CANOPY GROWTH CORPORATION

Transcription

1 CANOPY GROWTH CORPORATION MANAGEMENT S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2016 AND 2015 FEBRUARY 13, 2017

2 Canopy Growth Corporation ( the Company or Canopy Growth ) is a publicly traded corporation, incorporated in Canada, with its head office located at 1 Hershey Drive, Smiths Falls, Ontario. On February 1, 2017, Canopy Growth changed its trading symbol on the Toronto Stock Exchange ( TSX ) from CGC to WEED. This Management s Discussion and Analysis of the Financial Condition and Results of Operation ( MD&A ) is dated February 13, It should be read in conjunction with the Company s unaudited condensed interim consolidated financial statements (the Interim Financial Statements ) for the three and nine months ended December 31, 2016, including the accompanying notes. Unless otherwise indicated, all financial information in this MD&A is reported in thousands of Canadian dollars, except share amounts. We prepared this MD&A with reference to National Instrument Continuous Disclosure Obligations of the Canadian Securities Administrators. This MD&A provides information for the three and nine months ended December 31, 2016 and up to and including February 13, By their nature, the Interim Financial Statements do not include all the information required for full annual financial statements. Accordingly, this MD&A should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended March 31, 2016 and the related MD&A for the year ended March 31, 2016 dated July 8, The Interim Financial Statements and this MD&A have been reviewed by the Company s Audit Committee and approved by the Company s Board of Directors. The accompanying Interim Financial Statements were prepared in compliance with International Financial Reporting Standard 34 Interim Financial Reporting ( IAS 34 ), in accordance with subparagraph 3.2(1) (b) of NI and include the accounts of the Company and its wholly-owned subsidiaries which include Tweed Inc. ( Tweed ) located in Smiths Falls, Ontario, Tweed Farms Inc. ( Tweed Farms ) located in Niagara-on-the-Lake, Ontario, Bedrocan Canada Inc. ( Bedrocan ) located in Toronto, Ontario in addition to other subsidiaries and investments held. All intercompany balances and transactions have been eliminated on consolidation. Additional information filed by us with the Canadian Securities Administrators, including quarterly reports, annual reports and annual information forms are available on-line at and also on our website at and Short Form Prospectus with respect to the bought deals dated April 8, 2016, August 18, 2016 and December 16, 2016 are available on-line at Page 2

3 HIGHLIGHTS Earnings and Ending Cash Revenue of $9,752; a 15% increase over the second quarter of Fiscal 2017 and 180% over the third quarter of Fiscal 2016 when revenue totaled $3,481. Year to date revenue totaled $25,234, up 230% from the nine months ended December 31, 2015; 1,245 kilograms and kilogram equivalents 1 sold, representing an increase of 6% over the second quarter of Fiscal 2017 and an increase of 170% over the third quarter of last year. Year to date, 3,399 kilograms and kilogram equivalents were sold as compared to just 996 kilograms in the same period last year; Oil sales accounted for 12% of total third quarter revenue, shipping 1,157 litres (or 116 kilogram equivalents), included in the kilogram and kilogram equivalents above; Harvested 5,264 kilograms in the quarter. The greenhouse summer harvest in October produced yields ranging from 300 grams to 2,900 grams per plant, with a weighted average yield of over 800 grams per plant; Supply for sale was limited in the quarter by the normal course procedures to fully test the record crops harvested and approve the extensive product release for sale subsequent to the quarter s end. At the end of the third quarter, 3,809 kg of inventory was either in process of finishing or awaiting approval for sale; 3,844 kg of extraction-grade inventory accumulated and held for extraction is expected to be rapidly converted to oils and capsules when the new AES industrial capacity extraction equipment is fully commissioned and capsules are approved for sale by Health Canada; The third quarter Adjusted Product Contribution 2 was $6,677 or 68% of revenue as compared to an Adjusted Product Contribution of $2,422 and 70% of revenue in the same quarter of last year; The third quarter weighted average cost per gram to produce, harvest and sell cannabis was $2.47 per gram as compared to $2.29 in the same quarter of last year and $2.77 in the second quarter of Fiscal 2017; Net income of $2,976, or $0.03 per basic share and $0.02 per diluted share, in the three-month period ended December 31, 2016, compared to net loss of $3,316, or $0.04 per share on a basic and diluted basis, in the third quarter of Fiscal Year to date net income was $4,457, or $0.04 per basic and diluted share, as compared to the same period last year when net income was $1,626 and $0.02 per basic and diluted share; Over 29,000 registered patients at December 31, 2016 compared to over 8,000 in the third quarter of last year; and Cash and cash equivalents were $92,504 at December 31, Operations Milestones Tweed and entertainment icon Snoop Dogg, together, launched Leafs by Snoop for the Canadian Market; 1 Kilogram equivalents refers to cannabis oils sold in 100 ml bottles where 10 ml is the equivalent of approximately 1 gram of dried cannabis. 2 A Non-GAAP measure used by management, described elsewhere in this MD&A Page 3

4 Tweed Farms received its license to sell dried cannabis products to other licensed producers, and in particular its sister company Tweed, and its license capacity was amended to allow the production and sale of 6,000 kg of dried cannabis, valid through July 13, 2018, following its renewal on January 13, 2017; Bedrocan Canada exported 10 kilograms of dried cannabis to Brazil for research purposes; and Tweed received a Dealer s License pursuant to the provisions of the Controlled Drugs and Substances Act and its Regulations. As a licensed dealer, Tweed will be able to conduct research and possess cannabis and cannabis derivatives in forms that are not currently covered by the Access to Cannabis for Medical Purposes Regulations (ACMPR). Corporate Initiatives Acquired Quebec-based Licensed Producer Applicant Vert Cannabis ( Vert ) and 75% of Licensed Hemp producer, Groupe H.E.M.P.CA ( Hemp.CA ) on November 1, 2016; Acquired MedCann GmbH Pharma and Nutraceuticals ( MedCann GmbH ), on December 12, 2016, a German-based pharmaceutical distributor who placed Tweed-branded cannabis strains in German pharmacies and is well positioned for the emerging medical market in Germany and the European Union ( EU ); Announced the formation of the cannabis research incubator, Canopy Health Innovations Inc. ( CHI ). Also announced the closing of an offering of CHI common shares for aggregate gross proceeds of approximately $7,000 and a leadership appointment. Canopy s ownership stake was reduced to 46.15% of the CHI common shares following the CHI financing; The Company and Mettrum Health Corp. ( Mettrum ) entered into a definitive arrangement agreement dated November 30, 2016 and announced on December 1, 2016 pursuant to which Canopy Growth will acquire all of the issued and outstanding shares of Mettrum. The transaction closed on January 31, 2017, after the end of the third quarter, following shareholder, court and regulatory approvals; and Closed a bought deal equity financing on December 22, 2016 that raised aggregate gross proceeds of $60,017. RECENT DEVELOPMENTS Canopy Growth and Mettrum Announce Closing of Acquisition On January 31, 2017, the Company and Mettrum announced the closing of the acquisition of Mettrum by the Company pursuant to the terms of an arrangement agreement dated November 30, 2016 and previously announced by the Companies on December 1, Canopy Growth and Mettrum entered into the Arrangement Agreement pursuant to which Canopy Growth agreed to acquire all of the issued and outstanding Mettrum Shares on the basis that each holder of Mettrum Shares received Common Shares for each Mettrum Share held. Mettrum was a Tier 1 Industry Issuer listed on the TSXV. Mettrum ceased trading as an Issuer on the TSXV on February 1, Details of the plan of arrangement are available in the Joint Management Information Circular filed on SEDAR at Canopy Growth Triples Tweed s Production Potential by Acquiring 1 Hershey Drive On January 16, 2017, the Company announced that it had closed the acquisition of the property at 1 Hershey Drive that currently houses Canopy Growth s headquarters and the Tweed Inc. (Tweed) production facilities. The building, property and chattels were acquired for $6.6 million, of which $923,980 was settled with the issuance of 94,397 common shares of Canopy Growth, based on a 5-day VWAP of $ ending the day before closing. The remainder was paid in cash on closing. As a part owner of the facility prior to the transaction, the Chairman and CEO received 70,800 of the 94,397 shares issued. These shares are subject to a 4-month lockup. The entire 472,000 sq. ft. footprint could almost triple current production and processing capacity, making it by far the largest indoor cannabis production facility in Canada. The 42-acre Page 4

5 site could also house hundreds of thousands of square feet of additional production and processing space, either indoors or in greenhouse growing platforms. The acquisition is considered a related party transaction within the meaning of Multilateral Instrument Protection of Minority Security Holders in Special Transactions ( MI ) because Bruce Linton, a director and officer of Canopy Growth is also a shareholder of the vendor Tweed Hershey Drive Inc. MI provides that, unless exempted, an issuer proposing to undertake a related party transaction is required to prepare a formal valuation of the subject matter of the proposed transaction and to provide holders of the class of affected securities a summary of such valuation. MI also requires that, unless exempted, the issuer seek approval of the transaction by a majority of the votes cast by the minority holders of the affected securities. To ensure a fair valuation, an independent Lead Director of Canopy Growth led the purchase negotiation. The Company also obtained an independent appraisal to support the final price negotiated. The Company has each relied on an exemption available pursuant to MI from the formal valuation and minority approval requirements. MI provides that if, at the time the transaction is agreed to, neither the fair market value of the subject matter of, nor the fair market value of the consideration for the transaction, insofar as it involves interested parties, exceeds 25% of the issuer s market capitalization (calculated in accordance with MI ), the formal valuation and minority approval requirements do not apply to such transaction. The acquisition of 1 Hershey Drive is exempt from the formal valuation and minority approval requirements of MI because neither the fair market value of 1 Hershey Drive nor the fair market value of the purchase price for the acquisition of 1 Hershey Drive exceeds 25% of Canopy Growth s market capitalization. Canopy Growth trading symbol changed to WEED The share symbol of the company changed to TSX:WEED upon the commencement of trading on the Toronto Stock Exchange ( TSX ) on February 1, Page 5

6 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This MD&A contains certain forward-looking statements and forward-looking information within the meaning of Canadian securities laws, including such statements relating to: assumptions and expectations described in the Company s critical accounting policies and estimates; the Company s expectations regarding the adoption and impact of certain accounting pronouncements; the Company s expectations regarding legislation, regulations and licensing related to the cultivation, production and sale of cannabis products by the company s wholly-owned subsidiaries; the expected number of users of medical cannabis or the size of the medical cannabis market in Canada; the potential time frame for the introduction of legislation to legalize recreational cannabis use in Canada and the potential form that this legislation will take; the potential size of the recreational cannabis market in Canada should recreational use be legalized; the ability to enter and participate in international market opportunities; the Company s expectations with respect to the company s future financial and operating performance; product sales expectations; production capacity expectations; and the Company s ability to achieve profitability without further equity financing. The words plans, expects, is expected, budget, scheduled, estimates forecasts, intends, anticipates, or believes or variation (including negative variations) of such words and phrases, or statements that certain actions, events, or results may, could, would, might, or will be taken, occur or to achieve are all forward-looking statements. Forward-looking statements are based on the reasonable assumptions, estimates, internal and external analysis and opinions of management made in light of its experience and perception of trends, current conditions and expected developments, as well as other factors that management believes to be relevant and reasonable at the date that such statements are made. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, but are not limited to, the factors discussed in the section entitled RISKS AND UNCERTAINTIES. Although the Company has attempted to identify important factors that could cause actions, events or results to differ materially from those described in the forward-looking statements, there may be other factors that cause actions, events, or results to differ from those anticipated, estimated or intended. Forward-looking statements contained herein are made as at the date of the MD&A. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on the forward-looking statements. The Company does not undertake to update any forward-looking statements except as required by applicable securities laws. INTERNAL CONTROLS OVER FINANCIAL REPORTING The Chief Executive Officer and Chief Financial Officer, in accordance with National Instrument ( NI ), have both certified that they have reviewed the financial report and this MD&A (the Filings ) and that, based on their knowledge having exercised reasonable diligence, (a) the Filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is Page 6

7 necessary to make a statement not misleading in light of the circumstances under which it was made with respect to the period covered by the filings; and (b) the financial report together with the other financial information included in the Filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the Filings. The Company s internal controls over financial reporting ( ICFR ) are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company s management is responsible for establishing and maintaining adequate ICFR for the Company. Management, including the CEO and CFO, does not expect that the Company s ICFR will prevent or detect all errors and all fraud or will be effective under all future conditions. A control system is subject to inherent limitations and even those systems determined to be effective can provide only reasonable, but not absolute, assurance that the control objectives will be met with respect to financial statement preparation and presentation. The Company s management, with the participation of its CEO and CFO, has limited the scope of the design of the Company s disclosure controls and procedures and internal controls over financial reporting to exclude controls, policies and procedures and internal controls over financial reporting of the recently acquired operations of Vert (acquired November 1, 2016), Hemp.CA (acquired November 1, 2016), MedCann GmbH (acquired December 12, 2016). Excluding the goodwill created on the acquisitions, the operations of Vert, Hemp.CA, and MedCann GmbH, combined, represent less than 1% of the Company s assets (less than 1% of current assets, 1% of non-current assets); they also represent 1% of current liabilities and less than 1% of long-term liabilities, NIL% and NIL% of the Company s revenues and 1% and less than 1% of the Company s expenses for the three and nine month periods ended December 31, 2016, respectively. CSA National Instrument requires the CEO and CFO to certify that they are responsible for establishing and maintaining ICFR for the Company and that those internal controls have been designed and are effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. The CEO and CFO are also responsible for disclosing any changes to the Company s internal controls during the most recent period that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. There have been no changes in the Company's internal control over financial reporting during the nine months ended December 31, 2016 that have materially affected, or are likely to materially affect, the Company's internal control over financial reporting. NON-GAAP AND ADDITIONAL GAAP MEASURES The Company uses Income from operations as an additional GAAP financial measure within the financial statements and MD&A, and Adjusted Product Contribution and Adjusted EBITDA as Non-GAAP measures in the MD&A, but none are a defined term under IFRS to assess performance. Management believes that these measures provide useful supplemental information to investors and is computed on a consistent basis for each reporting period. Income from operations is calculated as total revenues less total operating expenses derived from the Consolidated Statements of Comprehensive Loss. It is used by management to analyze operating performance but it is not intended to represent an alternative to net earnings or other measures of financial performance in accordance with IFRS. Adjusted Product Contribution is a metric used by management to measure performance efficiencies in growing and selling medical cannabis. The metric is calculated by removing all amounts related to fair value accounting under IFRS, and then adding back the costs related to the inventory grown, harvested, and sold in the period, to arrive at a weighted average cost per gram to grow, harvest, and sell cannabis. The calculated weighted average cost per gram is applied to the number of grams sold in the period to determine the adjusted cost of sales and resulting Adjusted Product Contribution metric. Page 7

8 Adjusted EBITDA is a metric used by management which is Income (loss) from operations, as reported, before interest, tax, and adjusted for removing other non-cash items, including the stock based compensation expense, depreciation, and the non-cash effects of accounting for biological assets and inventories, and further adjusted to remove acquisition related costs. Management believes Adjusted EBITDA is a useful financial metric to assess its operating performance on a cash basis before the impact of non-cash items and acquisition related activities. DESCRIPTION OF THE BUSINESS MEDICAL MARIJUANA REGULATORY FRAMEWORK IN CANADA In 2001, Canada became the second country in the world to recognize the medicinal benefits of cannabis and to implement a government-run program for medical cannabis access. Health Canada replaced the prior regulatory framework and issued the Marihuana for Medical Purposes Regulations ( MMPR ) in June 2013 to replace government supply and home-grown medical cannabis with highly secure and regulated commercial operations capable of producing consistent, quality medicine. The MMPR regulations issued in June 2013 covered the production and sale of dried cannabis flowers only. A court injunction in early 2013 preserved the production and access methods of the prior legislation for those granted access prior to the injunction. On July 8, 2015 Health Canada issued certain exemptions under the Controlled Drugs and Substances Act (Canada) ( CDSA ), which includes a Section 56 Class Exemption for Licensed Producers under the MMPR to conduct activities with cannabis (the Section 56 Exemption ), which permits Licensed Producers to apply for a supplemental license to produce and sell cannabis oil and fresh cannabis buds and leaves, in addition to dried cannabis (this does not permit Licensed Producers to sell plant material that can be used to propagate cannabis). On August 24, 2016, the Government of Canada introduced new regulations governing the use of cannabis for medical purposes. This new regulations, known as the Access to Cannabis for Medical Purposes Regulations ( ACMPR ), were introduced in response to the February 24, 2016 decision rendered by the Federal Court of Canada in the Allard et al v the Federal Government of Canada case. The plaintiffs in the Allard case argued that the MMPR violates their Charter rights and the court, in a lengthy and detailed judgment, agreed with the plaintiffs. The court gave the Government of Canada until August 24, 2016 to determine how existing regulations should be amended to ensure that patients have the access to medical cannabis that they need. The ACMPR, remained largely consistent with the former MMPR, but restores the ability of patients to grow their own cannabis at home, including the ability to designate a third-party grower through regulations akin to the former Medical Marijuana Access Regulations (MMAR). Under the ACMPR, patients who choose to grow at home, subject to a maximum number of plants, will be required to register their production sites and provide copies of their medical authorization to Health Canada in order to allow for monitoring and auditing of their activities. Under the former MMPR and now ACMPR, patients are required to obtain a medical approval from their healthcare practitioner and provide a medical document to the licensed producer from which they wish to purchase cannabis. Since the requirements under the new regulations are both simpler and involve fewer obstacles to access than the previous regulatory regime, it is anticipated that the growth in the number of approved patients will accelerate. Moreover, the new system allows for competition among licensed producers on a host of factors including product quality, customer service, price, variety and brand awareness, allowing for well-positioned and capitalized producers to leverage their position in the marketplace. Page 8

9 Health Canada recently reported that over 98,000 patients had enrolled into the ACMPR program by September 30, , representing a market worth in excess of $100 million. By 2024, Health Canada estimates that the number of patients using medical marijuana will grow to 450,000, creating a medical cannabis market worth an estimated $1.3 billion. In the event recreational cannabis use is legalized (see Legalization of Recreational Use of Marijuana in Canada ), it is expected that the ACMPR will be replaced by a new regulatory framework that will cover both the medical and recreational markets. LEGALIZATION OF RECREATIONAL USE OF MARIJUANA IN CANADA On April 20, 2016, the Canadian Federal Government announced its intention to introduce, by the spring of calendar 2017, legislation to legalize the recreational use of cannabis in Canada. At this time, the form that this legislation will take is not known. On June 30, 2016, the Canadian Federal Government established a Task Force to seek input on the design of a new system to legalize, strictly regulate and restrict access to cannabis. Their advice will be considered by the Government of Canada as the new framework is developed. Members of the Task Force were: Anne McLellan (chair); Dr. Mark A Ware (vice-chair); Dr. Susan Boyd; George Chow; Marlene Jesso; Dr. Perry Kendall; Rafik Souccar; Dr. Barbara von Tigerstrom; Dr. Catherine Zahn. The Task Force issued its final report, titled A Framework for the Legalization and Regulation of Cannabis in Canada 4, on November 30, The report contains more than 80 recommendations to the federal and provincial governments on how to better promote and protect public health and safety, particularly among young Canadians. It recommends establishing a minimum age of access and restrictions on advertising and promotion. The report also recommends well-regulated production, manufacturing and distribution that can displace the illegal market, and provides appropriate safeguards, such as testing, packaging and labelling. It also recommends that Governments educate Canadians about the new system to improve the public s understanding of cannabis, including risks such as impaired driving. The Company believes the task force recommendations provide a strong policy framework for the government to consider, building on the current medical system for production for the future. CIBC World Markets reports estimates of the potential value of the recreational cannabis market in Canada range from $5 billion to $10 billion per year. The lower market value of $5 billion per year translates into yearly consumption of 770,000 kilograms of cannabis, assuming a price of approximately $6.50 per gram. 5 To put the potential size of the Canadian recreational market in context, Statistics Canada valued the beer market in Canada, in 2014, at $8.7 billion. 6 INTERNATIONAL DEVELOPMENT In recent years, the actions of governments around the world have signaled a significant change in attitudes towards cannabis. Governments in Australia, Brazil, Germany, Israel, Mexico, South Africa, and others have taken steps to foster research into cannabis-based medical treatments and/or towards increasing legal access to medical cannabis. On January 19, 2017, the German parliament passed legislation that legalized medical cannabis and included provisions for medical cannabis treatment expenses to be covered by health insurance. With cannabis beginning to emerge from the shadows, many countries are looking to Canada, and its regulatory framework for the commercialization of medical cannabis, with much interest and respect. Australia began the rollout of a regulatory framework in As Canada has developed an enviable Page 9

10 regulatory model, companies acting within that framework have expertise, knowledge and potentially product to share with the global community. The opening of legal cannabis markets around the world presents an opportunity for Canopy Growth ( Canopy ). Leveraging our dominant market position in Canada, world-class production platforms and knowledge, and strong balance sheet, our business is establishing a growing international presence. Medical cannabis opportunities are becoming increasingly available as new jurisdictions move towards establishing new or improved medical cannabis systems. Canopy Growth has to date announced its entry into emerging markets in Germany, Brazil, and Australia, and is evaluating other international opportunities where the regulatory framework permits (See Overview of Canopy Growth Corporation). OVERVIEW OF CANOPY GROWTH CORPORATION Canopy Growth is a publicly-traded corporation, incorporated in Canada, with its head office located at 1 Hershey Drive, Smiths Falls, Ontario. The Company s common shares were listed on the TSXV on April 4, 2014, but subsequently graduated to the TSX on July 26, 2016 under the trading symbol CGC. On February 1, 2017, the Company began trading on the TSX under the symbol WEED. Through its wholly-owned subsidiaries, Tweed, Tweed Farms, Bedrocan Canada and, after January 31, 2017, Mettrum Health Corp. ( Mettrum ), Canopy Growth is in the business of producing and selling legal medical cannabis, primarily in the Canadian market and has six licenses to cultivate and sell cannabis under the ACMPR program. Canopy Growth is also positioning itself to produce and sell cannabis in the recreational market in Canada through Tweed and potentially other brands, should it be legalized in the future. Bedrocan Canada will remain solely focused on the medical market and Mettrum will focus on both the medical and natural health markets. The Company s primary focus is strengthening the Company s market share position in legal cannabis markets in Canada, medical today and non-medical should it be legalized in the future, and to help establish similar positions in markets abroad. To achieve this, the Company will continue making specific and deliberate investments, including acquisitions, to: Increase the diversity, quality and inventory of the Company s product offerings across value and premium cannabis market segments; Diversify the Company s business in the distinct but complimentary legal cannabis markets. Increase the strength and differentiation of the Company s multiple brands; Increase the efficiency and effectiveness of the Company s customer engagement resources; Drive growth in international markets in which cannabis is legal; and Significantly increase the Company s production capacity, in both greenhouse and indoor controlled facilities, in support of the Company s diverse product offering. The Company has taken steps to diversify its cannabis-related business into the development, production and sale of hemp-based medical, recreational and industrial products. Hemp and cannabis come from the Cannabis sativa L specie, but are genetically distinct and are further distinguished by use, chemical makeup and cultivation methods. Hemp, which refers to the non-psychoactive (less than 1% THC) varieties of Cannabis sativa L, is a renewable raw material used in thousands of products including health foods, body care, clothing, construction materials, biofuels and plastic composites. The acquisition of wholly-owned subsidiary Mettrum and its Mettrum Originals brand of Hemp-based consumer food and skincare products along with the acquisition of subsidiary Group HEMP.CA, with its developing line of Hemp-based products, give the Company entry into the growing hemp market. The Company believes that entry into the regulated hemp market, whose regulations allow for more robust consumer-facing brand marketing, advertising and retail channels, will serve to strengthen the Company s consumer facing brands in the future. The Company is looking to expand production capacity through the acquisition of select ACMPR licensed producers and license applicants. The Company will utilize its documented and compliant standard operating procedures to improve the operations of ACMPR licensed producers or pursue completion of an Page 10

11 ACMPR license application. Given the Company s knowledge of and experience applying the ACMPR regulations as well as its business, operational and capital markets experience, the Company is able to conduct detailed business, finance and operational reviews of potential acquirees. To help the Company expedite the expansion of its production capacity, Canopy Growth announced on November 1, 2016 that it had entered into a Memorandum of Understanding ( MoU ) with The Goldman Group to expand the Company s cannabis production capacity and geographic footprint. The MoU is the culmination of a shared view that high quality cannabis grown through secure production channels will continue to be the preferred model for Canadian cannabis production and distribution, and that current capacity is insufficient to meet the growing demand for medical and future recreational cannabis. The growth strategy will see The Goldman Group purchase or build new properties, subject to Canopy Growth s approval and built to Canopy Growth s proprietary specifications, and lease those properties back to the Company on a cost plus basis. The partnership with The Goldman Group gives the Company access to a non-dilutive capital with which to accelerate the development of additional licensed production facilities. Leveraging this source of development capital is expected to reduce, but not eliminate, the Company s need to raise additional capital in the future. Management also believes a significant potential future opportunity exists, within an appropriate regulatory framework, to improve the Company s margins by vertically integrating up the value chain. For example: In the medical market, this could be cannabis-based therapies for the treatment of a wide-range of medical symptoms, from sleeping disorders to neuropathic pain. The Company established the cannabis research incubator CHI, of which the Company has a minority interest, to develop and research clinically ready cannabis drug formulations and dose delivery systems. In a potential future recreational market, this could mean the commercialization of edible and drinkable consumer products infused with cannabis elements, most notably THC. Management believes that a significant opportunity exists today to leverage the Company s expertise, financial strength and business model in federally legal cannabis markets around the world. In addition, management believes future opportunities are likely to exist for the Company in jurisdictions where governments are actively moving towards such a legal framework. Subject to regulatory approval, strategic international business opportunities pursued by the Company could include: Providing advisory services to third-parties that are interested in establishing licensed cannabis cultivation and sales operations; The export of medical cannabis to third-parties in countries outside of Canada; and Ownership of cannabis cultivation and sales operations in countries outside of Canada, where lawful to do so. To date, the Company has announced new ventures or business partnerships in Australia, Brazil and Germany as described below: Tweed has entered into a partnership with AusCann Group Holdings Ltd. ( AusCann ) of Australia, where Tweed will provide consultation in a number of areas including production, quality assurance and operations, and strategic advisory services. In exchange for these services, the Company owns a 15% interest in AusCann, a leader in Australia's emerging medical cannabis industry; The Company has entered into an agreement with São Paulo-based Entourage Phytolab S.A. ( Entourage ), Bedrocan International BV and local Brazilian partners to create a new company called Bedrocan Brasil S.A., which will facilitate the importation of Bedrocan Canada s proprietary standardized cannabis varieties and know-how into the Brazilian market. Additionally, the Company will partner with Entourage to develop cannabis-based pharmaceutical medical products for the Brazilian and international markets. Bedrocan Canada completed the first export of cannabis to Brazil in the third quarter of fiscal year The Company initially held a 41.75% interest in Bedrocan Brasil S.A. through its wholly-owned subsidiary Bedrocan Canada and a 50% direct ownership interest in Entourage, since reduced to % and %, respectively; and Page 11

12 Tweed has received necessary approvals in Canada and Germany to export medical cannabis for sale to German patients. To date, approximately 130 kilograms of Tweed-cannabis, have been exported to Germany. As described on page 19 of this MD&A, the Company acquired German-based pharmaceutical distributor MedCann GmbH on December 12, This investment in brand development, global expansion, product diversification, and increased production capacity, is likely to delay when the Company s business becomes cash flow positive. Management believes the focus on growing the Company s market share will drive significantly higher cash earnings and shareholder returns over the long-term. Across its six licensed production sites, as of February 13, 2017, Canopy subsidiaries are now licensed for 19,100 kilograms of dried cannabis production and 9,800 kilograms of cannabis oil production. Corporate Organization Chart 100% 75% 100% 100% 100% 15% 100% 100% 100% % 46.15% MedCann GmbH Pharma and Nutraceuticals (German Corporation) % 33% Ontario Inc. d/b/a Bodystream (Ontario Corporation) 100% 100% 1 100% of shares in Mettrum (Bennett North) Ltd. will be sold to Cannabis Care Canada Inc. subject to the terms of a Share Purchase Agreement entered into on September 16, The transaction is expected to close in February At December 31, 2016, there were 202 full-time employees in the Company as compared to 156 at March 31, TWEED INC. Tweed is a Licensed Producer of medical cannabis under the ACMPR. Tweed s Commercial License for its facility in Smiths Falls, Ontario will be up for renewal on July 18, Tweed s Commercial License covers 168,000 square feet of its Smiths Falls facility and includes 12 climate controlled indoor growing rooms. Prior to the end of the term of its licenses, Tweed must submit an application for renewal to Health Canada containing information prescribed by the ACMPR. Tweed has completed 12 of an eventual 39 growing rooms (of similar size), and the related vegetation, nutrient delivery and production infrastructure as is required to support the full configuration to be built. An additional 12 growing rooms are currently under construction with completion targeted in the first half of calendar year The Smiths Falls facility also includes an in-house laboratory and R&D area, cannabis oil extraction infrastructure, a high level security vault and a breeding facility that features several breeding rooms, phenotyping rooms, as well as male and female plant rooms. Page 12

13 Tweed received a Dealer s License pursuant to the provisions of the Controlled Drugs and Substances Act and its Regulations and will now begin operating this purpose built area, built to Good Manufacturing Practice ( GMP ) specifications, within Tweed s Smiths Falls, Ontario facility. The issuance of the license followed an extensive multi-year process that included application, design, construction and security clearance of key personnel. As a licensed dealer, Tweed will be able to conduct research and possess cannabis and cannabis derivatives in forms that are not currently covered by the ACMPR. Tweed can also begin development of innovative products for future market opportunities, and with necessary approvals undertake the export of non-dried form of cannabis to other jurisdictions. The total footprint of the existing Smiths Falls facility, at 472,000 square feet, can support a significant increase in licensed production capacity. In addition, the 42-acre site at 1 Hershey Drive has significant undeveloped land that can support the construction of additional buildings. Tweed sells its dried cannabis at prices ranging from $6 per gram for value strains to up to $12 per gram for premium strains. Typically, growth time, strain yield and market comparatives determine a strain s price. Very particular strains may be priced higher, but this would be the exception. In keeping with its goal of producing high quality value and premium cannabis strains for the legal cannabis market, Tweed has undertaken a number of progressive activities over the past 12 to 18 months: In October 2015, Tweed and DNA Genetics announced an exclusive partnership that would see Tweed leverage DNA's expertise in cannabis breeding to bring new, exclusive DNA-Certified strains to Tweed customers. Less than a year later on September 15, 2016, Tweed launched Lemon Skunk, the first strain certified by DNA Genetics and selected through phenotyping by DNA Genetics. Additional DNA-Certified strains are expected to be available through Tweed by Q DNA-Certified strains are being cultivated to DNA standards in Tweed s Smiths Falls, Ontario facility. Additional strains that are expected to be DNA-Certified are currently being harvested at the Tweed Farm s greenhouse in Niagaraon-the-Lake, Ontario; On September 12, 2016, Tweed announced the completion of its state-of-the art cannabis breeding facility within its Smiths Falls operation. With the facility, Tweed is evolving the way cannabis is bred and selected for commercial sale. Working with the best breeders in the world such as DNA Genetics and its own Master Breeder, Tweed and its partners will begin creating new proprietary genetics by selecting male and female plants with desirable traits, and breeding new strains under strictly controlled conditions. On November 7, 2016, the Company announced that Tweed has received approval from Health Canada to begin using this breeding facility; and On October 6, 2016, less than 8 months after entering into a business partnership, Tweed and international cannabis icon, Snoop Dogg, announced that Leafs By Snoop would be available in Canada, exclusively to Tweed customers. On October 27, 2016, Tweed began selling three Leafs By Snoop varieties - Sunset, Ocean View and Palm Tree CBD. All three Leafs By Snoop varieties are available through the Tweed Shop at prices between $9 and $12 per gram. Starting with three whole-flower dried cannabis strains and expanding over time, Leafs By Snoop will be a full spectrum offering of diverse strains including a high CBD option and mid to high-range THC options. Leafs By Snoop strains for the Canadian market are grown in Tweed s Smiths Falls, Ontario facility and at Tweed Farm s greenhouse in Niagara-on-the-Lake, Ontario. Tweed sells Cannabis Oils made with GMO-free, organic sunflower oil. Along with popular offerings of Quinn, Princeton and Zaius, Tweed will introduce new strain-specific Cannabis Oils on an ongoing basis. Prices for Cannabis Oils range from $95 per 100 ml bottle to $185 per 100 ml bottle depending on the strains incorporated. Tweed does not offer volume discounts to end users, but has developed an income-tested Compassionate Pricing Promise whereby eligible low-income patients may obtain a 20% discount off regular prices. A key focus of Tweed, since its inception, has been the development of its brand. From the name, logo and design aesthetic, to the approachable tone and light-hearted copy, Tweed is branded and positioned in a Page 13

14 unique way. Tweed deliberately chose to incorporate a sense of texture and approachability that welcomes customers and encourages an intimate relationship with the brand. Tweed has emerged as the most dynamic brand in the industry with exceptionally strong appeal and recognition in the medical cannabis market in Canada across value and premium product segments. In support of its brand, Tweed focuses heavily on its social media presence as an engagement strategy. Further engagement with the Tweed brand will be facilitated by the Company s expanding network of Tweed Main Street Community Engagement Centers. These centers in Southern Ontario (Barrie, Etobicoke, Guelph and Hamilton) provide an opportunity for interested individuals to learn about medical cannabis in a helpful, supportive and consumer-friendly environment. The Company is actively seeking partners to expand the network of Tweed Main Street locations, through licensing partnerships, to strategic locations across Canada. Like the Tweed Main Street concept, Tweed is intent on using creative marketing strategies to further increase public awareness of the Tweed brand. The partnership with the artist and cannabis connoisseur, known as Snoop Dogg, will see Tweed and Snoop Dogg partner on curated content and brand strategy exclusively in Canada. The objective of these marketing strategies, be it Tweed Main Street, the business partnership with Snoop Dogg and others that the Company may pursue in the future, is to make the Tweed brand top-of-mind as medical patients and future recreational users consider making their first legal cannabis purchase. Since the founding of Tweed, the Company has provided a variety of support to patients and doctors in order to improve knowledge with respect to cannabis for medical purposes and ultimately advance the sector. For example, the Company supports the Canadian AIDS Society ( CAS ) in the form of an unrestricted grant to CAS for the development of a patient-focused series that explains the science of cannabis as a therapy, the rules and regulations surrounding access and different ways to consume cannabis for safer use and better health. In addition, the Company has research partnerships in place with researchers from the University of Ottawa and Ryerson University, and has provided funding for education to the Chronic Pain Association of Canada. Tweed has been the sole licensed producer supporter of the Primary Care Updates across Canada reaching thousands of doctors, and supports countless efforts by local educators to improve the understanding of cannabis for medical purposes through a team of detailers visiting doctors throughout Ontario. Tweed has also partnered with Canabo Medical Corporation to conduct scientific and medical research through its network of healthcare practitioners at its medical clinics. This research data will be used to generate data to clarify the role of cannabis in various chronic conditions, including the management of chronic pain. Tweed was also, to the Company s knowledge, the first Licensed Producer to have an accredited M1 continuing medical education program to assist doctors, and in partnership with Bedrocan, one other Licensed Producer and the Collège des médecins du Québec, proudly contributed startup funding for the creation of a registry for medical cannabis patients in the Province of Quebec. The first of its kind, the anticipated 10-year Registry will gather information on the demographic profiles of patients who use medical cannabis, the medical purpose for which they use it, and at what dosage, while tracking the effectiveness and safety of cannabis used in the management of symptoms associated with particular health conditions. Tweed announced on May 16, 2016 its plan to fund a national campaign to raise awareness of impairment in relation to operating a motor vehicle under the influence of cannabis. The campaign will be developed and administered by two of the country s leading organizations in promoting evidence based drug policy and safe driving, the Canadian Drug Policy Coalition (CDPC) and Mothers Against Drunk Driving (MADD Canada). Funding will be provided to MADD Canada over three years by the Company, whose wholly-owned subsidiaries Tweed and Bedrocan Canada will fund the campaign using proceeds from a previously announced education fund dedicated towards responsible use of cannabis. Page 14

15 TWEED FARMS INC. Tweed Farms in Niagara-on-the-Lake, Ontario is comprised of a greenhouse facility that is 375,000 square feet, of which 350,000 square feet represents the greenhouse and 25,000 square feet is used for post-harvest processing storage, shipping and offices. The current greenhouse facility occupies approximately 8 acres. The Tweed Farms site includes an additional 14 acres (approximate) to support future expansion. On March 31, 2016, Tweed farms received its full commercial license to produce, possess, ship and sell dried cannabis. Currently, all dried cannabis produced in the Tweed Farms greenhouse is transferred to Tweed s Smiths Falls, facility for final processing and sale by Tweed pursuant to its Commercial License. As at December 31, 2016, all 350,000 square feet of the greenhouse was utilized for the production of medical cannabis. Utilizing refined input products and growing processes, the Tweed Farms greenhouse grows a variety of high quality cannabis strains that sell, through Tweed, across multiple price points, from value strains, priced at $6 per gram, to premium strains, priced at $12 per gram. Premium strains being cultivated at the Tweed Farms greenhouse are expected to include a number of DNA-Certified and Leafs By Snoop strains. The DNA-Certified and Leafs By Snoop strains grown at Tweed Farms began selling on February 1, 2017, exclusively to registered patients of Tweed at prices between $9 and $12 per gram. With the ability to grow high-quality strains that support premium price points, in a low cost greenhouse environment, Canopy Growth is expected to be to generate very high margins on these premium strains cultivated at Tweed Farms. Tweed Farms license has a current term ending July 13, Prior to the end of the term of its licenses, Tweed Farms must submit an application for renewal to Health Canada containing information prescribed by the ACMPR. BEDROCAN CANADA INC. On August 28, 2015, the Company acquired Bedrocan pursuant to a definitive plan of arrangement, in which the Company acquired all of the issued and outstanding securities of Bedrocan. Bedrocan leverages over two decades of indoor standardized cannabis growing experience of Netherlands based Bedrocan International BV. With the indoor growing techniques and technologies developed and selected over two decades, Bedrocan International BV has been able to drive the cost of indoor medical cannabis growing down to levels that are comparable to the cost of cultivating cannabis in hybrid greenhouses. Bedrocan s 52,000 square feet production facility in Toronto, Ontario is fully-licensed, and includes 34 vegetative and growing rooms, three dispensing rooms, the building s two-floor high security level vault, and the ability to dispose of cannabis refuse via composting. Bedrocan s Commercial License to sell domestic medical cannabis will be up for renewal on February 17, Bedrocan has been growing six proprietary genetic strains of standardized cannabis at its Toronto production facility since February Bedrocan began selling its dry cannabis products in the Canadian market in February Bedrocan is committed to providing high-quality value strains for medical use that are priced at or below the industry averages. The philosophy of Bedrocan is that price should not be reflective of the THC content of the product. Bedrocan s production methods have been refined over two decades to maximize yield and eliminate genetic variance from harvest to harvest. Because of that, Bedrocan is able to produce standardized varieties efficiently to permit the introduction of True Compassionate Pricing. Bedrocan does not offer volume discounts. The True Compassionate Pricing program ensures that all standardized strains are sold at the same price. In January 2016, the price for each strain was reduced from $7.50 per gram to Page 15

16 $5.00 per gram. In September 2016, prices for all six strains were increased to $6.75 per gram for new patients, with existing patients receiving the prior pricing for the duration of their medical document while registered with Bedrocan Canada. Bedrocan received its license to sell cannabis oil extracts in the first quarter of Fiscal Bedro-oil was first sold through the Tweed store on June 9, 2016 and then through the Bedrocan store on June 20, Prices for Bedro-oil products introduced in the first quarter of Fiscal 2017 are $110 per 100 ml bottle. Clients of Bedrocan order medical cannabis primarily through Bedrocan s online store with telephone orders as a secondary source. The Company intends for Bedrocan to remain solely focused on the medical market, even if a legalized recreational market is eventually legislated in Canada. Prior to the end of the term of its licenses, Bedrocan must submit an application for renewal to Health Canada containing information prescribed by the ACMPR. METTRUM HEALTH CORP. On January 31, 2017, Canopy Growth and Mettrum announced the closing of the acquisition of Mettrum by Canopy Growth pursuant to the terms of an arrangement agreement dated November 30, 2016 and previously announced by the Companies on December 1, Mettrum Ltd., a wholly-owned subsidiary of Mettrum, is a Toronto-based company and a licensed producer of medical cannabis under the ACMPR. Mettrum received its first license from Health Canada on November 1, 2013 and began production of medical cannabis at its first production facility in Bowmanville, Ontario. Mettrum received its second license from Health Canada on December 11, 2014 for its other wholly-owned subsidiary, Mettrum Creemore, at the Mettrum Creemore facility in Clearview, Ontario. Mettrum received its third license from Health Canada on December 17, 2015 for Mettrum Ltd. at its new 60,000 square foot production and distribution facility in Bowmanville, Ontario. With the company's three licenses, Mettrum is a leading producer and vendor of medical cannabis under the ACMPR system. In addition, through its wholly-owned subsidiary Mettrum Hemp, Mettrum also is a licensed producer and distributor of industrial cannabis (hemp) products, including Mettrum s functional food line, Mettrum Originals, under the Hemp Regulations issued pursuant to CDSA. Mettrum, through its wholly-owned subsidiaries, currently has a potential production capacity of 6,000 kg of medical cannabis per year. Its current total licensed production capacity is 5,600 kg of medical cannabis per year. Under the ACMPR, Mettrum sells dried cannabis and oil extractions to the client or to health care practitioners for distribution to their patients. There is no limit imposed by the ACMPR on the strains that may be produced nor does the ACMPR set out specific requirements for pricing. Mettrum currently sells dried cannabis for between $7.60 and $8.60 per gram and oil extracts for $90.00 per 40 ml bottle. However, future products may sell above or below this range. Mettrum also offers an assisted pricing program to help clients who are recipients of a Federal or Provincial income assistance program, or have an annual income of $30,000 or less. This 30/30 Mettrum Assisted Pricing Program provides a 30% discount on the first 30 grams ordered each month by eligible clients. Mettrum currently produces approximately sixteen strains, chosen from a genetic library of over sixty strains. Mettrum Hemp processes and packages hemp based products including hemp hearts, flour, cooking mixes, lip balm and oil. The processing is outsourced to qualified suppliers and the products are processed by Mettrum Hemp or the suppliers. Mettrum sells 30 hemp based products through distributors to over 2,000 retailers in Canada and the United States. Mettrum possesses three supplemental licenses to produce Cannabis Extracts. Mettrum Ltd. has an ACMPR license for its facility in Bowmanville, Ontario. The license was issued November 7, 2016 and is effective until the expected renewal date of November 1, This license allows for the production, sale or provision, possession, shipping, transportation, delivery and destruction of dried Page 16

17 marijuana, cannabis oil, cannabis resin, marijuana plants, and marijuana seeds. It allows the facility to produce up to 1,600 kg of dried marijuana, 1,600 kg of cannabis oil and 100 kg of cannabis resin. It also allows the facility to sell or provide other Licensed Producers with up to 100 kg of dried marijuana, 100 kg of cannabis oil and 200 kg of cannabis resin. Mettrum Creemore has an ACMPR license for its facility in Clearview, Ontario. The license was issued December 13, 2016 and is effective until the expected renewal date of December 12, This license allows for the production, sale or provision, possession, shipping, transportation, delivery and destruction of dried marijuana and marijuana plants or seeds. It allows the facility to produce up to 2,000 kg of dried marijuana, 1,500 kg of cannabis oil, and 200 kg of cannabis resin. It also allows the facility to sell or provide up to 2,000 kg of dried marijuana, 1,500 kg of cannabis oil and 200 kg of cannabis resin to another Licensed Producer, as well as to sell or provide up to 6,000 marijuana plants and 1 kg of marijuana seeds. It also allows the facility to sell or provide up to 1,000 marijuana plants and 1 kg of marijuana seeds to registered clients. Mettrum Hemp has three licenses issued under the Hemp Regulations for its facility located in Barrie, Ontario. These licenses are effective until the expected renewal date of December 31, 2016, and provide for the possession and sale of industrial hemp grain, industrial hemp oil and meal and industrial hemp seed and grain. On September 20, 2016 Mettrum announced that it entered into an agreement with Cannabis Care Canada Inc. to sell Mettrum North. It is expected that this transaction will close in the fourth quarter of Fiscal Mettrum North has a license issued pursuant to Section 35 of the ACMPR for its facility in Bowmanville, Ontario. The license was issued November 2, 2016 and is effective until the expected renewal date of November 1, This license allows for the production, sale or provision, possession, shipping, transportation, delivery and destruction of dried marijuana, cannabis oil, cannabis resin, marijuana plants and marijuana seeds. The license allows the facility to produce up to 2,000 kg of dried marijuana, 1,500 kg of cannabis oil, and 200 kg of cannabis resin. It also allows the facility to sell or provide up to 2,000 kg of dried marijuana, 1,800 kg of cannabis oil, 200 kg of cannabis resin, 15,000 marijuana plants, and 1 kg of marijuana seeds to another Licensed Producer. Prior to the end of the term of its licenses, Mettrum must submit an application for renewal to Health Canada containing information prescribed by the ACMPR. VERT CANNABIS Effective November 1, 2016, Canopy acquired all of the issued and outstanding shares of Vert through an amalgamation with a wholly-owned subsidiary of Canopy. Vert is a Québec-based applicant for a license pursuant to the ACMPR. In connection with the acquisition, the shareholders of Vert received $498 in cash and 58,978 Common Shares on the closing, with an additional 235,922 Common Shares in escrow and to be released as follows: 88,472 Common Shares will vest upon Vert obtaining from Health Canada a license for the cultivation of medical cannabis under the ACMPR in St. Lucien, Québec (the St. Lucien Property ) within five years of the completion of the Vert acquisition; 88,472 Common Shares will vest upon Vert obtaining from Health Canada a license for the cultivation and sale of medical cannabis under the ACMPR in respect of the St. Lucien Property within five years of the completion of the Vert Acquisition; and 58,978 Common Shares will vest upon the expansion of licensed capacity in the Province of Québec by Vert within five years of the completion of the Vert Acquisition. If any of the foregoing milestones are not satisfied, the applicable escrowed Common Shares will be returned to Canopy by the escrow agent for cancellation. In connection with the Vert Acquisition, Canopy also acquired the right to purchase 90 acres of land and a 7,000 square foot indoor growing space with an office facility located in Saint-Lucien, Québec. Page 17

18 The acquisition of Vert is not a significant acquisition for the purposes of Part 8 of National Instrument Continuous Disclosure Obligations. HEMP.CA Effective November 1, 2016, Canopy acquired 75% of the issued and outstanding shares of Hemp.CA in exchange for $595 ($295 of which is to be paid on or before April 1, 2017) and 258,037 Common Shares (the Hemp Consideration Shares ). One-half of the Hemp Consideration Shares were issued to the Hemp shareholders on closing of the acquisition, with the remaining Hemp Consideration Shares held in escrow and will be released on or before April 1, Hemp is licensed by Health Canada to cultivate hemp and extract oil from hemp seeds. The acquisition of Hemp strategically diversifies Canopy s business in a distinct but complementary market. The acquisition of Hemp is not a significant acquisition for the purposes of Part 8 of National Instrument Continuous Disclosure Obligations. CANOPY HEALTH INNOVATIONS INC. The Company established cannabis research incubator and subsidiary Canopy Health Innovations Inc. ( CHI ) to develop and research clinically ready whole plant cannabis drug formulations and dose delivery systems. On December 9, 2016, Canopy Growth announced the closing of an offering of CHI shares for aggregate gross proceeds of approximately $7,000 to reduce Canopy Growth s interest to 46.15% of CHI common shares. CHI is a Canadian Controlled Private Corporation. CHI will operate as a research incubator and will focus on creating an intellectual property ( IP ) portfolio that can be built into commercial opportunities for the Company and its subsidiaries. Pursuant to agreements entered into between CHI and Canopy Growth, Canopy Growth and its subsidiaries will work closely with CHI whereby Canopy Growth will act as a primary supplier of cannabis products for clinical research, as a research partner through its subsidiary Tweed. Tweed s Controlled Drugs and Substance Dealer s License from Health Canada, will allow it to, among other things, possess cannabis and cannabis by-products for the purposes of analytical testing, and in the commercialization of IP created by CHI. CANNSCIENCE INNOVATIONS Through the acquisition of MedCann Access ( MCA ) in the third quarter of Fiscal 2016, the Company acquired a 33% stake in CannScience Innovations Inc. ( CannScience ), a drug development company based out of the MaRS Centre in Toronto working collaboratively with the University Health Network. CannScience conducts in-depth extracts research, with the ultimate goal of delivering standardized metered dosing in a range of alternate delivery methods, a priority for the Company as the emerging cannabis extract market evolves. CannScience s lead product in development incorporates the Generex Biotechnology Corporation proprietary RapidMist drug delivery technology, which is specially engineered to propel metered doses into the buccal cavity where the active pharmaceutical ingredient is absorbed, providing patients with a safe, simple, and easy way to achieve rapid on-set with no deposit in the lungs. BEDROCAN BRASIL S.A. AND ENTOURAGE PHYTOLAB S.A. On June 28, 2016, the Company announced an agreement with São Paulo, Brazil-based Entourage Phytolab S.A. ( Entourage ). Under the agreement, wholly-owned subsidiary Bedrocan Canada, Bedrocan International BV (formerly Bedroca Beheer BV) and local Brazilian partners created a new company called Bedrocan Brasil S.A. ( Bedrocan Brasil ), which will facilitate the importation of Bedrocan's proprietary standardized cannabis varieties and know-how into the Brazilian market. Additionally, Canopy Growth will partner with Entourage to develop cannabis-based pharmaceutical medical products for the Brazilian and international markets. Page 18

19 The transaction formally closed on September 20, 2016, whereby Canopy Growth owned a 50% interest in Entourage and Bedrocan Canada owned a 41.75% interest in Bedrocan Brasil S.A. Canopy, Entourage and Bedrocan Brasil completed an initial funding round of USD$3 million from independent investors on November 23, 2016 in exchange for common shares in Entourage and Bedrocan Brasil. The funding round will reduce Canopy s holding in Entourage from 50% to % and reduce its holding in Bedrocan Brasil from 41.75% to % after all tranches are received. These funds will be used both for the continuing development of Bedrocan Brasil and the launch of the Entourage clinical research plan. AUSCANN GROUP HOLDINGS LTD. On May 20, 2016, the Company closed a partnership with AusCann Group Holdings Ltd. ( AusCann ), whereby the Company obtained a 15% stake in AusCann, a leader in Australia's emerging medical cannabis industry, in exchange for its consultation in a number of areas including production, quality assurance and operations, and strategic advisory services. The expertise and advisory services offered or performed by Canopy Growth subsidiaries will be exclusively carried out by Tweed Inc. and Tweed Farms Inc. Procedures, expertise, and/or intellectual property under license from Bedrocan BV as to medicinal cannabis and so employed by Bedrocan Canada or any affiliates of Canopy Growth will not be shared or form the basis for any cooperation, consultation or other form of consulting provided under the terms of the partnership with AusCann. Canopy Growth and its affiliates are exclusively entitled to utilize any of its rights under the Bedrocan BV license for Canada and South-America only. MEDCANN GMBH PHARMA AND NUTRACEUTICALS ( MEDCANN GMBH ) MedCann GmbH Pharma and Nutraceuticals ( MedCann GmbH ) is a German-based pharmaceutical distributor, that was acquired by the Company on December 12, On July 25, 2016, the Corporation announced that Tweed had received necessary approvals in Canada and Germany to begin export of medical cannabis for sale to German patients, and will be working with MedCann GmbH, a then privately held pharmaceutical importer and manufacturer in Germany. On November 28, 2016 Canopy entered into an agreement to acquire MedCann GmbH, who had placed Tweed-branded cannabis strains in German pharmacies. The acquisition was structured against certain licensing milestones that will move MedCann GmbH towards domestic production opportunities. An aggregate of 674,631 Common Shares were issued upon the closing of the acquisition of MedCann GmbH. An additional (i) 367,981 Commons Shares will be issued on the 18-month anniversary of obtaining an Import and Distribution License from the German Health Minister, and (ii) 122,660 Common Shares will be issued to a former principal of MedCann GmbH upon achieving certain other milestones within two years of closing the acquisition of MedCann GmbH. The acquisition of MedCann GmbH closed on December 12, The acquisition of MedCann GmbH is not a significant acquisition for the purposes of Part 8 of National Instrument Continuous Disclosure Obligations. Over the longer term, with a base of operations in Germany provided by MedCann GmbH, along with Canopy s track record of producing consistent and stabilized cannabis strains, management believes the Company is well positioned to pursue domestic production inside Germany should the regulatory environment shift. On January 19, 2017, the German parliament passed legislation that legalized medical cannabis and included provisions for medical cannabis treatment expenses to be covered by health insurance. Page 19

20 RESULTS OF OPERATIONS The following table sets forth condensed interim consolidated statements of operations and balance sheet data, which is expressed in thousands of Canadian dollars, except share and per share amounts, for the indicated periods. SELECTED QUARTERLY INFORMATION (CDN $000's, except share amounts) Revenue Gross margin Gross margin % Operating expenses Income (loss) from operations Net income (loss) after taxes Net income (loss) per share - basic Weighted average shares - basic Net income (loss) per share - diluted Weighted average shares - diluted Three Months Ended Nine Months Ended December 31, December 31, December 31, December 31, ,752 3,481 25,234 7,657 16,943 2,756 36,215 16, % 79% 144% 213% 12,190 5,459 29,432 14,050 4,753 (2,703) 6,783 2,248 2,976 (3,316) 4,457 1,626 $ 0.03 $ (0.04) $ 0.04 $ ,813,261 93,355, ,725,439 69,356,439 $ 0.02 $ (0.04) $ 0.04 $ ,034,872 93,355, ,094,787 76,688,213 Selected statements of financial position information December 31, March 31, Cash and cash equivalents 92,504 15,397 Biological assets 5,307 5,321 Inventory 50,598 22,153 Other working capital (9,756) (5,218) Long-term debt 7,170 4,022 Shareholders' equity 251, ,785 Page 20

21 Results of Operations for the three and nine months ended December 31, 2016 as compared to the three and nine months ended December 31, 2015 Page 21