ usage. Figure 2 Marijuana s Most Common Conditions to Treat Source: Bonn-Miller et al, 2013 Producers Health Canada is the gate keeper for MMPR licenses for which there are hundreds of applicants. Since the program began in 2013, just 33 licenses to cultivate / sell medical marijuana have been granted. There are several types of licenses surrounding medical marijuana but there are four types that are in the highest demand. These are licenses to 1) cultivate marijuana, 2) sell marijuana, 3) produce cannabis oil and 4) sell cannabis oil. Cannabis oil licenses began to be awarded in the summer of Cannabis oil is a marijuana extract of highly concentrated cannabinoids (i.e. THC, CBD) that are then diluted in plant-based oils. There are 34 licenses awarded to grow and / or sell marijuana and 22 licenses to produce and / or sell cannabis oil. See Figure 3 and Figure 4 for the timeline of licenses awarded by Health Canada. 6 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

7 Medical Marijuana Industry July 25, 2016 Figure 3 Cultivation and Sales Licenses for Dried Marijuana License to sell only License to cultivate only License to cultivate and sell Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun Source: Health Canada Figure 4 Production and Sales Licenses for Cannabis Oil Extracts License to only produce canabis oil License to produce and sell canabis oil 0 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun Source: Health Canada Distribution As mentioned, under the MMPR system doctors are the gatekeepers for prescribing marijuana to patients. There have been approximately 5,000 doctors that have written a recommendation for MMJ and that number continues to grow as the medical profession gains better insight into the effectiveness of marijuana for certain conditions. A doctor will prescribe a daily dosage as well as the name of a licensed producer of their choice. The patient must then register with the stated LP and order the product over the phone or online. The bottle of dried bud or cannabis oil is sent directly to the patient via Canada Post or courier. MMJ can be recommended as a treatment for any condition there are no official guidelines. Cannabis oils the future of MMJ? While dried bud sales make up the majority of MMJ revenue to date, we believe that the market for extracts or cannabis oil will be the big winner in the long run. We recognize that the traditional marijuana consumer will enjoy the experience of smoking or vaporizing marijuana including the flavors and smells associated with this form of consumption but we cannot envision the general population smoking anything after the long decline of cigarette users. Oils can be administered under the tongue or added to tea or other liquids. We believe pharmacies are likely to prefer to sell oil extracts in the form of oils or possibly capsules (filled with oil). Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 7

8 Medical Marijuana Industry July 25, 2016 Health Canada began awarding oil extract production licenses in the summer of 2014 and today there are still only 22 licenses (compared to 33 for dried product). Some LP s have only recently started selling oils so this market is still very young in Canada. Future Recreational Market The upcoming recreational marijuana market is coming soon in Canada. The Liberal government made the announcement on April 20th of this year. The details were not released other than proposed legislation will be tabled next spring and likely voted into law in the fall of The basic goal of this legislation is to make access for Canadian youth more difficult than the current black market as well as eliminating the profits from marijuana sales from organized crime. While we do not have any insight into the future legislation we do believe that the model will most likely follow a similar structure as the current alcohol system at least in terms of the provinces independent control. We do see a potential role for dispensaries as this system has worked in the US but we would expect the Federal/Provincial Governments to take a hands-on approach so there is likely to be a vigorous licensing process which may look very different than the current system of unlicensed and frankly illegal dispensaries. The recreational product will surely be taxed whereas the medical product may be tax exempt. The level of taxation would probably be similar to the US where recreational taxes range from 10% to 20%. Market Size We estimate that the total marijuana market in Canada will be $4.6B in the first year after recreational use is permitted. We expect this market to grow at 10% annually in the first five years to reach $7.4B. We assume that the first year will be split 50% for medical and 50% recreational with the recreational market increasing its relative exposure to 66% or two thirds of the overall market after five years. As a comparison, Canadians spent $9.1B on beer in 2013 and $21.4B on overall alcohol sales. (source: Statistics Canada) Figure 5 Estimated Market Size for Medical and Recreational Marijuana $25.0B $20.0B $15.0B Recreational Medical $10.0B $5.0B $0.0B Beer 2025 Alcohol 2026 Source: PI Financial estimates, Statistics Canada Colorado legalized recreational marijuana sales in 2014 and the state reported $699M in sales of marijuana with 7% of that total represented by non-residents or tourists (source: Colorado Department of Finance). The market grew by 42% in 2015 to $996M with similar non-resident 8 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

9 Medical Marijuana Industry July 25, 2016 sales thus on average approximately $175 per person was spent by its 5.3M population (our estimate assumes $ per person - less than the Colorado figures). Long-term success factors Whatever the chosen recreational distribution model is, we believe it will look completely different from the current mail order system that exists today. We expect it will be equivalent to a jump ball for marketplace domination and the current leaders in the MMJ market are not guaranteed to be the leaders under a recreational market. We believe that a strong brand and strong product will prove to be invaluable. If the model exists where the liquor control boards sell the product (one of many possibilities) these organizations will probably want to carry a limited selection of SKUs, some regional and some nationally branded. The current list of licensed producers will have an initial advantage to represent the national brands as they will be the only entities that will have the scale to supply the market in the initial years. We also believe that a certified organic brand will likely be received positively by consumers OrganiGram and Whistler Medical Marijuana are the two current organic brands. A low cost of production will be critical for growers to survive. We believe, based on data from select US states, that the retail price of recreational marijuana will be around $10 / gram (currently the average is around $ $8.00 in the medical market). We also expect a 20% tax embedded and a markup of 75% by the retailer then the wholesale price would be $4.76 in our example. The grower would need to have a gross margin of 30%-40% in order to cover its cost of marketing, admin, R&D, etc. This would require a $ $3.66 cost of producing a gram. Most LPs are not producing the product at this level albeit this is still a young industry with future gains in yields and more efficient production methods likely to evolve. Below is our thesis of what the key factors will be to determine success in both the current medical market as well as the eventual recreational market: Brand Capacity Cost Structure Product Quality This report analyzes what we believe is the most promising segment of the medical (soon to be recreational) market the cultivation and sale of dried marijuana and extracts (oils). We focus on the top four publically listed LPs Canopy Growth Corp. (V-CGC), Aphria Inc. (V-APH), Mettrum Health (V-MT) and OrganiGram Holdings Inc. (V-OGI). Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 9

10 Medical Marijuana Industry July 25, 2016 Figure 6 One Year Relative Stock Price Performance of MMJ LP Source: Thompson Eikon Figure 6 illustrates the relative performance of the four licensed producers that we are recommending. Shortly after Justin Trudeau s Liberals won a majority government all four of these LPs had significant stock price appreciation. The markets had a similar, albeit smaller, reaction when the Liberals announced its timetable for recreational marijuana for We are now seeing a third wave of share price increases as the market is anticipating amendments to the MMPR which we believe could expand the distribution of MMJ (possibly through pharmacies). Based on Health Canada figures for industry sales of MMJ (based on grams sold) we estimate that these combined LPs represent approximately 46% of the overall Canadian market with Canopy Growth leading this group with 22.7% market share. The remaining three LPs in order of market share are Mettrum (9.9%), Aphria (~7.5%) and OrganiGram (5.5%). The reason that we estimated Aphria s market share is due to the fact that its sales consist of both retail to the patient and wholesale to other LPs thus their net grams sold do not match up to Health Canada s sales for patients only. We estimate that 25% of Aphria s sales are wholesale and 75% are direct to patients. Current License Holders Advantage We believe that today s license holders have a competitive head start on any future participants whether the system changes or not. The progress that each LP has made in terms of costs, yields and phenotyping puts them in a strong position. Furthermore, the number of licenses awarded compared to the number of applicants (see Figure 7) indicates how valuable (read: rare) a license is. Just 1% of the applicants have been awarded a license and there appears to be a backlog of applicants that are waiting in the queue. 10 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

11 Medical Marijuana Industry July 25, 2016 Figure 7 Proportion of Applicants vs Licenses Awarded by Health Canada Source: Health Canada Brand Canopy Growth sells its MMJ offering under the brands Tweed and Bedrocan. Although both are currently only for medical products, the Tweed brand is well suited for the upcoming recreational market as the brand avoided the typical sterile branding of other MMJ products and instead focused on a laid-back and approachable image. The company utilizes social media and has incorporated a number of access centres called Tweed Main Street which are used as community engagement centres (no products are sold at these locations). Canopy has also partnered with other recognized brands including its partnership with Snoop Dogg (a marijuana icon) and DNA Genetics (world renowned marijuana growers who have won every category of the Cannabis Cup the preeminent cannabis competition). We believe OrganiGram s organic branding will do well in a recreational market. If the product is distributed through a liquor control board system, we envision a limited number of product SKUs with an organic option included. None of the Licensed Producers can advertise their products for sale but Mettrum is able to advertise its Mettrum Original hemp products which share the same logo. This enables the company to generate brand recognition for a related product and does not contravene the marketing restrictions for cannabis. Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 11

12 Medical Marijuana Industry July 25, 2016 Figure 8 Mettrum Original Brand vs Mettrum Health Brand Source: Mettrum website Overall, we believe Canopy Growth (Tweed/Bedrocan) has the best brand recognition in the market today. Capacity We believe those licensed producers that have the ability to ramp up its production capacity will have a significant advantage in the fight for market share. Given our estimate of the recreational and medical market to be $4.6B in the first year after legalization and the fact that the current industry today could only fulfill $268M of that demand, there is a huge shortfall in capacity. Our current production figure is derived from Health Canada s latest stats that record 4,037kg of marijuana produced by LPs in the latest quarter (Jan-Mar) with another 10,695kg in inventory (we assumed $10/gram to get to our $268M total). While we expect more producers will receive licenses to grow over the next few years, there will be a delay before new production can come online. This is due to fact that licensing has been a slow process (6-9 month process at minimum) and once certification is awarded there is a learning curve before production can get to scale. As can be seen in Figure 9, the four listed public LPs current Health Canada licenses to produce MMJ is a small fraction of what the potential capacity would be after a full build out is completed at each company s respective sites. One constraint on capacity growth is that each license is restricted to the present address so expansion must be limited to the current address. We would expect current license holders to be able to add additional locations but this would still require the LP to wait for the new location to be inspected and licensed among other applicants. 12 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

13 Medical Marijuana Industry July 25, 2016 Figure 9 Licensed Production / Potential Capacity 60,000 Production Capacity in KG (Licensed vs Potential Capacity at current locations) 50,000 40,000 30,000 20,000 10,000 0 Licensed Potential OGI APH MT CGC Source: Health Canada, company presentations, PI Financial Based on current licenses, Canopy Growth is the clear leader with licensed production capacity of 6,740kg combined between Smith Falls, ON (Tweed), Scarborough, ON (Bedrocan) and Niagaraon-the-Lake, ON (The Farm). With the recent acquisition of 36 acres of land at its current production site, Aphria has the room to reach 1,000,000 sqft of greenhouse production space which could conservatively produce 50,000kg of marijuana annually (although based on recent yields this figure could be in excess of 60,000kg). Mettrum s operations in Creemore, ON encompass 80 acres of zoned land which currently only contains grow pods that utilize one acre. Although adding more grow pods will not translate directly into better economies of scale, it does provide a significant upside to capacity. Overall, we rate Canopy Growth, Aphria and Mettrum to have superior capacity potential Cost Structure We believe that the lower cost producers will have an advantage as the market evolves. There are several factors that play into production costs including power consumption, labour and yields. Aphria grows in a greenhouse environment which eliminates a significant amount of power consumption compared to indoor growing environments. OrganiGram has an indoor grow facility but its power costs in New Brunswick compare very favorably to other jurisdictions like Ontario, Nova Scotia and PEI. Quebec and Manitoba have the lowest rates New Brunswick ranks third lowest in Canada for industrial level power rates. Aphria lowers its cost by utilizing a machine trimming process whereas Bedrocan (Canopy Growth) exclusively uses hand trimming. Canopy Growth s high production costs can also be attributed to the significant phenotyping program that carries production costs but no sales. These costs look high today but are essentially research & development type costs that could pay off by developing superior strains of marijuana catered for the recreational marketplace. Figure 10 illustrates the average selling price per gram and the average cost of production per gram. Prices are fairly similar across the sector with Canopy Growth at the low end given its $5.00 per gram compassion pricing at Bedrocan. Cost of production, however, has a significant range. Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 13

14 Medical Marijuana Industry July 25, 2016 We recognize that these costs are changing as producers experiment with processes and yields but at the moment Aphria is the lowest cost producer. In our previously mentioned recreational pricing structure of $10.00 per gram with an embedded tax and retail margin, we believe that producers will need to achieve a cost of production of at least $3.40 to $3.66. At this moment only APH and OGI meet these levels. Figure 10 Average Selling Price and Cost to Produce Avg. Selling Price vs. COGS (Per gram) $14.68 $ $8.23 $5.95 $7.16 $ APH OGI MT CGC Cost of Goods Sold Avg. Selling Price Per Gram Source: Company financial reports Overall, we rate Aphria to have the lowest cost of production followed by OrganiGram. We believe that Canopy Growth s greenhouse facility provides them with a low-cost option but to date we have not seen any evidence of decreasing costs in recent financials. Product Quality Most of the LPs have been breeding plants to maximize yields and THC/CBD levels rather than product quality. We believe that quality will be a factor when the market opens up for recreational use but probably not before then. Based on product reviews on various cannabis websites there appears to be little difference in the ratings each company s products receive. Based on our conversations with management / head growers from each LP we heard the need for a positive user experience from only two companies - Canopy Growth and OrganiGram. That said, at this early stage in the market, we are unable to pick a clear winner in the quality category but we believe LPs should focus on this criteria as much as they do for choosing breeds that produce larger plants and favourable cannabinoid profiles. Investment Opportunity We believe that the marijuana marketplace, for both medical and recreational uses, has significant growth potential. While we believe other companies will enter this potentially lucrative market, we believe that investing in the licensed producers provide the most upside. The growers that received their license to produce shortly after the program started a few years ago have a strong competitive advantage given these growers have had time to breed superior plants and have had time to increase yields and lower costs. The four LPs that we highlight all sit in an enviable competitive position and we believe each stock has strong upside. 14 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

15 Aphria Inc. (V-APH) July 25, 2016 INITIATING COVERAGE July 25, 2016 APHRIA INC. (V-APH) $2.27 RATING: BUY TARGET: $3.00 (initiating) (initiating) Only Pure Greenhouse Model Translates to Lowest Cost Producer Aphria is a licensed producer of medical marijuana both dried bud and oil extracts. The company grows its marijuana plants inside of a greenhouse which significantly reduces its power consumption associated with grow lights compared to an indoor grow setup. Aphria is the lowest cost producer among the public licensed producers in Canada. For the most recent quarter the cost of production was $2.08 per gram relative to other LPs that range from $3.34 to $ The company s greenhouse operations in Leamington, ON has the second warmest climate in Canada and has access to high caliber agricultural labour pool and close proximity of supplies, such as fertilizer inputs. Management has extensive greenhouse growing expertise which has translated into good yields and low costs. Company Statistics Risk: SPECULATIVE 52-week High/Low: $2.28 / $0.80 Shares o/s ('000): 70,053 Shares o/s (fd) ('000): 94,016 Market Cap (fd) ('000): $224,699 Market Float Value ('000): $107,505 Average Trading Volume: 319,565 Cash ('000): $16,473 Debt ('000): $0 CEO: Vic Neufeld CFO: Carl A. Merton Shareholders: Mgmt/Insiders 36% Institutional 0% Financial Summary (FYE May 31) $CAD FY16a FY17e FY18e FY19e Revenue ($K) 8,434 17,884 37,084 91,533 EBITDA ($K) 573 4,457 13,506 32,717 EBITDA (%) 6.8% 24.9% 36.4% 35.7% Net income ($K) 398 2,148 7,590 15,069 EPS ($) EV/EBITDA na 34.2x 11.3x 4.7x P/E na na 29.9x 15.0x Quarterly EPS ($) Q1 Q2 Q3 Q4 FY16 (0.01)a (0.01)a 0.00a 0.02a FY e 0.00e 0.00e 0.01e APH has significant room for expansion which will likely be needed to fulfill future demand under a recreational marijuana environment. Vic Neufeld was previously CEO of Jamieson Vitamins for 21 years and his relationships with the Canadian pharmacy professionals will likely prove to be invaluable if medical marijuana is sold through pharmacies. Cole Cacciavillani and John Cervini (both co-chairs and founders) have extensive greenhouse growing experience which has proven to be instrumental in keeping costs down and yields high. Revenue for Q4 (ending May 31) was up 456% yoy and up 4% from Q3 to $2.8M. Aphria was the first MMJ stock to report positive EBITDA back in Q2 FY16 and this quarter continued that trend with EBITDA of $0.5M. We are forecasting revenue of $17.9M, $37.1M, and $91.5M in FY17, FY18, and FY19 respectively. We believe EBITDA and EPS can reach $32.7M and $0.16 in FY19 which reflects the introduction of the recreational market. Thousands 2,500 2,000 1,500 1, dav mvg 2- dav mvg Jul-15 Sep-15 Nov-15 Dec-15 Feb-16 Apr-16 Jun-16 Corporate Information $2.50 $2.00 $1.50 $1.00 $0.50 Aphria is a licensed producer of medical marijuana both dried bud and oil extracts. The company grows its marijuana plants inside of a greenhouse which significantly reduces its power consumption associated with grow lights compared to an indoor grow setup. $- We are initiating coverage of Aphria Inc. (V-APH) with a BUY rating (risk: SPECULATIVE) and a 12-month target of $3.00. Our target represents an EV/EBITDA of 5.9x and a P/E of 19x based on our FY19 estimates. Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 15

16 Aphria Inc. (V-APH) July 25, 2016 Aphria is based in Leamington, Ontario the southernmost tip of Canada and the home of a large greenhouse industry. The company grows its marijuana plants inside of a greenhouse which significantly reduces its power consumption associated with grow lights compared to an indoor grow setup. MMJ s Lowest Cost Producer Aphria has demonstrated over the last year that its greenhouse facility is able to produce marijuana plants at a cost lower than anyone else to date. The company releases its cash cost to produce / gram along with its all-in cost / gram. There are various methods of calculating cost / gram in this sector, particularly when it comes to change in value of biological assets. Essentially, this IFRS mandated income line is the change in value of a crop from seed to mature plant. We are more concerned with the costs of producing a gram of marijuana, including power, labour, harvesting, trimming, packaging costs among others and so we do not include this biological asset revaluation in our COGS analysis. Wholesale Model Because of Aphria s low cost of production it is able to profitably sell dried bud to other licensed producers. We feel this is important as we believe the market will eventually go to a traditional wholesale / retail model (possibly with pharmacy s distributing medical product and liquor control boards distributing recreational product). The company does not break out the split between wholesale and direct sales but, based on patient count growth versus total grams sold, we estimate it is likely 25% wholesale and 75% direct sales. History Aphria received its first MMPR license in March 2014 after converting part of a large greenhouse facility to Health Canada standards for medical marijuana operations. Aphria went public soon after in December 2014 and raised $11.9M in December One of the original founders Cole Cacciavillani owned the initial greenhouse space and has sold his facility to Aphria the final sale was this last June which provided Aphria with the ability to expand to a total of 1,000,000 sqft of growing space. Figure 11 - Timeline Equity Related Raised $11.5M (8.8M units) via bought deal $1.30 / Unit Dec-14 Mar-15 Aug-15 Dec-15 Jan-16 Apr-16 Jun-16 Jul-16 Significant Events Commences trading on the TSXV Receives license for wholesale shipping of medical marijuana in dried bud form Receives license to produce (and only produce) cannabis oil extracts Board approves $10M capital project to increase greenhouse from 43,000 sq. ft. to 100,000 sq. ft. Acquisitions / Divestitures Acquired CannWay Pharmaceuticals Inc. Enters agreement to acquire 360,000 sq. ft. of existing production space for $6.5M Acquired a 7.2% equity interest in Cannabis Royalties & Holding Corp. for $1.5M Source: Company press releases 16 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

17 Aphria Inc. (V-APH) July 25, 2016 Facilities Aphria currently has 43,000 sqft of greenhouse space across glass greenhouses located in Leamington, Ontario. As mentioned earlier, the company recently purchased 360,000 sqft of greenhouse facilities including 36 acres of additional land. The acquired greenhouse space is planned to either be retrofitted to meet Health Canada standards (mainly security upgrades) or entirely reconstructed. Currently there are plans to increase capacity to 100,000 sqft but the land package recently acquired enables an expansion to up to 1,000,000 sqft of growing space. Figure 12 Inside Aphria s Greenhouse Source: Windsor Star Total licensed production capacity: 1,500 kilograms (to September 2016) Total annual growing capacity: 2,500 kilograms Potential expansion: Currently in preliminary planning and is expected to add an additional 57,000 sqft of greenhouse capacity and increase production of medical marijuana to approximately 10,000 kilograms on an annualized basis. If the entire land is fully utilized the company can build capacity of up to 1,000,000 sqft of greenhouse growing space. Note: licensed production figures typically lag actual production capacity as Health Canada will increase each LPs license as demand dictates. We expect under a recreational market that these caps will be eliminated. Products / Brands Dried Cannabis Currently Aphria has 10 strains available for sale which range in price from $5.99 to $ The highest THC level is 19% - 21% in its Kusawa strain ($8.20/gram) while Aphria has one of the highest CBD strains among the LPs with a 12% - 16% CBD strain called Treasure Island. Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 17

18 Aphria Inc. (V-APH) July 25, 2016 Figure 13 Example of Aphria s Product and Packaging Source: Liftcannabis.ca Extracts Although Aphria has a license for producing cannabis oil extracts, it does not have any product available for sale at the moment because The company received an extracts license in August 2015, one of the first licenses awarded. Aphria purchased two super-critical CO2 extractors which together produce 6L of oil per day ($2.0 - $2.5M in annual sales). Sales / distribution The company has addressed the medical market by reaching out to various influencers, aggregators, counsellors and clinics to acquire patients. One such group that the company has had success with is the Canadian Association of Veterans whose membership suffers from high rates of PTSD, sleep disorders, etc. and whose daily usage is five times higher than a typical medical users. Aphria also announced a partnership with Rethink Breast Cancer. Aphria also sells product to other licensed producers. This wholesale business is permitted within the Health Canada license and due to APH s low cost of production it can sell to its competitors at $4.25 and still make a healthy gross margin. The company has registered 4,675 patients to date (as of May 31, 2016) and has sold 1,039 kilograms of marijuana. Grams / patients / day was 0.81 during Q416 which looks very high relative to Health Canada s average of 0.71 grams / patient / day. This is likely explained by the fact that Aphria sells a material amount of dried marijuana to other licensed producers on a wholesale model. Management Vic Neufeld, CEO Mr. Vic Neufeld is Chief Executive Officer of Aphria and previously was CEO of Jamieson Laboratories, Canada s largest manufacturer and distributor of natural vitamins, minerals, concentrated food supplements, herbs and botanical medicines. Mr. Neufeld brings 15 years of experience as a chartered accountant and partner with Ernst & Young and 21 years leading Jamieson. Mr. Neufeld earned a Bachelor s degree from the University of Windsor and MBA from the University of Windsor and is a CPA. 18 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

19 Aphria Inc. (V-APH) July 25, 2016 Cole Cacciavillani, Co-Chair & Founder Mr. Cole Cacciavillani, Aphria s Co-chair and Founder is an industrial engineer. Mr. Cacciavillani sits on a number of charitable and associative boards including serving as Chairman of the Board for Leamington Memorial District Hospital, as well as, serving on the Hospital s Foundation Board. Mr. Cacciavillani is a part of The Ontario Greenhouse Alliance (TOGA); serves on the board of The Agricultural Institute of Ontario (ARIO), Police Services Board, F.V. Energy Co-op, and the Leamington Economic Development Committee. Currently, Mr. Cacciavillani serves as Co-Chair of Fundraising for the Erie Shores Campus Hospice. John Cervini Co-Chair & Founder Mr. John Cervini, Aphria s Co-chair, and Founder comes from fourth-generation growers in southwestern Ontario with hydroponic agricultural experience. Together, with his father and brother, John quadrupled the farming operation and established Lakeside Produce. Lakeside Produce is one of North America s leading sales and marketing companies selling fresh produce from Canada to multinational retailers throughout North America. John is a recognized leader in championing food safety, food traceability and standardized industry procedures. Mr. Cervini was very involved in the industry as part of the Ontario Greenhouse Vegetable Growers Association, sitting on many committees over the years, guiding and being involved in many key turning points as the industry grew from 900 acres to over 2500 today. Carl Merton, CFO Before taking the role of CFO at Aphria, Mr. Merton, served as Chief Financial Officer of Reko International Group, a TSX Venture listed manufacturing company. He was deeply involved in the restructuring of the Reko during the 2008 financial recession. In addition, he was instrumental in managing the company's liquidity during that period, as well as providing the liquidity necessary for its continued growth afterwards. Prior to joining Reko, Mr. Merton worked for Atlas Tube, a billiondollar private manufacturing company assisting them through an aggressive acquisition strategy that ultimately led to its divestiture to a private equity firm. Mr. Merton has 23 years' experience in various financial positions, as well as 10 years in executive financial leadership capacities. Mr. Merton is a Chartered Professional Accountant and is a Fellow of the Canadian Institute of Chartered Business Valuators. Source: Aphria Inc. Share structure Aphria Inc. has 70.0M shares outstanding and on a fully diluted basis 94.0M shares. The dilution is from 23.3M warrants issued and 5.0M options issued. Insiders, as individuals hold 31% of the total shares outstanding with Cole Cacciavillani and John Cervini, Aphria s Co-chairs and Founders holding 30% of the total. The figures below illustrate the common share ownership and dilution. Figure 14 Common share ownership Common stock % of Total Market value (as of Jul 5, 2016) Mgmt. & Employees 22M 31% $42M Institutions 7M 10% $13M Other 41M 59% $78M Total 70M 100% $133M Source: Company filings Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 19

20 Aphria Inc. (V-APH) July 25, 2016 Figure 15 Individual/Insider Holdings Individual Common stock % of Total John Cervini, Co-Chair & Founder 11.5M 16.4% Cole Cacciavillani, Co-Chair & Founder 9.5M 13.6% Vic Neufeld, CEO 0.7M 1.0% Total 21.7M 31.0% Source: Company filings Figure 16 Timeline for Share Structure Options outstanding Warrants Outstanding Weighted average Weighted average # of Options Outstanding exercise price per share # of Warrants Outstanding exercise price per share 4,925,000 $ ,254,753 $1.44 Source: Company financial statement notes (Q3 FY16) Financials / Outlook Aphria was the first LP to generate positive EBITDA in Q2 FY16 (ending November 2015). Since then, the Company has reported positive EBITDA in Q3 (+$0.4M) and Q4 (+$0.5M). Aphria has two significant cost advantages over its competitors power costs and fertilizer costs. The greenhouse growing environment significantly reduces APH s hydro bill estimated to be $5.50/sqft versus the average indoor grow operation of $65.00/sqft (Ontario-based competitor). Aphria makes its own fertilizers and nutrients in its own extensive in-house equipment compared to other competitors who would purchase pre-mixed / prepared fertilizer. Aphria s costs are $0.005/L of fertilizer compared to costs of $0.22/L for commercial fertilizer. Figure 17 Breakdown of Aphria s Costs Source: Company presentation As at February 29, 2016, Aphria reported total assets of $29.3M including $7.2M in property and equipment and $12.1M in cash. The company had no term debt at quarter end. During FY16 (preliminary results were released for its year ending May 31, 2016) revenue totaled $8.3M and reported a $0.4M profit for the year (the first LP to report positive net income. The total EBITDA for the year was $0.5M. 20 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

21 Aphria Inc. (V-APH) July 25, 2016 The cost of production per gram was $3.07 in FY16 and the average selling price was $8.12. The cost of production has been improving (in fact, cost of production was $2.08 in Q4) and we have modeled costs to be $2.03/gram in FY17 and we are assuming the selling cost will remain similar to FY16 s. That said, we believe there is upside to our cost assumptions as Aphria has been very aggressive at removing costs from production. Aphria ended the year with 4,675 patients and we expect the patient count to reach 9,694 by the end of FY17 with 2,193 in total kilograms sold. Our expectations for recreational sales in FY19 are $30.6M which represents 46% of volume for that year but 33% of sales given the lower wholesale price to the retailer. Valuation We are projecting a 12-month target price of $3.00 for Aphria Inc. (V-APH) shares. Our target is based on peer target multiples (7.6x EV/EBITDA FY19) and discounted cash flow analysis. We calculated our valuation assuming the medical market participation will grow consistently until our assumption of a recreational market commencing in mid After this point, we assume the medical market will plateau with the majority of growth coming from recreational sales. Our valuation calculation is shown in Figure 18. Figure 18 Valuation Summary Peer valuation EV/EBITDA Multiple Weighting Weighting MMJ Average 7.5x 50% Small Cap Growth Comparables Average 7.7x 50% Average 7.6x 100% FY19 EBITDA 32.7M Valuation based on 7.6x multiple $ % Discounted cash flow Valuation based on 10% discount rate and 8x terminal multiple $ % Overall forward valuation $ % Discount valuation based on: Delay in Recreation Market 10% Lack Of Greenhouse Control 5% 15% Discounted forward valuation $2.96 Price target $3.00 (rounded up) Source: PI Financial Corp. and Thompson EIKON We believe Aphria Inc. (V-APH) provides investors with a target return of 32% based on our target price. We are initiating coverage with a BUY rating (risk: SPECULATIVE ) and a 12-month target of $3.00. Our target represents an EV/EBITDA of 5.9x and a P/E of 19x based on our FY19 estimates. Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 21

22 Aphria Inc. (V-APH) July 25, 2016 The biggest risk to our valuation is a delay in legislation for recreational marijuana or amendments to the MMPR system that negatively impact LPs (note: we expect patients will be allowed to grow 6-12 plants under the upcoming amendments but do not consider this to be a significant threat to LPs business). See Appendix 2 for a full list of risks. 22 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

23 Canopy Growth Corp. (V-CGC) July 25, 2016 Company Statistics INITIATING COVERAGE July 25, 2016 CANOPY GROWTH CORP. (V-CGC) $2.83 RATING: BUY TARGET: $4.25 (initiating) (initiating) Largest Licensed Producer well-suited for the Recreational Marketplace Canopy Growth Corp. was the first licensed producer of medical marijuana to get a public listing in April The company was originally listed as Tweed Marijuana before it acquired Bedrocan, an indoor operation in Scarborough and The Farm, a large greenhouse operation in Niagara-on-the-Lake, ON. We believe Canopy Growth s greatest strength is its strong brands Tweed Marijuana which has a broad market, laid back appeal and Bedrocan, a well-known medical brand in the MMJ market. Canopy Growth currently has the largest licensed capacity in the space a total of 6,740 kilograms per annum spread across its four licenses. There are expansion opportunities at all three of its current facilities. Risk: SPECULATIVE 52-week High/Low: $3.69 / $1.15 Shares o/s ('000): 98,529 Shares o/s (fd) ('000): 98,529 Market Cap (fd) ('000): $303,470 Market Float Value ('000): $256,159 Average Trading Volume: 339,739 Cash ('000): $15,397 Debt ('000): $3,469 CEO: Bruce Linton CFO: Tim Saunders Shareholders: Mgmt/Insider 16% Institutional 5% Financial Summary (FYE Mar. 31) $CAD FY16a FY17e FY18e FY19e Revenue ($K) 12,699 34,622 71, ,252 EBITDA ($K) (217) ,753 64,654 EBITDA (%) -1.7% 2.3% 19.2% 33.1% Net income ($K) (3,496) (6,996) 5,666 43,867 EPS ($) (0.05) (0.07) EV/EBITDA na na 21.2x 4.5x P/E na na 53.6x 6.9x Quarterly EPS ($) Q1 Q2 Q3 Q4 FY a 0.05a (0.03)a (0.05)a FY17 (0.03)e (0.01)e (0.01)e (0.03)e The 350,000 sqft greenhouse facility has the potential to provide the company with low-cost production once the facility hits its stride. Bruce Linton leads a strong executive team and board of directors. Bruce has been a successful entrepreneur in the technology sector and surrounds himself with a strong CFO (Tim Saunders previously CFO of Plasco Energy Group), Marc Wayne, President of Bedrocan and chair of the Canadian Medical Cannabis Industry Association and Mark Zekulin, President of Tweed and also a board member of the Medical Cannabis Industry Association. Thousands Revenue in Q4 FY16 (Mar 31) was $5.0M, an increase of 113% from a year earlier and 45% higher than Q3 FY16. The loss in the quarter was $5.4M - the high level of spending reflects CGC s commitment to improving its products and market share position. We are forecasting revenue of $34.6M, $71.8M and $195.3M in FY17, FY18 and FY19 respectively compared to $12.7M in FY16. We believe EBITDA and EPS can reach $64.7M and $0.45 in FY19 which reflect the impact of the introduction of the recreational market in mid-18. We are initiating coverage of Canopy Growth Corp. (V-CGC) with a BUY rating (risk: SPECULATIVE) and a 12-month target of $4.25. Our target represents an EV/EBITDA of 6.3x and a P/E of 9.5x based on our FY19 estimates. Corporate Information Canopy Growth Corp. was the first licensed producer of medical marijuana to get a public listing in April The company was originally listed as Tweed Marijuana before it acquired Bedrocan, an indoor operation in Scarborough and The Farm, a large greenhouse operation in Niagara-on-the-Lake, ON Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 23

24 Canopy Growth Corp. (V-CGC) July 25, 2016 Canopy Growth Corporation is the largest public cannabis company in Canada. Canopy has 4 licenses from Health Canada to sell marijuana, including 3 licenses to cultivate (One of Bedrocan s two licenses is for sale only). Canopy also has 3 licenses to produce cannabis oil extracts including 2 licenses for the sale of oil. Based in Smith Falls, ON outside of Ottawa, the Company also has grow facilities in Scarborough, ON and Niagara-on-the-Lake, ON. History The Company was issued its first MMPR license in January 2014 under the name Tweed Marijuana. The facility in Smith Falls, ON used to be the home of a Hershey chocolate factory and has been repurposed to grow marijuana. Although, Tweed Marijuana received its first license from Health Canada to possess, cultivate and destroy marijuana in November 2013 it wasn t until January 2014 when the license was amended to allow the sale of marijuana. In June 2014, Tweed Farms was acquired which included an option to purchase a large greenhouse facility in Niagaraon-the-Lake, ON. The Company went public in April 2014 and issued an additional $15M in common shares. In June 2015, Tweed acquired Bedrocan Canada and subsequently changed the name of the combined companies to Canopy Growth. Highest Licensed Production Capacity and Grams Sold Among Public LPs Canopy Growth has four Health Canada MMPR licenses with a combined licensed production capacity of 6,740kg per annum more than all three other LPs highlighted in this report. Sales of marijuana in the last reported quarter (Q4 FY16 ending March 31) were 700,395 grams. If we combine the latest reported sales of Aphria (322,400 grams), Mettrum (305,950 grams) and OrganiGram (169,215 grams) the total is 797,565 grams only slightly bigger than CGC on its own. Focused on developing highest quality product Canopy announced an exclusive partnership with DNA Genetics, one of the most widely recognized and acclaimed global brands in cannabis breeding and genetics. This partner has won more than 125 awards for breeding and growing best-in-class strains. During the fourth quarter Canopy s cost of production soared compared to the sale of product. This was a direct result of the company s phenotyping process where the production is focused on selecting new and improved strains rather than growing product for sale. We believe that this investment will pay dividends in a recreational market where the quality of experience will matter more than in the current medical marketplace. Figure 19 Timeline Equity Related Raised $15M (4.7M shares) via bought $3.20 / Share Raised $20M (9.3M shares) via bought $2.15 / Share Raised $14.4M (7.0M shares) via bought $2.05 / Share Raised $11.5M (5.0M shares) via bought $2.30 / Share Jan-14 Apr-14 Jun-14 Mar-15 Aug-15 Sep-15 Nov-15 Feb-16 Apr-16 Jun-16 Jul-16 Significant Events Received full Licensed Producer status Commences trading on the TSXV Changed name from Tweed Marijuana Inc. to Canopy Growth Corporation Receives license to sell cannabis oil products Received conditional approval to graduate from the TSXV to the TSX Acquisitions / Divestitures Purchased 100% of Tweed Farms for $2.0M / exercised option to acquire Niagara-on-the-lake greenhouse for $3.2M Acquired Bedrocan Cannabis Corp. for $62.2M in an allstock transaction Source: Company press releases 24 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

25 Canopy Growth Corp. (V-CGC) July 25, 2016 Facilities Canopy has three facilities with 550,000 sqft of licensed production space. These facilities are all within Ontario and include both indoor grow and a large greenhouse facility. These facilities are: 1. Tweed Smith Falls, Ontario (168,000 sqft indoor production space) 2. Tweed Farms Facility in Niagara-on-the-lake, Ontario, (350,000 sqft greenhouse) 3. Bedrocan s Facility, (52,000 sqft pod-based indoor production facility) Figure 20 Inside Canopy Growth s Three Facilities Facility in Smith Falls, ON The Farm at Niagara-on-the-Lake, ON Bedrocan Facility in Scarborough, ON Source: Canopy Growth Corp. Investor Presentation December 2015 Total licensed production capacity: 6,740 kilograms Total annual growing capacity: 12,700 kilograms Potential expansion: Fully developed (current structures) production capacity 30,000 kilograms Note: licensed production figures typically lag actual production capacity as Health Canada will increase each LPs license as demand dictates. We expect under a recreational market that these caps will be eliminated. Products / Brands Canopy Growth has two distinct brands Bedrocan, a clinical brand with a standardized compassionate pricing model and Tweed, a laid-back lifestyle brand. Bedrocan has 6 standardized strains available for sale while Tweed currently has over 80 strains but is continuously evolving its breeding program. Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 25

26 Canopy Growth Corp. (V-CGC) July 25, 2016 Figure 21 Example of Tweed and Bedrocan s Product and Packaging Source: Liftcannabis.ca The company is partnered with DNA Genetics, a recognized leader in marijuana strain development which consistently wins awards at the Cannabis Cup the marijuana industry s leading trade show. DNA Genetics provides ongoing consulting services while assisting in phenotyping and grow method developments. Bedrocan has a standardized, pharmaceutical-grade product line based on product grown in the Netherlands for more than a decade and used in medical trials. The high level of consistency is necessary for the medical community, as doctors and patients can trust that each batch of medical cannabis contains the same percentage and ratio of cannabinoids. This consistency also makes dosing calibration more reliable. Extracts Bedrocan and Tweed both offer strain-specific cannabis extracts which are blended with hypoallergenic organic, non-gmo sunflower oil. Figure 22 Example of Tweed and Bedrocan s Cannabis Oil Packaging Source: Company website 26 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

27 Canopy Growth Corp. (V-CGC) July 25, 2016 Sales / distribution Under rules set out by Health Canada, LPs under the MMPR program are not allowed to advertise its products to the public. They are allowed, however, to promote its products to doctors as well as establish relationships with certified partners who are able to direct patients to Canopy. Canopy has built a network of community engagement centres called Tweed Main Street which is the only face-to-face touch point with customers. The Company has a call centre which registers patients over the phone. A total of 90% of patients are registered the same day they contact Canopy. The customer service centre was recently voted the best within the industry via Lift Cannabis, an leading industry web portal. The Company has created an accredited Continuing Medical Education (CME) program for physicians, to ensure that the healthcare community can confidently incorporate cannabis into their practices. Canopy has an outreach team that contacts and supports physicians in Canada. Over 10,000 physicians have been contacted to date. Management Bruce Linton - Chairman and Chief Executive Officer Mr. Bruce Linton is the founder of Canopy Growth Corporation (CGC) and co-founder of Tweed Marijuana Inc. Mr. Linton s experience as a founder, CEO, and Board member across a wide variety of enterprises has influenced the start of Canopy Growth, which to date has enjoyed market support for capital raises of approximately $95 million and the distinction of being the first company in the industry to be offered debt instruments by a federal lender. In addition to his leadership responsibility at Canopy Growth, Mr. Linton is the CEO of communications company Martello Technologies. He is the past Chairman of the Ottawa Community Loan Foundation, past Board Member and Treasurer of Canada World Youth, past Board of Governor for Carleton University, past President of the Nepean Skating Club and past President of the Carleton University Students Association. Tim Saunders, Senior Vice President and Chief Financial Officer Mr. Tim Saunders is a finance executive experienced with large international public companies and private equity-backed start-ups, having worked both in Canada and Europe. Mr. Saunders joined Canopy Growth in summer 2015 after gaining executive and leadership experience across a number of sectors including mobile, telecom, semiconductors, manufacturing and clean tech. Mr. Saunders most recently led Black Canvas Consulting with assignments such as Strategic Advisor to the President's Office of Export Development Canada. Mr. Saunders earned his CPA, CA with PricewaterhouseCoopers and is a graduate of Bishop s University where he obtained his BBA. Tim also earned an executive certificate from the Ivey School of Business at the University of Western Ontario. Mark Zekulin, Managing Director & President of Tweed - Mr. Zekulin oversees Tweed s patient outreach strategy, driving Tweed s operations and advancing market strategy and is in charge of Tweed s MMPR licenses. Mark has provided legal, political and strategic advice to high-profile local and international clients. He was Counsel at the Ottawa-Washington international trade law firm of Cassidy Levy Kent. He also served as a Senior Advisor to the Honorable Dwight Duncan, the Ontario Minister of Finance. Marc Wayne, Managing Director & President of Bedrocan Canada Mr. Wayne is the Board Chairman for the Canadian Medicinal Cannabis Industry Association (CMCIA). He was formerly the Director of Business Development for the Canadian Consortium for the Investigation of Cannabinoids (CCIC), a leading organization of scientists and healthcare professionals established Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 27

28 Canopy Growth Corp. (V-CGC) July 25, 2016 to promote evidenced based research and medical education concerning the therapeutic application of cannabis and cannabinoid-based medicines. Marc was managing partner and founder of the OAM Computer Group, a leading Canadian integrator and founding investor and Board member of Lasoo.com a leading provider of spatial software ASP services, whose technology was purchased by Yahoo ( ). Source: Canopy Growth Corp. Share Structure Canopy Growth Corp. has 101.5M shares outstanding and on a fully diluted basis 111.1M shares. The dilution is from 1.1M warrants issued and 8.5M employee stock option plan shares issued. Insiders, as individuals hold 4% of the total shares outstanding with Bruce Linton, Canopy s CEO holding 3% of the total. The figures below illustrate the common share ownership and dilution. Figure 23 Common share ownership Common stock % of Total Market value (as of Jul 7, 2016) Mgmt. & Employees 4M 4% $11M Institutions 2M 2% $6M Other 96M 94% $268M Total 101.5M 100% $285M Source: Company filings Figure 24 Individual/Insider Holdings Individual Common stock % of Total Bruce Linton - Chairman and Chief Executive Officer 3.6M 3.4% Angus Footman, Director 0.4M 0.3% Total 4.0M 3.7% Source: Company filings Figure 25 Timeline for Share Structure Options outstanding Warrants Outstanding # of Options Outstanding Weighted average exercise price per share # of Warrants Outstanding Weighted average exercise price per share 8,446,182 $2.05 1,138,104 $4.68 Source: Company financial statement notes (Q4 FY16) Financials / Outlook As at March 31, 2016, Canopy Growth reported total assets of $143.3M including $44.6M in property and equipment and $15.4M in cash. The company has term debt of $4.0M including: 5.3% (5 year term) 10.0% (10 year term) 7.0% % (2-5 year terms) During FY16 (ending March 31) revenue totaled $12.7M and reported a $3.5M net loss or ($0.05) per share. The total cash burn from operations was $13.6M which was primarily funded by $22.1M in cash from equity offerings and the exercise of warrants. 28 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

29 Canopy Growth Corp. (V-CGC) July 25, 2016 The cost of production per gram was $11.63 in FY16 and the average selling price was $7.20. The cost of production has been increasing (Q4 reported costs of $14.68/gram) as Canopy has focused on developing new strains of marijuana rather than minimizing growing costs. The selling prices have also been lower primarily due to Canopy s compassionate pricing model of $5/gram for Bedrocan patients. Canopy Growth ended the year with 11,630 patients and we expect the patient count to reach 27,648 by the end of FY17 with 4,810 in total kilograms sold. Our expectations for recreational sales in FY19 are $73.2M which represents 48% of volume for that year but 37% of sales given the lower wholesale price to the retailer. Valuation We are projecting a 12-month target price of $4.25 for Canopy Growth Corp. (V-CGC) shares. Our target is based on peer target multiples (7.6x FY19 EV/EBITDA) and discounted cash flow analysis. We calculated our valuation assuming the medical market participation will grow consistently until our assumption of a recreational market commencing in mid After this point, we assume the medical market will plateau with the majority of growth coming from recreational sales. Our valuation calculation is shown in Figure 26. Figure 26 Valuation Summary Peer valuation EV/EBITDA Multiple Weighting Weighting MMJ Average 7.5x 50% Small Cap Growth Comparables Average 7.7x 50% Average 7.6x 100% FY19 EBITDA 64.7M Valuation based on 7.6x multiple $ % Discounted cash flow Valuation based on 10% discount rate and 8x terminal multiple $ % Overall forward valuation with Rec $ % Discount valuation based on: Delay in Recreation Market 10% Lack Of Cost Controls 5% 15% Discounted forward valuation $4.21 Price target $4.25 (rounded up) Source: PI Financial Corp. and Thompson EIKON We believe Canopy Growth Corp. (V-CGC) provides investors with a target return of 50% based on our target price. We are initiating coverage with a BUY rating (risk: SPECULATIVE) and a 12- month target of $4.25. Our target represents an EV/EBITDA of 6.3x and a P/E of 9.5x based on our FY19 estimates. Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 29

30 Canopy Growth Corp. (V-CGC) July 25, 2016 The biggest risk to our valuation is a delay in legislation for recreational marijuana or amendments to the MMPR system that negatively impact LPs (note: we expect patients will be allowed to grow 6-12 plants under the upcoming amendments but do not consider this to be a significant threat to LPs business). See Appendix 2 for a full list of risks. 30 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

31 Mettrum Health Corp. (V-MT) July 25, 2016 INITIATING COVERAGE July 25, 2016 METTRUM HEALTH CORP. (V-MT) $2.45 RATING: BUY TARGET: $3.50 (initiating) (initiating) Strong Patient Growth, Multiple Licenses and Close Proximity to the GTA Mettrum was one of the first licensed medical marijuana producers in Canada receiving its first license in November The company has facilities close the Greater Toronto Area with locations in Bowmanville, ON and Creemore, ON. The company has three Health Canada licenses to cultivate and sell dried marijuana and has recently received licenses for the production and sale of cannabis oil extracts. Mettrum s current patient figures are impressive as it reported 12,099 patients at the end of June (second only to Canopy Growth s 16,000+ patient count). The company has developed and maintained strong relationships with physicians and clinics. Company Statistics Risk: SPECULATIVE 52-week High/Low: $2.48 / $1.11 Shares o/s ('000): 39,529 Shares o/s (fd) ('000): 39,529 Market Cap (fd) ('000): $96,845 Market Float Value ('000): $86,279 Average Trading Volume: 131,730 Cash ('000): $15,681 Debt ('000): $3,357 CEO: Michael Haines CFO: Peter Kampian Shareholders: Mgmt/Insiders 20% Institutional 11% Financial Summary (FYE Mar. 31) $CAD FY16a FY17e FY18e FY19e Revenue ($K) 7,692 23,326 39,619 85,594 EBITDA ($K) (5,395) 202 7,923 21,272 EBITDA (%) -70.1% 0.9% 20.0% 24.9% Net income ($K) (7,299) (2,552) 4,449 12,430 EPS ($) (0.22) (0.06) EV/EBITDA na na 10.7x 4.0x P/E na na 21.8x 7.8x Quarterly EPS ($) Q1 Q2 Q3 Q4 FY16 (0.06)a (0.06)a (0.06)a (0.04)a FY17 (0.03)e (0.02)e (0.01)e (0.00)e In addition to having a significant amount of licensed capacity, the company has extensive expansion opportunities on the 80 acres of zoned land in Creemore (currently only using one acre). The management team owns 20% of the shares outstanding. This team includes Michael Haines, CEO, and George Scorsis, President, who was previously president of Red Bull Canada which is part of a Health Canada regulated consumer market. Peter Kampian, CFO was the former CFO of publically listed Algonquin Power Income Fund (T-AQN). Most recent revenue figures (Q4 Mar 31) were $2.7M up 220% yoy and up 35% from Q3 FY16. EBITDA and net income were still negative at ($0.8M) and ($1.4M) respectively but have improved each of the last three quarters. We are forecasting revenue of $23.3M, $39.6M and $85.6M in FY17, FY18 and FY19 respectively compared to $7.7M in FY16. We believe EBITDA and EPS can reach $21.3M and $0.31 in FY19 which reflects the introduction of the recreational market. We are initiating coverage of Mettrum Health Corp. (V-MT) with a BUY rating (risk: SPECULATIVE) and a 12-month target of $3.50. Our target represents an EV/EBITDA of 5.9x and a P/E of 11x based on our FY19 estimates. Thousands 1,600 1,400 1,200 1, Jul-15 Sep-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Corporate Information 2-- day mvg 2- day mvg $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 Mettrum was one of the first licensed medical marijuana producers in Canada receiving its first license in November The company has facilities close the the Greater Toronto Area with locations in Bowmanville, ON and Creemore, ON. $- Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 31

32 Mettrum Health Corp. (V-MT) July 25, 2016 Overview Mettrum operates two facilities in Bowmanville, ON approximately 1 hour east of Toronto as well as another location in Creemore, ON which is approximately 1.5 hours north of the GTA. Together these operations have a license to produce 3,500 kilograms of MMJ per annum with significant room for expansion. All the grow operations are indoor utilizing grow lights. The company also has a facility in Barrie, ON which has a license to produce and sell industrial hemp products. These products are marketed as Mettrum Originals and include non-medicinal products like hemp oil, hemp moisturizing cream, lip balm, and hemp edibles including hemp protein powder. Fastest client onboarding in last 12 months Mettrum has been very successful at working with medical professionals to build an impressive database of registered patients. In June 2016, the company announced it had 12,099 patients register a 300% increase in the last 12 months. The key to success is, of course, translating those patient numbers into sales and during FY16 (ending March) MT has an average consumption of 0.51 grams per patient per day (below Health Canada s industry stats which suggest 0.71 grams per patient per day). Recently awarded third Health Canada license In May 2016, Mettrum received an amendment to its MMPR license for its recently purchased 60,000 sqft facility located in Bowmanville, ON ( Bowmanville South just a few minutes from its other MMPR licensed facility referred to as Bowmanville North ). The licensed production capacity for Mettrum increases to 3,550kg (previously 2,350kg) while this facility alone is capable of producing 8,000kg when fully built out. History Mettrum was the third producer to be licensed by Health Canada in November 2013 for its Bennett Road North location (in Bowmanville, ON). The company purchased a second location in Bowmanville in April 2014, just a short drive from the original location (this location is called Bennett Road South). In June 2014, the company purchased Agripharm which has 80 acres of land and uses modular containers to grow its product indoors. Figure 27 Timeline Equity Related Raised $8.6M (5.8M shares) via bought $1.50 / Share Oct-14 Dec-14 Feb-15 Mar-15 Aug-15 Sep-15 Dec-15 Jan-16 May-16 Jun-16 Jul-16 Significant Events Commences trading on the TSXV Receives production license for Creemore Enters hemp cannabis based functional foods market Launch of physician / client portal & online store Receives cannabis extraction license Launch of Mettrum Originals Receives license for Bowmanville South facility Receives license to sell cannabis extracts Launch of premium cannabis oils product line Acquisitions / Divestitures Source: Company press releases 32 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

33 Mettrum Health Corp. (V-MT) July 25, 2016 Facilities Mettrum has three facilities licensed under MMPR two in Bowmanville Ontario, and one in Creemore Ontario. Mettrum also has one facility that is licensed to produce and sell industrial hemp products in Barrie Ontario. Figure 28 Inside Mettrum s Bowmanville North Facility Source: cannabis culture Total annual production license: 3,550 kilograms (one license renews November, two renew in December) Total annual growing capacity: 6,000 kilograms. Current expansion: Fully developed (current structures) production capacity 12,000 kilograms Potential expansion: 26,000 kilograms per year Note: licensed production figures typically lag actual production capacity as Health Canada will increase each LPs license as demand dictates. We expect under a recreational market that these caps will be eliminated. Products/Brands Mettrum sells a range of dried cannabis and oil extracts and arranges the various strains within the Mettrum Spectrum. The spectrum is segmented by levels of THC and CBD starting with Red (high THC, low CBD) at one end of the spectrum and Yellow (low THC, high CBD) at the other end with Orange, Purple, Blue and Green levels in between. Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 33

34 Mettrum Health Corp. (V-MT) July 25, 2016 Figure 29 Example of Mettrum s Product and Packaging Source: Liftcannabis.ca In the early days the company only had 6 products labelled with colours but have since evolved to marketing unique strains with each colour spectrum using more traditional marijuana names like Mettrum Orange - Super Lemon Haze (Sativa dominant). The oil extracts are arranged in the same colour spectrum but currently Mettrum only offers products in three categories Red, Blue and Yellow. Each 40mL bottle of oil contains the equivalent of 5 grams of dried cannabis and sells for $80 to $90 per bottle. Figure 30 Mettrum s Product Spectrum Source: Company presentation 34 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

35 Mettrum Health Corp. (V-MT) July 25, 2016 Sales / distribution Mettrum reaches out to physicians and has tried to be the MMJ partner of choice through developing systems to eliminate the administrative burden associated with prescribing medical marijuana by: helping physicians understand changing regulations; simplifying the process for the physician s patient assessment, prescribing, and registration follow-up; leading a dialogue around the science of cannabinoids and the therapeutic benefits of medical cannabis; being associated with scientific excellence, product excellence, and expertise; and addressing important issues relating to social stigma and medical cannabis safety Mettrum created a professional physician interface, the Mettrum Cannabis Electronic Medical Records application which: provides a custom Mettrum app for faster and more accurate client on boarding; enables paperless client profiling through the proprietary app; simplifies paperwork redundancy and streamlines client sign-up; manages and updates client profiles for easy physician and Mettrum collaboration; can be accessed via tablet device, or personal computer displays product order history for physician review and recommendation; and empowers and educates the physician with product information. (Source: Mettrum) Management Michael Haines, CEO & Director Mr. Michael Haines is a founder, director and the CEO of Mettrum Health Corp. since May Previously he founded HIP Interactive in 1999 in which he helped build sales to over $500M. Mr. Haines was the Chairman of BlammoGames Ltd. from 2011 to George Scorsis, President Mr. George Scorsis is the President of Mettrum Health Corp. Previously he was the President of Red Bull Canada until October He was instrumental in restructuring the company from a geographical and operational perspective while working closely with Health Canada on the guidelines regulating the energy drink category. Prior to joining Red Bull, Mr. Scorsis held an executive role at Bacardi. Peter Kampian, CFO Mr. Peter Kampian has been the CFO of Mettrum since May Previously, he was the former CFO of Algonquin Power Income Fund (T-AQN) and has experience with various capital market initiatives on the TSX, including a cross border income trust initiative. Trevor Fencott, Chief Legal Officer - Mr. Fencott is a practicing lawyer and senior executive with 15 years of experience operating, building and financing businesses in the technology and media sectors. Most recently, Mr. Fencott was President and, subsequently, Executive Director of Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 35

36 Mettrum Health Corp. (V-MT) July 25, 2016 bitheads Inc. Prior to that, Mr. Fencott was President, co-founder, and a director of Groove Media Inc., and CEO of Bedlam Games, an interactive software business that was successfully sold in He also serves on the Board of Directors of the Canadian Medical Cannabis Industry Association. Grant Koehler, EVP Sales & Marketing - Mr. Koehler has worked in the pharmaceutical industry for more than 24 years. Prior to joining Mettrum, he was an employee of Valeant Canada (T-VRX). During his 8 year tenure with Valent Canada, he held the position of National Sales Manager Pain Specialty and Region Sales Manager for Ontario. Mr. Koehler also spent 8 years with McNeil Consumer Healthcare / Johnson & Johnson where he held positions in sales management, pharmaceutical product and brand management, and business development. Mr. Koehler s professional sales experience was gained through territory and hospital sales roles at Servier Canada. Source: Mettrum Health Corp. Share Structure Mettrum Health Corp. has 39.6M shares outstanding and on a fully diluted basis 43.2M shares. The dilution is from 1.0M warrants issued and 2.6M options issued. Insiders, as individuals hold 20% of the total shares outstanding with Michael Haines, Mettrum s CEO holding 5% of the total. The figures below illustrate the common share ownership and dilution. Figure 31 Common share ownership Common stock % of Total Market value (as of Jul 7, 2016) Mgmt. & Employees 8.3M 20% $18.1M Institutions 4.3M 11% $9.4M Other 27.0M 69% $59.9M Total 39.6M 100% $87.0M Source: Company filings Figure 32 Individual/Insider Holdings Individual Common stock % of Total Michael Haines, CEO & Director 2.0M 5.1% Trevor Fencott, Chief Legal Officer & Director 1.9M 4.8% Don Wright, Director 0.4M 1.1% Other managers 4.0M 9.0% Total 8.3M 20.0% Source: Company filings Figure 33 Timeline for Share Structure Options outstanding Warrants Outstanding # of Options Outstanding Weighted average exercise price per share # of Warrants Outstanding Weighted average exercise price per share 2,622,800 $ ,720 $2.29 Source: Company financial statement notes (Q4 FY16) 36 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

37 Mettrum Health Corp. (V-MT) July 25, 2016 Financials / Outlook As at March 31, 2016, Mettrum reported total assets of $35.0M including $20.0M in property and equipment and $7.1M in cash. The company has a term loan of $2.9M with an interest rate of 4.8% due in December During FY16 (ending March 31) revenue totaled $7.7M and reported a $7.3M net loss or ($0.22) per share. The total cash burn from operations was $8.9M which was primarily funded by the large cash balance of $21.7M at the beginning of the fiscal year. The cost of production per gram was $4.97 in FY16 (Q4 was $5.95) - our cost of production calculation includes costs from seed to packaging, including depreciation. The average selling price per gram was $8.87. The cost of production is expected to improve and we expect costs to be $3.45 in FY17 and we are assuming the selling cost will remain similar to FY16 s price of $8.87. Mettrum ended the year with 7,200 patients and we expect the patient count to reach 18,251 by the end of FY17 with 2,546 in total kilograms sold. Our expectations for recreational sales in FY19 are $28.4M which represents 46% of volume for that year but 33% of sales given the lower wholesale price to the retailer. Valuation We are projecting a 12-month target price of $3.50 for Mettrum Health Corp. (V-MT) shares. Our target is based on peer target multiples (7.6x FY19 EV/EBITDA) and discounted cash flow analysis. We calculated our valuation assuming the medical market participation will grow consistently until our assumption of a recreational market commencing in mid After this point, we assume the medical market will plateau with the majority of growth coming from recreational sales. Our valuation calculation is shown in Figure 34. Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 37

38 Mettrum Health Corp. (V-MT) July 25, 2016 Figure 34 Valuation Summary EV/EBITDA Multiple Weighting Weighting MMJ Average 7.5x 50% Small Cap Growth Comparables Average 7.7x 50% Average 7.6x 100% FY19 EBITDA 21.3M Valuation based on 7.6x multiple $ % Discounted cash flow Valuation based on 10% discount rate and 8x terminal multiple $ % Overall forward valuation with Rec. $ % Discount valuation based on: Potential Delay in Recreation Market 10% Lack Of Operating History 5% 15% Discounted forward valuation $3.49 Price target $3.50 (rounded up) Source: PI Financial Corp. and Thompson EIKON We believe Mettrum Health Corp. (V-MT) provides investors with a target return of 43% based on our target price. We are initiating coverage with a BUY rating (risk: SPECULATIVE) and a 12- month target of $3.50. Our target represents an EV/EBITDA of 5.9x and a P/E of 11x based on our FY19 estimates. The biggest risk to our valuation is a delay in legislation for recreational marijuana or amendment to the MMPR system that negatively impacts LPs (note: we expect patients will be allowed to grow 6-12 plants under the upcoming amendment but do not consider this to be a significant threat to LPs business). See Appendix 2 for a full list of risks. 38 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

39 OrganiGram Holdings Inc. (V-OGI) July 25, 2016 INITIATING COVERAGE July 25, 2016 ORGANIGRAM HOLDINGS INC. (V-OGI) $1.35 RATING: BUY TARGET: $2.25 (initiating) (initiating) Maritime-based Organic Producer Represents Strong Niche Player OrganiGram currently has a medical marijuana growing operation based in Moncton, New Brunswick in two buildings on 5.5 acres of land. The company has a Health Canada license to cultivate and sell medical marijuana as well as medical marijuana oil extracts. The company is a certified organic grower which we believe appeals to MMJ users and we believe will appeal to a broader recreational market in the future. OrganiGram is among the lowest cost producers as it benefits from lower power costs in New Brunswick as well as lower labour cost and lower power consumption with its LED lighting grow lamps. The current facility is presently expanding the number of grow rooms and a second building on the property is available for future conversion which could increase capacity by almost 8 times. Dennis Arsenault leads a strong management team that together own 23% of the shares outstanding. The company was able to attract a wellrounded talented team with a diverse background. This team has experience in both the pharmaceutical and alcohol sectors which we believe will translate well within the medical and recreational environment. Company Statistics Risk: SPECULATIVE 52-week High/Low: $1.42 / $0.20 Shares o/s ('000): 66,270 Shares o/s (fd) ('000): 66,270 Market Cap (fd) ('000): $89,464 Market Float Value ('000): $76,179 Average Trading Volume: 254,062 Cash ('000): $12,289 Debt ('000): $7,244 CEO: Denis Arsenault CFO: Peter R. Hanson Shareholders: Mgmt/Insider 15% Institutional 0% Financial Summary (FYE Aug. 31) $CAD FY16e FY17e FY18e FY19e Revenue ($K) 6,417 13,881 34,010 74,115 EBITDA ($K) 1,451 4,217 11,348 22,988 EBITDA (%) 22.6% 30.4% 33.4% 31.0% Net income ($K) 143 2,139 7,640 14,287 EPS ($) EV/EBITDA 58.2x 20.0x 7.4x 3.7x P/E na 41.8x 11.7x 6.3x Quarterly EPS ($) Q1 Q2 Q3 Q4 FY16 (0.00)a 0.00a 0.01a (0.00)e FY e 0.01e 0.01e 0.00e Thousands 7,000 6,000 5,000 4,000 3,000 2,000 1, dav mvg 2- dav mvg $1.60 $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 Revenue for OGI s recent quarter (Q3 ending May 31) was $1.8M, up from just $230K the year prior and up 27% from the previous quarter. The company posted positive EBITDA of $0.7M and reported net income of $0.4M compared to $0.2M in Q3 FY15. We are forecasting revenue of $6.4M, $13.9M, $34.0M and $74.1M in FY16, FY17, FY18 and FY19 respectively. In the first three quarters of FY16, OGI reported revenues of $4.3M and had FY15 revenues of $1.0M. We believe EBITDA and EPS can reach $23.0M and $0.22 in FY19 which reflect the introduction of the recreational market. We are initiating coverage of OrganiGram Holdings Inc. (V-OGI) with a BUY rating (risk: SPECULATIVE) and a 12-month target of $2.25. Our target represents an EV/EBITDA of 6.3x and a P/E of 10x based on our FY19 estimates. - Jul-15 Sep-15 Nov-15 Dec-15 Feb-16 Apr-16 Jun-16 PI Financial Corp. has received compensation for acting as a fiscal agent for OGI in the previous 12 months. See the disclosure section for additional details. Corporate Information OrganiGram currently has a medical marijuana growing operation based in Moncton, New Brunswick in two buildings on 5.5 acres of land. The company has a Health Canada license to cultivate and sell medical marijuana as well as medical marijuana oil extracts. $- Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 39

40 OrganiGram Holdings Inc. (V-OGI) July 25, 2016 OrganiGram is based in Moncton, New Brunswick one of two licensed facilities in the Maritimes. It has a significant head start on the other maritime LP, Canada s Island Garden Inc., which only received a license to cultivate in June, OrganiGram grows its plants in an indoor environment and has utilized LED lights (compared to industry standard high pressure sodium lights) and is an Ecocert certified organic grower. Maximizes facility grow space OrganiGram maximizes it s grow space within its rooms by utilizing three levels of plant production. The company grows an organic product without the use of high potency fertilizers so its plant height is smaller than average. To take advantage of this attribute, OrganiGram is able to utilize three levels of growing space within each grow room maximizing the output of dried bud per square foot. Organic product As mentioned, OrganiGram is an Ecocert organic grower which means growing marijuana in enriched soil and managing this soil with natural additives and using beneficial organisms to promote healthy growing. No synthetic nutrients, pesticides, herbicides or additives are used. Using this method has been shown to increase the quality of marijuana including increased terpene levels which enhances the flavor and aroma of the product. We believe an organic marijuana product will translate into strong demand under a recreational model. Whatever the retail distribution model looks like, we believe that retailers will want an organic choice for its customers. Currently, there are only two organic growers of medical marijuana in Canada OrganiGram and Whistler Medical Marijuana (private). History OrganiGram received its license to cultivate and sell medical marijuana in March 2014 and went public through a reverse take-over in August that year. The company has raised almost $15M in the last year through two equity offerings. Figure 35 Timeline Equity Related Raised $1.4M (2.0M units) via private $0.70 / Unit Raised $3.4M (3.3M units) via private $1.04 / Unit Raised $10.4M (9.9M units) via bought $1.05 / Unit Aug-14 Sep-14 Dec-14 May-15 Sep-15 Nov-15 Feb-16 Jun-16 Jul-16 Significant Events Commences trading on the TSXV post RTO Made first shipment of medical marijuana to registered patients Launched "Secure Doctor Portal" designed to simplify prescribing process for doctors Increased annual production capacity to 2,100kg Receives license to produce (and only produce) cannabis oil extracts Receives license to sell cannabis oil extracts Acquisitions / Divestitures Source: Company press releases Facilities OrganiGram has two buildings on 5.5 acres of land located in Moncton, New Brunswick. OGI has continued to expand the main facility to create additional production capability and expects 78,500 sqft of production space at full build out. 40 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA

41 OrganiGram Holdings Inc. (V-OGI) July 25, 2016 Currently, the company has 7 large grow rooms and are completing construction of 7 more. The facility has a license to produce 750kg of marijuana per annum and with the additional grow rooms will have an additional 1,500kg of capacity. On the property is an adjacent building which could house an additional 12 grow rooms and bring the annual capacity up to 7,500kg per year. Figure 36 OrganiGram s Three Level Growing Room Source: OrganiGram Investors Presentation Total annual production license: 750 kilograms (to March 2017) Total annual growing capacity: 2,700 kilograms Current expansion: Up to 3,500 kilograms per year almost complete (Nov/16) Potential expansion: Up to 19,000 kilograms per year expansion on existing property Note: licensed production figures typically lag actual production capacity as Health Canada will increase each LPs license as demand dictates. We expect under a recreational market that these caps will be eliminated. Products/Brands Like its name, OrganiGram offers an organic MMJ alternative. The growing process is certified by Ecocert Canada and is subject to audits to ensure ongoing compliance. Nutrient rich organic peat moss fortified by organic fertilizers is used and no synthetic or chemical pesticides are utilized but instead beneficial bacteria are added. The Company does not irradiate its dried bud like most of the other LPs do which is another positive selling point for OrganiGram. The irradiation process is viewed unfavorably from a consumer standpoint as it exposes the marijuana bud to ionizing radiation in order to destroy all bacteria and other living organism. Jason Zandberg, CFA Devin Schilling, BBA INITIATING COVERAGE 41

42 OrganiGram Holdings Inc. (V-OGI) July 25, 2016 Figure 37 Example of OrganiGram s Product and Packaging Source: Liftcannabis.ca Organigram currently offers 12 cannabis products, two of which are pre-milled (ground up for consumption). The company received a license to produce and sell oil extracts in February 2016 but have yet to release a product. Sales / distribution The company targets key health care professionals by providing information and education through face-to-face meetings, medical conferences and associations. OrganiGram has partnerships with specialty clinics which refer patients. They have also forged relationships with various health society groups including those involved with PTSD, AIDS, Cancer, and Arthritis. OrganiGram has an inbound call centre offering service in both English and French and its location in the Maritimes is likely to translate into a strong market share position within this region. Management Denis Arsenault, CEO and Director Mr. Denis Arsenault has spent the past 25 years as a successful entrepreneur, building, running and selling several profitable businesses. As the CEO of the Company, Mr. Arsenault has focused on growing the Company into a sustainable and successful employer in Moncton. His extensive knowledge and experience in building successful enterprises has helped to establish a strong management team and a modern production facility. Mr. Arsenault holds a Bachelor of Administration degree from the Université de Moncton. Larry Rogers, COO and Director Mr. Larry Rogers was the CEO and co-founder of CLS Lexi-tech Ltd., Canada s largest private language service provider. He began his career in the information technology field, before going on to play a key role in the creation and growth of Lexi-tech International Inc., first as Vice-President of Operations then as President from Mr. Rogers holds a Bachelor of Science degree, with a major in computer science degree from the University of New Brunswick. 42 INITIATING COVERAGE Jason Zandberg, CFA Devin Schilling, BBA